<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1999.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CALICO COMMERCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 77-0373344
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
333 WEST SAN CARLOS STREET, SUITE 300, SAN JOSE, CA 95110
(408) 975-7400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALAN P. NAUMANN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CALICO COMMERCE, INC.
333 WEST SAN CARLOS STREET, SUITE 300, SAN JOSE, CA 95110
(408) 975-7400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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ALAN C. MENDELSON, ESQ. GREGORY M. GALLO, ESQ.
COOLEY GODWARD LLP GRAY CARY WARE & FREIDENRICH LLP
FIVE PALO ALTO SQUARE 400 HAMILTON AVENUE
3000 EL CAMINO REAL PALO ALTO, CALIFORNIA 94301
PALO ALTO, CA 94306 (650) 833-2000
(650) 843-5000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the effective date of this Registration Statement
and the satisfaction or waiver of all other
conditions to the merger described in the proxy statement/prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFER REGISTRATION
REGISTERED REGISTERED(1) SHARE PRICE(1)(2) FEE(2)(3)
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Common Stock, par value $0.001 per
share................................. 1,430,151 $45.91 $65,658,941 $17,334
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</TABLE>
(1) The number of shares to be registered pursuant to this Registration
Statement is based upon the aggregate number of shares of ConnectInc.com,
Co. common stock, par value $0.001 per share ("ConnectInc.com Common
Stock"), currently outstanding, and the number of shares of ConnectInc.com
Common Stock issuable upon exercise of options and warrants to acquire
shares of ConnectInc.com Common Stock currently outstanding, multiplied by
an exchange ratio of 0.081 shares of common stock, par value $0.001 per
share, of the Registrant.
(2) The registration fee was computed pursuant to Rules 457(f) and 457(c) under
the Securities Act of 1933, as amended, based on the last reported sale
price of ConnectInc.com Common Stock, as reported by The Nasdaq Stock Market
on December 17, 1999.
(3) $13,749 of the registration fee was previously paid with the filing by
ConnectInc.com, Co. of preliminary proxy solicitation materials under
Section 14(g) and Rule 0-11 of the Securities Exchange Act of 1934, as
amended. Such fee has been credited against the registration fee payable
hereunder pursuant to Rule 457(b) under the Securities Act of 1933.
Accordingly, a registration fee of $3,585 is being paid herewith.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
[CONNECTINC.COM LOGO]
CONNECTINC.COM, CO.
SPECIAL MEETING OF STOCKHOLDERS
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
The board of directors of ConnectInc.com, Co. has unanimously approved a
merger combining ConnectInc.com and Calico Commerce, Inc.
If the merger is completed, holders of ConnectInc.com common stock will
receive 0.081 shares of Calico common stock for each share of ConnectInc.com
common stock they own. This is a fixed exchange ratio that will not be adjusted
for changes in the stock price of either company before the merger is completed.
The Calico common stock trades on the Nasdaq National Market under the symbol
"CLIC."
You will be asked to adopt the merger agreement approved by the
ConnectInc.com board of directors at a special meeting of the stockholders to be
held on January 31, 2000 at 2:00 p.m. at the principal executive offices of
ConnectInc.com located at 515 Ellis Street, Mountain View, California. The vote
of a majority of the outstanding shares of ConnectInc.com common stock is
required to adopt the merger agreement and approve the merger.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO
STOCKHOLDERS AND IS IN YOUR BEST INTERESTS. YOUR BOARD OF DIRECTORS THEREFORE
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO ADOPT THE MERGER AGREEMENT AND
APPROVE THE MERGER.
This proxy statement/prospectus provides you with detailed information
about the proposed merger. In addition, you may obtain other information about
ConnectInc.com and Calico from documents filed with the Securities and Exchange
Commission. We encourage you to read this entire document carefully.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, if you are a holder of ConnectInc.com common stock please take the time
to vote by completing and mailing the enclosed proxy card to us. If you sign,
date and mail your proxy card without indicating how you wish to vote, your
proxy will be counted as a vote in favor of the adoption of the merger agreement
and approval of the merger. If you fail to return your card, the effect will be
a vote against adoption of the merger agreement and approval of the merger.
ON BEHALF OF THE BOARD OF DIRECTORS OF CONNECTINC.COM, WE URGE YOU TO VOTE
"FOR" ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.
[CRAIG D. NORRIS LOGO]
Craig D. Norris
Chief Executive Officer
FOR A DISCUSSION OF CERTAIN SIGNIFICANT MATTERS THAT SHOULD BE CONSIDERED
BEFORE VOTING ON THE MERGER AGREEMENT AND THE MERGER AT THE SPECIAL MEETING, SEE
"RISK FACTORS" BEGINNING ON PAGE 19.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE CALICO COMMON STOCK TO BE ISSUED IN THE MERGER OR
DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated December 20, 1999, and is first
being mailed to ConnectInc.com stockholders on or about December 23, 1999.
<PAGE> 3
[CONNECTINC.COM LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 31, 2000
TO THE STOCKHOLDERS OF
CONNECTINC.COM, CO.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
ConnectInc.com, Co., a Delaware corporation, will be held on January 31, 2000,
at 2:00 p.m., local time, at 515 Ellis Street, Mountain View, California for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of November 19, 1999, by and among
ConnectInc.com, Co., Calico Commerce, Inc., a Delaware corporation, and
Calico Acquisition, Inc., a Delaware corporation and wholly-owned
subsidiary of Calico, the merger that will result in ConnectInc.com
becoming a wholly-owned subsidiary of Calico and ConnectInc.com
stockholders becoming Calico stockholders, and the other transactions
contemplated by the merger agreement. In the merger, each share of
ConnectInc.com common stock will be converted into 0.081 shares of
Calico common stock.
2. To consider and vote upon the postponement or adjournment of the special
meeting in order to solicit additional votes to approve the merger
agreement if the secretary of the special meeting determines that there
are not sufficient votes to approve the merger agreement.
The close of business on December 17, 1999 has been fixed as the record
date for determining those stockholders entitled to vote at the special meeting
and any adjournments or postponements of the special meeting. Therefore, only
stockholders of record on December 17, 1999 are entitled to notice of, and to
vote at, the special meeting and any adjournments or postponements of the
special meeting.
By Order of the Board of Directors
[Craig D. Norris Logo]
Craig D. Norris
Chief Executive Officer
December 20, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY CARD.
The merger agreement must be approved by the holders of a majority of the
outstanding shares of ConnectInc.com common stock. Your vote on this matter is
very important. We urge you to review carefully the enclosed material and to
return your proxy card promptly.
Your board of directors unanimously recommends that stockholders vote FOR
adoption of the merger agreement.
<PAGE> 4
[CONNECTINC.COM LOGO]
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PROXY STATEMENT
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[CALICO LOGO]
CALICO COMMERCE, INC.
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PROSPECTUS
-------------------------
ConnectInc.com, Co. and Calico Commerce, Inc. have entered into an
agreement that provides for a merger, as a result of which ConnectInc.com will
become a wholly-owned subsidiary of Calico. In the merger, ConnectInc.com
stockholders will receive 0.081 shares of Calico common stock for each of their
shares of ConnectInc.com common stock. Calico will issue at least 1,206,439
shares of its common stock, but may issue as many as 1,299,383 shares if all
ConnectInc.com options and warrants vested as of the date of this proxy
statement/prospectus are exercised.
This proxy statement/prospectus is being furnished to ConnectInc.com
stockholders in connection with the solicitation by ConnectInc.com's board of
directors of proxies for use at the special meeting of stockholders to be held
at 515 Ellis Street, Mountain View, California, at 2:00 p.m., local time, on
January 31, 2000. At this meeting, ConnectInc.com stockholders will vote on the
proposed merger. This proxy statement/prospectus also constitutes the prospectus
of Calico with respect to the shares of Calico common stock to be issued to
ConnectInc.com stockholders in the merger.
Share Information:
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Calico ("CLIC")............ The Nasdaq Stock Market closing price on December 17,
1999: $50.8125
ConnectInc.com ("CNKT").... The Nasdaq Stock Market closing price on December 17,
1999: $3.71875
</TABLE>
All information concerning Calico in this proxy statement/prospectus has
been furnished by Calico, and all information concerning ConnectInc.com in this
proxy statement/prospectus has been furnished by ConnectInc.com. ConnectInc.com
stockholders are encouraged to read this proxy statement/prospectus carefully
and to understand it before they vote.
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN RISKS
THAT YOU SHOULD CONSIDER IN DETERMINING HOW TO VOTE ON THE PROPOSED MERGER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE SECURITIES TO BE ISSUED IN THIS TRANSACTION OR
DETERMINED THAT THIS PROXY STATEMENT/ PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED DECEMBER 20, 1999, AND IS FIRST
BEING MAILED TO CONNECTINC.COM STOCKHOLDERS ON OR ABOUT DECEMBER 23, 1999.
<PAGE> 5
TABLE OF CONTENTS
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Questions and Answers About the Calico/ConnectInc.com
Merger...................................................... 1
Summary..................................................... 4
Risk Factors................................................ 19
Risk Factors Relating to the Merger....................... 19
Risk Factors Relating to Calico........................... 21
Risk Factors Relating to ConnectInc.com................... 34
ConnectInc.com Special Stockholders Meeting................. 41
General................................................... 41
Matters to be Considered.................................. 41
Proxies................................................... 41
Solicitation of Proxies................................... 41
Record Date and Voting Rights............................. 42
Recommendation of the ConnectInc.com Board................ 42
The Merger.................................................. 44
Background of the Merger.................................. 44
Calico's Reasons for the Merger........................... 47
Recommendation of the ConnectInc.com Board of Directors
and ConnectInc.com's Reasons for the Merger............ 48
Interests of ConnectInc.com's Officers and Directors in
the Merger and Potential Conflicts of Interests........ 51
Opinion of ConnectInc.com's Financial Advisor............. 53
The Merger................................................ 58
Closing................................................... 58
Conversion of ConnectInc.com Stock; Treatment of
ConnectInc.com Stock Options and Warrants.............. 58
Exchange of Certificates; Fractional Shares............... 59
Representations and Warranties............................ 59
Conduct of Business Before the Merger..................... 61
Conditions to Completing the Merger....................... 68
Regulatory and Other Approvals Required for the Merger.... 69
Extension, Waiver and Amendment of the Merger Agreement... 69
Termination of the Merger Agreement....................... 70
Material Federal Income Tax Consequences.................. 72
Accounting Treatment...................................... 74
Employee Benefits and Plans............................... 74
Restrictions on Resales by Affiliates..................... 75
Management After the Merger................................. 76
Price Range of Common Stock................................. 77
Information About Calico Commerce, Inc...................... 78
General................................................... 78
Calico's Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 90
Management and Additional Information..................... 104
Information About ConnectInc.com............................ 118
General................................................... 118
Management and Additional Information..................... 119
Calico Capital Stock and Comparison of Stockholder Rights... 120
Description of Calico Capital Stock....................... 120
</TABLE>
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Comparison of Rights of Calico Stockholders and
ConnectInc.com Stockholders................................. 121
Dissenters' Appraisal Rights................................ 126
Legal Matters............................................... 126
Experts..................................................... 126
Transfer Agent.............................................. 127
Stockholder Proposals....................................... 127
Other Matters............................................... 127
Where You Can Find More Information......................... 128
APPENDICES
APPENDIX A -- MERGER AGREEMENT
APPENDIX B -- OPINION OF ALLIANT PARTNERS
</TABLE>
Calico and the Calico logo are trademarks of Calico Commerce, Inc.
ConnectInc.com and the ConnectInc.com logo are trademarks of ConnectInc.com, Co.
All other trademarks used are owned by their respective owners.
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE CALICO/CONNECTINC.COM MERGER
Q: WHAT IS THE PROPOSED TRANSACTION WITH CALICO COMMERCE?
A: By agreement dated November 19, 1999, the boards of directors of Calico
Commerce, Inc. and ConnectInc.com, Co. unanimously approved the merger of the
two companies. The merger will be finalized upon approval of holders of more
than 50% of the outstanding shares of ConnectInc.com common stock held on the
record date. Calico stockholders are not required to approve the transaction.
Once approved, a wholly-owned subsidiary of Calico will merge into
ConnectInc.com. As a result, ConnectInc.com will become a wholly-owned
subsidiary of Calico, and ConnectInc.com stockholders will exchange their
ConnectInc.com common stock for Calico common stock.
Q: WHY ARE WE PROPOSING TO MERGE? (SEE PAGE 47)
A: The boards of directors of Calico and ConnectInc.com have determined that the
combined company would have the potential to realize a stronger competitive
position and improved long-term operating and financial results. In
particular, the merger will allow Calico and ConnectInc.com the opportunity:
- to provide enterprises with a more comprehensive solution for the
creation of Internet applications;
- to offer broader electronic commerce software solutions and market
presence;
- to benefit from combining established customer relationships at both
companies;
- to sell ConnectInc.com's products into Calico's installed customer
base and through its larger sales force;
- to improve time to market for products of the combined company; and
- to take advantage of the financial resources of the combined company
which are much greater than ConnectInc.com's financial resources.
Q: WHAT WILL I RECEIVE IN THE MERGER? (SEE PAGE 58)
A: If the merger is completed, you will receive 0.081 shares of Calico common
stock for each share of ConnectInc.com common stock you own at the time of
the merger. Calico will not issue fractional shares. You will receive cash
based on the market price of Calico common stock instead of any fractional
share.
Q: WHAT DO I NEED TO DO NOW? (SEE PAGE 41)
A: Following your review of this proxy statement/prospectus, mail your signed
proxy card in the enclosed return envelope as soon as possible so that your
shares can be voted at the special meeting of ConnectInc.com stockholders.
1
<PAGE> 8
Q: HOW DO I VOTE?
A: You may vote by mailing a signed proxy card in the enclosed return envelope
as soon as possible so that those shares may be represented at the special
meeting. You may also attend the special meeting and vote in person.
Q: WHAT HAPPENS IF I SIGN AND RETURN MY PROXY BUT DO NOT INDICATE HOW TO VOTE MY
PROXY? (SEE PAGE 41)
A: If you do not include instructions on how to vote your properly signed proxy,
your shares will be voted FOR adoption of the merger agreement and approval
of the merger.
Q: WHAT HAPPENS IF I DO NOT RETURN A PROXY CARD? (SEE PAGE 41)
A: Not returning your proxy card will have the same effect as voting against the
merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD? (SEE PAGE 41)
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send a
written notice to the secretary of ConnectInc.com stating that you would like
to revoke your proxy. Second, you can complete and submit a new proxy card.
Third, you can attend the special meeting, file a written notice of
revocation of your proxy with the secretary of ConnectInc.com and vote in
person. Your attendance alone will not revoke your proxy.
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY SHARES
FOR ME? (SEE PAGE 42)
A: No. Your broker will not be able to vote your shares without instructions
from you. If you do not provide your broker with voting instructions, your
shares will be considered present at the special meeting for purposes of
determining a quorum but will not be considered to have been voted in favor
of adoption of the merger agreement. If you have instructed a broker to vote
your shares, you must follow directions received from your broker to change
those instructions.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW? (SEE PAGE 59)
A: No. After we complete the merger, Calico will send you written instructions
for exchanging your ConnectInc.com stock certificates for Calico stock
certificates.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS OF
CONNECTINC.COM? (SEE PAGES 10, 19 and 72)
A: We expect that, for United States federal income tax purposes, your exchange
of shares of ConnectInc.com common stock for shares of Calico common stock
generally will not cause you to recognize any gain or loss. You may, however,
recognize gain or loss in ConnectInc.com with respect to any cash you receive
instead of a fractional share of Calico common stock.
Q: AM I ENTITLED TO APPRAISAL RIGHTS? (SEE PAGE 126)
A: No. Under Delaware law, you are not entitled to dissenters or appraisal
rights in the merger.
2
<PAGE> 9
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We expect to complete the merger in February 2000. Because the merger is
subject to certain conditions, however, we cannot predict the exact timing.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: You can call Kevin Berry, Chief Financial Officer of ConnectInc.com, at (650)
254-4000 with any questions about the merger. You may also call Corporate
Investor Communications, ConnectInc.com's proxy solicitor, toll free at (877)
393-4954.
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SUMMARY
This brief summary highlights selected information from the proxy
statement/prospectus. It does not contain all of the information that is
important to you. We urge you to carefully read the entire proxy
statement/prospectus and the other documents to which this proxy
statement/prospectus refers to fully understand our proposed merger. See "Where
You Can Find More Information."
THE MERGER (PAGE 44)
We have attached the merger agreement to this document as Appendix A.
Please read the merger agreement. It is the legal document that governs the
merger.
PARTIES TO THE MERGER (PAGES 78 AND 118)
CALICO COMMERCE, INC.
333 West San Carlos Street, Suite 300
San Jose, California 95110
(408) 975-7400
Calico provides software and services that enable its customers to engage
in electronic commerce by selling complex products and services over the
Internet and through intranets, extranets and corporate networks. Calico's
software and services allow its customers to interact directly with users to
create a web-based, guided selling experience. Based on the number of its
customers, Calico believes that it is a leading provider of software and
services that enable customers to implement greater electronic business
strategies.
With Calico's software, companies are able to design sales programs that
evolve beyond basic transactions and focus on enhanced interactions with their
customers. Calico believes that it has pioneered a new class of software that
enables companies to customize the appearance and function of their web site and
create a unique process to interact with their customers. This enables companies
to differentiate themselves from their competitors, and build strong customer
relationships that can result in increased revenue and reduced sales costs.
The Calico eSales Suite can be implemented on Calico's customers' web sites
to improve selling effectiveness and customer satisfaction. Calico's software
facilitates the selling process by dynamically assessing customer requirements,
providing tailored information, identifying constraints, proposing alternatives
and delivering quotes. Calico's software enables companies to provide highly
tailored products and services, recommend additional related or complementary
items to a buyer during the purchase process, and reduce the time to market of
new products and services. In addition, Calico's software is designed to improve
sales effectiveness and order accuracy, thereby enhancing operating efficiency
and reducing costs.
The key elements of Calico's strategy are to:
- increase the breadth, depth and functionality of its software;
- align with electronic commerce leaders and expand into additional
industry market segments;
- enhance and expand its sales and services through additional partnerships
and alliances;
- extend its technology leadership; and
- identify and capitalize on new opportunities offered by expansion of
electronic commerce.
4
<PAGE> 11
Calico is incorporated in Delaware and headquartered in San Jose,
California. Calico had approximately 272 employees worldwide at September 30,
1999. Calico had total net revenues for the fiscal year ended March 31, 1999 of
$21.4 million and total net revenues for the six months ended September 30, 1999
of $15.6 million.
CONNECTINC.COM, CO.
515 Ellis Street
Mountain View, California 94043
(650) 254-4000
ConnectInc.com provides integration solutions to enable its customers to
engage in Internet-based electronic commerce and extend their businesses through
the emerging network supply chain. ConnectInc.com's MarketStream software
applications and Web time-driven professional services are designed to enable
corporations to build open, multi-vendor electronic business solutions that help
them to compete effectively in the digital economy. ConnectInc.com utilizes
innovative methodologies and advanced technical expertise to design, develop and
deploy electronic business solutions. This process is facilitated by the use of
emerging Internet technologies. This business strategy allows ConnectInc.com to
leverage its core competencies and deliver to its customers effective
applications and consulting services solutions.
ConnectInc.com historically designed, developed, marketed and supported
application software for Internet-based interactive commerce. In October 1998,
ConnectInc.com announced a shift in business direction and focus, to providing
Internet systems and systems integration services based on technologies from
both ConnectInc.com and industry partners. It also focused on developing and
concentrating its intellectual property around a new version of its MarketStream
software application product. This combined applications, services and
intellectual property strategy is ConnectInc.com's approach to providing
solutions for electronic business.
ConnectInc.com is incorporated in Delaware and headquartered in Mountain
View, California. ConnectInc.com had approximately 38 full-time employees
worldwide at September 30, 1999. ConnectInc.com had revenues for the fiscal year
ended December 31, 1998 of $6.5 million and revenues of $4.9 million for the
nine months ended September 30, 1999.
EFFECT AND TIMING OF THE MERGER
We propose that Calico and ConnectInc.com combine by way of a merger as a
result of which each of you will become Calico stockholders. We expect to
complete the merger in February 2000, although the merger agreement does not
expire until May 31, 2000. We also expect that the merger will close within two
business days after the special meeting if ConnectInc.com stockholders approve
the merger.
EXCHANGE OF SHARES (PAGE 58)
When the merger occurs, each of your shares of ConnectInc.com common stock
will automatically become the right to receive from Calico 0.081 shares of
Calico common stock. You will receive cash based on the market price of Calico
common stock instead of any fractional share that would otherwise be issued.
You will have to surrender your ConnectInc.com common stock certificates to
receive new certificates representing Calico common stock. You will not need to
do this, however, until you receive written instructions after we have completed
the merger.
5
<PAGE> 12
CONNECTINC.COM STOCK OPTIONS (PAGE 58)
In the merger, each stock option and warrant to buy ConnectInc.com common
stock will become an option or warrant to buy Calico common stock. However, each
option or warrant will continue to be governed by the terms of the
ConnectInc.com stock option plan or other agreement under which it was issued.
The number of shares of Calico common stock subject to each new stock option or
warrant, as well as the exercise price of that stock option or warrant, will be
adjusted to reflect the merger exchange ratio applicable to the ConnectInc.com
common stock.
MANAGEMENT AFTER THE MERGER (PAGE 76)
The composition of Calico's current executive management is not expected to
change as a result of the merger.
The officers of Calico Acquisition, Inc. shall be the initial officers of
ConnectInc.com.
THE CONNECTINC.COM SPECIAL STOCKHOLDERS MEETING (PAGE 41)
At the ConnectInc.com special stockholders meeting, you will be asked to:
1. approve and adopt the merger agreement, the merger and the other
transactions contemplated by the merger agreement; and
2. vote on the postponement or adjournment of the meeting to solicit
additional votes to approve the merger agreement, if the secretary of
the meeting decides that there are not enough votes to approve the
merger agreement.
RECORD DATE AND THE VOTE REQUIRED (PAGE 42)
You can vote at the special meeting if you owned ConnectInc.com common
stock at the close of business on December 17, 1999, the record date for the
meeting. You can cast one vote for each share of ConnectInc.com common stock you
owned at that time. To adopt the merger agreement, the holders of a majority of
shares of ConnectInc.com common stock allowed to vote at the meeting must vote
in favor of it. As of the record date, ConnectInc.com's directors and executive
officers and their affiliates beneficially owned approximately 364 outstanding
shares of ConnectInc.com common stock, representing less than 1% of the voting
power of the ConnectInc.com common stock entitled to vote at the special
meeting. Calico's directors, executive officers and affiliates did not own any
shares of ConnectInc.com common stock as of the record date.
You may vote your shares in person by attending the meeting or by mailing
us your proxy if you are unable or do not wish to attend. You may revoke your
proxy at any time before we take a vote at the meeting by sending a written
notice revoking the proxy or a later-dated proxy to the secretary of
ConnectInc.com, or by attending the meeting and voting in person.
OUR REASONS FOR THE MERGER (PAGES 47 AND 48)
Calico and ConnectInc.com are proposing to merge because they believe that
the merger will significantly benefit their respective stockholders, customers
and employees.
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<PAGE> 13
Specifically, Calico believes that a combination with ConnectInc.com will
benefit Calico's stockholders, customers and employees for the following
reasons:
- the merger will better enable the combined company to provide complete
electronic commerce solutions to customers;
- through the integration of product lines, the combined company can
strengthen its market position, in order to serve important growth
segments of the business-to-business electronic commerce market;
- the merger will facilitate Calico's efforts to broaden its product
offerings to include early stage Internet market makers linking multiple
buyers and multiple sellers in an online trading community, an area that
Calico believes will become increasingly important for electronic
commerce;
- ConnectInc.com's products and technology are complementary to Calico's,
and its engineering staff has skills that augment Calico's; and
- both companies have a common culture, including a shared commitment to
maintaining high levels of customer satisfaction which will enhance
Calico's ability to integrate ConnectInc.com's operations and support
functions.
ConnectInc.com believes that a merger with Calico will:
- provide the financial strength that would enable the combined company to
commit greater resources to product development efforts and fund future
growth;
- provide to ConnectInc.com the positive marketplace momentum of Calico;
- leverage Calico's sales and marketing presence and financial resources to
increase sales of ConnectInc.com products;
- permit ConnectInc.com, as part of the combined company, to compete more
effectively;
- provide synergy and compatibility between ConnectInc.com and Calico,
based on the compatibility of the companies' product lines and company
cultures;
- enable ConnectInc.com stockholders to receive a premium over the recent
price range of ConnectInc.com common stock; and
- provide greater liquidity to ConnectInc.com stockholders.
The discussion of our reasons for the merger includes forward-looking
statements about possible or assumed future results of our operations and the
performance of the combined company after the merger. Future results and
performance are subject to risks and uncertainties, which could cause such
results and performance to differ significantly from those expressed in these
statements. For a discussion of factors that could affect these future results,
see "Forward-Looking Statements May Prove Inaccurate" on page 11 and "Risk
Factors" on page 19.
CONNECTINC.COM BOARD'S RECOMMENDATION TO STOCKHOLDERS (PAGE 42)
The ConnectInc.com board of directors believes that the merger is
advisable, fair to you and in your best interests, and unanimously recommends
that you vote FOR approval and adoption of the merger agreement, the merger and
the other transactions contemplated by the merger agreement.
7
<PAGE> 14
OPINION OF CONNECTINC.COM'S FINANCIAL ADVISOR (PAGE 53)
ConnectInc.com's financial advisor, Alliant Partners, has delivered a
written opinion to the ConnectInc.com board of directors as to the fairness,
from a financial point of view, of the total consideration received by the
stockholders of ConnectInc.com pursuant to the merger agreement. The full text
of Alliant Partners' written opinion is attached to this document as Appendix B.
We encourage you to read this opinion carefully in its entirety for a
description of the procedures followed, assumptions made, matters considered and
limitations on the review undertaken. ALLIANT PARTNERS' OPINION IS DIRECTED TO
THE CONNECTINC.COM BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY STOCKHOLDER AS TO ANY MATTER RELATING TO THE MERGER.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 77)
Calico common stock is traded on The Nasdaq Stock Market. On November 18,
1999, the last trading day before we announced the merger, Calico common stock
closed at $67.00 per share. ConnectInc.com common stock is also traded on The
Nasdaq Stock Market. On November 18, 1999, ConnectInc.com common stock closed at
$4.25 per share.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 68)
Whether we complete the merger depends on a number of conditions being
satisfied in addition to ConnectInc.com stockholders' approval of the merger
agreement. However, either Calico or ConnectInc.com may choose to complete the
merger even though one or more of these conditions has not been satisfied, as
long as the law allows them to do so. We cannot be certain when, or if, the
conditions to the merger will be satisfied or waived, or that the merger will be
completed.
WAIVER AND AMENDMENT (PAGE 70)
We may jointly amend the merger agreement, and each of us may waive our
right to require the other to adhere to the terms and conditions of the merger
agreement. However, after the ConnectInc.com stockholders approve the merger, we
may not adopt an amendment or waiver that legally requires the approval of
ConnectInc.com's stockholders unless such stockholders approve the amendment or
waiver.
TERMINATION OF THE MERGER AGREEMENT (PAGE 69)
We can agree at any time prior to completing the merger to terminate the
merger agreement. Also, either of us can decide, without the other's consent, to
terminate the merger agreement for various reasons, including not completing the
merger by May 31, 2000, unless the failure to complete it by that date is
principally due to the failure of the party seeking to terminate the merger
agreement to timely fulfill its obligations under the merger agreement.
TERMINATION OF THE MERGER AGREEMENT IN CONNECTION WITH AN UNSOLICITED
ACQUISITION PROPOSAL (PAGE 66)
ConnectInc.com may engage in negotiations regarding an unsolicited proposal
from a potential acquirer other than Calico if the ConnectInc.com board decides,
based upon the advice of its financial advisor, that the potential acquirer is
capable of consummating a proposal that is superior to the merger and, after
consulting with legal counsel, that its failure to do so would likely be a
breach of its fiduciary duties under Delaware law. ConnectInc.com may also
provide the other potential
8
<PAGE> 15
acquirer with due diligence information pursuant to confidentiality agreements
and if copies are provided to Calico.
ConnectInc.com may terminate the merger agreement if, after
ConnectInc.com's board of directors has received an unsolicited proposal from a
potential acquirer other than Calico, the board decides in good faith, after
consultation with legal counsel, that it must withdraw its recommendation of the
merger with Calico in order to comply with its fiduciary duties under Delaware
law. Under these circumstances, however, ConnectInc.com's board of directors
must give Calico the opportunity to make an offer that is at least as favorable
as the potential acquirer's proposal. Calico may terminate the merger agreement
if ConnectInc.com's board of directors withdraws or adversely modifies its
recommendation that ConnectInc.com stockholders approve the merger with Calico
or recommends that ConnectInc.com stockholders approve another competing
transaction.
TERMINATION PAYMENTS (PAGE 71)
In general, ConnectInc.com has agreed to pay Calico $5.0 million if the
merger agreement is terminated because:
- the ConnectInc.com board withdrew or adversely modified its approval or
recommendation of the merger agreement or merger or recommended that the
ConnectInc.com stockholders approve a proposal for a merger or other
business combination with a company other than Calico;
- ConnectInc.com breached any of its representations or warranties or if
any of ConnectInc.com's representations or warranties have become untrue
so that the conditions to Calico's obligation to complete the merger
could not be satisfied by May 31, 2000, and within nine (9) months after
termination of the merger agreement ConnectInc.com becomes party to a
third-party acquisition or a third-party acquisition is closed;
- ConnectInc.com breached any of its covenants or agreements in the merger
agreement having, in the aggregate, a material adverse affect on
ConnectInc.com or materially adversely affecting either party's ability
to consummate the merger and ConnectInc.com fails to cure such breach
within thirty (30) business days notice and within nine (9) months after
the stockholders meeting, ConnectInc.com becomes party to a third-party
acquisition or a third-party acquisition is closed;
- ConnectInc.com held a stockholder meeting and failed to obtain their
approval of the merger and within six (6) months after the stockholders'
meeting ConnectInc.com enters into an agreement with respect to a
third-party acquisition or a third-party acquisition is closed; or
- the ConnectInc.com board recommended a superior proposal from a potential
acquirer other than Calico.
Whether or not the merger is completed, each party will pay its own fees
and expenses.
INTERESTS OF CONNECTINC.COM'S OFFICERS AND DIRECTORS IN THE MERGER THAT DIFFER
FROM YOUR INTERESTS (PAGE 51)
Some of ConnectInc.com's officers have interests in the merger that differ
from, or are in addition to, their interests as stockholders of ConnectInc.com.
These additional interests exist because of change in control agreements that
these officers have entered into with ConnectInc.com. These agreements will
provide the ConnectInc.com officers with severance benefits and acceleration of
vesting of stock options if their employment with ConnectInc.com is terminated
after the merger
9
<PAGE> 16
occurs. In addition, certain ConnectInc.com officers are eligible to receive
payments under these agreements upon completion of the merger. Certain directors
of ConnectInc.com will also receive accelerated stock option vesting if their
service to ConnectInc.com is terminated after the merger.
In addition, after the merger, Calico will continue the indemnification
arrangements for directors and officers of ConnectInc.com and its subsidiaries
in effect prior to the merger. Under the merger agreement, Calico's
indemnification of ConnectInc.com's directors or officers may not exceed
ConnectInc.com's net worth as of September 30, 1999. Also, Calico will cause
ConnectInc.com to maintain a policy of directors' and officers' liability
insurance for six years after the merger for the benefit of those persons who
were directors or officers covered by liability insurance immediately before the
merger occurs.
Details about the interests of some of ConnectInc.com's directors and
executive officers are described under "The Merger -- Interests of
ConnectInc.com's Officers and Directors in the Merger and Potential Conflicts of
Interests."
The members of ConnectInc.com's board of directors knew about these
interests, and considered them when they approved the merger agreement.
DISSENTERS' APPRAISAL RIGHTS (PAGE 126)
Delaware law does not provide you with dissenters' appraisal rights in the
merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO CONNECTINC.COM STOCKHOLDERS (PAGE
72)
We expect that, for United States federal income tax purposes, your
exchange of shares of ConnectInc.com common stock for shares of Calico common
stock generally will not cause you to recognize any gain or loss. You may,
however, recognize gain or loss in ConnectInc.com with respect to any cash you
receive instead of a fractional share of Calico common stock.
THIS TAX TREATMENT DISCUSSION MAY NOT ADDRESS ALL RELEVANT TAX
CONSIDERATIONS FOR EVERY CONNECTINC.COM STOCKHOLDER. DETERMINING THE ACTUAL TAX
CONSEQUENCES OF THE MERGER TO YOU MAY BE COMPLICATED. THEY WILL DEPEND ON YOUR
SPECIFIC SITUATION AND ON VARIABLES NOT WITHIN OUR CONTROL. YOU SHOULD CONSULT
YOUR OWN TAX ADVISOR FOR A FULL UNDERSTANDING OF THE MERGER'S TAX CONSEQUENCES
TO YOU.
ACCOUNTING TREATMENT (PAGE 74)
We will account for the merger using the purchase method of accounting.
This means that, for accounting and financial reporting purposes, Calico will
make a determination of the fair value of ConnectInc.com's assets and
liabilities in order to allocate the purchase price to the assets acquired and
the liabilities assumed.
MATERIAL DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE 121)
The rights of Calico stockholders are governed by Delaware law and Calico's
certificate of incorporation and bylaws. The rights of ConnectInc.com
stockholders are also governed by Delaware law and ConnectInc.com's certificate
of incorporation and bylaws. If we complete the merger, you will become a
stockholder of Calico, and your rights will be governed by Delaware law and by
Calico's charter documents.
10
<PAGE> 17
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
We have each made forward-looking statements in this proxy
statement/prospectus and in other documents to which we refer you that are
subject to risks and uncertainties. These forward-looking statements include
information about possible or assumed future results of our operations or the
performance of Calico and ConnectInc.com after the merger is completed. When we
use any of the words "believes," "expects," "anticipates," "intends,"
"estimates" or similar expressions, we are making forward-looking statements.
Many possible events or factors could affect the actual financial results and
performance of each of our companies after the merger, and these factors or
events could cause those results or performance to differ significantly from
those expressed in our forward-looking statements. These possible events or
factors include the following:
- we could lose customers and employees as a result of the merger;
- our revenues after the merger may be lower than we currently expect;
- integrating our businesses and products may be more time consuming,
costly and difficult than we anticipate;
- competition in Calico's and ConnectInc.com's industries is extremely
intense and may increase;
- changes in technology and changes caused by the rapidly evolving
electronic commerce market and the impact of "year 2000" data investments
by us or our customers may adversely impact our sales or our ability to
compete;
- we may be unable to timely introduce new products or product upgrades
that are accepted by the market or that meet market demand;
- we could have trouble hiring or retaining employees;
- we may not be able to expand our professional services organization or
establish and maintain relationships with third party consultants to meet
demand for our products;
- third-parties may infringe our proprietary intellectual property rights;
- litigation involving matters such as intellectual property, securities,
antitrust and customer issues may adversely affect our business;
- general economic conditions in the U.S. or abroad may change or be worse
than we currently expect;
- U.S. or international legislative or regulatory changes may adversely
affect our business; and
- changes may occur in the securities markets.
11
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables show selected consolidated financial data for each of
us. The information is based on historical financial information that Calico and
ConnectInc.com have presented in our prior SEC filings. Calico's consolidated
historical financial statements for each of the three years in the period ended
March 31, 1999 were audited by PricewaterhouseCoopers LLP, independent
accountants, and ConnectInc.com's consolidated historical financial statements
for each of the three years in the period ended December 31, 1998 were audited
by Ernst & Young LLP, independent auditors. The consolidated statements of
operations data of Calico for the six months ended September 30, 1999 and 1998
and of ConnectInc.com for the nine months ended September 30, 1999 and 1998 and
the consolidated balance sheet data for each company as of September 30, 1999
and 1998 are derived from unaudited condensed consolidated financial statements.
In the opinion of management of both Calico and ConnectInc.com, the unaudited
condensed consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of these periods. The consolidated statement of
operations data for Calico for the fiscal year ended March 31, 1999 include the
results of operations of FirstFloor Software, Inc. subsequent to Calico's
acquisition of FirstFloor in August 1998. The results for the interim periods
presented are not necessarily indicative of the results that may be expected for
any future period. You should read all of the summary financial information we
provide in the following tables in connection with this historical financial
information.
The historical financial information for ConnectInc.com has been
incorporated into this document by reference. See "Where You Can Find More
Information" on page 128. The historical financial information for Calico is
included in this document. See "Financial Statements" commencing on page F-1.
This Selected Consolidated Financial Data is based on, and should be read
in conjunction with, the historical consolidated financial statements and the
related notes thereto of Calico, included elsewhere in this proxy
statement/prospectus, and ConnectInc.com, incorporated herein by reference.
12
<PAGE> 19
CALICO COMMERCE, INC.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 14, SIX MONTHS
1994 ENDED
(INCEPTION) TO YEAR ENDED MARCH 31, SEPTEMBER 30,
MARCH 31, -------------------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999
-------------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue:
License...................................... $ 93 $ 1,521 $ 3,940 $ 6,965 $ 10,482 $ 5,589 $ 6,959
Services..................................... 227 749 1,963 4,894 10,931 4,349 8,650
------ ------- ------- ------- -------- ------- --------
Total net revenue.......................... 320 2,270 5,903 11,859 21,413 9,938 15,609
------ ------- ------- ------- -------- ------- --------
Cost of net revenue:
License...................................... 2 7 178 265 1,179 366 373
Services..................................... 66 433 2,122 3,115 7,272 3,109 6,133
------ ------- ------- ------- -------- ------- --------
Total cost of net revenue.................. 68 440 2,300 3,380 8,451 3,475 6,506
------ ------- ------- ------- -------- ------- --------
Gross profit................................... 252 1,830 3,603 8,479 12,962 6,463 9,103
------ ------- ------- ------- -------- ------- --------
Operating expenses:
Sales and marketing.......................... 98 1,972 5,950 7,593 14,138 5,824 9,199
Research and development..................... 132 458 2,224 3,342 5,677 2,204 6,467
General and administrative................... 25 480 1,486 2,222 3,988 2,100 3,352
Stock compensation........................... -- 990 864 780 2,007 893 934
Acquired in-process research and
development................................ -- -- -- -- 1,840 1,840 --
Amortization of goodwill..................... -- -- -- -- 550 78 476
------ ------- ------- ------- -------- ------- --------
Total operating expenses................... 255 3,900 10,524 13,937 28,200 12,939 20,428
------ ------- ------- ------- -------- ------- --------
Loss from operations........................... (3) (2,070) (6,921) (5,458) (15,238) (6,476) (11,325)
Interest and other income, net................. 31 100 21 (41) (23) (81) 137
------ ------- ------- ------- -------- ------- --------
Net income (loss).............................. $ 28 $(1,970) $(6,900) $(5,499) $(15,261) $(6,557) $(11,188)
Net income (loss) per share:
Basic and diluted............................ $ -- $ (0.69) $ (2.12) $ (1.08) $ (2.27) $ (1.04) $ (1.21)
====== ======= ======= ======= ======== ======= ========
Weighted average shares...................... 6,000 2,856 3,248 5,079 6,710 6,303 9,184
====== ======= ======= ======= ======== ======= ========
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD
END):
Cash and cash equivalents...................... $ 83 $ 1,780 $ 1,921 $ 2,514 $ 15,441 $ 5,366
Working capital (deficit)...................... (42) 1,683 353 44 10,187 (1)
Total assets................................... 252 2,800 4,356 7,692 31,368 23,040
Debt and capital leases, long-term portion..... -- 90 815 814 877 1,163
Total mandatorily redeemable convertible
preferred stock.............................. -- 3,842 9,500 14,505 32,535 32,551
Total stockholders' deficit.................... (21) (2,012) (8,854) (13,428) (16,780) (26,766)
</TABLE>
13
<PAGE> 20
CONNECTINC.COM, CO.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- -------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATION DATA:
Net revenue:
License........................................... $ 1,627 $ 288 $ 4,693 $ 3,131 $ 1,828 $ 1,608 $ 1,989
Services.......................................... 6,345 8,285 5,487 6,231 4,650 3,433 2,873
------- -------- -------- -------- ------- ------- -------
Total net revenue............................. 7,972 8,573 10,180 9,362 6,478 5,041 4,862
------- -------- -------- -------- ------- ------- -------
Cost of net revenue:
License........................................... 162 140 791 753 413 415 343
Services.......................................... 4,426 5,452 8,277 8,312 4,333 3,428 1,752
------- -------- -------- -------- ------- ------- -------
Total cost of net revenue..................... 4,588 5,592 9,068 9,065 4,746 3,843 2,095
------- -------- -------- -------- ------- ------- -------
Gross profit........................................ 3,384 2,981 1,112 297 1,732 1,198 2,767
------- -------- -------- -------- ------- ------- -------
Operating expenses:
Sales and marketing............................... 1,622 4,810 4,652 4,990 3,153 3,153 1,363
Research and development.......................... 1,355 3,978 10,445 7,194 3,051 3,050 742
General and administrative........................ 1,947 3,330 2,373 2,632 2,263 1,761 1,949
Termination of distribution rights................ -- 4,057 -- -- 1,098 1,098 --
------- -------- -------- -------- ------- ------- -------
Total operating expenses...................... 4,924 16,175 17,470 14,816 9,565 9,062 4,054
------- -------- -------- -------- ------- ------- -------
Loss from operations.............................. (1,540) (13,194) (16,358) (14,519) (7,833) (7,864) (1,287)
Interest and other income, net.................... (199) (971) 216 (66) (71) (78) 187
Net loss before taxes............................. (1,739) (14,165) (16,142) (14,585) (7,904) (7,942) (1,100)
Provision (benefit) for income taxes.............. 26 (26) -- -- -- -- --
------- -------- -------- -------- ------- ------- -------
Net loss.......................................... $(1,765) $(14,139) $(16,142) $(14,585) $(7,904) $(7,942) $(1,100)
======= ======== ======== ======== ======= ======= =======
Net loss per share:
Basic and diluted............................... $ (0.79) $ (4.81) $ (3.85) $ (0.74) $ (0.80) $ (0.07)
======== ======== ======== ======= ======= =======
Weighted average shares......................... 17,814 3,358 3,784 10,682 9,909 14,674
======== ======== ======== ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):
Total assets........................................ $ 5,161 $ 18,063 $ 19,154 $ 15,364 $ 5,453 $ 7,110
Debt and capital leases, long-term portion.......... 1,167 1,636 790 10,591 245 111
Total mandatorily redeemable convertible preferred
stock............................................. 8,060 37,041 -- -- -- --
Total stockholder's equity (deficit)................ (1,538) 13,318 13,355 (633) 1,946 4,894
</TABLE>
14
<PAGE> 21
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF CALICO AND
CONNECTINC.COM
We are providing the following summary unaudited pro forma combined
financial data to give you a better picture of what the results of operations
and the financial position of the combined businesses of Calico and
ConnectInc.com might have looked like had the merger occurred on April 1, 1998
for income statement purposes and on September 30, 1999 for balance sheet
purposes. This information is provided for illustrative purposes only and does
not show what the results of operations or financial position of Calico would
have been if the merger with ConnectInc.com actually occurred on the dates
assumed. In addition, this information does not indicate what Calico's future
consolidated operating results or consolidated financial position will be.
HOW THE PRO FORMA FINANCIAL DATA WAS PREPARED
The following unaudited pro forma combined condensed consolidated financial
statements combine Calico's historical financial position, adjusted for the
proceeds from its initial public offering completed on October 6, 1999, with
ConnectInc.com's as of September 30, 1999 and historical results of operations
of Calico for fiscal year ended March 31, 1999 with ConnectInc.com's for the
fiscal year ended December 31, 1998 and the six months ended September 30, 1999
for both companies. The pro forma statement of operations data assumes the
combination occurred on April 1, 1998 while the pro forma balance sheet data
assume the combination took place on September 30, 1999.
THESE PRO FORMA FINANCIAL STATEMENTS HAVE BEEN BASED ON ASSUMPTIONS
We prepared these pro forma statements on the basis of assumptions
described in the notes thereto. These statements also reflect the issuance of
0.081 of a share of Calico common stock for each outstanding share of
ConnectInc.com common stock, the exchange ratio specified in the merger
agreement. We assumed the value of the Calico shares to be issued for
outstanding ConnectInc.com shares to be $79.6 million, based on 14,858,566
ConnectInc.com shares outstanding as of October 31, 1999 and the conversion
value of a ConnectInc.com share at the time of the merger agreement. We
increased this value by approximately $10.4 million for the value of all
outstanding ConnectInc.com options and a warrant to be assumed by Calico and by
approximately $2.0 million for transaction costs associated with the merger.
The allocation of the aggregate purchase price of approximately $92.0
million will be finalized following receipt of the closing balance sheet of
ConnectInc.com and a final independent appraisal of certain intangible assets of
ConnectInc.com. The excess of the purchase price over the fair value of the
acquired ConnectInc.com net tangible and identifiable intangible assets will
then be allocated to goodwill.
The aggregate purchase price is expected to be allocated as follows, based
upon a preliminary independent appraisal of ConnectInc.com (in thousands):
<TABLE>
<S> <C>
Net tangible assets of ConnectInc.com....................... $ 3,220
In-process research and development......................... 230
Customer base............................................... 150
Workforce-in-place.......................................... 2,580
Existing technology......................................... 5,000
Goodwill.................................................... 80,851
-------
$92,031
=======
</TABLE>
15
<PAGE> 22
Because the valuation has not been completed, the actual amount of the
allocations could vary from the estimates above. The net tangible assets of
ConnectInc.com consist primarily of cash and cash equivalents and accounts
receivable. In-process research and development has not reached technological
feasibility at the acquisition date and will be immediately charged to
operations in the period the merger is consummated. The amount allocated to
customer base, workforce-in-place and existing technology will be amortized over
the estimated useful life of three years. The purchase price in excess of net
tangible and identifiable intangible assets will be allocated to goodwill and
amortized over its expected useful life of three years.
COSTS RESULTING FROM THE COMBINATION
Calico and ConnectInc.com estimate they will incur transaction costs of
approximately $2.0 million associated with the merger, consisting primarily of
business consulting fees paid to investment bankers, legal and accounting fees
and expenses, and other related charges. This is a preliminary estimate and is
therefore subject to change. Additionally, Calico expects to assume
approximately $1.7 million of liabilities associated with change of control and
termination benefits. These assumed liabilities will be included in the purchase
price allocation. These nonrecurring costs will be included as part of the
aggregate purchase price.
YOU SHOULD READ THESE SUMMARY PRO FORMA FINANCIAL STATEMENTS WITH THE HISTORICAL
FINANCIAL STATEMENTS
This selected consolidated financial data is based on, and should be read
in conjunction with, the historical consolidated financial statements and the
related notes thereto of Calico, included elsewhere in this proxy
statement/prospectus, and ConnectInc.com, incorporated herein by reference.
The unaudited pro forma combined consolidated balance sheet and statements
of operations are not necessarily indicative of the financial position and
operating results that would have been achieved had the transaction been in
effect as of the dates aforementioned and should not be construed as being a
representation of financial position or future operating results of the combined
company.
UNAUDITED SELECTED PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................................. $ 18,444 $ 27,891
Loss from operations..................................... (27,575) (52,598)
Net loss................................................. (27,324) (52,692)
Net loss per share; basic and diluted.................... $ (1.05) $ (2.41)
Weighted average common shares; basic and diluted........ 26,015 21,893
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
<S> <C>
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 94,342
Working capital............................................. 84,726
Total assets................................................ 202,621
Long-term obligations....................................... 1,742
Stockholders' equity........................................ 179,476
</TABLE>
16
<PAGE> 23
UNAUDITED COMPARATIVE PER SHARE DATA
The following tables present certain unaudited historical and unaudited pro
forma per share data that reflect the completion of the merger of Calico and
ConnectInc.com. This data should be read in conjunction with the unaudited pro
forma combined condensed financial statements and related notes included
elsewhere in this proxy statement/prospectus, the audited consolidated financial
statements and related notes of Calico included elsewhere in this proxy
statement/prospectus and the audited consolidated financial statements and
related notes of ConnectInc.com which are incorporated in this proxy
statement/prospectus by reference. The selected unaudited pro forma combined per
share data is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred had the transaction been consummated at the dates indicated, nor is it
necessarily indicative of the future operating results or financial position of
the combined companies.
Shares used to calculate pro forma basic and diluted loss per share for the
six months ended September 30, 1999 were determined by adding the 1.2 million
shares assumed to be issued in exchange for the outstanding ConnectInc.com
shares to Calico's 24.8 million weighted average shares outstanding for the six
months ended September 30, 1999 (which are as adjusted for the conversion of the
Mandatorily Redeemable Convertible Preferred Stock), for a total of 26.0 million
shares. Shares used to calculate pro forma basic and diluted loss per share for
the year ended March 31, 1999 were determined by adding the 1.2 million shares
assumed to be issued in exchange for the outstanding ConnectInc.com shares to
Calico's 20.7 million weighted average shares outstanding for the year ended
March 31, 1999 (which are as adjusted for the conversion of the Mandatorily
Redeemable Convertible Preferred Stock) for a total of 21.9 million shares.
Shares used to calculate pro forma book value per share at September 30, 1999
were determined by adding the 1.2 million shares issued for the ConnectInc.com
shares to Calico's absolute shares outstanding at September 30, 1999, as
adjusted for the shares issued in its initial public offering completed on
October 6, 1999 and the shares issued upon the conversion of the Mandatorily
Redeemable Convertible Preferred Stock, of 33.7 million. Shares used to
calculate pro forma book value per share at March 31, 1999 were determined by
adding the 1.2 million shares issued for the ConnectInc.com shares to Calico's
absolute shares outstanding at September 30, 1999, as adjusted for the shares
issued in its initial public offering and the shares issued upon the conversion
of the Mandatorily Redeemable Preferred Stock, of 33.5 million.
For purposes of computing the historical book value per share of Calico at
September 30, 1999, historical book value, adjusted for the proceeds from its
initial public offering and the automatic conversion of its Mandatorily
Redeemable Convertible Preferred Stock, of $89.7 million, was divided by
historical actual shares outstanding, adjusted for the shares issued in its
initial public offering and the common shares issued upon the conversion of the
Mandatorily Redeemable Preferred Stock, of 33.7 million. For purposes of
computing the historical book value per share of Calico at March 31, 1999,
historical net book value of $15.8 million, including the value of the
Mandatorily Redeemable Preferred Stock, was divided by actual shares outstanding
of 27.1 million, including the shares of Mandatorily Redeemable Convertible
Preferred Stock outstanding. For purposes of computing the historical book value
per share of ConnectInc.com at September 30, 1999, historical book value of $4.9
million was divided by the actual shares outstanding of 14.9 million. For
purposes of computing the historical book value per share of ConnectInc.com at
December 31, 1998, historical book value of $1.9 million was divided by the
actual shares outstanding of 13.2 million. Calculation of ConnectInc.com
equivalent pro forma per share amounts are computed by multiplying the pro forma
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<PAGE> 24
amounts per Calico share by the exchange ratio of 0.081 of shares of Calico
common stock for each ConnectInc.com common share.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ ------------------------
<S> <C> <C>
PER SHARE OF CALICO COMMON STOCK:
Book value:
Historical, as adjusted..................... $ 2.66 $ 0.58
Pro forma................................... 5.15
Net loss per common share:
Historical, as adjusted basic and diluted... (0.45) (0.74)
Pro forma basic and diluted................. (1.05) (2.41)
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ ------------------------
<S> <C> <C>
PER SHARE OF CONNECTINC.COM COMMON STOCK:
Book value:
Historical.................................. 0.33 0.15
Per equivalent share........................ 0.42
Net loss per common share:
Historical basic and diluted................ (0.09) (0.74)
Per equivalent share basic and diluted...... (0.09) (0.20)
</TABLE>
18
<PAGE> 25
RISK FACTORS
ConnectInc.com stockholders should carefully consider the following risk
factors, together with the other information included and incorporated by
reference in this proxy statement/prospectus, in deciding whether to vote to
approve the merger.
RISK FACTORS RELATING TO THE MERGER
CHANGES IN THE MARKET VALUE OF CALICO COMMON STOCK COULD ADVERSELY AFFECT THE
VALUE OF THE CONSIDERATION THAT YOU ARE RECEIVING FOR YOUR CONNECTINC.COM COMMON
STOCK
There will be no adjustment to the exchange ratio of 0.081 shares for
changes in the market price of either ConnectInc.com common stock or Calico
common stock, and ConnectInc.com is not permitted to "walk away" from the merger
or resolicit the vote of its stockholders solely because of changes in the
market price of Calico common stock. Accordingly, the specific dollar value of
Calico common stock to be received by you upon completion of the merger will
depend on the market value of Calico common stock at the time of the merger.
CALICO AND CONNECTINC.COM COULD LOSE CUSTOMERS OR FAIL TO ATTRACT NEW CUSTOMERS
AS A RESULT OF THE MERGER OR THE ANNOUNCEMENT OF THE MERGER, WHICH WOULD CAUSE A
DECREASE IN REVENUE
We cannot assure you that Calico's and ConnectInc.com's current customers
will continue their current buying patterns. In addition, the announcement of
the merger may inhibit Calico's and ConnectInc.com's attempts to attract new
customers. Certain of ConnectInc.com's or Calico's current or potential
customers may cancel or defer orders for each company's products as a result of
the merger or the announcement of the merger. We believe these cancellations or
deferrals may occur because some of our current or potential customers might be
concerned about our ability to integrate our operations. See "-- We may not
successfully integrate our business operations, or our management may be
distracted by the integration process." Any such delay or cancellation would
adversely effect Calico's or ConnectInc.com's business or, after the merger,
Calico's sales. These effects may occur with respect to each company during the
period before completion of the merger or after the merger.
CONNECTINC.COM STOCKHOLDERS MAY EXPERIENCE LOWER RETURNS ON THEIR INVESTMENT
AFTER THE MERGER
ConnectInc.com stockholders may receive a lower return on their investment
after the merger than if the merger does not occur. A lower return could occur,
for example, if Calico does not achieve the anticipated operating and strategic
benefits of the merger or if Calico does not otherwise achieve its business
objectives and the market price for Calico's stock is adversely affected. The
issuance of Calico common stock in the merger will result in dilution and this
could hurt its market price. In addition, the trading price of Calico common
stock has fluctuated since its October 1999 initial public offering and these
fluctuations are likely to continue. These fluctuations have been greater than
those experienced by the stock market in general.
THE IRS MAY CHALLENGE THE TAX-FREE NATURE OF THE MERGER, AND IF THIS CHALLENGE
WERE SUCCESSFUL, YOU COULD BE REQUIRED TO PAY INCOME TAX ON ANY GAIN REALIZED IN
THE MERGER
Calico and ConnectInc.com will not seek a ruling from the Internal Revenue
Service that the merger generally will be tax-free to ConnectInc.com
stockholders. Therefore, there is a risk that the Internal Revenue Service may
later challenge the tax-free nature of the merger. If it does,
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<PAGE> 26
ConnectInc.com stockholders may be required to pay tax on any gain realized in
the merger. See "The Merger -- Material Federal Income Tax Consequences."
SOME OF CONNECTINC.COM'S DIRECTORS AND OFFICERS HAVE CONFLICTS OF INTEREST THAT
COULD HAVE INFLUENCED THEIR DECISION TO RECOMMEND THE MERGER TO CONNECTINC.COM
STOCKHOLDERS
In considering the recommendation of the ConnectInc.com board of directors
to approve the merger, ConnectInc.com stockholders should recognize that one of
ConnectInc.com's directors and several of its officers have conflicts of
interest because of potential change of control or severance benefits and other
reasons. These reasons are described under the headings "The Merger -- Interests
of ConnectInc.com's Officers and Directors in the Merger and Potential Conflicts
of Interests" and "Management After the Merger."
WE MAY NOT SUCCESSFULLY INTEGRATE OUR BUSINESS OPERATIONS, OR OUR MANAGEMENT MAY
BE DISTRACTED BY THE INTEGRATION PROCESS
After the merger has been completed, Calico may integrate, among other
things, the following business operations of ConnectInc.com into Calico:
- product and service offerings;
- product development, sales and marketing;
- research and development;
- administrative, financial and customer service functions; and
- management information systems.
Integrating the operations of ConnectInc.com with those of Calico after the
merger may be difficult, costly and time consuming. The integration of our
combined operations may temporarily distract management from the day-to-day
business of the combined company after the merger. Calico and ConnectInc.com may
fail to manage this integration effectively or to achieve any of the anticipated
benefits that both companies hope will result from the merger.
CALICO EXPECTS TO INCUR POTENTIALLY SIGNIFICANT INTEGRATION COSTS IN CONNECTION
WITH THE MERGER, WHICH COULD NEGATIVELY AFFECT CALICO'S EARNINGS
Calico expects to incur costs from integrating ConnectInc.com's operations
with those of Calico. These costs may be substantial and may include:
- costs for employee redeployment, relocation or severance;
- costs for employee retention, which could include salary increases,
bonuses or additional option grants;
- conversion of information systems; and
- reorganization or closures of facilities.
We cannot determine the amount of these costs at this time for sure. Calico
expects to charge these costs to operations in the quarter in which the merger
is completed and in subsequent quarters as decisions are made and costs are
incurred. This will increase Calico's operating costs and expenses and decrease
Calico's operating income for those quarters. Additionally, we estimate that the
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<PAGE> 27
transaction costs directly associated with the merger will be approximately $2.0
million. Calico expects to capitalize these costs as part of the purchase price.
CALICO COULD LOSE KEY CONNECTINC.COM PERSONNEL WHO ARE NECESSARY TO ACHIEVE THE
BENEFITS THAT CALICO AND CONNECTINC.COM EXPECT TO REALIZE FROM THE MERGER
The merger could lead to the loss of key ConnectInc.com personnel.
ConnectInc.com's contribution to the combined company's success will depend in
part on the continued service of key groups of ConnectInc.com personnel. If one
or more of ConnectInc.com's senior management, engineers or sales or customer
support personnel leaves after we complete the merger, ConnectInc.com's business
could be seriously harmed, and Calico may not be able to achieve the benefits
that it expects to realize from the merger.
THE FAILURE TO SATISFY CONDITIONS TO OUR COMPLETION OF THE MERGER COULD
JEOPARDIZE THE MERGER. FAILURE TO COMPLETE THE MERGER COULD BE COSTLY TO
CONNECTINC.COM AND ITS STOCKHOLDERS
Even if ConnectInc.com's stockholders approve the merger, the merger may
not close if any of the following occur:
- either Calico or ConnectInc.com has significantly breached any of its
representations, warranties or covenants made in the merger agreement;
- there is imposed a law, regulation or court order that prohibits the
merger; or
- the merger is not completed by May 31, 2000.
If the merger is not completed:
- ConnectInc.com may be required to pay Calico a termination fee of $5.0
million if an acquisition or other similar transaction involving
ConnectInc.com potentially exists or occurs;
- the price of ConnectInc.com common stock may decline, assuming that
current market prices reflect a market assumption that the merger will be
completed; and
- ConnectInc.com must still pay its costs related to the merger, such as
legal, accounting and financial advisory fees.
RISK FACTORS RELATING TO CALICO
CALICO HAS A FIVE YEAR HISTORY OF LOSSES, EXPECTS TO CONTINUE TO INCUR LOSSES
AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
Calico has incurred quarterly and annual losses in each of the five years
since Calico was formed, and expects to continue to incur losses on both a
quarterly and annual basis for the foreseeable future. Calico incurred net
losses of $6.9 million for fiscal 1997, $5.5 million for fiscal 1998, $15.3
million for fiscal 1999 and $11.2 million for the six months ended September 30,
1999. As of September 30, 1999, Calico had an accumulated deficit of $40.9
million. Moreover, Calico expects to continue to incur significant sales and
marketing and research and development expenses, and, as a result, Calico will
need to generate significant revenue to achieve and maintain profitability.
Although Calico's revenue has grown in recent quarters, Calico cannot be certain
that it can sustain this growth or that it will generate sufficient revenue for
profitability. If Calico does achieve profitability, it cannot be certain that
it can sustain or increase profitability on a quarterly or annual basis in the
future.
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<PAGE> 28
CALICO'S QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY, ARE SUBJECT TO SEASONALITY
AND MAY FALL SHORT OF ANTICIPATED LEVELS, WHICH MAY CAUSE VOLATILITY OR DECLINE
IN THE PRICE OF ITS COMMON STOCK
Calico's quarterly operating results have varied significantly in the past
and it expects that they will continue to vary significantly from quarter to
quarter in the future.
In addition, Calico receives a major portion of its orders near the end of
each quarter. Therefore, Calico has difficulty predicting the volume and timing
of orders, and short delays in closing orders or implementation of products can
cause its operating results to fall substantially short of anticipated levels
for that quarter. Demand for Calico's products may be particularly volatile and
unpredictable for the remainder of calendar 1999 and into 2000, due to concerns
over year 2000 compliance.
Calico also expects to experience seasonal fluctuations in the sales of its
software products. For example, Calico's quarterly results may fluctuate based
upon its customers' calendar year budgeting cycles. These seasonal variations
may lead to fluctuations in its quarterly operating results.
As a result of these and other factors, Calico believes that
period-to-period comparisons of its historical results of operations are not
necessarily meaningful and are not a good predictor of its future performance.
In some future quarter Calico's operating results may be below the expectations
of public market analysts and investors, which could cause volatility or decline
in the price of Calico's common stock.
CALICO'S PRODUCTS HAVE A LONG SALES AND IMPLEMENTATION CYCLE WHICH MAKES IT
DIFFICULT TO PREDICT ITS QUARTERLY RESULTS AND MAY CAUSE OPERATING RESULTS TO
VARY SIGNIFICANTLY
The sales cycle for Calico's products is long, typically ranging from three
months to a year, making it difficult to predict the quarter in which revenue
recognition may occur. Calico's products have a relatively high sales price per
unit, and often are part of a significant strategic decision by its customers
regarding their information systems infrastructure. Accordingly, the decision to
purchase Calico's products typically requires significant pre-purchase
evaluation. Calico spends significant time educating and providing information
to prospective customers regarding the use and benefits of its products. During
this evaluation period, Calico may expend substantial funds in sales, marketing
and management efforts.
This lengthy sales cycle may cause license revenue and operating results to
vary significantly from period to period. If anticipated sales from a specific
customer for a particular quarter are not realized in that quarter, its
operating results may vary significantly and Calico may miss its revenue
forecast.
IF CALICO IS UNABLE TO COMPLETE SUBSTANTIAL LICENSE SALES WHEN ANTICIPATED OR
EXPERIENCES DELAYS IN THE PROGRESS ON A PROJECT OR IN THE SATISFACTION OF
CONTRACT TERMS, IT MAY HAVE TO DEFER REVENUE UNTIL LATER QUARTERS, CAUSING ITS
QUARTERLY RESULTS TO FLUCTUATE AND FALL BELOW ANTICIPATED LEVELS
Even after purchase of Calico's products, it often takes substantial time
and resources to implement its software and to integrate it with its customers'
existing computer systems. Calico may not be able to recognize all or a portion
of the revenue until the implementation of the software is completed or
milestones are achieved. Calico has in the past and may in the future be
required to defer license revenue for software products from the period in which
the agreement for the license of software is signed to subsequent periods. If
Calico is unable to complete one or more substantial anticipated license sales
or experiences delays in the progress on a project or product or in the
22
<PAGE> 29
satisfaction of contract terms required for revenue recognition in a particular
quarter, Calico may not be able to recognize revenue when anticipated, causing
its quarterly results to fluctuate and fall below anticipated levels. This could
cause Calico's stock price to decline.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF
CALICO'S REVENUE, ITS REVENUE COULD DECLINE IF IT LOSES A MAJOR CUSTOMER
Calico derives a significant portion of its software license revenue in
each quarter from a limited number of customers. For example, for the fiscal
year ended March 31, 1999, four customers accounted for 52% of Calico's revenue
and ten customers accounted for 81% of its revenue and in the six months ended
September 30, 1999 10 customers accounted for 80% of Calico's revenues. Many of
Calico's contracts are in excess of $1.0 million. Calico expects that a limited
number of customers will continue to account for a substantial portion of its
revenue for the foreseeable future. As a result, if Calico loses a major
customer, if a contract is delayed, cancelled or deferred or if an anticipated
sale is not made, its revenue would be adversely affected. In addition,
customers that have accounted for significant revenue in the past may not
continue to generate revenue in any future period.
CALICO MAY NOT ACHIEVE ANTICIPATED REVENUE IF IT DOES NOT SUCCESSFULLY
INTRODUCE, AND IF ITS CUSTOMERS DO NOT ACCEPT, UPGRADES AND ENHANCEMENTS TO ITS
PRODUCTS, INCLUDING ITS LATEST VERSION RELEASED IN NOVEMBER 1999
Calico currently derives substantially all of its revenue from licenses,
professional services and support related to sales of the Calico eSales Suite.
The latest version of the Calico eSales Suite was introduced in November
1999. Calico's business depends on the success and customer acceptance of this
introduction as well as future enhancements and successful new product
introductions. Although Calico's products have been subject to its internal
testing procedures, since the new version of the Calico eSales Suite has only
recently been introduced, customers may discover errors or other problems with
the product, which may adversely affect its acceptance.
Calico expects that it will continue to depend on revenue from new and
enhanced versions of the Calico eSales Suite for the foreseeable future,
particularly enhancements adding to the functionality and scalability of its
products, as well as enhancements enabling its products to run on Unix. If
Calico's target customers do not continue to adopt and expand their use of the
Calico eSales Suite, or if Calico is unable to timely develop and introduce
upgrades and enhancements, it may not achieve anticipated revenue.
CALICO COULD FAIL TO ACHIEVE ANTICIPATED REVENUE IF IT EXPERIENCES DELAYS IN
INTRODUCTION AND MARKET ACCEPTANCE OF NEW PRODUCTS
Calico expects to add new products by acquisition or internal development
and by developing enhancements to its existing products. Calico has in the past
and may in the future experience delays in the planned release dates of its
software products and upgrades. New products may not be released on schedule or
may contain defects when released. The introduction of enhancements to Calico's
suite of products may cause customers to defer orders for Calico's existing
products. New and enhanced products may not meet the requirements of the
marketplace and achieve market acceptance. If Calico is unable to ship or
implement new or enhanced products when planned, or fails to achieve timely
market acceptance of its new or enhanced products, it may suffer lost sales and
could fail to achieve anticipated revenue.
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CALICO HAS LIMITED EXPERIENCE WITH LARGE-SCALE DEPLOYMENTS, THE CALICO
ESALES CONFIGURATOR OPERATES ONLY ON WINDOWS NT AND NOT ON UNIX-BASED WEB
SERVERS, AND IF CALICO'S PRODUCTS DO NOT SCALE TO OPERATE IN A COMPANY-WIDE
ENVIRONMENT, CALICO MAY LOSE SALES AND SUFFER DECREASED REVENUE
Calico's strategy requires that its software be highly scalable, or able to
accommodate substantial increases in the number of users concurrently using the
product. However, Calico is just beginning to deploy large-scale Internet-based
solutions and no large-scale deployment has been operating at any customer site
for an extended period of time. In addition, the interface component of the
Calico eSales Configurator is powered by Microsoft Active Server Pages and
therefore operates only on Windows NT. Calico is developing user interface
components to allow its customers to use either a Unix-based or Windows NT-based
web server. If Calico is unable to promptly or successfully develop the Unix
version, the scalability of its Calico eSales Configurator may be limited for
larger customer applications due to the scalability limitations of Windows NT.
If Calico's solutions do not perform adequately in large-scale implementations,
it may lose customer sales resulting in a decline in revenue.
In addition, the computer software for Calico's larger customer
applications is often implemented together with computer software applications
from other companies. Some of these implementations are performed by third
parties. If Calico's customers experience delays or difficulties implementing
its software together with these computer software applications in large scale
complex integrations, it may lose sales, incur customer dissatisfaction and
suffer decreased revenue.
TO DATE, CALICO'S SALES HAVE BEEN CONCENTRATED IN THE COMPUTER HARDWARE AND
NETWORK AND TELECOMMUNICATIONS EQUIPMENT MARKETS AND IF IT IS UNABLE TO
SUCCESSFULLY PENETRATE NEW MARKETS, IT MAY NOT BE ABLE TO ACHIEVE EXPECTED
SALES GROWTH
Sales of Calico's products and services in two markets -- computer hardware
and network and telecommunications equipment -- accounted for over 80% of its
total net revenue in the fiscal year ended March 31, 1999, and 62% in the six
months ended September 30, 1999. Calico expects that revenue from these two
markets will continue to account for a substantial portion of its total net
revenue in fiscal 2000. Calico is targeting expansion in additional market
segments defined by industries where eCommerce software is highly strategic and
promotes competitive advantage, including manufacturing, retail,
telecommunications services and financial services. If Calico is unable to
successfully increase penetration of its existing markets or expand in these
additional markets, or if the overall economic climate of its target markets
deteriorates, it may not be able to achieve expected sales growth.
IN ORDER TO INCREASE SALES OF ITS PRODUCTS, CALICO MUST INCREASE ITS DIRECT
SALES FORCE; HOWEVER, HIRING AND INTEGRATING SALES PERSONNEL TAKES TIME AND
THERE IS A SHORTAGE OF QUALIFIED PERSONNEL
Calico's future growth depends on the ability of its direct sales force to
develop customer relationships and increase sales to a level that will allow it
to reach and maintain profitability. Calico's ability to increase its sales will
depend on its ability to recruit, train and retain top quality sales people who
are able to target prospective customers' senior management, and who can
productively generate and service large accounts.
There is a shortage of the sales personnel Calico needs, and competition
for qualified personnel is intense. In addition, it will take time for new sales
personnel to achieve full productivity. If Calico is unable to hire or retain
qualified sales personnel, or if newly hired personnel fail to develop the
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<PAGE> 31
necessary skills or to reach productivity when anticipated, it may not be able
to expand its sales organization and increase sales of its products.
IF CALICO DOES NOT EXPAND ITS PROFESSIONAL SERVICES ORGANIZATION AND ESTABLISH
AND MAINTAIN RELATIONSHIPS WITH THIRD PARTY CONSULTANTS, IT MAY NOT BE ABLE TO
PROVIDE ADEQUATE IMPLEMENTATION SERVICES TO ITS CUSTOMERS
Growth in the license of Calico's products depends on its ability to
provide its customers with professional services to assist with design,
implementation and maintenance. If Calico is unable to get the support of
third-party consultants to provide these services or if third parties do not
provide these services effectively or in a cost-efficient manner, or decide to
develop their own products or support the products of Calico's competitors
rather than its products, Calico may not be able to provide sufficient
implementation services to its customers. This could result in decreased
customer satisfaction and loss of sales. In addition, if Calico has to retain
third party consultants to provide services for its customers for which it has
previously committed, the resulting increased costs could have an adverse impact
on the gross margins for its professional services.
YEAR 2000 CONSIDERATIONS MAY CAUSE CALICO'S CUSTOMERS AND POTENTIAL CUSTOMERS TO
DELAY PURCHASES OF ITS PRODUCTS UNTIL LATER IN 2000, AND MAY REDUCE ITS SALES
Calico may experience reduced license of products as customers and
potential customers put a priority on correcting year 2000 problems and
therefore defer purchase decisions for software products until later in 2000.
Accordingly, demand for Calico's products may be particularly volatile and
unpredictable for the remainder of calendar 1999 and 2000.
CALICO'S DEPENDENCE ON SERVICES REVENUE, WHICH HAS A LOWER GROSS MARGIN THAN
LICENSE REVENUE, COULD ADVERSELY IMPACT ITS GROSS MARGIN AND OPERATING RESULTS
Calico anticipates that services revenue will continue to represent a
significant percentage of total net revenue as it continues to provide
consulting and training services that complement its products and as its
installed base of customers grows. To increase services revenue, Calico must
expand its services organization, successfully recruit and train a sufficient
number of qualified services personnel, and obtain renewals of current
maintenance contracts by its customers.
Although services revenue is important to its business, services revenue
has lower gross margins than license revenue. As a result, a continued increase
in the percentage of total net revenue represented by services revenue or an
unexpected decrease in license revenue could have a detrimental impact on its
overall gross margins and its operating results.
CALICO NEEDS TO ESTABLISH AND MAINTAIN KEY MARKETING ALLIANCES TO COMPLEMENT ITS
DIRECT SALES FORCE IN ORDER TO GROW SALES; HOWEVER, FEW POTENTIAL PARTNERS HAVE
FOCUSED ON ITS SOFTWARE MARKET AND CALICO HAS ONLY ENTERED INTO A SMALL NUMBER
OF KEY ALLIANCES
In order to increase geographic sales coverage worldwide and to address new
markets and customer segments, Calico must complement its direct sales force
with strategic marketing alliances. Until recently, few potential partner
organizations have focused on the emerging class of packaged electronic commerce
applications and Calico has only established a limited number of such key
alliances. To date, Calico has not generated significant revenue from these
alliances. If Calico fails to maintain its existing relationships and to
establish new key alliances, or if its partners do not perform to its or its
customers' expectations, Calico may not be able to expand its sales as
anticipated.
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<PAGE> 32
COMPETITION IN THE MARKET FOR ADVANCED ELECTRONIC COMMERCE PRODUCTS AND
SERVICES IS INTENSE AND COMES FROM DEVELOPERS OF IN-HOUSE SOLUTIONS, VENDORS
OF ENTERPRISE CLASS SOFTWARE AND EMERGING COMPANIES FOCUSED ON ELECTRONIC
COMMERCE, AND COULD REDUCE CALICO'S SALES AND PREVENT IT FROM ACHIEVING
PROFITABILITY
The market for software and services that enable electronic commerce is
new, intensely competitive, highly fragmented, and rapidly changing. Calico
expects competition to persist and intensify, which could result in price
reductions, reduced gross margins and loss of market share.
Competitors vary in size and in the scope and breadth of the products and
services offered. Many of Calico's competitors and potential competitors have a
number of significant advantages over it, including:
- a longer operating history;
- preferred vendor status with Calico's customers;
- more extensive name recognition and marketing power; and
- significantly greater financial, technical, marketing and other
resources, giving them the ability to respond more quickly to new or
changing opportunities, technologies and customer requirements.
Calico's competitors may also bundle their products in a manner that may
discourage users from purchasing Calico's products. Current and potential
competitors may establish cooperative relationships with each other or with
third parties, or adopt aggressive pricing policies to gain market share.
Competitive pressures may require Calico to reduce the prices of its products
and services. Calico may not be able to maintain or expand its sales if
competition increases and it is unable to respond effectively.
MANY OF CALICO'S EXECUTIVE OFFICERS AND KEY PERSONNEL ARE RELATIVELY NEW AND
MUST BE INTEGRATED INTO CALICO'S ORGANIZATION, AND CALICO NEEDS TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS AND HIRE ADDITIONAL PERSONNEL IN
ORDER TO CONTINUE TO MANAGE ITS RAPID GROWTH
Calico has recently experienced a period of rapid growth and expansion,
which places significant demands on its managerial administrative, operational,
financial and other resources. All members of its management team, other than
its Vice President, Research and Development have joined Calico since June 1997.
Calico's Vice President, Engineering joined Calico in January 1999, and its Vice
President and Chief Financial Officer joined Calico in June 1999. From September
30, 1997 to September 30, 1999, Calico expanded from 85 to 272 employees.
Calico's new employees include a number of key managerial, marketing, planning,
technical and operations personnel who have not yet been fully integrated into
its organization.
Calico also plans to expand the geographic scope of its operations.
Calico's rapid growth and expansion places significant demands on its
managerial, administrative, operational, financial and other resources. To
accommodate continued anticipated growth and expansion, Calico will be required
to:
- improve existing and implement new operational and financial systems,
procedures and controls; and
- hire, train, manage, retain and motivate qualified personnel.
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<PAGE> 33
These measures may place additional burdens on Calico's management and its
internal resources.
THE MARKET FOR CALICO'S ELECTRONIC COMMERCE PRODUCTS AND SERVICES IS NEW AND
EVOLVING AND CUSTOMERS MAY NOT ACCEPT CALICO'S PRODUCTS
The market for Calico's products and services is at an early stage of
development and is rapidly evolving. This market may not continue to develop and
grow, and companies may not elect to utilize Calico's products and services
rather than attempt to develop applications internally or through other sources.
Companies that have already invested substantial resources in other methods of
conducting commerce may be reluctant to adopt a new approach that may replace,
limit or compete with their existing systems. Calico expects that it will
continue to need intensive marketing and sales efforts to educate prospective
customers about the uses and benefits of its products and services. Therefore,
demand for and market acceptance of Calico's products and services will be
subject to a high level of uncertainty.
NEW TECHNOLOGIES COULD RENDER CALICO'S PRODUCTS OBSOLETE OR REQUIRE IT TO
REWRITE ITS SOFTWARE IN NEW COMPUTER LANGUAGES OR FOR OTHER OPERATING SYSTEMS
The market for software and services that enable electronic commerce is
characterized by rapid technological change, changes in customer requirements,
frequent new product and service introductions and enhancements and emerging
industry standards. Advances in Internet technology or in applications software
directed at electronic commerce, or the development of entirely new technologies
to replace existing software, could lead to new competitive products that have
better performance or lower prices than its products and could render its
products obsolete and unmarketable. In addition, if a new software language or
operating system becomes standard or is widely adopted in Calico's industry,
Calico may need to rewrite portions of its products in another computer language
or for another operating system to remain competitive. If Calico is unable to
develop products that respond to changing technology, its business could be
harmed.
It is common for software companies to acquire other companies as a means
of introducing new products or emerging technologies. If a new technology or
product emerges that may displace Calico's product lines, competitors with large
market capitalizations or cash reserves would be better positioned than Calico
is to acquire such new technology or product.
IF CALICO LOSES KEY PERSONNEL, IT COULD EXPERIENCE REDUCED SALES, DELAYED
PRODUCT DEVELOPMENT AND DIVERSION OF MANAGEMENT RESOURCES
Calico's success depends largely on the continued contributions of Calico's
key management, engineering, sales and marketing and professional services
personnel, many of whom would be difficult to replace. Calico does not have
employment agreements with most of its key personnel. Although Calico has not
experienced significant turnover in its key personnel in the recent past, if one
or more members of its senior management were to resign, the loss of personnel
could result in loss of sales, delays in new product development and diversion
of management resources.
BECAUSE COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, CALICO MAY NOT BE ABLE
TO RECRUIT OR RETAIN PERSONNEL, WHICH COULD IMPACT THE DEVELOPMENT OR SALES OF
ITS PRODUCTS
Calico's success depends on its ability to attract and retain additional
qualified engineering, sales and marketing and professional services personnel.
Competition for these types of personnel is intense, especially in Silicon
Valley. If Calico is unable to retain its existing key personnel, or attract and
train
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additional qualified personnel, Calico's growth may be limited due to its lack
of capacity to develop and market its products.
ACQUISITIONS, SUCH AS CALICO'S ACQUISITION OF FIRSTFLOOR IN AUGUST 1998 AND
PROPOSED ACQUISITION OF CONNECTINC.COM, MAY BE COSTLY AND DIFFICULT TO
INTEGRATE, DIVERT MANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE
As part of its business strategy, Calico may in the future make other
acquisitions of, or investments in companies, products or technologies that
complement its current products, augment its market coverage, enhance its
technical capabilities or that may otherwise offer growth opportunities. For
example, in 1998 Calico acquired FirstFloor Software. Calico encountered the
following difficulties in its acquisition of FirstFloor and would anticipate
similar difficulties in future acquisitions, including the proposed acquisition
of ConnectInc.com:
- difficulties in the assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from other business concerns; and
- adverse effects on existing business relationships with suppliers and
customers.
Future acquisitions could also pose risks of entering markets where Calico
has no or limited prior experience and require it to use substantial portions of
its available cash to consummate the acquisition.
In addition, in connection with any future acquisitions, Calico could:
- issue equity securities which would dilute current stockholders'
percentage ownership;
- incur substantial debt; or
- assume significant liabilities.
These actions could materially adversely affect Calico's operating results
and/or the price of its common stock.
CALICO INTENDS TO PURSUE RELATIONSHIPS WITH EMERGING ELECTRONIC COMMERCE
BUSINESSES THAT MAY HAVE NO PROVEN RECORD OF SUCCESS
Calico intends to pursue relationships with and foster development of
emerging electronic commerce-based businesses at an early stage of their
development. Calico may pursue these new ventures by acquisition, joint venture,
or other alternative investment. Calico cannot be certain that these new
ventures will be successful, or that it will generate any revenue from these new
ventures. In addition to the risks posed by traditional acquisitions, these new
ventures may have no proven record of success, and may fail, causing Calico to
lose its investment, and may divert management time and resources.
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CALICO DEPENDS ON TECHNOLOGY LICENSED TO IT BY THIRD PARTIES FOR ITS APPLICATION
SERVERS, SEARCH CAPABILITY SOFTWARE, A LICENSING MECHANISM AND QUOTE GRID
TECHNOLOGY, AND THE LOSS OR INABILITY TO MAINTAIN THESE LICENSES COULD RESULT IN
INCREASED COSTS OR DELAY SALES OF ITS PRODUCTS
Calico licenses technology from several software providers for its
application servers, its search capability software, a licensing mechanism, and
quote grid technology. Calico anticipates that it will continue to license
technology from third parties in the future. This software may not continue to
be available on commercially reasonable terms, if at all. Some of the software
Calico licenses from third parties could be difficult to replace. The loss of
any of these technology licenses could result in delays in the license of
Calico's products until equivalent technology, if available, is developed or
identified, licensed and integrated. In addition, the effective implementation
of Calico's products depends upon the successful operation of third-party
licensed products in conjunction with Calico's products, and therefore any
undetected errors in these licensed products could prevent the implementation or
impair the functionality of Calico's products, delay new product introductions
and/or injure Calico's reputation. The use of additional third-party software
would require Calico to enter into license agreements with third parties, which
could result in higher royalty payments and a loss of product differentiation.
SOFTWARE DEFECTS IN CALICO'S SOFTWARE PRODUCTS AND SYSTEM ERRORS IN ITS
CUSTOMERS' SYSTEMS AFTER INSTALLING CALICO'S SOFTWARE COULD DIMINISH DEMAND FOR
ITS PRODUCTS AND RESULT IN LOSS OF REVENUE, DELAY IN MARKET ACCEPTANCE AND
INJURY TO ITS REPUTATION
Complex software products like Calico's may contain undetected errors or
defects, including year 2000 related errors, that may be detected at any point
in the life of the product. Calico has in the past discovered software errors in
its products and as a result has experienced delays in shipment of products
during the period required to correct these errors. The latest version of the
Calico eSales Suite was only introduced in June 1999. Errors may be found from
time to time in Calico's new or enhanced products after commencement of
commercial shipments, such as this latest version of its suite and any new
version, resulting in loss of revenue, delay in market acceptance and sales,
diversion of development resources, injury to its reputation or increased
warranty and repair costs.
Calico's products are generally used in systems with other vendors'
products, and as a result Calico's products must integrate successfully with
these existing systems. System errors, whether caused by Calico's products or
those of another vendor, could adversely affect the market acceptance of its
products, and any necessary revisions could cause it to incur significant
expenses.
IF CALICO BECOMES SUBJECT TO PRODUCT LIABILITY LITIGATION, IT COULD BE COSTLY
AND TIME CONSUMING TO DEFEND
Since Calico's products are used for company-wide, integral computer
applications with potentially strong impact on Calico's customers' sales of
their products, errors, defects or other performance problems could result in
financial or other damages to Calico's customers. Although Calico's license
agreements generally contain provisions designed to limit its exposure to
product liability claims, existing or future laws or unfavorable judicial
decisions could negate such limitation of liability provisions. Product
liability litigation, even if it were unsuccessful, would be time consuming and
costly to defend.
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IF CALICO'S SYSTEMS AND THE SYSTEMS OF CALICO'S KEY SUPPLIERS AND CUSTOMERS ARE
NOT YEAR 2000 COMPLIANT, CALICO COULD INCUR INCREASED COSTS, DELAY OR LOSS OF
REVENUE, DIVERSION OF DEVELOPMENT RESOURCES OR DAMAGE TO ITS REPUTATION
Calico's products are generally integrated into computer systems involving
sophisticated hardware and complex software products, which may not be year 2000
compliant. The failure of Calico's customers' systems to be year 2000 compliant
could impede the success of applications that Calico or its partners have
developed for them. Accordingly, known or unknown defects that affect the
operation of Calico's software, including any defects or errors in applications
that include Calico's products, could result in delay or loss of revenue,
diversion of development resources, damage to Calico's reputation, or increased
service or warranty costs and litigation costs.
Calico needs to ensure year 2000 compliance of its own internal computer
and other systems, to continue testing its software products and to audit the
year 2000 compliance status of its suppliers and business partners. Calico has
not completed its year 2000 investigation and overall compliance initiative, and
the total cost of its year 2000 compliance may be substantial. Calico may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in its internal systems.
IF CALICO IS UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY IT MAY LOSE A VALUABLE
ASSET OR INCUR COSTLY LITIGATION TO PROTECT ITS RIGHTS
Calico's success and ability to compete depend upon its proprietary
technology. Calico relies on patent, trademark, trade secret and copyright laws
to protect its intellectual property. Despite Calico's efforts to protect its
intellectual property, a third party could copy or otherwise obtain Calico's
software or other proprietary information without authorization, or could
develop software competitive to Calico's. Calico's means of protecting its
proprietary rights may not be adequate and its competitors may independently
develop similar technology, duplicate its products or design around its patents
or other intellectual property. In addition, the laws of some foreign countries
do not protect Calico's proprietary rights to as great an extent as do the laws
of the United States, and Calico expects that it will become more difficult to
monitor the use of its products if it increases its international presence.
Calico may have to litigate to enforce its intellectual property rights, to
protect its trade secrets or know-how or to determine their scope, validity or
enforceability. Enforcing or defending Calico's proprietary technology is
expensive, could cause the diversion of Calico's resources and may not prove
successful. Calico's protective measures may prove inadequate to protect its
proprietary rights. Any failure to enforce or protect its rights could cause us
to lose a valuable asset. If Calico is unable to protect its intellectual
property, it may lose a valuable asset or incur costly litigation to protect its
rights.
IF THE FUNCTIONALITY OF CALICO'S PRODUCTS OVERLAPS A COMPETITORS' PRODUCTS AND
IT BECOMES SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, THESE CLAIMS
COULD BE COSTLY AND TIME-CONSUMING TO DEFEND, DIVERT MANAGEMENT ATTENTION OR
CAUSE PRODUCT DELAYS
There has been substantial litigation in the software and Internet
industries regarding intellectual property rights. It is possible that, in the
future, third parties may claim that Calico or its current or potential future
products infringe their intellectual property. Calico expects that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in its industry grows and the functionality of products overlaps.
Any claims, with or without merit, could be costly and time-consuming to defend,
divert Calico's management's attention, or cause product delays. If its products
were found to infringe
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a third party's proprietary rights, Calico could be required to enter into
royalty or licensing agreements in order to be able to sell its products.
Royalty and licensing agreements, if required, may not be available on terms
acceptable to us or at all.
IF USE OF THE INTERNET DOES NOT CONTINUE TO DEVELOP AND RELIABLY SUPPORT THE
DEMANDS PLACED ON IT BY ELECTRONIC COMMERCE, IT MAY NOT DEVELOP AS A COMMERCIAL
MARKETPLACE, CAUSING CALICO TO FAIL TO ACHIEVE ANTICIPATED SALES GROWTH
Growth in sales of Calico's products and services depends upon the
continued and increased use of the Internet as a medium for commerce and
communication. Although the Internet is experiencing growth in the number of
users and traffic, such rapid growth is a recent phenomenon and may not
continue. In addition, the Internet infrastructure may not be able to support
the demands placed on it by increased usage and bandwidth requirements. Other
risks associated with commercial use of the Internet could slow its growth,
including:
- inadequate security of information distributed over the Internet,
resulting in privacy concerns;
- inadequate reliability of the network infrastructure;
- slow development of enabling technologies and complementary products; and
- limited accessibility and ability to deliver quality service.
In addition, the recent growth in the use of the Internet has caused
frequent periods of poor or slow performance, requiring components of the
Internet infrastructure to be upgraded. Delays in the development or adoption of
new equipment and standards or protocols required to handle increased levels of
Internet activity, or increased government regulation, could cause the Internet
to lose its viability as a commercial medium. If the Internet infrastructure
does not develop sufficiently to address these concerns, it may not develop as a
commercial marketplace, necessary for Calico to increase sales.
INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT THE MARKET FOR
CALICO'S PRODUCTS AND SERVICES, OR IMPOSE ON CALICO GREATER TAX BURDENS OR
LIABILITY FOR TRANSMISSION OF PROTECTED DATA
As electronic commerce and the Internet continue to evolve, Calico expects
that federal, state and foreign governments will adopt laws and regulations
covering issues such as user privacy, taxation of goods and services provided
over the Internet, pricing, content and quality of products and services. If
enacted, these laws and regulations could limit the market for electronic
commerce, and therefore the market for Calico's products and services. Although
many of these regulations may not apply directly to Calico's business, Calico
expects that laws regulating the solicitation, collection or processing of
personal or consumer information could indirectly affect its business.
The Telecommunications Act of 1996 prohibits certain types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. The imposition upon Calico and other software and service
providers of potential liability for information carried on or disseminated
through its applications could require Calico to implement measures to reduce
its exposure to this liability. These measures could require Calico to expend
substantial resources or discontinue certain services. In addition, although
substantial portions of the Communications Decency Act (the Act through which
the Telecommunications Act of 1996 imposes criminal penalties) were held to be
unconstitutional, similar legislation may be enacted and upheld in the future.
It is possible that this legislation could expose companies involved in
electronic commerce to liability, which could limit the
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growth of electronic commerce generally. Legislation like the Telecommunications
Act and the Communications Decency Act could dampen the growth of Internet usage
and decrease its acceptance as a communications and commercial medium.
RESTRICTIONS ON EXPORT OF ENCRYPTED TECHNOLOGY COULD CAUSE CALICO TO INCUR
DELAYS IN INTERNATIONAL PRODUCT SALES
Calico's software utilizes encryption technology, the export of which is
regulated by the United States government. If Calico's export authority is
revoked or modified, if Calico's software is unlawfully exported or if the
United States adopts new legislation restricting export of software and
encryption technology, Calico may experience delays or reduction in shipment of
its products internationally. Current or future export regulations could limit
Calico's ability to distribute its products outside of the United States. While
Calico takes precautions against unlawful exportation of its software, it cannot
effectively control the unauthorized distribution of software across the
Internet.
IF CALICO DOES NOT EXPAND ITS INTERNATIONAL OPERATIONS, IT MAY NOT ACHIEVE
ANTICIPATED SALES GROWTH
In order to increase its international sales opportunities, Calico will
need to develop further its international sales, professional services and
support organizations, and it will need to form additional relationships with
partners worldwide. If Calico is unable to expand its international operations
and international sales on a timely basis, it may not achieve anticipated sales
growth. This expansion may be more difficult or take longer than it anticipates,
and it may not be able to successfully market, sell, deliver and support its
products internationally.
INTERNATIONAL EXPANSION COULD BE DIFFICULT AND PRESENT RISKS TO CALICO'S
BUSINESS
If successful in its international expansion, Calico will be subject to a
number of risks associated with international operations, including:
- longer accounts receivable collection cycles;
- expenses associated with localizing products for foreign markets;
- difficulties in managing operations across disparate geographic areas;
- difficulties in hiring qualified local personnel;
- difficulties associated with enforcing agreements and collecting
receivables through foreign legal systems; and
- unexpected changes in regulatory requirements that impose multiple
conflicting tax laws and regulations.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES AND THE POSSIBLE LACK OF FINANCIAL
STABILITY IN FOREIGN COUNTRIES COULD PREVENT OVERSEAS SALES GROWTH
Calico's international sales are currently U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make Calico's products less competitive in international
markets. In the future, Calico may elect to invoice some of its international
customers in local currencies. Doing so will subject it to fluctuations in
exchange rates between the U.S. dollar and the particular local currency.
Calico's operating results could also be adversely affected by the seasonality
of international sales and the economic conditions of its overseas markets.
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CALICO'S DIRECTORS AND EXECUTIVE OFFICERS HAVE SIGNIFICANT CONTROL OVER CALICO,
WHICH MAY LEAD TO CONFLICTS WITH OTHER STOCKHOLDERS OVER CORPORATE GOVERNANCE
Calico's directors, executive officers, and holders of 5% or more of its
outstanding common stock will beneficially own approximately 49.4% of Calico's
outstanding common stock if the merger with ConnectInc.com is completed and
1,203,544 shares are issued to the ConnectInc.com stockholders. These
stockholders, acting together, would be able to significantly influence all
matters requiring approval by Calico's stockholders, including the election of
directors and significant corporate transactions, such as mergers or other
business combination transactions. This control may have the effect of delaying
or preventing a third party from acquiring or merging with Calico.
CALICO'S CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER OR CHANGE IN
CALICO'S CONTROL THAT A STOCKHOLDER MAY CONSIDER FAVORABLE
Provisions in Calico's certificate of incorporation and bylaws may have the
effect of delaying or preventing a merger or acquisition of Calico or a change
in its control or changes in its management.
CALICO'S STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE HIGHLY BE VOLATILE, WHICH
MAY LEAD TO LOSSES BY INVESTORS
The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies in particular, such
as Calico, have been highly volatile. ConnectInc.com stockholders may not be
able to resell their shares acquired in the merger at or above the market value
of the shares at the time of the merger. The market price of Calico's common
stock may decrease significantly in response to a number of factors, some of
which are beyond Calico's control, including the following:
- variations in its quarterly operating results;
- announcements that its revenues or income are below securities analysts'
expectations;
- changes in securities analysts' estimates of Calico's performance or
industry performance;
- changes in market valuations of similar companies;
- sales of large blocks of Calico's common stock;
- the termination of lock up agreements signed by Calico's officers,
directors and certain of its stockholders; and
- fluctuations in stock market prices and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
CALICO MAY BE SUBJECT TO SECURITIES CLASS ACTION LITIGATION IF ITS STOCK PRICE
IS VOLATILE
In the past, securities class action litigation has often been instigated
against a company following periods of volatility in the company's stock price.
If this were to happen to Calico, litigation would be expensive and would divert
management's attention.
FUTURE SALES OF CALICO'S STOCK COULD CAUSE ITS STOCK PRICE TO FALL
Sales of a substantial number of shares of Calico's common stock in the
public market could cause the market price of its common stock to decline by
potentially introducing a large number of sellers of Calico's common stock into
a market in which Calico's common stock price is already
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volatile. In addition, the sale of these shares could impair Calico's ability to
raise capital through the sale of additional equity securities. All of the
4,600,000 sold by Calico in its initial public offering in October 1999 are
freely tradable. Calico's directors, executive officers and other stockholders
signed lock-ups at the time of the initial public offering restricting their
right to sell their shares of Calico's common stock. These lock-up agreements
expire as to 30% of the shares held by these stockholders on March 5, 2000, and
expire in full on April 4, 2000, at which time these shares and the shares of
common stock underlying any options held by these stockholders will become
eligible for sale, in some cases subject only to the volume, manner of sale and
notice requirements of Rule 144 of the Securities Act of 1933.
RISK FACTORS RELATING TO CONNECTINC.COM
CONNECTINC.COM MAY CONTINUE TO EXPERIENCE NET LOSSES
Except for the fourth quarter of 1998 and the first quarter of 1999,
ConnectInc.com has not realized a net operating profit in any quarter since it
began operations. In 1998, 1997 and 1996, ConnectInc.com experienced significant
losses and negative cash flow from operations. If operating expenses exceed
revenues in a given period, ConnectInc.com may continue to experience net losses
and negative cash flow from operations. ConnectInc.com may not be able to
increase its revenue, or sustain the increase in revenue achieved. In addition,
if increases in operating expenses are not accompanied by increased revenues,
ConnectInc.com may not achieve profitability and may continue to incur increased
losses. If ConnectInc.com does achieve profitability, it may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
CONNECTINC.COM'S NET REVENUES AND OPERATING RESULTS MAY FLUCTUATE
ConnectInc.com's net revenues and operating results may fluctuate
significantly because of a number of factors, many of which are outside of its
control. These factors include:
- the ability of ConnectInc.com to develop, introduce and market new and
enhanced versions of its products on a timely basis;
- announcements of new and enhanced versions of products by ConnectInc.com
or competitors;
- the length of time required to complete a sale of products by
ConnectInc.com and the demand for the products of ConnectInc.com;
- the pace of development of electronic commerce conducted on the Internet;
- the fact that customers may defer purchasing the products of
ConnectInc.com in anticipation of enhancements or new products offered by
ConnectInc.com or its competitors;
- whether existing customers will renew existing service agreements;
- software defects and other product quality problems;
- the ability of ConnectInc.com to attract and retain key personnel;
- the success of the international sales efforts of ConnectInc.com;
- changes in the level of operating expenses; and
- general economic conditions.
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CONNECTINC.COM MAY NOT BE ABLE TO GENERATE OR MAINTAIN SUFFICIENT CASH TO FUND
ITS OPERATIONS
Since operations began, ConnectInc.com has incurred net losses and
experienced significant negative cash flow from operations. Based on its current
operating plan, ConnectInc.com believes it has adequate cash to fund operations
through at least 2000. However, actual cash requirements may exceed anticipated
cash requirements. ConnectInc.com would then have to seek additional sources of
cash to fund operations. If ConnectInc.com issues additional shares of stock,
its current stockholders' ownership may be diluted, or the shares issued may
have rights, preferences or privileges senior to those of the common stock.
Additional financing may not be available to ConnectInc.com, or may be available
but on terms that are not acceptable. If it is unable to secure additional
funds, ConnectInc.com may be unable to continue operations, develop or enhance
its products, take advantage of future opportunities or respond to competitive
pressures, any of which could have an adverse effect on the business, operating
results and financial condition of ConnectInc.com.
CONNECTINC.COM DEPENDS ON SERVICES REVENUE
Services revenue represented a majority of the total revenue of
ConnectInc.com in 1998. ConnectInc.com anticipates that services revenue will
continue to account for a majority of its total revenue for the foreseeable
future. Because services revenue has lower gross margins than software license
revenue, an increase in the percentage of total revenue represented by services
revenue or an unexpected decrease in software license revenue could have a
detrimental impact on the overall gross margins and operating results of
ConnectInc.com. ConnectInc.com subcontracts certain product implementation to
third-party service providers. Revenue from these third-party service providers
generally carries lower gross margins which may vary from period to period,
depending on the mix of revenue from third-party service providers. Services
revenue depends in part on ongoing renewals of support contracts. If services
revenue is lower than anticipated, ConnectInc.com may not achieve anticipated
revenues or may incur losses. ConnectInc.com's ability to increase services
revenue will depend in large part on its ability to increase the scale of its
professional services organization. ConnectInc.com may not be able to do so.
CONNECTINC.COM DOES NOT KNOW IF ITS RECENTLY INTRODUCED PRODUCTS OR ITS FUTURE
PRODUCTS WILL BE ACCEPTED
Although founded in 1987, in 1998 ConnectInc.com announced a shift in
business direction and focus, towards providing Internet-based systems
integration based on technologies from within ConnectInc.com and from its
industry partners. ConnectInc.com also committed to developing and concentrating
its intellectual property around a new version of its MarketStream software
application product. Accordingly, you should consider its business in light of
the risks, expenses and problems frequently encountered by companies in an early
stage of development, particularly companies in new and rapidly evolving markets
such as the Internet. These risks include:
- lack of acceptance of products and services by target customers;
- development of equal or superior products or services by competitors;
- failure of Internet-based electronic commerce;
- ConnectInc.com's inability to develop and enhance competitive products or
to successfully market these products; and
- ConnectInc.com's inability to identify, attract, retain and motivate
qualified personnel.
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ConnectInc.com expects Internet-based applications and systems integration
services to account for most of its revenues for the foreseeable future. As a
result, ConnectInc.com's net revenue and operating results may fluctuate
significantly due to factors affecting its ability to market and sell
Internet-based systems integration services to new and existing customers, many
of which are beyond the control of ConnectInc.com. These factors include:
- competition;
- technological change;
- failure of the market for Internet-based packaged applications to develop
as anticipated by ConnectInc.com;
- lack of customer acceptance of these products; and
- the failure of ConnectInc.com to develop and introduce new and enhanced
versions of these products on a timely basis.
Further, if any of ConnectInc.com's customers are not able to successfully
develop and deploy electronic commerce applications with MarketStream or are not
satisfied with its products or services, the reputation of ConnectInc.com could
be damaged, which could negatively impact ConnectInc.com's ability to achieve
anticipated sales and revenue.
CONNECTINC.COM MAY NOT BE ABLE TO KEEP PACE WITH REGULATORY AND TECHNOLOGICAL
CHANGE
ConnectInc.com's success may, in part, depend upon its ability to develop
new products and provide new services that meet changing customer needs. The
market for products of ConnectInc.com is characterized by:
- rapidly changing technology;
- evolving industry standards, customer requirements and emerging
competition; and
- frequent new product and service introductions.
As a result, ConnectInc.com may be required to change and improve its
services and products in response to changes in operating systems, application
and networking software, computer and communications hardware, programming tools
and computer language technology. If ConnectInc.com cannot introduce new
Internet-based services offerings that keep pace with technology, its business
could be harmed. If ConnectInc.com cannot successfully develop MarketStream to
meet the requirements of the market, or if MarketStream does not perform as
expected, its business could be harmed.
THE TIME REQUIRED TO ENGAGE A CLIENT AND TO IMPLEMENT INTERNET-BASED SYSTEMS
INTEGRATION SOLUTIONS MAY BE LENGTHY AND UNPREDICTABLE
ConnectInc.com services are complex and expensive and generally involve
significant investment decisions by prospective customers. Accordingly, the
engagement of its services is often an executive-level decision by prospective
customers and usually requires ConnectInc.com to engage in a lengthy sales cycle
to educate prospective customers regarding the use and benefits of its service
and product offerings. As such, the costs associated with Internet-based systems
integration solutions can cause the sales and implementation cycle to be
delayed, whether or not such delays are within the control of ConnectInc.com,
and could cause ConnectInc.com's operating results to vary significantly from
quarter to quarter.
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CONNECTINC.COM DOES NOT KNOW IF THIRD-PARTY TECHNOLOGY LICENSES WILL CONTINUE TO
BE AVAILABLE
ConnectInc.com licenses some of its technology from third parties,
including a relational database management system from Oracle, an object
database management system from Object Design, Inc. and other software that is
integrated with internally developed software and used in ConnectInc.com's
software to perform key functions. Oracle offers products that compete with the
products of ConnectInc.com. ConnectInc.com does not know if the third-party
technology licenses will continue to be available to it on commercially
reasonable terms, or at all. The loss or inability to maintain any of these
technology licenses could delay the introduction of products and services of
ConnectInc.com until equivalent technology, if available, is identified,
licensed and integrated. The use of additional third-party software would
require ConnectInc.com to enter into license agreements with third parties,
which could result in higher royalty payments and a loss of product
differentiation.
CONNECTINC.COM'S EXPANDING DISTRIBUTION AND SALES CHANNELS CREATES ADDITIONAL
RISKS THAT MAY RESULT IN LOWER NET REVENUE
Until the second quarter of 1998, ConnectInc.com sold products and services
through a direct sales force. In the third quarter of 1998, ConnectInc.com
announced a shift in business direction and focus to providing Internet-based
systems and system integration services based on technologies from within
ConnectInc.com and from its industry partners. ConnectInc.com's primary sales
and marketing efforts are through innovative uses of the Internet and strategic
partner programs. ConnectInc.com's ability to achieve revenue growth in the
future depends on its ability to establish and maintain relationships with
software developers, distributors, resellers and system integrators. If
ConnectInc.com is unable to expand its direct sales force or other distribution
channels, or if its partners do not perform to its or its customers'
expectations, ConnectInc.com may not be able to increase sales as anticipated.
YEAR 2000 PROBLEMS MAY CAUSE AN INTERRUPTION IN THE BUSINESS OF CONNECTINC.COM
Many existing computer programs and systems use only two-digit fields to
identify the year, e.g. 85=1985, and they are unable to process date and time
information between the twentieth and twenty-first centuries. Accordingly,
computer programs and software may need to be modified prior to the year 2000 in
order to remain functional. Although ConnectInc.com has invested a large amount
of time and resources to address potential year 2000 problems, it may not be
successful in its efforts to identify and address all year 2000 issues. Failure
to complete the necessary modifications could cause a disruption or failure of
such program and system. In addition, known or unknown defects that affect the
operation of its applications, could result in delay or loss of revenue,
diversion of development resources, damage to ConnectInc.com's reputation or
increased service or warranty costs or litigation costs.
CONNECTINC.COM DOES NOT KNOW IF IT WILL EFFECTIVELY COMPETE IN THE ELECTRONIC
COMMERCE SOFTWARE AND SOFTWARE IMPLEMENTATION INDUSTRIES
The market for electronic commerce software and software implementation is
relatively new, rapidly changing and highly competitive. ConnectInc.com competes
with:
- vendors of prepackaged electronic commerce software;
- vendors of software tools for developing electronic commerce
applications;
- system integrators; and
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- providers of business application software.
In addition, potential customers may elect to develop their own electronic
commerce solutions. ConnectInc.com's current competitors include:
- TRADEX Technologies, Inc.;
- Viant Corporation;
- Scient, Corp.;
- The Extraprise Group;
- Epicentric, Inc.;
- Webridge, Inc.;
- Click Interactive, Inc.;
- Open Market, Inc.; and
- Broadvision, Inc.
ConnectInc.com also expects additional competition from other companies,
including Microsoft, IBM/Lotus, Oracle Corporation, Interworld and Netscape
Communications, Inc., all of which have announced or released products for
Internet-based electronic commerce or intranet requisitioning. ConnectInc.com's
potential competitors include a number of successful client/server applications
software companies, such as Baan Company, PeopleSoft, Inc., Vantive Corporation
and SAP AG, and electronic data interchange solution vendors, including Sterling
Commerce, Inc. and General Electric Information Services Corporation.
Many of these competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than ConnectInc.com
and these competitors may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Also, many current and
potential competitors have greater name recognition and more extensive customer
bases that could be leveraged, thereby gaining market share to the detriment of
ConnectInc.com. Such competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies and offer more
attractive terms to purchasers than ConnectInc.com. These competitors may also
be able to bundle their products in a manner that may discourage users from
purchasing products offered by ConnectInc.com. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to enhance their products.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. ConnectInc.com may not
be able to compete effectively with competitors and the competitive pressures
faced by ConnectInc.com may require it to reduce the prices of its products and
services and limit ConnectInc.com's ability to maintain or expand its sales.
CONNECTINC.COM IS DEPENDENT ON THE SUCCESS OF THE INTERNET
ConnectInc.com services and products facilitate online commerce over the
Internet. The Internet, and online commerce over the Internet, are at an early
state of development and are rapidly evolving. While the Internet is expected to
experience substantial growth in the number of users and amount of traffic,
Internet infrastructure may not continue to support the increasing demands
placed on it by this growth. Break-downs and slow-downs in Internet traffic may
slow expansion of its use.
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The infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace may not develop or may not develop in a timely
manner.
Demand and market acceptance for online commerce over the Internet is
subject to a high level of uncertainty. This uncertainty is compounded for
ConnectInc.com since adequate Internet infrastructure development is necessary
in order to support increased online commerce, which in turn is necessary in
order for ConnectInc.com to succeed. If the Internet develops more slowly than
expected, the operating results of ConnectInc.com could be materially adversely
affected.
If the Internet infrastructure is unable to support the current growth of
ConnectInc.com, its performance may be negatively impacted. The use of its
products and services depends in large part upon the continued development of
the infrastructure for providing Internet access and services. The Internet has
experienced, and is expected to continue to experience, substantial growth in
the number of users and amount of traffic. The Internet infrastructure may not
continue to support the demands placed on it by this growth. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols to handle increased levels of Internet activity,
or due to increased governmental regulation. Further, the costs of use of the
Internet could increase to a degree that reduces its attraction as a platform
for electronic commerce. As a result, the infrastructure or complementary
services necessary to make the Internet a viable commercial marketplace may not
develop into a viable commercial marketplace for ConnectInc's products and
services.
PROBLEMS RELATING TO SECURITY, SYSTEM DISRUPTIONS AND COMPUTER INFRASTRUCTURE
COULD NEGATIVELY AFFECT THE BUSINESS OF CONNECTINC.COM AND THE BUSINESS OF ITS
CUSTOMERS
Although ConnectInc.com has implemented in its products various security
mechanisms, these products may be vulnerable to break-ins and similar disruptive
problems caused by Internet users. The level of security provided by the
products of ConnectInc.com depends upon the level of security selected by
customers and the proper configuration and use of the products' security
mechanisms. Computer break-ins and other disruptions would jeopardize the
security of information stored in and transmitted through the computer systems
of users of ConnectInc.com's products, which may result in significant liability
to ConnectInc.com and may also deter potential customers.
The security and privacy concerns of existing and potential customers, as
well as concerns related to computer viruses, may inhibit the growth of the
Internet marketplace generally, and the customer base and revenues of
ConnectInc.com in particular. ConnectInc.com attempts to implement contracts
which limit its liability to customers, including liability arising from a
failure of the security feature contained in the products of ConnectInc.com.
However such contractual provisions may not be enforceable. ConnectInc.com
currently does not have product liability insurance to protect against these
risks.
ConnectInc.com operates and manages online networks for some of its
customers and provides hosting for certain customers' MarketStream applications.
These services depend upon the ability of ConnectInc.com to protect the computer
equipment and the information stored in its data center against damage caused by
fire, earthquakes, power loss, telecommunications failures, unauthorized entry
and other similar events. Any such damage or failure that causes interruptions
in operations could negatively affect the businesses of the customers of
ConnectInc.com, which could expose ConnectInc.com to liability.
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CONNECTINC.COM MAY NOT BE ABLE TO MAINTAIN THE REQUIREMENTS FOR LISTING ON THE
NASDAQ NATIONAL MARKET
ConnectInc.com believes that continued listing on The Nasdaq Stock Market
provides additional prestige and enhanced liquidity for its stockholders. In
1998, The Nasdaq Stock Market informed ConnectInc.com that it did not meet the
requirements for the continued listing of its common stock on The Nasdaq
National Market. Specifically, Nasdaq's listing rules require ConnectInc.com to
maintain net tangible assets of at least $4.0 million. With the net proceeds of
approximately $4.0 million from the financing that was completed in January
1999, and subsequent operations, the net tangible assets of ConnectInc.com were
approximately $4.9 million as of September 30, 1999. Accordingly, ConnectInc.com
believes that its net tangible assets currently exceed the minimum level
required for continued listing on The Nasdaq Stock Market.
Nevertheless, in order for ConnectInc.com to remain listed on The Nasdaq
National Market, it must continue to meet the Nasdaq continuing listing criteria
on an ongoing basis. ConnectInc.com may not be able to maintain compliance with
the listing requirements. The removal of ConnectInc.com's common stock from
listing on The Nasdaq National Market may have a negative effect on the market
price of its common stock and on the ability of stockholders and investors to
buy and sell shares of its common stock in the public market.
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CONNECTINC.COM SPECIAL STOCKHOLDERS MEETING
GENERAL
This proxy statement/prospectus is first being mailed to the recordholders
of ConnectInc.com common stock on or about December 23, 1999. Also enclosed is a
notice of the special meeting of ConnectInc.com stockholders and a form of proxy
that the ConnectInc.com board of directors is soliciting for use at the special
meeting and at any adjournments or postponements thereof. The special meeting
will be held on January 31, 2000 at 2:00 p.m., local time, at 515 Ellis Street,
Mountain View, California.
MATTERS TO BE CONSIDERED
The purpose of the special meeting is to vote on the adoption and approval
of the merger agreement, the merger and the other transactions contemplated by
the merger agreement. ConnectInc.com stockholders may also be asked to vote upon
a proposal to adjourn or postpone the special meeting to allow additional time
for the solicitation of additional votes to approve the merger agreement if the
secretary of the meeting determines that there are not sufficient votes to
approve the merger agreement.
PROXIES
ConnectInc.com stockholders should fill out and send back the accompanying
form of proxy if they will be unable to attend the special meeting in person.
ConnectInc.com stockholders may revoke their proxies at any time before the
proxies are exercised by giving the secretary of ConnectInc.com written notice
of revocation, properly executed proxies of a later date or by attending the
special meeting and voting in person. Written notices of revocation and other
communications with respect to the revocation of ConnectInc.com proxies should
be addressed to ConnectInc.com., Co., 515 Ellis Street, Mountain View,
California 94043, Attention: Company Secretary. All shares represented by valid
proxies received and not revoked before they are exercised will be voted in the
manner specified in the proxies. If no specification is made, the proxies will
be voted in favor of the merger agreement, the merger and the other transactions
contemplated by the merger agreement. No proxy that is voted against the merger
agreement will be voted in favor of any adjournment or postponement of the
special meeting for the purpose of soliciting additional proxies. However, if a
stockholder abstains from voting on the adoption and approval of the merger
agreement, the merger and the other transactions contemplated by the merger
agreement and makes no specification on an adjournment or postponement for the
purpose of soliciting additional proxies, then the proxy will be voted for the
adjournment or postponement.
SOLICITATION OF PROXIES
ConnectInc.com will pay the entire cost of soliciting proxies. In addition
to soliciting proxies by mail, ConnectInc.com will request banks, brokers and
other recordholders to send proxies and proxy material to the beneficial owners
of ConnectInc.com common stock and obtain their voting instructions, if
necessary. ConnectInc.com will reimburse these recordholders for their
reasonable expenses in performing these tasks. ConnectInc.com has also made
arrangements with Corporate Investor Communications, Inc. to assist in
soliciting proxies from banks, brokers and nominees and has agreed to pay
Corporate Investor Communications, Inc. approximately $10,000 plus expenses for
its services. If necessary, ConnectInc.com may also use several of its regular
employees, who will not be specially compensated, to solicit proxies from
ConnectInc.com stockholders, either personally or by telephone, letter or other
means.
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RECORD DATE AND VOTING RIGHTS
The ConnectInc.com board of directors has fixed December 17, 1999 as the
record date for determining the ConnectInc.com stockholders entitled to notice
of and to vote at the ConnectInc.com special meeting. Therefore, only
stockholders of record at the close of business on the record date will receive
notice of, and be able to vote at, the ConnectInc.com special meeting. At the
close of business on the record date, there were 14,894,308 shares of
ConnectInc.com common stock outstanding held by approximately 209 recordholders
in addition to approximately 14,000 holders who do not hold shares in their own
names. A majority of these shares must be present at the special meeting, either
in person or by proxy, in order for there to be a quorum at the special meeting.
There must be a quorum in order for the vote on the merger agreement, the merger
and the other transactions contemplated by the merger agreement to occur. Each
share of outstanding ConnectInc.com common stock entitles its holder to one
vote.
Shares of ConnectInc.com common stock present in person at the
ConnectInc.com special meeting but not voting, and shares for which
ConnectInc.com has received proxies but with respect to which holders of these
shares have abstained, will be counted as present at the special meeting for
purposes of determining whether or not a quorum exists. Brokers who hold shares
in nominee or "street" name for customers who are the beneficial owners of the
shares may not give a proxy to vote shares held for these customers on the
matters to be voted on at the special meeting without specific instructions from
them. However, broker non-votes will be counted for purposes of determining
whether a quorum exists.
Under Delaware law and ConnectInc.com's certificate of incorporation,
holders of a majority of the outstanding shares of ConnectInc.com common stock
entitled to vote at the ConnectInc.com special meeting must vote for the merger
agreement in order for it to be adopted by ConnectInc.com.
Because approval of the merger agreement, the merger and the other
transactions contemplated by the merger agreement requires the affirmative vote
of holders of a majority of the outstanding shares of ConnectInc.com common
stock entitled to vote at the special meeting, abstentions and broker non-votes
will have the same effect as votes against approving the merger agreement, the
merger and the other transactions contemplated by the merger agreement.
Therefore, the ConnectInc.com board of directors urges stockholders to complete,
date and sign the accompanying proxy and return it promptly in the enclosed,
postage-paid envelope.
As of the record date, ConnectInc.com's directors and executive officers
beneficially owned approximately 364 outstanding shares of ConnectInc.com common
stock, representing less than 1% of the voting power of the ConnectInc.com
common stock entitled to vote at the special meeting. ConnectInc.com expects
that each of these directors and/or executive officers will vote his or her
shares for the merger agreement, the merger and the other transactions
contemplated by the merger agreement.
More information about the beneficial ownership of ConnectInc.com common
stock by those who own more than 5% of the stock, and more detailed information
about the beneficial ownership of ConnectInc.com common stock by directors and
executive officers of ConnectInc.com, can be found in ConnectInc.com's annual
report on Form 10-K for the year ended December 31, 1998, incorporated into this
proxy statement/prospectus by reference. See "Where You Can Find More
Information."
RECOMMENDATION OF THE CONNECTINC.COM BOARD
The ConnectInc.com board of directors has unanimously approved the merger
agreement, the merger and the other transactions contemplated by the merger
agreement. The ConnectInc.com
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board believes that the merger agreement is in the best interests of
ConnectInc.com and its stockholders and recommends that ConnectInc.com
stockholders vote FOR the merger agreement, the merger and the other
transactions contemplated by the merger agreement. See "The Merger --
Recommendation of the ConnectInc.com Board of Directors and ConnectInc.com's
Reasons for the Merger."
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THE MERGER
This section of the proxy statement/prospectus describes the most
significant aspects of the merger, including the principal provisions of the
merger agreement between ConnectInc.com and Calico. The following discussion,
which includes a summary of the significant terms and provisions of the merger
agreement, is qualified by reference to the merger agreement. The merger
agreement is attached as Appendix A to this proxy statement/prospectus, and is
incorporated herein by reference.
BACKGROUND OF THE MERGER
As a regular part of their business plans, Calico and ConnectInc.com have
from time to time each considered opportunities for expanding and strengthening
their technology, products, research and development capabilities and
distribution channels, including strategic acquisitions, business combinations,
investments, licensing and development agreements and joint ventures. In this
connection, Calico and ConnectInc.com negotiated and signed an OEM Software
License Agreement in October 1999 for ConnectInc.com's MarketStream product.
During the negotiation of the OEM Software License Agreement, on October
19, 1999, David Cardinal, Calico's Chief Technical Officer, telephoned Craig
Norris, ConnectInc.com's CEO, to arrange a meeting between Mr. Norris and Alan
Naumann, Calico's CEO.
On October 25, 1999, Calico's board met with management to consider
potential strategic acquisitions and business combinations, including
ConnectInc.com.
At a regular meeting of the Calico board of directors held on October 26,
1999, Mr. Naumann mentioned the possibility and strategic rationale for various
merger and acquisition opportunities, including ConnectInc.com, that had been
discussed on October 25.
On November 1, 1999, Messrs. Cardinal, Naumann and Norris met and discussed
the Internet marketplace and company strategies, after which Mr. Naumann
suggested a possible merger of ConnectInc.com with Calico. Mr. Norris
subsequently contacted Gordon Bridge and Rory O'Driscoll, two other
ConnectInc.com board members, to apprise them of the Calico conversations.
On November 2, 1999, during internal meetings at ConnectInc.com's facility
in Mountain View, California, James Kochman and Kevin Ainsworth, representatives
of Alliant Partners, met with Mr. Norris and Kevin Berry, ConnectInc.com's Chief
Financial Officer, to discuss the prospect of a business combination with Calico
and prepare for due diligence meetings. Alliant Partners was also engaged as the
financial advisor for ConnectInc.com. In the evening, Mr. Norris called Ms.
Radhu Basu and Mr. Richard Lussier, members of ConnectInc.com's board of
directors, to update them on his meeting of November 1, 1999 with Mr. Naumann.
On November 3, 1999, after executing a mutual nondisclosure agreement, a
meeting between the senior managers of both companies took place at Calico's
headquarters in San Jose, California. In attendance for Calico were Messrs.
Naumann and Cardinal, Arthur Knapp, Calico's Chief Financial Officer, and
Melissa Baten Caswell, Calico's Director of Corporate Development. In attendance
for ConnectInc.com were Messrs. Norris and Berry and David Wippich,
ConnectInc.com's Executive Vice President of Marketing and Sales. At the
meeting, both Calico and ConnectInc.com executives made presentations regarding
their respective businesses and product strategies.
On November 4 and 5, 1999, the parties met at a hotel in Sunnyvale,
California to further discuss the possibility of a merger and begin due
diligence. They were joined by Bill Fleming, Calico's Corporate Counsel. Mr.
Fleming also visited the headquarters of ConnectInc.com to inspect certain
contractual and legal documents. During the period beginning on November 4, 1999
through
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November 18, 1999, the parties, their financial advisors and their legal counsel
conducted due diligence.
On November 4, 1999, Mr. Knapp contacted representatives at Hambrecht &
Quist, LLC and subsequently executed an engagement letter covering the potential
merger with ConnectInc.com. From November 6 through November 9, 1999, Mr. Knapp
and Hambrecht & Quist discussed various valuation and structure issues.
On November 5, 1999, Messrs. Berry, Norris and Wippich of ConnectInc.com,
and Messrs. Naumann, Knapp, Cardinal and Fleming and Ms. Baten Caswell of
Calico, met at a hotel in Sunnyvale, California to further discuss the merger
possibility.
From November 5, 1999 through November 9, 1999, various discussions were
held among the companies and their financial advisors. On November 6, 1999, Mr.
Knapp and Mr. Berry held a telephonic meeting to further discuss financial due
diligence.
On November 9, 1999, the financial advisors of both companies discussed
valuation levels but did not agree upon an exchange ratio. Following these
discussions, the advisors suggested that Messrs. Naumann and Knapp should speak
directly with Mr. Norris to try to resolve various valuation issues.
On November 9, 1999, the ConnectInc.com board of directors held a telephone
conference call to discuss the merger proposal. Mr. Kochman of Alliant Partners
and James Jones of Cooley Godward LLP, ConnectInc.com's counsel in the
transaction, also participated in the conference call.
In the evening of November 10, 1999, ConnectInc.com's board of directors
held a special meeting by telephone conference call to discuss the exchange
ratio and strategic benefits to ConnectInc.com and its stockholders of a
combined company as well as the prospects of ConnectInc.com as a stand-alone
company. After extensive discussion, the board directed Mr. Norris to continue
the discussions with Calico and to execute a no-shop agreement covering a period
of 20 days.
On November 11, 1999, the Calico transaction team reviewed the status of
the negotiations and due diligence with representatives of Gray Cary Ware &
Freidenrich LLP, counsel to Calico, and with Hambrecht & Quist. The team
continued to discuss the terms of the merger with representatives of
ConnectInc.com and Alliant Partners.
On November 12, 1999, representatives from Hambrecht & Quist conducted due
diligence at Calico's headquarters, including a review of financial and other
matters. Messrs. Knapp and Fleming, Ms. Baten Caswell and representatives of
Hambrecht & Quist met with ConnectInc.com and its financial advisor, Alliant
Partners, to conduct further due diligence. On November 15, 1999, representative
from Alliant Partners visited Calico headquarters to conduct due diligence with
Calico.
In the evening of November 12, 1999, at a special telephonic meeting,
Calico's board discussed the status of the proposed transaction with
ConnectInc.com. Members of the board discussed the benefits to Calico that would
result from a merger with ConnectInc.com. Mr. Naumann presented to the board a
summary of all discussions with ConnectInc.com. Mr. Knapp and Ms. Baten Caswell
updated the board on the preliminary results of the due diligence and the board
provided Mr. Naumann some guidance about the circumstances under which Calico
should continue discussions.
On November 12, 1999, Gray Cary Ware & Freidenrich distributed drafts of
the proposed merger agreement to the parties for their review. On November 13,
1999, Messrs. Knapp and Fleming held a telephonic meeting with Gray Cary Ware &
Freidenrich to review various aspects of
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the draft agreement. On November 14, 1999, Mr. Knapp and Mr. Norris further
discussed the agreement and other aspects of the due diligence process.
On November 16, 1999, at a special telephonic meeting, Calico's board
discussed the status of the proposed transaction with ConnectInc.com.
On November 17, 1999, at a special meeting held at Calico's headquarters,
Calico's board, among other things, discussed the status of the proposed
transaction with ConnectInc.com. Messrs. Knapp and Cardinal and Ms. Baten
Caswell updated the board on the results of the due diligence procedures.
Representatives of Gray Cary Ware & Freidenrich described the fiduciary duties
of the board and presented a report on the due diligence that had been
completed. Representatives of Hambrecht & Quist presented a financial analysis
of the proposed transaction, including a review of the pricing of the
transaction with ConnectInc.com as compared to other similar transactions. The
board also reviewed the terms of the merger agreement. Following discussion, the
board gave tentative approval to the merger, including a deal structure
involving stock and the assumption of outstanding options to acquire
ConnectInc.com common stock, subject to review of the final terms of the merger.
On November 17, 1999, ConnectInc.com held a special meeting of the board of
directors to discuss the potential transaction. At that meeting, Mr. Jones of
Cooley Godward made a presentation on the significant terms and conditions of
the draft merger agreement and reviewed the board's fiduciary duties with
respect to considering a business combination transaction. Representatives of
Alliant Partners reviewed with the board the financial terms of the proposed
transaction and also discussed other potential companies with whom
ConnectInc.com could combine. The ConnectInc.com board, management and financial
and legal advisors discussed the positive and negative factors relevant to the
potential transaction with Calico, which are discussed below under
"ConnectInc.com's Reasons for the Merger." Alliant Partners presented a
financial analysis of the proposed exchange ratio. At that time, the board
considered a fixed exchange ratio of 0.081. After extensive discussion, the
board determined to continue discussions with Calico and provided guidance and
parameters for the negotiations.
From November 16, 1999 through November 18, 1999, representatives of
ConnectInc.com, Calico, Alliant Partners, Cooley Godward and Gray Cary Ware &
Freidenrich held various telephonic conference calls to continue negotiating the
terms of the transaction, including certain provisions in the draft merger
agreement.
In the evening of November 18, 1999, at a special telephonic meeting,
Calico's board discussed the status of the proposed transaction with
ConnectInc.com. Mr. Knapp presented to the board a summary of all discussions
with ConnectInc.com. Representatives of Hambrecht & Quist advised the board
regarding the financial aspects of the transaction and representatives of Gray
Cary Ware & Freidenrich presented the Calico board with the proposed final terms
of the transactions. Following discussion, the board unanimously approved
resolutions authorizing the transaction on that basis.
Also in the evening of November 18, 1999, ConnectInc.com held a special
telephonic meeting of the board of directors. Mr. Jones of Cooley Godward
updated the ConnectInc.com board on the terms of the merger agreement.
Representatives of Alliant Partners delivered its opinion, which was
subsequently confirmed by delivery of a written opinion dated November 18, 1999,
to the effect that as of the date of the opinion and based upon and subject to
the matters stated in the opinion, the total consideration received by the
stockholders of ConnectInc.com pursuant to the merger agreement was fair, from a
financial point of view, to the holders of ConnectInc.com common stock. After
extensive discussion, the ConnectInc.com board unanimously approved the
transaction, approved an
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exchange ratio of 0.081, which implied a valuation for ConnectInc.com of $5.427
per share, based upon the November 18, 1999 closing price of $67.00 per share of
Calico, and instructed management to continue discussions with Calico and to
execute the merger agreement upon negotiation of satisfactory terms.
Early in the morning of November 19, 1999, the parties finalized the merger
agreement and all exhibits. ConnectInc.com, Calico and a subsidiary of Calico
set up for that purpose then executed the merger agreement and issued a joint
press release announcing the merger prior to the opening of the stock market on
November 19, 1999.
CALICO'S REASONS FOR THE MERGER
Calico's strategic intent is to grow its business and provide its customers
with completely integrated customer solutions through internal development,
strategic acquisitions, business combinations and alliances. Calico's board of
directors approved the merger and determined that the merger would provide
Calico with a strategic presence in the emerging market of facilitating online
trading communities for the electronic purchase and sale of goods and services
among multiple parties. Calico determined that ConnectInc.com's leadership in
this area would complement Calico's leadership in customer-focused electronic
commerce applications. In approving the merger, Calico's board considered the
following:
- the merger will better enable the combined company to provide complete
electronic commerce solutions to customers;
- the merger will facilitate Calico's efforts to broaden its product
offerings to include Internet market makers who act as a portal in the
role of intermediaries and aggregators in the conduct of electronic
commerce and the establishment of an online trading community;
- the integration of ConnectInc.com's MarketStream product, which enables
electronic business along the entire chain of sellers, buyers and market
makers, with Calico's eSales suite, will position the combined company to
serve important growth segments of the business-to-business electronic
commerce market;
- the merger will enable Calico to enhance the functionality of its eSales
suite and expand its applications to technology and early stage Internet
market makers linking multiple buyers and multiple sellers in an online
trading community;
- Calico will gain access to ConnectInc.com's customer base;
- Calico will gain access to ConnectInc.com's engineering and deployment
resources;
- The products developed by Calico and ConnectInc.com will have a common
technology architecture which could facilitate product integration;
- both companies are in relatively close geographic proximity; and
- both companies have a common culture, including a shared commitment to
maintaining high levels of customer satisfaction which will enhance
Calico's ability to integrate ConnectInc.com's operations and support
functions.
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The Calico board of directors considered these benefits as well as certain
potentially negative factors that may result from the merger, including:
- the potential dilutive effect on Calico's common stock price if revenue
expectations of the combined company are not met;
- the potential loss of key ConnectInc.com employees critical to the
ongoing success of the ConnectInc.com products and to the successful
integration of both companies' product lines;
- the loss of key ConnectInc.com customers;
- the general difficulties of integrating software products, technologies
and companies;
- the possibility of cultural conflicts despite the apparent similarities;
and
- the other risks described above under "Risk Factors."
The above discussion of reasons for the merger includes forward-looking
statements about possible or assumed future results of operations of the
combined company and the performance of the combined company after the merger.
Future results and performance are subject to risks and uncertainties, which
could cause such results and performance to differ significantly from those
expressed in these statements. For a discussion of these risks and
uncertainties, and other factors that could affect future results and
performance, see "Risk Factors."
RECOMMENDATION OF THE CONNECTINC.COM BOARD OF DIRECTORS AND CONNECTINC.COM'S
REASONS FOR THE MERGER
The ConnectInc.com board of directors believes that the merger is advisable
and fair to and in the best interests of ConnectInc.com and ConnectInc.com's
stockholders. Accordingly, the ConnectInc.com board of directors has unanimously
approved the merger agreement and unanimously recommends that ConnectInc.com
stockholders vote FOR the adoption and approval of the merger agreement, the
merger and the other transactions contemplated by the merger agreement.
The ConnectInc.com board of directors believes that, despite
ConnectInc.com's efforts to date, increasing competition and industry
consolidation would make it increasingly important for ConnectInc.com to grow
and gain critical mass in order to compete with larger companies with
substantially greater resources and broader, integrated product offerings.
ConnectInc.com's management has considered a number of alternatives for
enhancing its competitive position, including by growing through the acquisition
of smaller companies that could extend ConnectInc.com's product offering and
enhance the distribution of ConnectInc.com products and services, or merging
with a larger company. In the industry environment referred to above, the
ConnectInc.com board of directors identified several potential benefits for
ConnectInc.com's stockholders, employees and customers that it believes would
result from the merger. These potential benefits include:
- the financial strength of Calico that would enable the combined company
to commit greater resources to both current and emerging product
development efforts and to fund the future growth of the combined
company's business;
- the positive marketplace momentum of Calico, as compared to the
perception in the marketplace of ConnectInc.com in light of its
historical legacy;
- the ability to leverage Calico sales and marketing presence and financial
resources to increase sales of ConnectInc.com products;
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- the opportunity for ConnectInc.com, as part of the combined company, to
compete more effectively in the increasingly competitive and rapidly
changing electronic commerce industry;
- the potential synergy and compatibility between ConnectInc.com and
Calico, based on the compatibility of the companies' product lines and
company cultures;
- the merger consideration to be received by ConnectInc.com stockholders,
which at the time the parties signed the merger agreement represented a
premium over the recent price range of ConnectInc.com common stock; and
- the greater liquidity to ConnectInc.com stockholders of an investment of
Calico common stock instead of ConnectInc.com common stock.
In the course of its deliberations during the ConnectInc.com board of
directors meetings, the ConnectInc.com board of directors reviewed with
ConnectInc.com's management a number of additional factors relevant to the
merger, including the strategic overview and prospects for ConnectInc.com. The
ConnectInc.com board of directors also considered the following positive
factors, among others, in connection with its review and analysis of the merger.
The ConnectInc.com board's conclusions with respect to each of these factors
supported its determination that the merger agreement and the consummation of
the merger were fair to, and in the best interests of, ConnectInc.com and its
stockholders:
- the financial condition, results of operations, prospects and competitive
position of Calico and ConnectInc.com before and after giving effect to
the merger -- the ConnectInc.com board believed that, in light of, among
other things, market and industry conditions, the financial strength of
Calico and the ability to leverage Calico's sales and marketing presence
and financial resources to increase sales of ConnectInc.com's products,
the potential synergy and compatibility between ConnectInc.com and
Calico, the long-term financial condition, results of operations,
prospects and competitive position of the combined company would be
better than the long-term financial condition, results of operations,
prospects and competitive position of ConnectInc.com on a stand-alone
basis;
- current financial market conditions and historical market prices and
trading information with respect to Calico common stock and
ConnectInc.com common stock -- the ConnectInc.com board viewed favorably
Calico's stock market presence and positive reputation with investors and
the greater liquidity to ConnectInc.com stockholders of an investment in
Calico common stock instead of ConnectInc.com common stock;
- the ConnectInc.com board's belief that the complementary products and
services, sales channels, partners, technology and critical skills of
Calico and ConnectInc.com should enable the combined company to compete
more effectively;
- a comparison of selected recent acquisition and merger transactions in
the industry -- the ConnectInc.com board viewed favorably the comparison
of the merger to the information provided to it by Alliant Partners
relating to selected recent acquisition and merger transactions in the
industry including the information described below under "-- Opinion of
ConnectInc.com's Financial Advisor";
- the expected tax treatment of the merger -- the ConnectInc.com board
viewed favorably the expectations that for U.S. federal income tax
purposes, no gain or loss would be recognized by a holder of
ConnectInc.com common stock upon the exchange of all of such holder's
shares of ConnectInc.com common stock solely for shares of Calico common
stock in the merger;
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- the opinion of Alliant Partners rendered at the November 18, 1999 meeting
of the board of directors that, based upon certain analyses performed by
Alliant Partners and discussed with the ConnectInc.com board of
directors, portions of which analyses are described below under
"-- Opinion of ConnectInc.com's Financial Advisor", and based upon and
subject to the various conditions set forth in the opinion of Alliant
Partners, the total consideration received by the stockholders of
ConnectInc.com pursuant to the merger agreement was fair to holders of
ConnectInc.com common stock, from a financial point of view, as of
November 18, 1999;
- the ConnectInc.com board's belief that the merger will benefit
ConnectInc.com customers and employees for a number of reasons, including
that the combined company will be better able to provide enhanced and
more valuable products to its customers, and the combined company will
provide employees with the opportunity to participate in the growth of a
more competitive company; and
- positive reports from management and financial advisors as to the results
of their investigation of Calico.
In the course of the deliberations, the ConnectInc.com board considered
that the merger would be accounted for as a "purchase," but did not view it as a
positive or negative factor.
The ConnectInc.com board of directors also considered a number of
potentially negative factors in its deliberations concerning the merger,
including;
- the loss of control over the future operations of ConnectInc.com
following the merger;
- the risk that the benefits sought to be achieved in the merger will not
be achieved;
- the fixed nature of the exchange ratio and the resulting risk that it
will not adjust for subsequent price fluctuations;
- the possibility that the public announcement of the merger would have a
negative impact on ConnectInc.com's sales, customer relations and
operating results and ConnectInc.com's ability to attract and retain key
management, marketing and technical personnel;
- certain terms of the merger agreement and related agreements that
prohibit ConnectInc.com and its representatives from soliciting third
party bids and from accepting, approving or recommending unsolicited
third party bids except in very limited circumstances, which terms would
reduce the likelihood that a third party would make a bid for
ConnectInc.com; and
- the other risks described above under "Risk Factors."
The ConnectInc.com board of directors discussed with ConnectInc.com's
management the risks and benefits of a stand-alone strategy. The ConnectInc.com
board of directors believed that certain of the above risks were unlikely to
occur or unlikely to have a material impact on the combined company, while
others could be avoided or mitigated by ConnectInc.com or Calico, and that,
overall, the risks associated with the merger agreement and the merger were
outweighed by the potential benefits of the merger.
The foregoing discussion of information and factors considered by the
ConnectInc.com board of directors is not intended to be exhaustive but is
believed to include all material factors considered by the ConnectInc.com board
of directors. In view of the wide variety of factors considered by the
ConnectInc.com board of directors, the ConnectInc.com board of directors did not
find it practicable to quantify or otherwise assign relative weight to the
specific factors considered. However, after taking into account all of the
factors set forth above, the ConnectInc.com board of directors unanimously
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agreed that the merger agreement and the merger were fair to, and in the best
interests of, ConnectInc.com and its stockholders and that ConnectInc.com should
proceed with the merger.
The above discussion of reasons for the merger includes forward-looking
statements about possible or assumed future results of operations of the
combined company and the performance of the combined company after the merger.
Future results and performance are subject to risks and uncertainties, which
could cause such results and performance to differ significantly from those
expressed in these statements. For a discussion of these risks and
uncertainties, and other factors that could affect future results and
performance, see "Risk Factors."
INTERESTS OF CONNECTINC.COM'S OFFICERS AND DIRECTORS IN THE MERGER AND POTENTIAL
CONFLICTS OF INTERESTS
In considering the recommendations of ConnectInc.com's board of directors
with respect to the merger, stockholders should be aware that certain members of
the board of directors and management of ConnectInc.com have interests in the
merger that are in addition to the interests of stockholders of ConnectInc.com
generally. The ConnectInc.com board of directors was aware of these interests
and considered them, among other matters, in approving the merger agreement and
the merger transactions.
CHANGE IN CONTROL AGREEMENTS. In June 1997 ConnectInc.com entered into a
Change of Control Agreement with Craig Norris, which was subsequently amended in
April 1998. Pursuant to the terms of his Change of Control Agreement, as
amended, Mr. Norris will be entitled to a cash payment equal to 2.99 times his
total compensation during fiscal year 1997 upon certain change of control
transactions involving ConnectInc.com. Such cash payment is subject to reduction
in certain circumstances and would be reduced to zero if the aggregate value to
be received by ConnectInc.com's stockholders in connection with such change of
control transaction were equal to or less than $25 million. Also, Mr. Norris'
cash payment is reduced by the amount of net gains that Mr. Norris would
recognize if he exercised on the date of closing of the change of control any
vested options held by him as of such date. It is anticipated that Mr. Norris'
vested option gain will exceed the amount of his change of control cash payment
and, therefore, Mr. Norris' change of control cash payment will be reduced to
zero.
In April 1998, Lucille Hoger, ConnectInc.com's newly appointed Vice
President of Professional Services, entered into a Change of Control Agreement.
Ms. Hoger will be entitled to a cash payment equal to 2.99 times her total
compensation during fiscal year 1997 upon certain change of control transactions
involving ConnectInc.com. Such cash payment is subject to reduction in certain
circumstances and would be reduced to zero if the aggregate value to be received
by ConnectInc.com's shareholders in connection with such change of control
transaction were equal to or less than $25 million.
In addition, if Mr. Norris or Ms. Hoger were to be terminated involuntarily
within two years of a change of control, he or she would be entitled for a
period of twelve months following such termination to continuation of his or her
monthly salary, payment on a monthly basis of one-twelfth of the performance
bonus to which he or she would have been entitled assuming full achievement of
all performance objectives of ConnectInc.com for such year, acceleration of
vesting of all stock options held at the time of termination, certain benefits
under ConnectInc.com's health and other benefit plans, and outplacement services
not to exceed $15,000.
In July 1998, ConnectInc.com entered into Change of Control Agreements with
William Whitney, ConnectInc.com's newly appointed Vice President of E-Business
Solutions, Rohit Saxena, ConnectInc.com's newly appointed Director of Customer
Deployment, and Preetham Gopalaswamy,
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ConnectInc.com's newly appointed Vice President of E-Business Technologies. In
August 1999, ConnectInc.com entered into a Change of Control Agreement with
Vimal Goel, ConnectInc.com's newly appointed Vice President of Engineering.
Pursuant to the terms of such Change of Control Agreements, if such officer were
to be terminated involuntarily within six months of a change of control, he or
she would be entitled for a period of three months following such termination to
continuation of his or her monthly salary, acceleration of vesting of all stock
options held at the time of termination, and certain benefits under
ConnectInc.com's health and other benefit plans.
In May 1999, ConnectInc.com entered into a Change of Control Agreement with
Kevin Berry, ConnectInc.com's newly appointed Chief Financial Officer. Pursuant
to the terms of his Change of Control Agreement, if Mr. Berry were to be
terminated involuntarily within six months of a change of control, he would be
entitled for a period of twelve months following such termination to
continuation of his monthly salary, payment on a monthly basis of one-twelfth of
the performance bonus to which he would have been entitled assuming full
achievement of all performance objectives of ConnectInc.com for such year,
acceleration of vesting of all stock options held at the time of termination,
certain benefits under ConnectInc.com's health and other benefit plans, and
outplacement services not to exceed $15,000.
In September 1999, ConnectInc.com entered into a Change of Control
Agreement with David Wippich, ConnectInc.com's newly appointed Executive Vice
President of Marketing and Sales. Pursuant to the terms of his Change of Control
Agreement, if Mr. Wippich were to be terminated involuntarily within six months
of a change of control, he would be entitled for a period of twelve months
following such termination to continuation of his monthly salary, payment on a
monthly basis of one-twelfth of the performance bonus to which he would have
been entitled assuming full achievement of all performance objectives of
ConnectInc.com for such year, acceleration of vesting of all stock options held
at the time of termination, certain benefits under ConnectInc.com's health and
other benefit plans, and outplacement services not to exceed $15,000.
For purposes of the Change of Control Agreements, involuntary termination
includes the officer's voluntary termination following a material reduction or
change in job duties, any reduction in base compensation or the officer's
refusal to relocate to a facility more than 50 miles from ConnectInc.com's
current location.
Each of the above change of control agreements provides that an employee's
severance and other benefits shall be reduced, if necessary, to ensure that no
portion of such benefits shall be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code.
Calico and ConnectInc.com have agreed that the merger is a change of
control under each of these agreements.
Also, Mr. Berry, Ms. Hoger and Mr. Wippich each have entered into Severance
Agreements with ConnectInc.com whereby he or she is entitled for a period of six
months following termination without cause to receive his or her monthly salary
and targeted bonus, plus certain medical benefits. For purposes of the Severance
Agreements, termination includes a significant reduction in level or type of
responsibility. ConnectInc.com is not obligated to make payments under these
Severence Agreements so long as payments are made under the Change of Control
Agreements described above.
In addition, certain directors of ConnectInc.com will receive accelerated
stock option vesting if their service to ConnectInc.com is terminated after the
merger.
INDEMNIFICATION AND INSURANCE. The merger agreement provides that after the
effective time, Calico will cause ConnectInc.com to indemnify each present and
former director and officer of ConnectInc.com or any of its subsidiaries against
any claims, losses, liabilities, damages, payments,
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settlement, costs or expenses incurred in connection with any claim, demand,
action, suit, proceeding or investigation arising out of or pertaining to
matters existing or occurring at or prior to the effective time or based in
whole or in part on or pertaining to the merger. Calico will cause
ConnectInc.com to fulfill and honor the obligations of ConnectInc.com pursuant
to all indemnification agreements existing on the date of the merger and the
certificate of incorporation and bylaws of ConnectInc.com in effect on the date
of the merger agreement. Calico's obligations for such indemnification shall not
exceed ConnectInc.com's net worth as of September 30, 1999. In addition, for a
period of six years after the effective time, Calico will maintain or cause
ConnectInc.com to maintain a directors' and officers' policy covering those
persons who are currently covered by ConnectInc.com's directors' and officers'
liability insurance policy with coverage and scope at least as favorable as
ConnectInc.com's existing coverage. Calico is not required to expend per year
for such coverage more than 200% of the current annual premium expended by
ConnectInc.com to provide such coverage. If the annual premiums of such
insurance coverage exceed this amount, Calico may elect to cause coverage at
least as favorable as existing coverage in all material respects to be provided
under any policy maintained for the benefit of Calico or any of its
subsidiaries.
OPINION OF CONNECTINC.COM'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated November 8, 1999, ConnectInc.com
retained Alliant Partners to render an opinion regarding the fairness of a
possible sale of ConnectInc.com, from a financial point of view, to the holders
of common stock of ConnectInc.com stock.
On November 18, 1999, after the market close, the ConnectInc.com board met
by teleconference and approved the merger. At this meeting, Alliant Partners
delivered to the ConnectInc.com board its opinion that, as of November 18, 1999,
and based on the matters described therein, the total consideration received by
the stockholders of ConnectInc.com pursuant to the merger agreement was fair,
from a financial point of view, to the holders of ConnectInc.com common stock.
Alliant Partners noted that its presentation on the financial terms of the
merger was based on the closing stock price of Calico on November 17, 1999. No
limitations were imposed by ConnectInc.com on the scope of Alliant Partners'
investigations or the procedures to be followed by Alliant Partners in rendering
its opinion. The exchange ratio was determined through negotiations between the
management of ConnectInc.com and Calico. In furnishing its opinion, Alliant
Partners was not engaged as an agent or fiduciary of ConnectInc.com's
stockholders or any other third party.
The full text of the Alliant Partners opinion, which sets forth, among
other things, assumptions made, matters considered and limitations on the review
undertaken, is attached hereto as Appendix B and is incorporated herein by
reference. Stockholders of ConnectInc.com are urged to read the Alliant Partners
opinion in its entirety. The Alliant Partners opinion was prepared for the
benefit and use of the ConnectInc.com board of directors in its consideration of
the merger and does not constitute a recommendation to stockholders of
ConnectInc.com as to how they should vote at the meeting in connection with the
merger. The Alliant Partners opinion does not address the relative merits of the
merger and any other transactions or business strategies discussed by the
ConnectInc.com board of directors as alternatives to the merger agreement. In
addition, the Alliant Partners opinion does not address the underlying business
decisions of the ConnectInc.com board of directors to proceed with the merger,
except with respect to the fairness of the total consideration received by the
ConnectInc.com stockholders pursuant to the merger agreement, from a financial
point of view, to the holders of common stock of ConnectInc.com, the underlying
business decision of the ConnectInc.com board of directors to proceed with or
effect the merger. The summary of the Alliant Partners opinion set forth in this
proxy statement/prospectus is qualified in its entirety by reference to the full
text of the Alliant Partners opinion.
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In connection with the preparation of its opinion, Alliant Partners, among
other things:
- reviewed the terms of the draft agreement and plan of merger and the
associated exhibits thereto distributed through November 18, 1999;
- reviewed the ConnectInc.com Form 10-K for the fiscal years ended December
31, 1997 and 1998, including the audited financial statements included
therein, and the ConnectInc.com Form 10-Q for the nine months ended
September 30, 1999, including the unaudited financial statements included
therein;
- reviewed certain internal financial and operating information relating to
ConnectInc.com prepared by ConnectInc.com management;
- participated in discussions with ConnectInc.com management concerning the
operations, business strategy, financial performance and prospects for
ConnectInc.com;
- reviewed the recent reported closing prices and trading activity for
ConnectInc.com Common Stock;
- compared certain aspects of the financial performance of ConnectInc.com
with comparable public companies;
- analyzed available information, both public and private, concerning other
mergers and acquisitions comparable in whole or in part to the merger;
- reviewed the Calico Form S-1, Forms S-1/A, Form 424(b)4 Prospectus, and
Form 10-Q for the period ending September 30, 1999;
- participated in discussions with Calico management concerning the
operations, business strategy, financial performance and prospects for
Calico and its strategic rationale for the merger;
- reviewed the recent reported closing prices and trading activity for
Calico common stock;
- considered the total number of shares of Calico common stock outstanding
and the average weekly trading volume of Calico common stock;
- reviewed recent equity analyst reports covering Calico;
- considered the effect of the merger on the future financial performance
of the consolidated entity;
- participated in discussions related to the merger among Calico,
ConnectInc.com and their financial and legal advisors; and
- conducted other financial studies, analyses and investigations as Alliant
Partners deemed appropriate for purposes of its opinion.
In conducting its review and arriving at the Alliant Partners opinion,
Alliant Partners relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by ConnectInc.com and Calico
or otherwise made available to Alliant Partners and did not assume
responsibility independently to verify such information. Alliant Partners
further relied upon the assurances of ConnectInc.com's and Calico's management
that the information provided was prepared on a reasonable basis in accordance
with industry practice and with respect to financial planning data, reflected
the best currently available estimates and good faith judgments of
ConnectInc.com's and Calico's management as to the expected future financial
performance of
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ConnectInc.com and Calico and that such parties were not aware of any
information or facts that would make the information provided to Alliant
Partners incomplete or misleading. Without limiting the generality of the
foregoing, for the purpose of the Alliant Partners opinion, Alliant Partners
assumed that neither ConnectInc.com nor Calico was a party to any pending
transaction, including external financing, recapitalizations, acquisitions or
merger discussions, other than the merger or in the ordinary course of business.
Alliant Partners also assumed that the merger would be free of Federal tax to
the holders of ConnectInc.com common stock.
In arriving at its opinion, Alliant Partners did not perform any appraisals
or valuations of specific assets or liabilities of ConnectInc.com or Calico and
was not furnished with any such appraisals or valuations.
Without limiting the generality of the foregoing, Alliant Partners did not
undertake any independent analysis of any pending or threatened litigation,
possible unasserted claims or other contingent liabilities, to which
ConnectInc.com, Calico or any of their respective affiliates was a party or may
be subject and, at ConnectInc.com's direction and with its consent, the Alliant
Partners opinion made no assumption concerning and therefore did not consider,
the possible assertion of claims, outcomes or damages arising out of any such
matters. Although developments following the date of the Alliant Partners
opinion may affect its opinion, Alliant Partners assumed no obligation to
update, revise or reaffirm its opinion.
Following is a summary explanation of the various sources of information
and valuation methodologies employed by Alliant Partners in conjunction with
rendering its opinion to the ConnectInc.com board of directors.
COMPARABLE COMPANY ANALYSIS. Alliant Partners compared certain financial
information and valuation ratios relating to ConnectInc.com to corresponding
publicly available data and ratios from a group of selected publicly traded
companies deemed comparable to ConnectInc.com. The comparable companies selected
included twenty-two publicly traded companies in the business of Internet
services and Internet software. Financial information reviewed by Alliant
Partners included each company's: enterprise value, calculated as the market
capitalization of the selected company, plus such company's debt, less such
company's cash; revenue run rate, calculated as the most recent quarter's
revenue multiplied by four; calendar year 1999 revenue, including actual revenue
reported to date plus projected revenue through December 1999; calendar 2000
projected revenue; prior year revenue growth rate; and current year revenue
growth rate. Companies in the Internet services sector included: AnswerThink
Consulting Group Inc.; Appnet Inc.; Cambridge Technology Partners; Diamond
Technology Partners Inc.; IXL Enterprises Inc.; Proxicom Inc.; Razorfish Inc.;
Sapient Corporation; Scient Corporation; USInternetworking Inc.; USWeb
Corporation; Viant Inc.; and Whittman-Hart Inc. Companies in the Internet
software sector included: Allaire Corporation; Art Technology Group; Broadvision
Inc.; Calico; Commerce One Inc.; Interworld Corporation; Open Market Inc.;
Silknet Software Inc.; and Vignette Corporation.
The comparable companies had an enterprise value/revenue run rate ratio
range of 1.3x to 176.3x with a weighted narrow average (narrow average excludes
the highest and lowest estimates) of 30.0x; enterprise value/1999 revenue ratio
range of .8x to 255.3x with a weighted narrow average of 41.4x; enterprise
value/2000 projected revenue ratio range of .8x to 118.0x with a weighted narrow
average of 25.2x. After making certain adjustments for differences in liquidity,
performance and size, this analysis yielded an implied ConnectInc.com equity
value of $84.8 million.
No company utilized as a comparison in the comparable company analysis,
with the exception of Calico, is identical to ConnectInc.com or Calico. In
evaluating the comparable companies, Alliant Partners made judgments and
assumptions with regard to industry performance, general business,
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economic, market and financial conditions and other matters, many of which are
beyond the control of ConnectInc.com or Calico.
COMPARABLE TRANSACTION ANALYSIS. Alliant Partners reviewed forty-four
comparable merger and acquisition transactions from March 1997 through November
18, 1999, which involve sellers sharing many characteristics with ConnectInc.com
including revenue size, products offered and business model. These comparable
transactions of companies in the Internet software and Internet services sectors
are: Ciber Inc.'s acquisition of Davis, Thomas & Associates Inc.; USWeb Corp.'s
acquisition of Infopreneurs, Inc.; Ciber Inc.'s acquisition of KCM Computer
Consulting Inc.; USWeb Corp.'s acquisition of Electronic Images Inc.; USWeb
Corp.'s acquisition of Dreammedia Inc.; USWeb Corp.'s acquisition of
Cybernautics Inc.; Ciber Inc.'s acquisition of The Constell Group; USWeb Corp.'s
acquisition of W3-Design Inc.; USWeb Corp.'s acquisition of USWeb-Apex Inc.;
USWeb Corp.'s acquisition of Reach Networks Inc.; Ciber Inc.'s acquisition of
Advanced Systems Engineering Inc.; USWeb Corp.'s acquisition of
Interlogic.Studios Inc.; USWeb Corp.'s acquisition of Ensemble Corp.; ICC
Technologies Inc.'s acquisition of Rare Medium Inc.; USWeb Corp.'s acquisition
of Konic Interactive Inc.; Ciber Inc.'s acquisition of Step Consulting Inc.;
Ciber Inc.'s acquisition of Summit Group Inc.; USWeb Corp.'s acquisition of
Kallista Inc.; USWeb Corp.'s acquisition of Gray Peak Technologies Inc.; Think
New Ideas Inc.'s acquisition of Ubicube Group Inc.; Think New Ideas Inc.'s
acquisition of Red Dot Interactive; USWeb Corp.'s acquisition of Tucker Network
Technologies; Ciber Inc.'s acquisition of EJR Computer Associates, Inc.; USWeb
Corp.'s acquisition of Metrix Communications Corp.; Ciber Inc.'s acquisition of
Cushing Group Inc.; USWeb Corp.'s acquisition of CKS Group Inc.; AnswerThink
Consulting Group's acquisition of TriSpan Inc.; Apollo Management L.P.'s
acquisition of Rare Medium Group Inc.; USWeb Corp.'s acquisition of Mitchell
Madison; Luminant Worldwide Corp.'s acquisition of Align Solutions Corp.; IXL
Enterprises Inc.'s acquisition of Tessera Enterprise Systems; Razorfish Inc.'s
acquisition of International Integration Inc.; AnswerThink Consulting Group
Inc.'s acquisition of Think New Ideas, Inc.; OpenMarket Inc.'s acquisition of
Folio Corp.; Calico Technology Inc.'s acquisition of FirstFloor Software Inc.;
Inktomi Corp.'s acquisition of C2B Technologies; Allaire Corp.'s acquisition of
Bright Tiger Technologies; Vignette Corp.'s acquisition of Diffusion Inc.;
Concur Technologies Inc.'s acquisition of Seeker Software; Allaire Corp.'s
acquisition of Live Software Inc.; Open Market Inc.'s acquisition of FutureTense
Inc.; Silknet Software Inc.'s acquisition of InSite Marketing Technology Inc.;
and Commerce One Inc.'s acquisition of CommerceBid.com.
The price/revenue multiples of the forty-four transactions range from 0.7x
to 30.0x with a weighted average of 9.8x. The price/earnings ratio did not
result in a meaningful multiple since primarily all of the companies either had
negative earnings or did not disclose the trailing twelve months earnings. This
analysis yielded an implied ConnectInc.com equity value of $61.4 million.
Estimated multiples paid in the comparable transactions were based on
information obtained from public filings, public company disclosures, press
releases, industry and popular press reports, databases and other sources. No
company, transaction or business used in the comparable company analysis or
comparable transaction analysis as a comparison is identical to ConnectInc.com
or the merger. Accordingly, an analysis of the results of the foregoing is not
entirely mathematical; rather it involves complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the acquisition, public trading and other values of
the comparable companies, comparable transactions or the business segment,
company or transactions to which they are being compared.
DISCOUNTED CASH FLOW ANALYSIS. Alliant Partners estimated the present value
of the projected future cash flows of ConnectInc.com on a stand-alone basis
using internal financial planning data prepared by the management of
ConnectInc.com for the years ending December 31, 1999 through December 31, 2001.
Alliant Partners obtained a terminal valuation based on the average of three
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terminal value methods: average revenue multiple derived from the comparable
companies analysis applied to 2001 revenue; average revenue multiple derived
from the comparable transactions analysis applied to 2001 revenue; and the
Gordon Growth Model which assumed a long-term growth rate of 30%. In all cases,
Alliant Partners used a discount rate of 35%. This analysis yielded an estimated
present value of ConnectInc.com's equity value of $101.3 million.
STOCK PERFORMANCE ANALYSIS. For comparative purposes, Alliant Partners
examined the weekly historical volume and trading price for Calico from
inception of trading on Nasdaq on October 7, 1999 to November 17, 1999 and for
ConnectInc.com from November 17, 1997 to November 17, 1999.
While the foregoing summary describes certain analyses and factors that
Alliant Partners deemed material in its presentation to the ConnectInc.com board
of directors, it is not a comprehensive description of all analyses and factors
considered by Alliant Partners. The preparation of a fairness opinion is a
complex process that involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Alliant Partners believes that its analyses
must be considered as a whole and that selecting portions of its analyses and of
the factors considered by it, without considering all analyses and factors,
would create an incomplete view of the evaluation process underlying the Alliant
Partners opinion. Several analytical methodologies were employed and no one
method of analysis should be regarded as critical to the overall conclusion
reached by Alliant Partners. Each analytical technique has inherent strengths
and weaknesses, and the nature of the available information may further affect
the value of particular techniques. The conclusions reached by Alliant Partners
are based on all analyses and factors taken as a whole and also on application
of Alliant Partners' own experience and judgment. Such conclusions may involve
significant elements of subjective judgment and qualitative analysis. Alliant
Partners therefore gives no opinion as to the value or merit standing alone of
any one or more parts of the analysis it performed. In performing its analyses,
Alliant Partners considered general economic, market and financial conditions
and other matters, many of which are beyond the control of ConnectInc.com and
Calico. The analyses performed by Alliant Partners are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by such analyses. Accordingly, analyses
relating to the value of a business do not purport to be appraisals or to
reflect the prices at which the business actually may be purchased. Furthermore,
no opinion is being expressed as to the prices at which shares of Calico common
stock may trade at any future time.
Pursuant to an engagement letter dated November 8, 1999, Alliant Partners
is to receive a fee of $350,000 for the fairness opinion rendered to the
ConnectInc.com board. ConnectInc.com has also agreed to reimburse Alliant
Partners for its out of pocket expenses and to indemnify and hold harmless
Alliant Partners and its affiliates and any person, director, employee or agent
acting on behalf of Alliant Partners or any of its affiliates, or any person
controlling Alliant Partners or its affiliates for certain losses, claims,
damages, expenses and liabilities relating to or arising out of services
provided by Alliant Partners as financial advisor to ConnectInc.com. The terms
of the fee arrangement with Alliant Partners, which ConnectInc.com and Alliant
Partners believe are customary in transactions of this nature, were negotiated
at arm's length between ConnectInc.com and Alliant Partners, and the
ConnectInc.com board was aware of such fee arrangements.
Alliant Partners was retained based on Alliant Partners' experience as a
financial advisor in connection with mergers and acquisitions and in securities
valuations generally, as well as Alliant Partners' investment banking
relationship and familiarity with ConnectInc.com. Alliant Partners has provided
financial advisory and investment banking services to ConnectInc.com in the
past.
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As part of its investment banking business, Alliant Partners is frequently
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, sales and divestitures, joint ventures and strategic
partnerships, private financings and other specialized studies.
THE MERGER
Once the conditions to completing the merger contained in the merger
agreement have been satisfied or waived, the merger will be completed in
accordance with Delaware law.
CLOSING
The closing date of the merger will be a date specified by Calico and
ConnectInc.com but will be no later than two business days after the
satisfaction or waiver of the latest to occur of the conditions to the merger in
the merger agreement. Calico and ConnectInc.com anticipate that the merger will
close in February 2000. However, we cannot assure you when or if the merger will
be completed. If the merger does not occur by May 31, 2000, either Calico or
ConnectInc.com may terminate the merger agreement and its obligations to
consummate the merger, unless the failure to complete the merger by that date is
principally due to the failure of the party seeking to terminate the merger
agreement to fulfill any of its obligations in the merger agreement. See
"-- Conditions to Completing the Merger" and "-- Regulatory and Other Approvals
Required for the Merger."
CONVERSION OF CONNECTINC.COM STOCK; TREATMENT OF CONNECTINC.COM STOCK OPTIONS
AND WARRANTS
In the merger, each ConnectInc.com stockholder will receive 0.081 shares of
Calico common stock for each of their shares of ConnectInc.com common stock.
Each stock option, whether vested or unvested, to acquire ConnectInc.com
common stock granted under ConnectInc.com's stock option and incentive plans,
which we refer to as the ConnectInc.com stock plans, warrants and any other
right to acquire ConnectInc.com common stock, outstanding and unexercised
immediately before the merger shall be assumed by Calico and will be converted
automatically in the merger into a stock option, warrant or other right to
purchase Calico common stock, except any option granted under the 1996 Employee
Stock Purchase Plan shall not be assumed by Calico and this plan will be
terminated on the closing day of the merger. In each case, the number of shares
of Calico common stock subject to the new Calico options, warrants or other
rights will be equal to 0.081 shares of Calico common stock for each share of
ConnectInc.com common stock that the holder of the ConnectInc.com option,
warrant or other right would have been entitled to receive had the holder
exercised the option, warrant or other right, whether or not vested, in full
immediately before the merger rounded down to the nearest whole share. The
applicable exercise price will be adjusted by dividing the per share exercise
price in effect immediately before the merger by 0.081 rounded up to the nearest
tenth of a cent. The terms of each new Calico option, warrant or other right
will be substantially the same, including vesting requirements, as the
corresponding ConnectInc.com option, warrant or other right. In any event,
options that are incentive stock options under the Internal Revenue Code will be
adjusted as provided by the Internal Revenue Code.
Soon after the merger occurs, Calico will deliver to the holders of
ConnectInc.com options, warrants and other rights notices that describe these
holders' rights under the ConnectInc.com stock plans, warrants and other rights,
as applicable, and confirmation that the terms of the agreements evidencing the
grants of the options, warrants or other rights will continue in effect on the
same terms and conditions, subject to adjustments giving effect to stock splits
or similar adjustments.
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EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
Following the merger, Calico will deliver to its designated exchange agent
certificates representing the shares of Calico common stock, and cash instead of
any fractional shares that would otherwise be issued to ConnectInc.com
stockholders under the merger agreement, in exchange for the outstanding shares
of ConnectInc.com common stock.
Not later than three business days after the merger becomes effective, the
exchange agent will mail to ConnectInc.com stockholders a transmittal letter.
The transmittal letter will contain instructions with respect to the surrender
of certificates representing ConnectInc.com common stock.
PLEASE DO NOT RETURN CONNECTINC.COM COMMON STOCK CERTIFICATES WITH THE
ENCLOSED PROXY AND DO NOT FORWARD YOUR CERTIFICATES TO THE EXCHANGE AGENT UNLESS
AND UNTIL YOU RECEIVE A LETTER OF TRANSMITTAL FOLLOWING THE MERGER.
Calico will deliver a certificate representing the shares of Calico common
stock issued to you only upon your surrender of the certificate(s) representing
ConnectInc.com common stock accompanied by a completed letter of transmittal.
You will be paid cash instead of being issued any fractional shares of Calico
common stock you would otherwise receive and the surrendered certificate will be
canceled. The amount of cash you receive instead of a fractional share will be
equal to the fraction of a Calico share you would otherwise receive multiplied
by the average of the last reported sales price for Calico common stock, as
adjusted for stock splits, as reported on the Nasdaq National Market on the ten
trading days immediately before the day the merger becomes effective.
Calico will pay you dividends or other distributions declared or made after
the merger becomes effective on Calico common stock with a record date after the
effective time of the merger only after the merger has occurred and after you
have surrendered your certificates representing ConnectInc.com common stock.
If a certificate for ConnectInc.com common stock has been lost, stolen or
destroyed, the exchange agent will issue your shares of Calico common stock and
any cash instead of a fractional share only after you have delivered an
affidavit as to such loss, theft or destruction and as to your ownership of the
certificate. Calico or the exchange agent may require you to post a customary
bond in such amount as Calico or the exchange agent may determine is reasonably
satisfactory as indemnity against any claim that may be made against Calico with
respect to the lost, stolen or destroyed certificate.
Any cash which would have been paid to you instead of a fractional share
and any shares of Calico common stock that would otherwise be issued to
ConnectInc.com stockholders under the merger agreement, as well as any
applicable dividends or distributions with respect to Calico common stock, which
remain undistributed upon the expiration of one (1) year after the merger closes
shall be delivered to Calico upon demand and thereafter, ConnectInc.com
stockholders who have failed to surrender their certificate(s) representing
ConnectInc.com common stock and letter of transmittal will only look to Calico
as general creditors for such payment.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties by Calico and
ConnectInc.com. These relate to, among other things:
- due organization, existence, good standing and qualification to do
business and its subsidiaries and, additionally, in the case of
ConnectInc.com, its equity investments;
- capitalization of the companies and their subsidiaries;
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- corporate power and authority to enter into the merger agreement and
perform its obligations under the merger agreement;
- proper execution, delivery and enforceability of the merger agreement;
- compliance of the merger agreement with the charter documents and
material agreements of each party and their subsidiaries and any law
applicable to each party and their subsidiaries or by which any of their
respective properties or assets are bound;
- governmental and third-party approvals;
- each party's financial statements and SEC filings;
- broker's fees arising from the merger;
- absence of undisclosed materially adverse events, changes or effects;
- absence of legal proceedings and injunctions pending or threatened
against each party or their subsidiaries that are material or may prevent
or delay the merger;
- accuracy of the information, representations and warranties each party
made or furnished to the other included in this proxy
statement/prospectus and to be included in the S-4;
- compliance with applicable law by each party and their subsidiaries;
- absence of existing defaults under the charter documents and material
agreements of each party and their subsidiaries and law applicable to
each party or their subsidiaries or any of its properties or assets;
- absence of undisclosed liabilities, including undisclosed liabilities of
its subsidiaries;
- opinion of financial advisor;
- each company or their subsidiaries holding all necessary permits,
licenses, variances, exemptions, orders and approvals for the lawful
conduct of business;
- title to or valid leasehold interests in properties and assets, free and
clear of liens, except for liens for taxes not yet due and payable and
immaterial imperfections of title;
- ownership of or rights to material intellectual property by each party or
their subsidiaries and, additionally, in the case of ConnectInc.com,
ownership of or rights to immaterial intellectual property;
- absence of any infringement, violation or unauthorized use of any
intellectual property owned by each company or their subsidiaries by
third parties;
- "year 2000" compliance; and
- absence of or agreement or proposal to take any action that would prevent
the merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Internal Revenue Code.
The merger agreement contains additional representations and warranties of
ConnectInc.com. These relate to, among other things:
- unanimous approval of the merger and recommendation to ConnectInc.com's
stockholders to approve the merger by ConnectInc.com's board of
directors;
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- absence of environmental violations and liabilities by ConnectInc.com and
its subsidiaries;
- payment of taxes and filing of tax returns;
- employee benefit plans, labor, employment and related matters;
- maintenance of and compliance with customary insurance policies by
ConnectInc.com and its subsidiaries;
- certain business practices;
- intellectual property including specifically, but not limited to,
MarketStream version 2.0, with respect to its ownership and protection,
and any pending or threatened infringement claims;
- product warranties and guaranties;
- affiliates of ConnectInc.com;
- absence of restrictions on business activities including business
practices, acquisition of property or the conduct of business or the
sale, license or distribution of ConnectInc.com's products or providing
of services;
- scheduled contracts, agreements and commitments;
- not being subject to anti-takeover statutes or regulations;
- affirmative vote of the majority of outstanding shareholders required to
approve the merger; and
- the absence of any directors, officers, agents or employees of
ConnectInc.com or any of its subsidiaries making any unlawful payment on
behalf of the company or using ConnectInc.com's funds to make any
unlawful payments related to domestic or foreign political activity.
CONDUCT OF BUSINESS BEFORE THE MERGER
Each of Calico and ConnectInc.com has agreed to do certain things before
the merger occurs. For ConnectInc.com, these include:
- conducting its business in the ordinary course consistent with past
practice with no less diligence and effort than would be applied in the
absence of the merger agreement;
- using commercially reasonable efforts to preserve intact its business
organization and business relationships;
- retaining the services of its current officers and key employees; and
- negotiating, executing and delivering a lease for new principal offices,
subject to Calico's approval, such approval not to be unreasonably
withheld.
Calico and ConnectInc.com have also agreed to:
- use all reasonable efforts to take or cause to be taken all action and to
do or cause to be done all things reasonably necessary, proper or
advisable under law to complete the merger and execute any instruments
necessary to complete the merger;
- cooperate in the preparation and making of any required filings;
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- obtain consents of all third-parties and governmental authorities
necessary, proper, advisable or reasonably requested by Calico or
ConnectInc.com in order to complete the merger;
- contest any legal proceeding related to the merger;
- consult and cooperate with one another and consider in good faith the
views of one another in connection with any proceeding under or related
to any law regarding the merger, including promptly informing the other
of any material miscommunication between such party and any antitrust or
competition governmental entity;
- provide the other party and its representatives with reasonable access to
their employees, books and records, plants, offices, warehouses and other
facilities and personnel files of current employees of each and their
subsidiaries as the other party may reasonably request;
- provide the other party periodic financial and operating data and
information about the business and properties of each and their
subsidiaries as such other party may reasonably request;
- not issue any press release or make any other public statements without
the advance approval of the other party except as required by law,
pursuant to any agreement with the Nasdaq National Market, the filing of
a Form 8-K or following a change, if any, of ConnectInc.com's board
recommendation of the merger;
- promptly tell the other party about the occurrence or nonoccurrence of
any events or circumstances that would cause any representations or
warranties to not be true or any obligations not to have been fulfilled
or satisfied or any material failure to comply with or satisfy in any
material respect any covenant, condition or agreement; and
- deliver certificates relating to tax matters as reasonably requested by
each party's attorneys and not to take or cause to take any action that
would cause any of the representations contained in the certificate to be
untrue.
Calico has also agreed to use all reasonable efforts to list its shares to
be issued in the merger and upon the exercise of stock options assumed in the
merger on the Nasdaq National Market, subject to official notice of issuance,
prior to the effective time of the merger. Subject to the merger agreement,
Calico has agreed to use all reasonable efforts to cause the merger to occur as
soon as practicable after ConnectInc.com stockholders approve the merger.
Unless the merger agreement permits or except as already disclosed to
Calico or approved in writing by Calico, such approval not to be unreasonably
withheld, ConnectInc.com has agreed for itself and on behalf of its subsidiaries
not to:
- amend its charter documents;
- authorize for issuance, issue or agree or commit to issue, sell or
deliver any stock of any class or any other debt or any other equity
securities or equity equivalents, except for grants of options in the
amounts and under the option plans disclosed to Calico as of the date of
the merger agreement and shares of ConnectInc.com common stock issued
under options granted prior to the date of the merger;
- split, combine or reclassify any shares of its capital stock;
- declare, set aside or pay any dividend or other distribution or other
actual, constructive or deemed distribution or otherwise make any payment
of any kind in respect of its capital stock;
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- redeem or otherwise acquire any of its or its subsidiaries' securities
except as may be required under any grants of options under
ConnectInc.com's option plans or other agreements disclosed to Calico;
- adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization
other than the merger with Calico;
- alter any subsidiary's corporate structure or ownership;
- incur or assume any debt or issue any debt securities in each case,
except under existing lines of credit in the ordinary course of business,
consistent with past practices, or change the terms of any existing debt;
- become liable or responsible for the obligations of any other person
except for obligations of ConnectInc.com's subsidiaries incurred in the
ordinary course of business consistent with past practices but not
including intellectual property indemnifications in the ordinary course
of business consistent with past practices;
- make any loans, advances or capital contributions to or investments in
any other person, except its subsidiaries or for customary loans or
advances to employees in the ordinary course of business consistent with
its past practices;
- pledge or encumber its capital stock;
- mortgage or pledge any of its significant assets, tangible or intangible,
or create or permit any material lien on these assets, except purchase
money security interests incurred in the ordinary course of business
consistent with past practices;
- except as required by law and for signing bonuses for non-officer
employees in an amount not to exceed $25,000 per person and $150,000 in
the aggregate, enter into, adopt, amend or terminate any employee
compensation, benefit or similar plan or increase in any compensation or
fringe benefits;
- grant any severance or termination pay, except as required by law or by
any written agreements outstanding as of November 19, 1999 the material
terms of which were previously disclosed to Calico;
- exercise its discretion or otherwise voluntarily accelerate the vesting
of any stock options;
- acquire, license, sell, lease, transfer or otherwise dispose of any
material assets in any single transaction or series of related
transactions (including in any transaction or series of related
transactions) having a fair market value over $25,000 total, except for
sales of its products and licenses of its software in the ordinary course
of business consistent with its past practices;
- enter into any exclusive license, distribution, marketing, sales or other
agreements;
- enter into any product development agreement with a term beyond 60 days
or which provides for payments that could exceed $25,000 for any single
agreement or $100,000 total;
- sell, transfer or otherwise dispose of any intellectual property except
sales of its products and licenses of software in the ordinary course of
business consistent with past practices;
- except as required as a result of a change in law or in generally
accepted accounting principles, materially change any of its accounting
principles, practices or methods;
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- revalue in any material respect any of its assets, including writing down
the value of inventory or writing-off notes or accounts receivable, other
than in the ordinary course of business, consistent with past practices;
- acquire any other business or entity or any division of or any equity
interest in such other business or entity;
- enter into any material agreement other than a non-exclusive license
agreement or a service agreement with end-users entered into in the
ordinary course of business consistent with its past practices;
- amend, modify or waive any material right under its material contracts;
- modify its standard product warranty terms or existing product warranties
in effect as of November 19, 1999 in any material and negative manner;
- authorize any new or additional capital expenditure(s) over $25,000 in
the aggregate in any calendar quarter if such capital expenditure was not
previously disclosed to Calico, except as required pursuant to existing
customer contracts;
- authorize any new or additional manufacturing capacity expenditures for
any new manufacturing capacity contracts or arrangements;
- make or revoke any material tax election or settle or compromise any
material income tax liability;
- fail to file any tax returns when due (or, alternatively, fail to file
for available extensions) or fail to cause filed tax returns to be
complete and accurate in all material respects;
- permit any material insurance policy naming ConnectInc.com or its
subsidiaries as a beneficiary or loss-payable to expire, be canceled or
terminated, unless a comparable insurance policy reasonably acceptable to
Calico is obtained and in effect;
- fail to pay any material taxes or other material debts when due;
- settle or compromise any pending or threatened legal proceeding that
relates to the merger agreement, or transactions contemplated by the
merger agreement, or which involves more than $25,000 total or would
otherwise be material to ConnectInc.com, or relates to any intellectual
property matters;
- take or fail to take any action that could reasonably be expected to
limit the use of any net operating losses, built-in losses or tax credits
or other similar items or to cause any transaction intended by
ConnectInc.com or its subsidiaries to be a tax-free reorganization to
fail to qualify as such a reorganization;
- enter into any licensing, distribution, sponsorship, advertising or other
similar agreements that are not cancelable with less than 60 days notice
without penalty or provides for payment by or to ConnectInc.com of more
than $25,000 over the term of the agreement, except for licensing and
distribution contracts and agreements entered into with end-user
customers in the ordinary course of business consistent with past
practices;
- fail to timely meet any SEC filing deadlines;
- engage in any willful action with the intent to directly or indirectly
adversely impact the merger; and
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- agree to take any of the actions described above.
ConnectInc.com has also agreed to use all reasonable efforts not to do
anything that would make any of its representations or warranties contained in
the merger agreement untrue or incorrect.
The merger agreement restricts the ability of ConnectInc.com, its
subsidiaries, affiliates and respective officers, employees, directors,
representatives and agents to discuss or negotiate proposals for certain
significant transactions with anyone other than Calico. These provisions require
ConnectInc.com not to have or continue discussions with anyone else for any
third-party acquisition.
We use the term third-party acquisition to mean any of the following:
- an acquisition of ConnectInc.com by anyone other than Calico or its
affiliates;
- the acquisition of more than 50% of ConnectInc.com's assets and its
subsidiaries taken as a whole, other than the sale of its products in the
ordinary course of business consistent with its past practices;
- an acquisition of 50% or more of the outstanding shares of ConnectInc.com
common stock;
- ConnectInc.com's adoption of a plan of liquidation or declaration or
payment of an extraordinary dividend;
- ConnectInc.com's repurchase (or any of its subsidiaries' purchase) of
more than 10% of the outstanding shares of ConnectInc.com common stock;
or
- acquisition (or any group of acquisitions) by ConnectInc.com or any of
its subsidiaries of any direct or indirect ownership interest or
investment in any business (or businesses) whose annual revenues, net
income or assets is equal to or greater than 10% of the annual revenues,
net income or assets of ConnectInc.com.
ConnectInc.com has agreed that it will and will cause its subsidiaries,
affiliates and employees, directors, representatives (including any of its
investment bankers, attorneys and accountants) and agents to:
- immediately cease and not to encourage, solicit, participate in or
initiate discussions or negotiations with or provide any non-public
information to anyone except Calico concerning any third-party
acquisition directly or indirectly. However, the merger agreement does
not prohibit the ConnectInc.com board of directors from taking and
disclosing to ConnectInc.com stockholders a position contemplated by
Rules 14d-9 and 14e-2 under the Securities Exchange Act of 1934, or
Exchange Act, with regard to a tender or exchange offer made by someone
other than Calico. In addition, if the ConnectInc.com board determines in
its good faith judgment, after consultation with legal counsel of
nationally recognized standing, that its fiduciary duties require it to
do so, the ConnectInc.com board may participate in discussions and
negotiations with a third-party regarding any unsolicited bona fide
proposal, offer or inquiry and furnish information to such offeree, but
only for so long as such discussions have a substantial probability of
leading to an offer containing the following terms:
1. to acquire, directly or indirectly, solely for cash and/or
securities, all of the shares of ConnectInc.com common stock then
outstanding, or all or substantially all of ConnectInc.com's assets;
2. that contains terms that the ConnectInc.com board of directors by a
majority vote determines, in good faith taking into account, as to
the financial terms, the opinion of a financial advisor of nationally
recognized reputation, to be more favorable to
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ConnectInc.com stockholders than the merger with Calico, taking into
account all aspects of the transaction;
3. that the ConnectInc.com board by a majority vote determines in its
good faith judgment based on consultation with a financial advisor of
nationally recognized reputation and its legal and other advisers to
be reasonably capable of being completed after taking into account
all aspects of the proposal and the person making the proposal; and
4. that does not contain a right of first refusal or right of first
offer regarding any counter-proposal that Calico might make.
We sometimes refer to an offer that has all of these characteristics as a
superior proposal.
- not authorize or permit any of its or their respective officers,
directors, employees, representatives or agent to, directly or
indirectly, engage in any of the actions described above.
In connection with any proposal, offer or inquiry concerning a third-party
acquisition, ConnectInc.com has agreed it will:
- promptly (and no later than within 24 hours of becoming aware of such
offer) notify Calico if ConnectInc.com or any of its subsidiaries or
other affiliates or any of their respective officers, directors,
employees and agents receives any communication regarding a third-party
acquisition, including its key terms and conditions and the identity of
the third-party and any request for confidential information in
connection with the potential third-party acquisition;
- provide a copy of any written agreements, proposals, or other materials
ConnectInc.com receives about a third-party acquisition or the
third-party;
- provide copies of all information furnished by ConnectInc.com in
connection with such third-party acquisition if the information has not
already been provided to Calico;
- obtain confidentiality agreements substantially similar to the
confidentiality agreement executed by Calico prior to its execution of
the merger agreement from all third-parties furnished with any
information in connection with a third-party acquisition;
- notify Calico of any material changes or developments concerning any
third party acquisitions; and
- advise Calico from time to time upon Calico's request, of the status of
any third-party acquisition.
Except as described below, the ConnectInc.com board of directors may not
withdraw or modify its recommendation of the merger with Calico. ConnectInc.com
also may not approve, recommend, cause or permit ConnectInc.com to enter into
any letter of intent, agreement or obligation relating to any third-party
acquisition. However, if the ConnectInc.com board determines in its good faith
judgment, after consultation with legal counsel of nationally recognized
standing and in a manner consistent therewith, that its fiduciary duties require
it to do so, the ConnectInc.com board may withdraw its recommendation of the
merger and approve or recommend any superior proposal and cease efforts to
obtain an affirmative vote of ConnectInc.com's stockholders approving and
adopting the merger and merger agreement. The ConnectInc.com board of directors
may do so only after providing written notice to Calico advising Calico that the
ConnectInc.com board of directors has received a superior proposal. This notice
must specify its material terms and conditions and identify the person making
the superior proposal. Upon its receipt of such notice, Calico will then have
three business days to make a counter offer, which must be accepted if the
ConnectInc.com board of directors by a majority vote determines in good faith,
based on the advice of a financial advisor of
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nationally recognized reputation, that Calico's counter offer is at least as
favorable to ConnectInc.com stockholders as the superior proposal. If Calico
fails to make a counter offer, ConnectInc.com may enter into an agreement with
respect to the superior proposal only if the merger agreement is concurrently
terminated in accordance with its terms and ConnectInc.com has paid all of the
$5.0 million termination fee due to Calico under the merger agreement, as
described below under "-- Termination of the Merger Agreement -- Termination Fee
and Expenses." ConnectInc.com will take all necessary action to duly call, give
notice of, convene and hold a meeting of its stockholders as promptly as
practicable to consider and vote upon the adoption and approval of the merger
agreement and merger.
ConnectInc.com also has agreed that it will:
- provide Calico, during normal working hours, with, and cause each of its
subsidiaries to provide Calico with, reasonable access to
ConnectInc.com's employees to, among other things, deliver offers of
continued employment and provide information to the employees about
Calico;
- promptly request each person who has at any time executed a
confidentiality agreement that governs such person's discussions with the
Company or any of its representatives to return all confidential
information furnished to such person and, if requested by Calico, to
enforce such person's obligation to do so;
- take all reasonable action to amend, merge, freeze or terminate all of
its compensation and benefit plans, effective at the closing of the
merger, as requested in writing by Calico;
- use all reasonable efforts to obtain a letter agreement from each
affiliate;
- promptly grant such approvals and use all reasonable efforts to eliminate
or minimize the effects of any takeover statute or any similar applicable
law as well as use all reasonable efforts to take any necessary action so
that the merger be consummated promptly and on the terms contemplated by
the merger agreement;
- use all reasonable efforts to encourage its employees to accept any
offers of employment extended by Calico; and
- provide Calico periodic financial information.
Calico has agreed that it will:
- file a registration statement for Calico's shares issuable upon exercise
of its assumed stock options within five (5) business days after
completion of the merger; and
- use all reasonable efforts to give each employee of Calico domiciled in
the U.S., who was an employee of ConnectInc.com immediately prior to the
closing of the merger, full credit for services performed for
ConnectInc.com for purposes of eligibility, vesting, benefit accrual and
determination of the level of benefits which Calico's benefit plans and
employee arrangements under which the employee is entitled to
participate, if and to the extent permitted by such plans.
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CONDITIONS TO COMPLETING THE MERGER
Neither of Calico or ConnectInc.com must complete the merger unless:
- ConnectInc.com stockholders have approved the merger agreement;
- all applicable waiting periods under the Hart-Scott-Rodino Act or other
similar foreign anti-trust or similar laws have terminated or expired;
- no law or order by any United States federal or state or foreign court or
United States federal or state or foreign governmental authority
prohibits, restrains, enjoins or restricts the merger;
- Calico and ConnectInc.com have obtained or complied with all governmental
or regulatory notices, approvals or other requirements necessary to
complete the merger and to operate ConnectInc.com's business after the
merger as it was operated before the merger;
- the registration statement containing this proxy statement/prospectus has
become effective and is not subject to any stop order or proceedings
seeking a stop order by the SEC; and
- Calico has received all state securities laws or "blue sky" permits and
authorizations necessary to issue the Calico common stock to
ConnectInc.com shareholders.
ConnectInc.com will not be required to complete the merger unless:
- except to the extent the aggregate of all breaches would not have a
material adverse effect, Calico's representations and warranties in the
merger agreement are true and correct on the date of the merger, but if
such representations specifically relate to an earlier date, the
representations are true and correct as of the earlier date;
- Calico has performed in all material respects each of its covenants and
obligations to be performed at or before the merger;
- the Calico common stock issuable to ConnectInc.com stockholders in the
merger are approved for quotation on the Nasdaq National Market, upon
official notice of issuance; and
- ConnectInc.com has received an opinion from its or Calico's tax counsel
stating that the merger will be treated as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code and
Calico and ConnectInc.com will be a party to the reorganization.
Calico will not be required to complete the merger unless:
- except to the extent the aggregate of all breaches would not have a
material adverse effect, ConnectInc.com's representations and warranties
contained in the merger agreement are true and correct on the date of the
merger, but if such representations specifically relate to an earlier
date, the representations are true and correct as of the earlier date;
- ConnectInc.com has performed in all material respects each of its
covenants and obligations to be performed at or before the merger;
- Calico receives letters from ConnectInc.com's directors and executive
officers relating to restrictions on the disposition of the Calico common
stock received by them in the merger and all stock options assumed in the
merger;
- there has been no material adverse change in the intellectual property
owned by or licensed to ConnectInc.com other than changes requested by
Calico or resulting from the merger;
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- no litigation commenced against ConnectInc.com that would be required to
be disclosed by Item 103 of Regulation S-K;
- Calico has received the opinion of its or ConnectInc.com's tax counsel
stating that the merger will be treated as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code and
Calico and ConnectInc.com will be a party to the reorganization for
federal income tax purposes;
- ConnectInc.com's officers and directors have entered into lock-up
agreements in substantially the form entered into by Calico's officers
and directors in connection with its initial public offering (with
identical release and expiration dates) covering all the Calico common
stock issuable to ConnectInc.com stockholders and all stock options
assumed by Calico in the merger; and
- Calico has received amendments to those license agreements with customers
previously identified by ConnectInc.com establishing that each of these
agreements provides for the grant of a non-exclusive license.
All of the conditions to completing the merger are waivable or the time for
performance may be extended in writing by the party agreeing to such extension
or waiver. Calico and ConnectInc.com cannot assure you that all of the
conditions to completing the merger will either be satisfied or waived.
REGULATORY AND OTHER APPROVALS REQUIRED FOR THE MERGER
GENERAL. Calico and ConnectInc.com have agreed to use all reasonable
efforts to do all things reasonably necessary under applicable law to complete
the merger. These things include:
- obtaining consents of all third-parties and governmental authorities
necessary, proper, advisable or reasonably requested by Calico or
ConnectInc.com to complete the merger; and
- contesting any legal proceeding related to the merger.
Calico and ConnectInc.com are not aware of any significant regulatory
approvals or actions that are required for the merger. If any governmental
approvals or actions are required, we intend to obtain them. We cannot assure
you, however, that we will be able to obtain any necessary approvals or actions.
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
EXTENSION AND WAIVER. At any time before the merger, Calico and
ConnectInc.com may agree, in writing, to:
- extend the time for performing any of the obligations or other acts of
the other party;
- waive any inaccuracies in the other's representations and warranties
contained in the merger agreement or any written document delivered in
connection with the merger agreement; or
- waive the other's compliance with any of the agreements or conditions in
the merger agreement.
AMENDMENT. The merger agreement may be changed by Calico and ConnectInc.com
at any time before or after ConnectInc.com stockholders approve the merger.
However, any change which by law requires the approval of ConnectInc.com
stockholders will require their subsequent approval to
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be effective. Any amendment must be made in writing and signed by both Calico
and ConnectInc.com.
TERMINATION OF THE MERGER AGREEMENT
TERMINATION. The merger agreement may be terminated at any time before
completing the merger, whether or not approved and adopted by ConnectInc.com
stockholders. This termination may occur in the following ways:
- Calico and ConnectInc.com agree in writing to terminate it;
- Calico or ConnectInc.com decides to terminate it because:
1. any state or federal court or other governmental authority has issued
a final, non-appealable order, decree or ruling prohibiting the
merger; or
2. the merger is not completed by May 31, 2000, unless the failure to
complete it by that date is principally due to the failure of the
party seeking to terminate the merger agreement to timely fulfill its
obligations under the merger agreement;
- ConnectInc.com decides to terminate it because:
1. Calico's breach of any of its representations or warranties in the
merger agreement or if any of Calico's representations and warranties
have become untrue so that the conditions to ConnectInc.com's
obligation to complete the merger could not be satisfied by May 31,
2000, so long as ConnectInc.com has not materially breached any of
its own obligations under the merger agreement;
2. Calico's breach of any of its covenants or agreements in the merger
agreement, and this breach, in the aggregate, materially adversely
affects Calico or the ability of Calico or ConnectInc.com to complete
the merger and Calico fails to cure its breach within thirty (30)
business days after notice by ConnectInc.com, so long as
ConnectInc.com has not materially breached its own obligations under
the merger agreement;
3. ConnectInc.com has failed to obtain its stockholders' approval of the
merger; or
4. the ConnectInc.com board has received a superior proposal and
responded in a way that permitted termination of the merger
agreement, including payment of the termination fee to Calico;
- Calico decides to terminate it because:
1. ConnectInc.com's breach of any of its representations or warranties
in the merger agreement or if any of ConnectInc.com's representations
and warranties have become untrue so that the conditions to Calico's
obligation to complete the merger could not be satisfied by May 31,
2000, so long as Calico has not materially breached any of its own
obligations under the merger agreement;
2. ConnectInc.com's breach of any of its covenants or agreements in the
merger agreement, and this failure, in the aggregate, materially
adversely affects ConnectInc.com or the ability of Calico or
ConnectInc.com to complete the merger and ConnectInc.com fails to
cure its breach within thirty (30) business days after notice by
ConnectInc.com, so long as Calico has not materially breached its own
obligations under the merger agreement;
3. the ConnectInc.com board has recommended a superior proposal to its
stockholders;
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4. the ConnectInc.com board has withdrawn or adversely modified its
approval or recommendation of the merger agreement or merger; or
5. ConnectInc.com failed to obtain its stockholders' approval of the
merger.
EFFECT OF TERMINATION. In the event the merger agreement is terminated:
- Calico may, without restriction for any purpose, including, without
limitation, development or marketing of other applications, software or
components, use any knowledge, idea, concepts or inventions that may be
retained in the minds of Calico's employees or contractors who had access
to any of ConnectInc.com's intellectual property;
- unless expressly permitted in the merger agreement, neither Calico nor
ConnectInc.com, nor any of its subsidiaries, can acquire any license in
the other party's intellectual property as a result of any termination of
the merger agreement; and
- the merger agreement will become void and have no effect without any
liability on the part of either ConnectInc.com or Calico or their
affiliates, directors, officers or stockholders.
Even after the merger agreement has been terminated, its confidentiality
and fees and expenses provisions will remain in effect. Also, termination will
not relieve either party from liability for any fraudulent misconduct or willful
breach by it of the merger agreement before it was terminated.
TERMINATION FEE AND EXPENSES. ConnectInc.com has agreed to pay Calico $5.0
million within 10 business days of the event giving rise to termination if the
merger agreement is terminated as follows:
- it is terminated by ConnectInc.com because:
1. the ConnectInc.com board of directors received a superior proposal
and responded in a way that permitted its termination; or
2. ConnectInc.com held a stockholder meeting and failed to obtain their
approval of the merger and ConnectInc.com within six (6) months after
the stockholder meeting ConnectInc.com becomes party to a third-party
acquisition or a third-party acquisition is closed.
- it is terminated by Calico because:
1. the ConnectInc.com board recommended that the ConnectInc.com
stockholders approve a superior proposal;
2. ConnectInc.com breached any of its representations or warranties or
if any of ConnectInc.com's representations or warranties have become
untrue so that the conditions to Calico's obligation to complete the
merger could not be satisfied by May 31, 2000, and within nine (9)
months after termination of the merger agreement ConnectInc.com
becomes party to a third-party acquisition or a third-party
acquisition is closed;
3. ConnectInc.com breached any of its covenants or agreements in the
merger agreement having, in the aggregate, a material adverse affect
on ConnectInc.com or materially adversely affecting either party's
ability to consummate the merger and ConnectInc.com fails to cure
such breach within thirty (30) business days notice and within nine
(9) months after the stockholders meeting, ConnectInc.com becomes
party to a third-party acquisition or a third-party acquisition is
closed;
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4. the ConnectInc.com board withdrew or adversely modified its approval
or recommendation of the merger agreement or merger; or
5 ConnectInc.com held a stockholder meeting and failed to obtain their
approval of the merger and within six (6) months after the
stockholders' meeting ConnectInc.com enters into an agreement with
respect to a third-party acquisition or a third-party acquisition is
closed.
Except as described above, whether or not the merger occurs, each party
will pay its own fees and expenses incurred in connection with the merger
agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses the material federal income tax
considerations of the merger that are generally applicable to ConnectInc.com
stockholders who are exchanging their ConnectInc.com common stock for Calico
common stock pursuant to the merger. The following discussion does not deal with
all federal income tax considerations that may be relevant to particular
ConnectInc.com stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, banks, insurance companies, foreign
persons, or tax-exempt organizations. This discussion also does not apply to
stockholders who are subject to alternative minimum tax, hold their shares as
part of a hedge, straddle or other risk reduction transaction or acquired their
ConnectInc.com common stock through stock option or stock purchase programs or
otherwise as compensation. In addition, it does not address the tax consequences
of the merger under foreign, state or local tax laws or tax consequences of
transactions completed before or after the merger, such as the exercise of
options or rights to purchase ConnectInc.com common stock in anticipation of the
merger.
CONNECTINC.COM STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES TO THEM OF THE MERGER BASED ON THEIR OWN
CIRCUMSTANCES, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER.
The following discussion is based on the Internal Revenue Code, applicable
Treasury Regulations, judicial decisions and administrative rulings and
practice, all as of the date of this proxy statement/prospectus, all of which
are subject to change. Any such changes could be applied retroactively and could
affect the accuracy of the statements and conclusions in this discussion and the
tax consequences of the merger to Calico, ConnectInc.com and/or their
stockholders.
Neither Calico nor ConnectInc.com has requested or will request a ruling
from the Internal Revenue Service with regard to any of the tax consequences of
the merger. However, it is a condition to the consummation of the merger that
Calico and ConnectInc.com each receive an opinion of Gray Cary Ware &
Freidenrich LLP, counsel to Calico, and Cooley Godward LLP, counsel to
ConnectInc.com, that:
- the merger will constitute a reorganization under Section 368(a) of the
Internal Revenue Code; and
- each of Calico and ConnectInc.com will be a party to the reorganization
within the meaning of Section 368(b) of the Internal Revenue Code.
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If the merger constitutes a reorganization within the meaning of Section
368(a) of the Internal Revenue Code as discussed above, and subject to the
limitations and qualifications referred to in this discussion, in the opinion of
Gray Cary Ware & Freidenrich and Cooley Godward, the following U.S. federal
income tax consequences will result from the merger:
- no gain or loss will be recognized by a ConnectInc.com stockholder upon
the receipt of Calico common stock solely in exchange for ConnectInc.com
common stock in the merger, except for gain or loss arising from the
receipt of cash in lieu of a fractional share as discussed below;
- the aggregate tax basis of the Calico common stock received by a
ConnectInc.com stockholder in the merger, including any fractional share
of Calico common stock for which cash is received, will be the same as
the aggregate tax basis of the ConnectInc.com common stock exchanged for
the Calico stock;
- the holding period of the Calico common stock received by each
ConnectInc.com stockholder in the merger will include the period for
which the ConnectInc.com common stock exchanged therefor was considered
to be held, provided that such ConnectInc.com common stock was held as a
capital asset at the time of the merger;
- a ConnectInc.com stockholder receiving cash instead of a fractional share
of Calico common stock will generally recognize gain or loss equal to the
difference between the amount of cash received and the stockholder's
basis in the fractional share; and
- neither Calico nor ConnectInc.com will recognize gain or loss solely as a
result of the merger.
The opinions that have been rendered and the opinions to be rendered at the
closing of the merger are and will be conditioned upon the following
assumptions:
- the truth and accuracy of the statements, covenants, representations and
warranties in the merger agreement, in the representations received from
Calico and ConnectInc.com that are to be delivered to counsel, and that
are substantially in the forms contained in exhibits in the merger
agreement, to support the opinions, and in other documents related to
Calico and ConnectInc.com relied upon by such counsel for those opinions;
- consummation of the merger in accordance with the merger agreement,
without any waiver, breach or amendment of any material provisions of the
merger agreement, the effectiveness of the merger under applicable state
law, and the performance of all covenants contained in the merger
agreement and the tax representations without waiver or breach of any
material provision thereof;
- the accuracy of any representation or statement made "to the best of
knowledge" or similarly qualified without such qualification, and as to
all matters in which a person or entity is making a representation, that
such person or entity is not a party to, does not have, or is not aware
of, any plan or intention, understanding or agreement inconsistent with
such representation, and there is no such plan, intention, understanding
or agreement inconsistent with such representation;
- the reporting of the merger as a reorganization under Section 368(a) of
the Internal Revenue Code by Calico and ConnectInc.com in their
respective federal income tax returns; and
- other customary assumptions as to the accuracy and authenticity of
documents provided to such counsel.
Opinions of counsel are not binding on the Internal Revenue Service or the
courts. If the Internal Revenue Service determines successfully that the merger
is not a reorganization within the
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meaning of Section 368(a) of the Internal Revenue Code, ConnectInc.com
stockholders must recognize gain or loss with respect to each share of
ConnectInc.com common stock surrendered in the merger in an amount equal to the
difference between the tax basis in the share and the fair market value of the
Calico common stock received in exchange for the ConnectInc.com share. In such
event, a ConnectInc.com stockholder's aggregate basis in the Calico common stock
received in the merger would equal its fair market value, and the stockholder's
holding period for the stock would begin the day after the merger.
With respect to cash payments received by a ConnectInc.com stockholder in
lieu of a fractional share of Calico common stock, a noncorporate stockholder of
ConnectInc.com may be subject to backup withholding at a rate of 31%. However,
backup withholding will not apply to a stockholder who either (a) furnishes a
correct taxpayer identification number and certifies that he or she is not
subject to backup withholding by completing the substitute Form W-9 that will be
included as part of the transmittal letter, or (b) otherwise proves to Calico
and its exchange agent that the stockholder is exempt from backup withholding.
ACCOUNTING TREATMENT
Calico will account for the merger as a "purchase" transaction for
accounting and financial reporting purposes, in accordance with generally
accepted accounting principles. Accordingly, Calico will make a determination of
the fair value of ConnectInc.com's assets and liabilities in order to allocate
the purchase price to the assets acquired and the liabilities assumed. For
accounting purposes, the purchase price of the merger is estimated to be $92.0
million. The assumed value of Calico common stock issued is $79.6 million based
on a Calico stock price of $66.10, which is the average of Calico's stock price
for a few days before and after the agreement date of November 19, 1999. We
based the value of the Calico common stock issued on approximately 14.9 million
ConnectInc.com shares outstanding which will be exchanged for approximately 1.2
million Calico shares at the ratio of 0.081. We also included approximately
$10.4 million for the value of ConnectInc.com employee stock options outstanding
and a warrant assumed by Calico and $2.0 million in acquisition expenses. In
connection with the merger, we anticipate that Calico will take a one-time
charge consisting of a write-off of in-process research and development,
estimated to be approximately $230,000. We also anticipate that Calico will
record intangible assets consisting of customer base of $150,000,
workforce-in-place of $2.6 million, existing technology of $5.0 million and
goodwill of $80.9 million. These intangible assets will be amortized over a
period of three years. The purchase price allocation will be finalized, upon
receipt of the closing balance sheet of ConnectInc.com and the receipt of a
final independent appraisal of certain intangible assets of ConnectInc.com.
EMPLOYEE BENEFITS AND PLANS
After the merger, the compensation and employee benefit plans, arrangements
and agreements of ConnectInc.com existing on the date of the merger agreement
will remain in effect with respect to ConnectInc.com employees covered by these
plans when the merger occurs unless Calico requests ConnectInc.com to modify,
freeze or terminate any of these ConnectInc.com compensation or benefit plans.
Calico will use all reasonable efforts to give ConnectInc.com employees who
become participants in Calico's compensation and benefit plans full credit for
service performed for ConnectInc.com for purposes of eligibility, vesting,
benefit accrual and determination of the level of benefits under Calico benefit
plans and employee arrangements under which such employee is entitled to
participate, to the extent permitted by Calico's employee plans.
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RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Calico common stock issuable to ConnectInc.com stockholders
in the merger and upon exercise of outstanding ConnectInc.com stock options
after the merger have been registered under the Securities Act. Therefore, these
shares of Calico common stock may be traded freely and without restriction by
those ConnectInc.com stockholders and holders of ConnectInc.com stock options
who are not "affiliates" of ConnectInc.com as defined under the Securities Act.
An "affiliate" of ConnectInc.com is a person who, directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, ConnectInc.com. Any subsequent transfer of these shares by
a person who is an affiliate of ConnectInc.com at the time the merger is voted
on by the ConnectInc.com stockholders will require one of the following:
- further registration of these shares under the Securities Act;
- compliance with Rule 145 under the Securities Act; or
- the availability of another exemption from registration under the
Securities Act.
These restrictions are expected to apply to ConnectInc.com's directors and
executive officers and the holders of 10% or more of its outstanding shares of
common stock. Calico will give stop transfer instructions to its transfer agent
and legend certificates representing the Calico common stock to be received by
affiliated persons.
Calico and ConnectInc.com have agreed to use all reasonable efforts to
cause each of their affiliates to deliver a written agreement intended to ensure
compliance with the Securities Act.
As a condition to the merger, the officers and directors of ConnectInc.com
will enter into lock-up agreements in substantially the form entered into by the
officers and directors of Calico in connection with its initial public offering
(with identical release and expiration dates) covering all shares of Calico
common stock to be issued in the merger and all stock options to buy
ConnectInc.com common stock assumed by Calico.
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MANAGEMENT AFTER THE MERGER
BOARDS OF DIRECTORS
The Calico board of directors will not change as a result of the merger.
Immediately after the merger, Arthur F. Knapp, Jr., the director of Calico
Acquisition, Inc., shall be the initial director of ConnectInc.com.
MANAGEMENT
The composition of Calico's executive management is not expected to change
as a result of the merger. It is expected that after the merger, Arthur F.
Knapp, Jr., David J. Cardinal and William Fleming, the officers of Calico
Acquisition, Inc., shall be the initial officers of ConnectInc.com. See
"Information About Calico -- Management and Additional Information" for
information about the current Calico directors and executive officers.
Key management and staff positions within the combined company post-merger
have not been finally determined. From time to time prior to the merger,
decisions may be made with respect to the post-merger management and operations
of ConnectInc.com, including its other officers and managers.
Information about the current ConnectInc.com directors and executive
officers can be found in ConnectInc.com's annual report on Form 10-K for the
year ended December 31, 1998. ConnectInc.com's annual report on Form 10-K and
quarterly reports on Form 10-Q for the quarters ended March 31, 1999, June 30,
1999 and September 30, 1999 are incorporated by reference into this proxy
statement/prospectus. See "Where You Can Find More Information."
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PRICE RANGE OF COMMON STOCK
CALICO. Calico common stock is listed on The Nasdaq Stock Market under the
symbol "CLIC" and has traded since October 7, 1999. The following table shows,
for the periods indicated, the high and low reported sales prices per share of
Calico common stock on The Nasdaq Stock Market. Calico has never declared or
paid any cash dividends on its common stock, and does not plan on declaring any
dividends in the near future.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended March 31, 2000
Third Quarter (October 7 through December 17, 1999)......... $75.75 $40.00
</TABLE>
The last reported trade price on November 18, 1999, the date immediately
prior to the public announcement of the merger, was $67.00 per share. The last
reported trade price on December 17, 1999 was $50.8125 per share.
CONNECTINC.COM. ConnectInc.com common stock is listed on The Nasdaq Stock
Market under the symbol "CNKT." The following table shows the high and low sales
prices for ConnectInc.com common stock for the periods indicated, as reported on
The Nasdaq Stock Market. All sales prices have been adjusted to reflect the
1-for-5 reverse stock split effected by ConnectInc.com in February 1998.
ConnectInc.com has never declared or paid any cash dividends on its common
stock, and does not plan on declaring any dividends in the near future.
<TABLE>
<CAPTION>
PRICE RANGE
OF
COMMON
STOCK
---------------
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter............................................... 40 5/8 19 3/8
Second Quarter............................................ 20 5/8 4 5/8
Third Quarter............................................. 15 7 1/2
Fourth Quarter............................................ 10 5/16 2 1/2
1998
First Quarter............................................. 5 5/16 7/8
Second Quarter............................................ 4 15/32 1 1/2
Third Quarter............................................. 3 3/8
Fourth Quarter............................................ 15 1/16 1/4
1999
First Quarter............................................. 10 2 3/4
Second Quarter............................................ 7 3
Third Quarter............................................. 4 5/32 1 13/16
Fourth Quarter (through December 17, 1999)................ 7 2 5/32
</TABLE>
The last reported trade price on November 18, 1999, the date immediately
prior to the public announcement of the merger, was $4.25 per share. The last
reported trade price on December 17, 1999 was $3.71875 per share.
The merger agreement prohibits ConnectInc.com from paying cash dividends on
ConnectInc.com common stock before the merger. See "The Merger -- Conduct of
Business Before the Merger."
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INFORMATION ABOUT CALICO COMMERCE, INC.
GENERAL
Calico provides electronic commerce software and services focused on the
purchasing customer, to companies worldwide in the telecommunications, financial
services, retail, computer hardware and manufacturing industries. Calico's
products enable companies to sell complex goods and services over the Internet
and to create a buying experience that engages and guides customers through the
purchasing process, resulting in more successful purchases and enhancing repeat
business.
Calico's electronic commerce software is broadly applicable to a wide range
of industries and markets, products and services. Calico's current customers
include a number of companies that have adopted aggressive electronic business
strategies, such as Best Buy, Cisco, Dell, Gateway, Merrill Lynch, Nortel
Networks, Qwest, Siemens, Telia and US West, who represented an aggregate of 67%
of Calico's total net revenue for fiscal 1999.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The rapid growth of the Internet is revolutionizing the way in which
businesses and consumers communicate, share information and conduct business.
The Internet has created a new means for businesses to reach and interact
directly with new and existing customers worldwide, transforming the traditional
ways companies market, sell and support their product and services offerings.
For some organizations, the Internet acts as a means to improve the
effectiveness of existing distribution channels. For others, it is replacing
those channels or enabling entirely new business models in a world where
traditional barriers to entry are rapidly dissolving. Forrester Research, Inc.
estimates, based upon its research, that the total value of U.S. business trade
on the Internet will grow to approximately $1.3 trillion by 2003. However, there
can be no assurance that these projections will be met.
Driven by rapidly accelerating global competition, companies are seeking to
improve their operations by improving collaboration and communication along the
supply chain, increasing their responsiveness to customers, and offering a wider
range of products and services which can be dynamically matched with customers'
specific needs. In order to capitalize on this opportunity, companies are
adopting more sophisticated approaches to electronic commerce and are increasing
their investment in electronic commerce infrastructure. These approaches are
characterized by enhanced interactivity, greater personalization and the ability
to offer a broad array of complex configurable products and services, all at the
time of purchase.
ELECTRONIC COMMERCE REQUIRES A NEW CLASS OF SOFTWARE
Over the past two decades, many major corporations have invested large
amounts of time and money automating their internal business processes through
the implementation of enterprise resource planning and sales force automation
software. These systems have enabled companies to centralize and better manage
important company-wide data and business processes, and provide sales
representatives with updated product information, contact management and data to
trace sales leads. While these systems have become an important element of
company-wide information technology processes and have brought many operational
benefits, they were developed prior to the commercial use of the Internet, and
were not designed for large scale, Internet-based, customer-driven interactions
and commerce. Because these process automation systems were designed for a
limited universe of internal users, they have not generally scaled to
accommodate the significant number of
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users or transactions made possible by the Internet and have not provided the
level of intuitive graphical user interface that is necessary for engaging
customer interactions.
As commercial use of the Internet began to develop, early electronic
commerce vendors developed custom websites and transactions systems using
general purpose Internet publishing tools, such as HTML editors and specialized
database tools. These tools enabled companies to post static product catalogs
and brochure content on the Internet, but generally allowed only limited
real-time interactivity and did not provide proven reliability and scalability.
Recently, packaged electronic commerce applications have emerged, focusing
primarily on enabling transactions by providing security, credit card validation
and the management of "shopping baskets". In addition, a variety of point
solution software applications have been developed to provide functionality in
discrete aspects of the selling process, such as personalization and content
delivery. While these early packaged applications and point solutions have
helped to automate online transactions, they generally have not provided
well-integrated functionality or capabilities for the online purchasing of
complex and configurable products and services, such as computers, network
equipment or financial services.
Calico believes that the rapid growth and evolution of electronic commerce
requires a new class of software solutions designed specifically for electronic
commerce interactions with customers, resellers and partners. This new class of
software must leverage companies' large investments in company-wide business
applications, and combine the proven reliability of traditional enterprise
systems with the scalability and flexibility of Internet software. In addition,
this software must be customer-driven, integrate a broad range of sophisticated
functionality and enable the sale of complex products and services.
THE CALICO SOLUTION
The Calico eSales Suite is designed to allow companies to interact directly
with their customers over the Internet, intranets, extranets and corporate
networks and can be accessed through desktop and mobile computers and retail
kiosks. Using Calico's software, companies can create a web-based guided selling
experience that can be customized based upon the needs of the customer. Calico's
software enables companies to provide tailored information to their customers,
identify constraints in the buying process, propose alternatives to the items
chosen and deliver quotes.
Buyers use Calico's software to research, evaluate, weigh trade-offs on
price, performance and other attributes, configure in real-time and buy complex
goods and services.
Calico's solutions provide customers the following advantages:
HIGHLY STRATEGIC. Calico's software is designed to help suppliers increase
their revenue by capitalizing on new electronic commerce opportunities and
reduce their costs by enhancing operating efficiency and order accuracy. For
example, Calico's tailored solutions enable suppliers to provide personalized
products and services, to recommend additional or related complementary items to
a buyer during the purchase process, resulting in improved sales effectiveness
and order accuracy and reduced cost of returned items. This functionality also
reduces the time to market of new products and services. As a result, Calico
believes that its software can provide a significant return on investment and
generally is viewed by customers as a means of achieving strategic and
competitive advantage.
CUSTOMER-DRIVEN. Unlike traditional enterprise applications, Calico's
software is designed specifically for interacting directly with customers,
resellers and other partners. Calico's "user-guided behavior" technology enables
users to define the purchasing process according to their own needs and to
flexibly configure complex goods and services at the point of sale in real time.
In addition, Calico's agent technology delivers personalized information during
the purchase process, enabling companies
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to proactively engage the customer, anticipate customer needs, provide real-time
information and speed product delivery. By keeping the customer at the center of
the buying experience, focus can be shifted from the transaction to the customer
relationship, creating a key source of competitive differentiation for
companies.
INTEGRATED. By combining advanced configuration, information delivery,
content management and personalization functionality, Calico offers a broad,
integrated suite of electronic commerce software, providing significant benefits
to customers who wish to launch or improve comprehensive electronic commerce
functionality quickly. In addition, Calico's software enables customers to
develop highly intuitive, interactive, graphical and content-rich electronic
commerce sites. Calico also provides professional consulting and implementation
services, complemented by its relationships with third-party implementation
partners, to provide a tailored solution for each company's needs.
SCALABLE AND FLEXIBLE. Calico's product architecture is designed to be
highly scalable, enabling enterprises to interact directly with large numbers of
customers via the Internet and other platforms. The Calico eSales Suite employs
highly flexible modeling and tools to facilitate connections between computer
applications, designed to enable its software to be rapidly integrated with
other computer applications maintained by a company. These other computer
applications include enterprise resource planning, sales force automation and
supply chain management software programs, and their underlying databases.
DESIGNED TO BE ACCESSED ACROSS MULTIPLE MODES OF DISTRIBUTION. The Calico
eSales Suite is designed to connect buyers and sellers, including distributors,
resellers, telemarketers and direct sales forces, to end users. To reach these
audiences, the Calico eSales Suite can be implemented across the Internet,
intranets, extranets and corporate networks and accessed through desktop and
mobile computers and retail kiosks. The Calico eSales Suite uses a single set of
business rules, enhancing consistency of user experience and reducing
maintenance.
CALICO'S STRATEGY
Calico's objective is to be the leading provider of electronic commerce
software to customers worldwide. The key elements of this strategy include:
INCREASE THE BREADTH AND DEPTH OF CALICO'S ELECTRONIC COMMERCE
SOLUTIONS. Calico's strategy is to provide software that enhances customer
interaction by adding new features to the Calico eSales Suite and by adding new
products that provide marketing and post-sales service functionality. Calico
plans to accomplish this through internal product development, licensing and
acquisitions of third-party technology and partnering. Calico's acquisition of
FirstFloor provided agent technology which enables targeted, personalized
information delivery, a key element in the Calico eSales solution. The
introduction of personalized products which provide marketing functionality will
enable customers to tailor Internet sites to help build relationships with their
most important customers. In addition, Calico intends to facilitate integration
of its products with a broad range of enterprise and Internet software
applications through the development of additional tools for integration of its
software with other computer applications and additional application programming
interfaces.
ALIGN WITH ELECTRONIC COMMERCE LEADERS AND EXPAND IN OTHER TARGETED
VERTICAL MARKETS. Calico's electronic commerce software is broadly applicable to
a range of industries and markets. To date, Calico's customers have been
concentrated in two major industry groups -- computer hardware and network and
telecommunications equipment. Calico's strategy has been to pursue relationships
with leading participants in key industries who have adopted aggressive
electronic business strategies. In addition, Calico plans to continue to expand
in additional industries where electronic commerce
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software is highly strategic and promotes significant competitive advantage,
including manufacturing, retail, telecommunications services, and financial
services.
ENHANCE SALES AND IMPLEMENTATION SERVICES THROUGH INCREASED
ALLIANCES. Calico's strategy is to increase its revenue base by complementing
its direct sales force and professional services organization with strategic
partnerships and alliances. These partnerships are intended to increase
geographic sales coverage worldwide, address new industry market segments, and
provide Calico's customers with access to additional design, modeling and
implementation resources. In addition, Calico's goal is to form additional
marketing and distribution alliances with electronic commerce software vendors
and resellers to broaden distribution or provide complementary functionality to
its applications. Calico also intends to provide company-wide integration of its
software through alliances with systems integrators and vendors focused on
providing software and integration services for connecting computer applications
from multiple business software providers.
EXTEND TECHNOLOGY LEADERSHIP. The Calico eSales Suite is based on advanced
expert systems technology which allows matching of user requirements with
suppliers' product and service offerings. For example, the bill of materials
created by the Calico eSales Quote product is described in extensible markup
language, or XML, enabling dynamic and intelligent exchange among electronic
commerce applications. Calico's strategy is to continue to develop leading
technologies in order to deliver more advanced functionality in its software to
its customers.
IDENTIFY AND CAPITALIZE ON NEW ELECTRONIC COMMERCE-BASED
BUSINESSES. Calico's strategy is to pursue relationships with and foster the
development of emerging electronic commerce-based businesses at an early stage
of their development. By entering into a variety of arrangements with these
emerging leaders, Calico believes it can further capitalize on the growth of
electronic commerce and remain at the forefront of electronic commerce trends
and technology.
CALICO PRODUCTS AND SERVICES
THE CALICO ESALES SUITE
The Calico eSales Suite is an integrated family of interactive user-guided
software products that provide Calico's customers with the ability to create
aspects of person-to-person selling in an on-line environment. Companies can use
the suite of products to support multiple sales channels, including direct
sales, in-store, resellers, value added resellers, telesales and sales over the
Internet. Calico's products can be implemented individually or as part of the
entire suite, depending on customer preference.
Initial implementations by customers typically include the majority of the
functionality provided by the product line. Additional user licenses and Calico
eSales Engines, together with any additional functionality, may be added
following the initial implementation.
The Calico eSales Suite includes the following software modules:
CALICO ESALES CONFIGURATOR. At the heart of the Calico eSales Suite is the
Calico eSales Configurator, an expert system that matches customer requirements
with product attributes, guiding customers to products and services that meet
their needs. The Calico eSales Configurator employs Calico's "user-guided
behavior" technology to explore different combinations of solution elements.
This technology enables users to evaluate trade-offs on price, performance or
other attributes, while at the same time determining that the configured product
or service meets business or legal constraints set by the vendor. The Calico
eSales Configurator uses dynamic models of customer requirements and product
attributes developed using the Calico eSales Workbench. Once the models have
been created, they can be loaded into an application running standalone or in a
multi-user setting. A single
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model can be implemented and accessed across multiple sales channels, including
direct sales, in-store, resellers, value added resellers, telesales, and sales
over the Internet, streamlining maintenance and permitting significant
flexibility.
In this way, customers can select and purchase complex products and
services without the individual attention of a sales person and speed the
process of creating complete and correct complex product configurations.
CALICO ESALES LOYALTY BUILDER. The Calico eSales Loyalty Builder is
designed to address the challenge of building and maintaining customer loyalty
on-line. Calico eSales Loyalty Builder personalizes the Internet-based guided
selling experience from the customer's initial expression of interest through
configuring and ordering products. This personalized guided selling experience
enables companies to proactively engage customers to build stronger customer
relationships with the objective of increasing revenue and reducing sales costs.
The Calico eSales Loyalty Builder is an integral part of the Calico eSales
Suite, and provides organizations with customer-driven electronic commerce
software with profiling technology for personalized buying over the Internet.
The Calico eSales Loyalty Builder's agent technology automatically monitors
content and notifies users of changes. In addition, the Calico eSales Loyalty
Builder's Java and XML-based architecture is designed to enable customers to
adopt the technology within their existing web infrastructure.
CALICO ESALES QUOTE. The Calico eSales Quote provides customized sales
quotations to customers for selected products and stores quotes for later
retrieval or immediate entry into an order management system. The Calico eSales
Quote is designed to enable unification of product requirements, complex
configurations and pricing and acts as the intermediary to automating order
entry. The Calico eSales Quote is built using the Java programming language and
XML-based architecture. This enables companies to integrate the quoting and
pricing functions of the Calico eSales Suite with existing order entry,
enterprise resource planning and external pricing tools and software programs.
In addition, the core functionality of the Calico eSales Quote can be extended
via the Java-based application programming interfaces provided with the Calico
eSales Quote.
CALICO ESALES INFOGUIDE. The Calico eSales InfoGuide, previously called
Calico eSales Catalog, delivers targeted marketing information, such as
brochures, product datasheets, product reviews and competitive comparisons,
directly to customers during the on-line buying process. The Calico eSales
InfoGuide is a Java-based programming tool that pairs content-sensitive
selections and browser clicks with content from any source, even pre-existing
content stored in multiple file formats. The Calico eSales Configurator, Calico
eSales Quote and Calico eSales InfoGuide are integrated so that at any point
within the buying process the customer can request additional information and
have targeted information delivered.
CALICO ESALES WORKBENCH. The Calico eSales Workbench is a flexible toolset
for creating product, pricing and content models for use by the Calico eSales
Configurator. This toolset is used to develop models that describe how each
product can be configured and priced and establishes the relationship between
the requirements and the products to be configured. The Calico eSales Workbench
does not require significant computer programming or advanced technical
expertise to develop or maintain models.
CALICO ESALES ENGINE. The Calico eSales Engine runs the models created with
the Calico eSales Workbench. The Calico eSales Engine is a constraint-based
sales engine, that can be implemented on laptops, desktops and high-end servers,
among others. Because the engine allows users to access the same model,
regardless of whether they are using ActiveX-, Java- or HTML-based user
interfaces, each modification and update of a model only needs to be made once.
Calico eSales Engines are included with each Calico eSales Configurator.
Additional Calico eSales Engines can be added to run
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the same model, thereby accommodating increased traffic while continuing to
provide rapid response time.
PROFESSIONAL SERVICES
Calico offers a range of professional and support services including
requirements analysis and definition, creation and evolution of sample customer
implementations based on customer input, design, data analysis, process
modification advice, implementation consultation, education, and post-
implementation maintenance. Calico's staff of professionals and consultants who
define the implementation specifications for installing its software work with
customers to capture and model the business logic and policies that reflect
marketing and selling practices. Calico's professional services consultants also
help with the integration of its applications into other company-wide computer
software systems. Calico's professional services team and its consulting
partners use the Calico eSales Workbench to design, create and finalize
graphical user interfaces which meet specific customer requirements, delivering
a personalized buying experience. These professionals have backgrounds in user
interface design, systems integration, technology strategy, and project
management.
Calico uses its Opportunity Assessment Methodology in working with
customers to define the opportunity set, priorities, business justification,
project costs and roadmap to implementation relating to each project. This
methodology includes a series of cross-functional interviews at many levels of
its customer's project team. This series of interviews results in an analytical
comparison, known as the Calico eSales Proficiency Matrix, which is used to
determine how Calico's customer's sales practices compare to other sales
practices in their industry. This analysis enables the customer to build cross-
functional action plans, including economic justification and a cohesive and
knowledgeable project team. The methodology may recommend that a prototype be
created to demonstrate the concept and set expectations for Calico's engagement.
MAINTENANCE AND CUSTOMER SERVICE
Calico offers a broad range of maintenance and customer service options to
meet the varying needs of each customer. Customers covered by maintenance
agreements can report application problems, make enhancement requests and obtain
update releases. Calico's help desk is staffed with technical support engineers
experienced in a variety of programming languages. For its customers, including
those using in-house modeling resources, Calico's remote consulting staff
provides ongoing consulting, limited continuing education and customer-specific
model support. Calico's implementation support is targeted at customers who have
completed their modeling and require assistance in implementing a client/server
or Internet server deployment. Calico also helps troubleshoot problems with
network bandwidth, network access and configurations as they pertain to Calico's
products.
SALES AND MARKETING
Calico markets and sells its products primarily through its direct sales
force located at its headquarters in San Jose, and regional sales and service
offices in Atlanta, Boston, Chicago, England, Germany and Sweden. As of
September 30, 1999, Calico's total sales and marketing organization consisted of
78 employees. Calico intends to increase its domestic and international direct
sales organizations, in part by increasing its direct sales force in Australia,
the Benelux, Singapore and Japan during fiscal 2000. Calico is also
complementing its direct sales force through additional distribution channels,
including systems integrators and value added resellers, both domestically and
internationally. For example, Calico has entered into an agreement with an
entity to provide sales distribution and services in Japan.
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Calico has multi-disciplined sales teams that consist of sales, technical
and support professionals. Calico's senior management also takes an active role
in its sales efforts. Calico often develops a pilot or custom demonstration
which Calico or its partners can then use to design a model for a full scale
implementation. Calico's sales efforts are typically directed to senior
executives at its customers' organizations, including the chief executive
officer, the chief information officer and the vice presidents of sales and
marketing.
To support its direct sales efforts and to actively promote its Calico
eSales brand, Calico conducts comprehensive marketing programs and market
research, including public relations, print advertisements, online
advertisements, trade shows, speaking engagements and ongoing customer
communications.
STRATEGIC ALLIANCES
Calico is pursuing marketing, implementation and resale alliances with
electronic commerce software vendors, systems integrators, professional services
organizations and application services providers. These alliances are intended
to increase geographic sales coverage worldwide and address new vertical markets
and market segments. In addition, these partnerships and alliances allow Calico
to provide its customers with access to additional resources to design, install
and customize its solutions. As of September 30, 1999, these alliances were in
their early phase of development and Calico had not yet generated significant
revenue from these alliances.
As part of this strategy, Calico has formed marketing and distribution
alliances with electronic commerce software vendors. For example, Calico has
entered into joint marketing relationships with Silknet Software, a provider of
Internet-based customer support solutions, and with Netcentives, a provider of
Internet loyalty, direct marketing and promotion products and services designed
to drive electronic commerce. Calico has also recently entered into a joint
marketing agreement with Vignette, a provider of Internet relationship
management software products and services, to share sales and marketing leads,
provide complementary training of each other's sales teams and develop joint
marketing materials. In addition, Calico has a cooperative marketing agreement
with IBM. These relationships enable Calico to broaden distribution of its
products and provide complementary functionality to its applications.
Under these joint marketing arrangements, each party agrees to provide each
other with reasonable marketing and sales assistance. Calico's marketing and
distribution alliances are not exclusive and some of its partners provide
similar services to other companies.
Calico also intends to expand the professional services offered to its
customers by enhancing existing relationships with systems integrators and
professional services organizations. Calico has entered into a joint marketing
agreement with Andersen Consulting to form a global alliance. Under this
alliance, Andersen Consulting acquired rights to market integration services
related to its software, and Calico has agreed to promote Andersen Consulting as
the preferred integrator of its software. The parties anticipate that this
alliance will allow the development of offerings by the two organizations to
target specific industries, which may include banking, healthcare and insurance,
among others.
Calico is also developing additional relationships with other professional
services organizations, such as Cap Gemini, who specialize in offering
consulting services for the installation and implementation of software products
such as the Calico eSales Suite. In addition, Calico has entered into a joint
marketing agreement with USWeb/CKS, an Internet professional services firm,
where USWeb/CKS may provide its Internet integration expertise in its customer
deployments.
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Calico also participates in the Oracle Partner Program, which assists
Calico in marketing the Calico eSales suite of products to Oracle customers.
Since Calico's products are built to be database independent, they can be easily
integrated with Oracle's products.
SIGNIFICANT CUSTOMERS
Calico has provided electronic commerce software primarily to customers
concentrated in two major industry groups -- computer hardware and network and
telecommunications equipment. Calico is continuing to expand in other markets,
such as manufacturing, retail, telecommunication services and financial
services. In fiscal 1999, Gateway and Dell each represented more than 10% of
Calico's total net revenue. In fiscal 1998, Micron Electronics accounted for
more than 10% of Calico's total net revenue. In fiscal 1997, Amdahl, Lanier and
US Robotics (subsequently acquired by 3Com) each accounted for more than 10% of
Calico's total net revenue. A substantial portion of Calico's revenue in any
given quarter has been, and is expected to continue to be, generated from a
limited number of customers with large financial commitment contracts.
The following is a representative list of current customers from whom
Calico has generated revenue of in excess of $100,000 in either the year ended
March 31, 1999 or the six months ended September 30, 1999:
<TABLE>
<S> <C>
Best Buy Qwest
Cabletron Siemens
Cisco Starhub
Dell Sunrise Medical
Flextronics Telia
Gateway Telxon
Merrill Lynch US West
Motorola Zurn Industries
Nortel Networks
</TABLE>
These customers accounted for 87% of Calico's total net revenue for fiscal
1999 and 83% of its total net revenue for the six months ended September 30,
1999.
TECHNOLOGY
Calico's software architecture provides the platform for its electronic
commerce software. Calico's technology is designed to provide interactive,
scalable, and easily maintained advanced electronic commerce applications. The
user interface component of the Calico eSales Configurator is powered by
Microsoft Active Server Pages and therefore operates only on Windows NT. The
Calico eSales Loyalty Builder, Calico eSales Quote, Calico eSales InfoGuide and
Calico eSales Engine each operate on Unix and Windows NT. Calico intends to
develop user interface components to allow its customers to use either a
Unix-based or Windows NT-based Web server. If Calico is unable to promptly or
successfully develop the Unix version, the scalability of its Calico eSales
Configurator may be adversely impacted for certain customer applications due to
the scalability limitations of Windows NT.
The elements of Calico's technology consist of the following:
USER-GUIDED BEHAVIOR TECHNOLOGY. Calico has developed proprietary
"user-guided behavior" technology that is based upon expert systems that provide
the ability to match user requirements with
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specific product and service offerings from companies, subject to a number of
constraints. The user-guided behavior technology offers the following benefits:
- Calico's data maintenance system allows data to be entered in tabular
form for concise expression of relationships between data, thereby
reducing the system's maintenance requirements.
- Applications that are constructed from the models created with the Calico
eSales Workbench require only constraints, product content information
and user interface information. Since models can be loaded into an
application running standalone or in a multi-user setting, the same
application can be targeted to run on laptops, desktops and the Internet.
- Constraints, together with Calico's user-guided behavior technology,
provide options to the end user and explain why particular configurations
are not valid.
The Calico eSales Engine is designed to handle complex configurations.
Calico's technology allows for composite modeling, which permits the
configuration to expand to accommodate numerous sites at the user's request. The
Calico eSales Configurator supports multiprocessor servers as well as server
clusters. This enables organizations to scale their deployments readily to
accommodate traffic. Because session state information is stored in multiple
locations, a user's configuration session can proceed uninterrupted even in the
event of a server failure.
ACCESS TO ENTERPRISE DATA. Calico's proprietary agent technology allows
customers to quickly and easily access their company-wide business data and
content, as well as external content from their intranet and the Internet as
part of an electronic commerce software system, without re-creating the content
or re-submitting each document to a new system. Automatic notification and
delivery of documents and other important information is possible without
needing to modify existing software applications or information sources.
ADHERENCE TO INDUSTRY STANDARDS. The Calico eSales Loyalty Builder, Calico
eSales Quote and Calico eSales InfoGuide have been designed based on XML, an
emerging standard for data representation and computer-to-computer exchange of
information supporting electronic commerce. Software systems that support XML
provide customers with the ability to reduce application development time,
easily integrate with prior generations of business software and hardware
systems and build applications that span the business processes of a company,
its suppliers, distributors and customers.
In addition, Calico eSales Loyalty Builder, Calico eSales Quote and Calico
eSales InfoGuide have all been designed using Java, a programming language that
enables compatibility across multiple platforms and facilitates Internet-based
performance. Java is emerging as a development language for electronic business
and other Internet applications.
Calico's architecture is designed to comply with widely accepted commercial
software industry standards for building large-scale Internet applications. In
addition to XML, Calico uses other widely accepted standards in developing its
products, including structured query language, Java database connectivity and
open database connectivity for accessing relational database management systems,
HTTP for Internet access and HTML for web information presentation. The Calico
eSales Configurator can be operated in conjunction with enterprise applications
provided by Oracle, Baan, SAP and JD Edwards. Integration with these and other
applications is facilitated by its support of open standards.
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RESEARCH AND DEVELOPMENT
Calico's future success will depend in part upon its ability to enhance the
Calico eSales Suite of products, develop new products and capitalize on its
technological leadership to provide electronic commerce software to a global
customer base. Calico's immediate focus is to extend the existing company-wide
business application integration capabilities of its product suite to Oracle
Order Entry and SAP Order Entry. In addition, Calico is seeking to broaden its
current product line by improving performance, adaptation to standards,
integration with company-wide business applications, and ease of modeling and
applicability to commercial products and services.
To foster development, definition, adoption and implementation of open
standards that can be leveraged by the Calico eSales Suite, Calico works with
several industry standards organizations such as the World Wide Web Consortium,
RosettaNet, Commercenet, the American Association of Artificial Intelligence,
the Institute for Electrical and Electronic Engineering and the Association for
Computing Machinery. For example, through these organizations Calico is actively
promoting the use of XML technology for data representation and
computer-to-computer exchange of information.
Calico's research and development expenses were $2.2 million for fiscal
1997, $3.3 million for fiscal 1998, $5.7 million for fiscal 1999, $2.2 million
for the six months ended September 30, 1998 and $6.5 million for the six months
ended September 30, 1999. Calico expects to continue to invest significantly in
research and development in the future. Calico has experienced technical
personnel in the areas of agent-based technology, artificial intelligence,
expert systems, user interface design, enterprise and middleware software
development.
PROPRIETARY RIGHTS
Calico's success and ability to compete are substantially dependent on its
internally developed technology and software applications. Calico has two U.S.
patents, one of which is related to the monitoring and notification technology
incorporated in the Calico eSales Loyalty Builder and the other of which is
related to certain aspects of Calico's user-guided product configuration
technology. In addition, Calico has filed patent applications in three foreign
jurisdictions. While Calico relies on patent, trademark, copyright and trade
secret laws and restrictions in the United States and other jurisdictions,
together with contractual restrictions, to protect its proprietary rights,
patent, trademark, copyright and trade secret protection may not be available in
every country in which it distributes its products.
Calico also typically enters into confidentiality and invention assignment
agreements with its employees and contractors, and nondisclosure agreements with
its customers, suppliers and strategic partners in order to limit access to and
distribution and disclosure of its proprietary information. However, despite its
efforts to protect its proprietary rights, unauthorized parties could copy or
otherwise obtain and use Calico's products or technology or develop products
with the same functionality as Calico's products. Policing unauthorized use is
difficult, and the steps Calico has taken may not prevent misappropriation of
its technology. In addition, the laws of some foreign countries provide less
protection of proprietary rights than do the laws of the United States, and
Calico expects that it will become more difficult to monitor the use of its
products as it increases its international presence.
Calico utilizes technology provided by BEA Systems, Inc. for its
application servers, from Verity, Inc. for its search capability software, from
Rainbow Software, Inc. to provide a licensing mechanism, from TideStone
Technologies, Inc. for quote grid technology and from Rogue Wave Software, Inc.
for development software. Should this third-party software no longer continue to
be available at an acceptable cost, Calico's products could be delayed until
equivalent software could be developed or
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licensed and integrated into its products. However, Calico does not believe that
its business could be considered to be substantially dependent on any one of
these license agreements.
Substantial litigation regarding intellectual property rights exists in the
software industry. Calico expects that software products may increasingly be
subject to third-party infringement claims as the number of competitors
supplying electronic commerce applications and solutions grows, and the
functionality in other industry segments overlaps. Some of Calico's competitors
may have filed or intend to file patent applications covering aspects of their
technology that they claim Calico's technology infringes. Calico's competitors
may make a claim of infringement against it with respect to its products and
technology. These claims could result in litigation subjecting Calico to
significant liability for damages, or in invalidation of its proprietary rights.
Any claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources or require Calico
to enter into royalty or licensing agreements in order to be able to sell its
products. Royalty or licensing agreements, if required, may not be available on
terms acceptable to Calico, or at all.
COMPETITION
The market for software and services that enable electronic commerce for
the interactive buying and selling of products is new, intensely competitive,
highly fragmented and rapidly changing.
Calico believes that its ability to compete depends on many factors, both
within and beyond its control, including:
- the performance, functionality, scalability and flexibility of its
software solutions;
- the timing and market acceptance of new products and product enhancements
to the Calico eSales Suite of products;
- the effectiveness of its sales and marketing efforts; and
- the quality and performance of its professional services.
Although Calico believes that it currently competes favorably as to each of
these factors, Calico expects competition to persist and intensify. Calico's
primary competition currently comes from companies developing solutions in-house
and from a large number of emerging companies focused on electronic commerce.
Calico also competes with vendors of enterprise class application software,
including BroadVision, Siebel Systems, Oracle, SAP, Baan and Microsoft. Within
the Calico eSales Configurator product line, Calico's competitors include
Trilogy, pcOrder.com, Selectica and FirePond.
Many of Calico's competitors and potential competitors have a number of
significant advantages over Calico, including:
- a longer operating history;
- preferred vendor status with customers;
- more extensive name recognition and marketing power; and
- significantly greater financial, technical, marketing and other
resources, giving them the ability to respond more quickly to new or
changing opportunities, technologies and customer requirements.
Calico also expects that competition will increase as a result of software
industry consolidation. For example, a number of enterprise software companies
have announced acquisitions of point
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solution providers to expand their product lines. Calico's competitors may also
bundle their products in a manner that may discourage users from purchasing
Calico's products. Current and potential competitors may establish cooperative
relationships among themselves or with third parties or adopt aggressive pricing
policies to gain market share. In addition, new competitors could emerge and
rapidly capture market share.
LEGAL PROCEEDINGS
Calico is currently involved in litigation with a former employee arising
out of the alleged sexual harassment and wrongful termination of the employee.
Calico has responded to the lawsuit by filing an answer that denies all of the
material allegations. The lawsuit was filed by Susan D. Quinn on June 11, 1997
in the Santa Clara County Superior Court for the State of California, naming
Calico and one of its former employees as defendants. The case is currently in
the stage of pre-trial discovery. The lawsuit seeks unspecified monetary amounts
for lost wages and benefits, emotional and physical distress and punitive
damages.
Calico believes that it has meritorious defenses against the alleged
claims, and intends to defend itself vigorously. However, due to the nature of
litigation and the fact that the case is still in discovery, Calico cannot
determine the possible loss, if any, that may ultimately be incurred either in
the context of a trial or as a result of a negotiated settlement. Calico may
also incur substantial legal fees in this matter. After consideration of the
nature of the claims and facts relating to the litigation, Calico believes that
the resolution of this matter will not harm its business. However, the results
of these proceedings, including any potential settlement, are uncertain and
there can be no assurance that they will not harm its business.
EMPLOYEES
As of September 30, 1999, Calico had 272 employees. Of that total, 90 were
primarily engaged in product development, engineering or systems engineering, 78
were engaged in sales and marketing, 73 were engaged in professional services
and 31 in operational, financial and administrative functions.
None of Calico's employees is represented by a labor union, and Calico has
never experienced a work stoppage. Calico's relations with its employees are
good.
FACILITIES
Calico's headquarters are located in approximately 58,000 square feet in
San Jose, California, occupied under an office lease expiring in September 2004.
Calico also leases office space in Pleasanton, California; Boston,
Massachusetts; Atlanta, Georgia; Chicago, Illinois; Reading, England; and
Stockholm, Sweden, under leases for terms expiring from August 1999 to January
2002. Calico has additional leased space in San Jose and Mountain View,
California, some of which it has sublet to unrelated third parties.
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CALICO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this discussion contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Factors that might cause such a
discrepancy include, but are not limited to, those discussed in "Factors that
May Affect Results," "Liquidity and Capital Resources" and Risk Factors. The
following discussion should be read in conjunction with Calico's consolidated
financial statements and notes thereto appearing elsewhere in this proxy
statement/prospectus.
OVERVIEW
Calico provides software and services that enable companies to interact
directly with their customers over the Internet, intranets, extranets, and
corporate networks, and accessed through desktop and mobile computers and retail
kiosks to improve the interactive buying and selling of complex products and
services.
Calico was incorporated in April 1994. From May 1994 through March 1997,
Calico generated revenue primarily from the license of products based upon its
first generation configuration technology. In March 1997, Calico released its
first product designed for use over the Internet and corporate networks. In
December 1998, Calico released Calico eSales 2.0, an integrated suite of
products that extended the Internet-based architecture and included Calico
eSales Catalog (since re-named Calico eSales InfoGuide), a product that allows
targeted delivery of information without the need to modify existing
applications or information sources. Calico eSales InfoGuide was the first
product release based upon technology obtained from Calico's August 1998
acquisition of FirstFloor. In May 1999, Calico released Calico eSales Loyalty
Builder, which incorporates technology also obtained from its acquisition of
FirstFloor. In June 1999, Calico released Calico eSales 2.5, an integrated suite
that incorporates eSales Loyalty Builder, eSales Quote and improved versions of
its other products.
Calico derives revenue principally from the license of its Calico eSales
Suite of products and the delivery of associated implementation and support
services. Prior to the fourth quarter of fiscal 1999, more than 90% of Calico's
license revenue was derived from the license of the predecessors to the eSales
Configurator and eSales Workbench products. Commencing in the fourth quarter of
fiscal 1999, Calico released the Calico eSales Suite, which is an integrated
family of interactive software products. Initial implementations have typically
included the majority of the functionality provided by the product suite
available at implementation, with additional user licenses and Calico eSales
Engines added as use expands. However, the eSales Configurator and Calico eSales
Workbench products comprised more than 72% of license revenue in the second
quarter of fiscal 2000 and more than 79% of license revenue in the six months
ended September 30, 1999. The mix of products and services sold varies by
customer, and follow-on sales typically reflect an expansion of the use of
Calico's products within the customer's business, rather than a migration to
different products. To date, Calico sales have been primarily within the
computer hardware and network and telecommunications equipment industries.
Revenue from international sales have not been material to date.
Licenses for Calico's suite of products are sold in different methods, such
as per user, per site or per enterprise. Customer licenses are typically several
hundred thousand dollars. The price of Calico's annual maintenance contracts are
based on a percentage of the related product license price and is
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generally paid in advance. Consulting fees for implementation and training are
generally priced on a per hour basis.
For contracts with multiple elements, and for which vendor-specific
objective evidence of fair value exists for the undelivered elements, Calico
recognizes revenue for the delivered elements based upon the residual contract
value as prescribed by SOP 98-9. Revenue from license fees is recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant obligations of Calico with regard to implementation
exist, the fee is fixed and determinable, and collection is probable. Provisions
for sales returns are made at the time of revenue recognition based upon
estimated returns. License revenue from contracts involving customization or
services which are essential to the functionality of the software is recognized
under contract accounting using the completed contract or
percentage-of-completion methods as appropriate. During fiscal 1997, 100% of
Calico's license revenue was generated from new customer implementations, during
fiscal 1998, 91% of Calico's license revenue was generated from new customer
implementations, and in fiscal 1999, 78% of Calico's license revenue was
generated from new customer implementations. New implementations include
implementations in additional divisions of an existing customer.
Services revenue primarily comprises revenue from consulting services,
maintenance contracts and training. Services revenue from consulting and
training is generally recognized as the service is performed. Maintenance
contracts include the right to unspecified upgrades and ongoing support.
Maintenance revenue is deferred and recognized on a straight-line basis as
services revenue over the life of the related contract, which is typically one
year. Calico's customers generally purchase maintenance contracts with their
initial software implementation.
Revenue from contracts involving significant implementation, customization
or services essential to the functionality of the software is recognized over
the period of each engagement, primarily using the percentage-of-completion
method of contract accounting. Labor hours completed is generally used as the
measure of progress towards completion. Calico classifies revenue for these
arrangements as license revenue and services revenue based upon Calico's
estimate of fair value for each element and recognize the revenue based on the
percentage-of-completion ratio for the arrangement. A provision for estimated
losses on engagements is made in the period in which the loss becomes probable
and can be reasonably estimated.
Calico bills customers in accordance with contract terms. Customer advances
and amounts billed to customers in excess of revenue recognized are recorded as
deferred revenue. Amounts recognized as revenue in advance of billing are
recorded as unbilled receivables.
Services revenue as a percentage of total net revenue was 33% in fiscal
1997, 41% in fiscal 1998, 51% in fiscal 1999, 44 % in the six months ended
September 30, 1998 and 55% in the six months ended September 30, 1999. As Calico
develops additional relationships with service partners, Calico anticipates that
an increasing share of professional services will be provided by third parties.
As a result, Calico expects that a higher percentage of total net revenue may be
attributable to license revenue in the future. Although services revenue may
continue to increase in absolute dollars if Calico increases the professional
services it provides, services revenue has a lower gross margin than license
revenue. Calico's overall gross profit can therefore fluctuate based on the mix
of license revenue compared to services revenue.
Calico's cost of license revenue consists primarily of amortization of
purchased technology, sub-licensing fees paid for embedded technology, and to a
lesser extent other product-related costs. Calico's cost of services revenue
consists primarily of salary expense and other related costs for its consulting
and support organizations, as well as third-party contractor expenses.
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Calico's operating expenses are classified as sales and marketing, research
and development, and general and administrative. Calico classifies all charges
to these operating expense categories based on the nature the expenses incurred.
All operating expense categories contain common recurring expenditures,
including salaries, employee benefits, incentive pay, travel and entertainment,
costs for contract staff and professional advisory services, rent and utilities.
The sales and marketing category contains additional expenditures specific to
the sales and marketing group, such as public relations, trade show
participation, advertising, sales lead generation, and commissions. Commission
expense is recorded upon contract signing. To date, all software development
costs in research and development have been expensed as incurred. General and
administrative expenses include our executive, financial, human resources and
information technology departments, and include additional expenditures related
to legal and financial advisors, as well as bad debt reserves.
In connection with the granting of stock options to its employees, Calico
has recorded unearned stock compensation totaling $5.6 million through September
30, 1999, of which $1.8 million remains to be amortized. This amount represents
the difference between the exercise price and the estimated fair value of
Calico's common stock on the date these stock options were granted. This amount
is included as a component of stockholders' equity and is being amortized by
charges to operations over the vesting period of the options, consistent with
the method described in Financial Accounting Standards Board, or FASB,
Interpretation No. 28. Calico recorded amortization of unearned stock
compensation of $780,000 for fiscal 1998, $2.0 million for fiscal 1999, $893,000
for the six months ended September 30, 1998 and $934,000 for the six months
ended September 30, 1999. The amortization of the remaining unearned stock
compensation at September 30, 1999 will result in additional charges to
operations through fiscal 2003. The amortization of stock compensation is
classified as a separate component of operating expenses in our consolidated
statement of operations.
Effective August 21, 1998, Calico acquired all of the outstanding shares of
FirstFloor, a developer and marketer of interactive marketing systems for
business-to-business communications, in exchange for 1,248,423 shares of our
Series D preferred stock, valued at $4.558 per share. In addition, Calico
assumed all of the outstanding options to purchase FirstFloor common stock and
converted them into options to acquire 47,203 shares of Calico's common stock.
Calico accounted for the acquisition using the purchase method of accounting. Of
the total purchase price, valued at approximately $6.1 million, approximately
$1.8 million was allocated to in-process research and development and
immediately charged to operations, $360,000 to tangible assets, $1.5 million to
existing products and core technology, $2.0 million to liabilities assumed, and
$4.3 million to goodwill. The intangible assets will be amortized over their
estimated useful lives which range from seven to 48 months. Calico structured
the acquisition as a tax-free exchange of stock; therefore, the differences
between the recognized fair values of acquired assets, including tangible and
intangible assets, and their historical tax bases are not deductible for tax
purposes.
In connection with its acquisition of FirstFloor, Calico acquired one
existing product and two in-process research and development projects. The
existing product provides customers with the ability to automatically update
their sales force with the latest information. The first acquired in-process
project, a marketing information delivery system, is a complete rewrite of the
acquired product, and replaced the product upon its release. While the solution
remains the same, the functionality has been completely re-engineered. This
development effort increased the product's utility as well as its scalability on
larger intranets, which increases the possible number of users, and provides a
variety of data sources instead of just one central database. The second
in-process project, a personalization solution, provides customers with the
ability to obtain in-depth information and critical data needed to build
stronger customer relationships with the objective of increasing revenue and
reducing sales cost.
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At the time of the acquisition, an entity affiliated with Mr. Unger, one of
Calico's directors, was a principal shareholder of both Calico and FirstFloor.
Since its inception, Calico has incurred quarterly and annual losses, and
expects to continue to incur losses on both a quarterly and annual basis for the
foreseeable future. Calico incurred net losses of $15.3 million for fiscal 1999,
$5.5 million for fiscal 1998, $6.9 million for fiscal 1997 and $11.2 million for
the six months ended September 30, 1999. As of September 30, 1999, Calico had an
accumulated deficit of $40.9 million. Calico expects that its operating expenses
will continue to increase substantially in future quarters as it increases sales
and marketing operations, develops new distribution channels, expands its
professional services organization, and continues to fund research and
development.
Calico has recently experienced a period of rapid growth and expansion, and
expects to continue to expand through multiple growth strategies. To manage this
growth effectively, Calico will have to improve its existing operational and
financial systems and hire additional qualified personnel. In addition, Calico
expanded its current headquarters during the first half of fiscal 2000. The
expenses related to this expansion may be greater than Calico's obligations for
its current facility.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentage of
revenues represented by certain lines in Calico's condensed consolidated
statements of operations.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUE
Total net revenue increased 57% to $15.6 million in the six months ended
September 30, 1999 from $9.9 million in the six months ended September 30, 1998.
LICENSE. License revenue increased 25% to $7.0 million in the six months
ended September 30, 1999 from $5.6 million in the six months ended September 30,
1998. License revenue as a percentage of total net revenue was 45% in the six
months ended September 30, 1999 and 56% in the six months ended September 30,
1998. The increase in license revenue in absolute dollars is attributable to an
increase in the number and average size of license transactions recognized
during the period. Six percent of this period's license revenue resulted from an
arrangement with a stockholder who at the time of the transaction owned 4% of
Calico's outstanding stock (including conversion of mandatorily redeemable
convertible preferred stock).
SERVICES. Services revenue increased 99% to $8.7 million in the six months
ended September 30, 1999 from $4.3 million in the six months ended September 30,
1998. Services revenue as a percentage of total net revenue was 55% in the six
months ended September 30, 1999 and 44% in the six months ended September 30,
1998. The increase in services revenue in absolute dollars and as a percentage
of total net revenue is attributable to a significant increase in the number and
size of consulting engagements, as well as an increase in the installed base of
customers and in the average size of maintenance contracts. This increase in
services revenue as a percentage of total net revenue has resulted in reduced
overall gross margins, since services revenue typically has lower gross margins
than license revenue. During the six months ended September 30, 1999, 71% of
maintenance revenue came from initial maintenance contracts, with the remainder
from maintenance renewals.
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COST OF REVENUE
LICENSE. Cost of license revenue increased 2% to $373,000 in the six months
ended September 30, 1999 from $366,000 in the six months ended September 30,
1998. Cost of license revenue as a percentage of license revenue was 5% in the
six months ended September 30, 1999 and 7% in the six months ended September 30,
1998. The increase in cost of license revenue in absolute dollars is due to the
amortization of existing products and core technology acquired in the
acquisition of FirstFloor, offset by reduced payments to third parties for
embedded technology. The decline in cost of license revenue as a percentage of
net license revenue is due to growth in license revenue and lower average
royalty rates.
SERVICES. Cost of services revenue increased 97% to $6.1 million in the six
months ended September 30, 1999 from $3.1 million in the six months ended
September 30, 1998. Cost of services revenue as a percentage of services revenue
was 71% in the six months ended September 30, 1999 and 71% in the six months
ended September 30, 1998. The increase in cost of services revenue in absolute
dollars is primarily due to costs associated with increased personnel in our
services organization as well as increased costs for third-party contractors
used to staff consulting engagements.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 58% to $9.2
million in the six months ended September 30, 1999 from $5.8 million in the six
months ended September 30, 1998. Sales and marketing expenses as a percentage of
total net revenue was 59% in the six months ended September 30, 1999 and 59% in
the six months ended September 30, 1998. Sales and marketing expenses increased
in absolute dollars primarily due to increased personnel-related costs,
resulting from our continued investment in the development of our international
direct sales and indirect sales and marketing organizations.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 193%
to $6.5 million in the six months ended September 30, 1999 from $2.2 million in
the six months ended September 30, 1998. Research and development expenses as a
percentage of total net revenue increased to 42% in the six months ended
September 30, 1999 from 22% in the six months ended September 30, 1998. Research
and development expenses increased in absolute dollars and as a percentage of
total net revenue as a result of increased engineering and product development
personnel partially attributable to personnel added as a result of our
acquisition of FirstFloor in the quarter ended September 30, 1998.
Personnel-related expenses accounted for the majority of the increase in
absolute dollars.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
60% to $3.4 million in the six months ended September 30, 1999 from $2.1 million
in the six months ended September 30, 1998. General and administrative expenses
as a percentage of total net revenue were 21% in the six months ended September
30, 1999 and 21% in the six months ended September 30, 1998. In the six months
ended September 30, 1998, general and administrative expenses included a charge
of $660,000 for the minimum lease payments committed under Calico's previous
leased facility which it vacated and losses on disposal of certain fixed assets,
related to the relocation of our corporate headquarters. Excluding this charge,
the majority of the absolute dollar increase in general and administrative
expenses was due to increased personnel-related costs resulting from the growth
of our finance, human resources and information systems staff, and due to
increased spending for legal and financial advisory services.
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STOCK COMPENSATION. Calico recorded expenses related to stock compensation
of $934,000 in the six months ended September 30, 1999 and $893,000 in the six
months ended September 30, 1998. Stock compensation expenses as a percentage of
total net revenue were 6% in the six months ended September 30, 1999 and 9% in
the six months ended September 30, 1998.
AMORTIZATION OF GOODWILL. During the six months ended September 30, 1999,
Calico recorded $476,000 in amortization, compared with $78,000 in the six
months ended September 30, 1998.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, improved to $137,000 of net interest income
in the six months ended September 30, 1999 from $81,000 of net interest expense
in the six months ended September 30, 1998. The improvement is primarily due to
interest earned on increased cash and cash equivalent balances.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1999, 1998 AND 1997
REVENUE
Total net revenue increased 81% to $21.4 million in fiscal 1999 from $11.9
million in fiscal 1998 and 101% from $5.9 million in fiscal 1997.
LICENSE. License revenue increased 50% to $10.5 million in fiscal 1999 from
$7.0 million in fiscal 1998, and 77% from $3.9 million in fiscal 1997. License
revenue as a percentage of total net revenue was 49% in fiscal 1999, 59% in
fiscal 1998 and 67% in fiscal 1997. The increases in absolute dollars were
primarily due to increased market acceptance of Calico's products, increases in
the average size of transactions, as well as the introduction of versions of
Calico's products that included functionality for Internet and corporate network
use. During fiscal 1999, 78% of Calico's license revenue came from new customer
deployments.
SERVICES. Services revenue increased 123% to $10.9 million in fiscal 1999
from $4.9 million in fiscal 1998, and 149% from $2.0 million in fiscal 1997.
Services revenue as a percentage of total net revenue was 51% in fiscal 1999,
41% in fiscal 1998 and 33% in fiscal 1997. The increases in absolute dollars and
as a percentage of total net revenue were primarily due to an increase in the
number and size of customer deployments, additional follow-on consulting
services for existing customers, an increase in the installed base of customers
on maintenance contracts and renewals of prior period maintenance contracts.
COST OF REVENUE
LICENSE. Cost of license revenue increased 345% to $1.2 million in fiscal
1999 from $265,000 in fiscal 1998, and 49% from $178,000 in fiscal 1997. Cost of
license revenue as a percentage of license revenue was 11% in fiscal 1999, 4% in
fiscal 1998 and 5% in fiscal 1997. The increase in absolute dollars and as a
percentage of license revenue in fiscal 1999 was primarily due to the
amortization of existing products and core technology acquired in the
acquisition of FirstFloor in the quarter ended September 30, 1998. The increase
in absolute dollars in fiscal 1998 was primarily due to costs associated with
sub-licensing of third-party software used in Calico's products.
Calico may from time to time in the future enter into various technology
sub-licensing arrangements with third parties which may require payments that do
not coincide with the timing and magnitude of license revenue. In addition, the
cost of amortization of Calico's existing products and core technology does not
vary with recognized license revenue. As a result, Calico's cost of license
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revenue may vary significantly from quarter to quarter in both absolute dollars
and as a percentage of license revenue.
SERVICES. Cost of services revenue increased 133% to $7.3 million in fiscal
1999 from $3.1 million in fiscal 1998, and 47% from $2.1 million in fiscal 1997.
Cost of services revenue as a percentage of services revenue was 67% in fiscal
1999, 64% in fiscal 1998 and 108% in fiscal 1997. The increase in absolute
dollars was primarily due to increased professional services personnel engaged
in deployment, training and technical support, representing 58% of the increase
in fiscal 1999 and 67% of the increase in fiscal 1998. In 1997, Calico's cost of
services revenue exceeded its services revenue because the actual cost of
providing consulting services exceeded the fixed-price payment received from the
customer. During this period, Calico provided its services under low margin
fixed-price contracts, and subsequently agreed to provide services in excess of
those originally agreed for no additional fees, in order to gain market share.
However, Calico generally does not enter into and does not intend to enter into
fixed-price payment arrangements for its consulting services.
Cost of services revenue as a percentage of services revenue increased in
fiscal 1999 due to increased use of contract personnel. Cost of services revenue
declined as a percentage of services revenue in fiscal 1998 primarily due to
improved billing rate realization as well as an increase in revenue from
maintenance contracts during fiscal 1998. Calico expects cost of services
revenue to increase in the future in absolute dollars it expands its service
capacity to meet anticipated demand. Cost of services revenue as a percentage of
services revenue may vary significantly from quarter to quarter depending upon
the mix of services that Calico provides and the utilization rate of its
services personnel. Additionally, Calico may seek to gain more flexibility by
staffing engagements with increasing use of third-party contractors, whose
expenses may exceed those of employees.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 86% to $14.1
million in fiscal 1999 from $7.6 million in fiscal 1998, and 28% from $6.0
million in fiscal 1997. Sales and marketing expenses as a percentage of total
net revenue were 65% in fiscal 1999, 64% in fiscal 1998 and 101% in fiscal 1997.
The increases in absolute dollars were primarily due to an increase in sales and
marketing personnel, representing 69% of the increase in fiscal 1999 and 88% of
the increase in fiscal 1998. Sales and marketing expenses increased as a
percentage of total net revenue in fiscal 1999 due to the investments in sales
and marketing described above and decreased in fiscal 1998 primarily due to
revenue growth. Calico believes sales and marketing expenses will continue to
increase in absolute dollars as it expands its sales and marketing organization,
initiates additional marketing programs, expands its distribution channels and
expands geographically. Sales and marketing expenses may increase or fluctuate
as a percentage of total net revenue from period to period.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 70%
to $5.7 million in fiscal 1999 from $3.3 million in fiscal 1998, and 50% from
$2.2 million in fiscal 1997. Research and development expenses as a percentage
of total net revenue were 27% in fiscal 1999, 28% in fiscal 1998 and 38% in
fiscal 1997. The increase in absolute dollars in fiscal 1999 was due to Calico's
addition of engineering and development personnel, both through new hiring and
as a result of its FirstFloor acquisition. Personnel-related expenses accounted
for 96% of the increase in fiscal 1999. The increase in fiscal 1998 in absolute
dollars was primarily due to increases in engineering and development personnel,
representing 69% of the increase. Research and development expenses as a
percentage of total net revenue declined in fiscal 1999 and fiscal 1998 due to
the higher rate of revenue growth during the periods.
Calico believes that continued investment in research and development is
critical to attaining its strategic objectives, and as a result Calico expects
that research and development expenses will
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increase in absolute dollars in future periods, and may increase or fluctuate
significantly as a percentage of total net revenue from period to period.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
79% to $4.0 million in fiscal 1999 from $2.2 million in fiscal 1998, and 50%
from $1.5 million in fiscal 1997. General and administrative expenses as a
percentage of total net revenue were 19% in fiscal 1999, 19% in fiscal 1998 and
25% in fiscal 1997. The increase in general and administrative expenses in
absolute dollars was primarily due to increased personnel to support Calico's
expanding operations. Personnel-related expenses represented 43% of the increase
in fiscal 1999 and 70% of the increase in fiscal 1998. General and
administrative expenses also increased in absolute dollars in fiscal 1999 due to
the relocation of Calico's corporate headquarters which resulted in a charge of
$660,000 for the minimum lease payments committed under its previous leased
facility and losses on disposal of certain fixed assets.
Calico believes that general and administrative expenses will continue to
increase in absolute dollars as it expands its operations and assumes the
responsibilities of a public company, and may fluctuate as a percentage of total
net revenue from period to period.
STOCK COMPENSATION. In fiscal 1999 and 1998 Calico recorded aggregate
unearned compensation totaling $5.6 million. The unearned compensation
represents the difference between the exercise price of stock option grants and
the deemed fair value of our common stock at the time of the grants. Calico
recorded expenses related to stock compensation of $2.0 million during fiscal
1999, $780,000 during fiscal 1998 and $864,000 during fiscal 1997.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with Calico's
acquisition of FirstFloor, Calico ascribed $1.8 million to two specific
in-process research and development projects -- a marketing information delivery
system and a personalization solution -- which was charged to operations in the
quarter ended September 30, 1998.
The amount of purchase price allocated to in-process research and
development was determined using appropriate valuation techniques, including
percentage-of-completion, which utilizes research and development cost metrics
and key milestones to estimate the stage of development of each in-process
research and development project at the date of acquisition, estimating cash
flows resulting from the revenue expected to be generated from these projects,
and discounting the net cash flows back to their present value. The discount
rate includes a factor that takes into account the uncertainty surrounding the
successful development of the purchased in-process technology. The remaining
identified intangibles, including the value of acquired existing products and
core technology, is amortized over the periods of benefit ranging from seven to
36 months.
The value assigned to acquired in-process research and development was
determined by identifying the two specific research and development projects
discussed above for which technological feasibility had not been established.
The first project reached technological feasibility and was commercially
released in December 1998. The second project reached technological feasibility
and was commercially released in May 1999. In assigning value to the in-process
projects, consideration was given, as appropriate, to the stage of completion,
the complexity of the work completed to date, the difficulty of completing the
remaining development, costs already incurred and the projected cost to complete
the projects, adjusting for the relative value and contribution of the core
technology. The value assigned to acquired in-process research and development
was based on the assumptions set forth in the following paragraph.
Net cash flows from these projects were determined based on Calico's
estimates of revenue, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes associated with the projects.
Revenue growth rates for each technology was developed considering,
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among other things, the then-current and expected industry trends, acceptance of
the technologies and historical growth rates for similar industry products.
Estimated total revenue from the acquired in-process research and development
projects are expected to generally peak in fiscal 2000 and decline through
fiscal 2001 as other new products are expected to be introduced. Calico assumed
no synergies as a result of the acquisition and the revenue projections are
within the historical growth rates of FirstFloor product introductions.
Projected gross margins for the marketing information delivery system averaged
74% and the personalization solution averaged 69% over the estimated product
lives. The estimated selling, general and administrative costs for the marketing
delivery system averaged 41% as a percentage of revenue and the personalization
solution averaged 47% as a percentage of revenue over the estimated product
lives, and are consistent with FirstFloor's historical operating cost structure.
These revenue projections were based on Calico's management's estimate of market
size and growth, expected trends in technology and the expected timing of new
product introductions. Calico's applied a royalty charge as a percentage of
operating income for each in-process project to attribute value for dependency
on predecessor core technology. Royalty rates were developed based on published
documentation of royalty rates and the specific facts and circumstances, and in
Calico's view, are considered reasonable approximations of fair value rates for
the respective types of technology under exclusive, perpetual, worldwide
licenses. The estimated net cash flows of each project were discounted back to
their present value using discount rates of 30% for the marketing information
delivery system and 40% for the personalization solution, which represents a
premium over our cost of capital of 20% to reflect the risk associated with the
stage of completion of the in-process technologies. The estimated
percentage-of-completion of the in-process research and development projects
were 82% for the marketing information delivery system and 47% for the
personalization solution.
The actual development timeline and costs of approximately $200,000 for the
marketing information delivery system and approximately $1.2 million for the
personalization solution were in line with the estimates used to compute the
estimated percentage-of-completion used in the valuation of the in-process
research and development projects. These products were just recently released
and it is premature to compare the actual revenue with those projected. To date,
Calico's cash flow and other assumptions have not materially changed.
AMORTIZATION OF GOODWILL. During fiscal 1999, Calico recognized $550,000 in
amortization, reflecting the amortization of goodwill acquired as part of the
FirstFloor acquisition.
INTEREST AND OTHER INCOME, NET
Interest and other income, net improved to $23,000 of net interest expense
in fiscal 1999 from $41,000 of net interest expense in fiscal 1998, and declined
from $21,000 of net interest income in fiscal 1997, representing less than one
percent of total net revenue in each period.
INCOME TAXES
No provision for federal and state income taxes was recorded for fiscal
1999, 1998 or 1997 because we incurred net operating losses in each of those
periods.
As of March 31, 1999, Calico had net operating loss carryforwards for
federal income tax reporting purposes of $12.1 million that expire in various
amounts beginning in fiscal 2011. Calico also had net operating loss
carryforwards for state income tax reporting purposes of $9.7 million that
expire in various amounts beginning in fiscal 2003. Calico had net deferred tax
assets, including its net operating loss carryforwards and tax credits of $8.8
million as of March 31, 1999. A valuation allowance has been recorded for the
net deferred tax asset balance as a result of uncertainties regarding the
realization of the asset balance. See note 5 of Calico's notes to the
consolidated financial statements.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth Calico's unaudited consolidated statement of
operations data for each of the ten quarters in the period ended September 30,
1999, as well as that data expressed as a percentage of our total net revenue
for the quarters presented. Calico has prepared this unaudited consolidated
information on a basis consistent with its audited consolidated financial
statements, and in the opinion of its management, this information reflects all
normal recurring adjustments necessary for a fair presentation of its operating
results for the quarters presented. You should read this information in
conjunction with Calico's consolidated financial statements and related notes
included elsewhere in this proxy statement/prospectus. You should not draw any
conclusions about Calico's future results from the operating results for any
quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenue:
License....................... $ 1,285 $ 1,162 $ 2,305 $ 2,213 $ 2,932 $ 2,657 $ 2,560 $ 2,333
Services...................... 780 1,371 1,150 1,593 1,721 2,628 3,155 3,427
------- ------- ------- ------- ------- ------- ------- -------
Total net revenue......... 2,065 2,533 3,455 3,806 4,653 5,285 5,715 5,760
Cost of net revenue:
License....................... 20 53 97 95 101 265 350 463
Services...................... 815 597 828 875 1,367 1,742 2,036 2,127
------- ------- ------- ------- ------- ------- ------- -------
Total cost of net
revenue................. 835 650 925 970 1,468 2,007 2,386 2,590
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 1,230 1,883 2,530 2,836 3,185 3,278 3,329 3,170
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........... 1,768 1,962 1,824 2,039 2,758 3,066 3,699 4,615
Research and development...... 670 776 934 962 972 1,232 1,684 1,789
General and administrative.... 542 610 573 497 641 1,459 934 954
Stock compensation............ 11 160 252 357 424 469 582 532
Acquired in-process research
and development............. -- -- -- -- -- 1,840 -- --
Amortization of goodwill...... -- -- -- -- -- 78 234 238
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................ 2,991 3,508 3,583 3,855 4,795 8,144 7,133 8,128
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations............ (1,761) (1,625) (1,053) (1,019) (1,610) (4,866) (3,804) (4,958)
Interest and other income,
net........................... (36) (6) 7 (6) (35) (46) 54 4
------- ------- ------- ------- ------- ------- ------- -------
Net loss.................. $(1,797) $(1,631) $(1,046) $(1,025) $(1,645) $(4,912) $(3,750) $(4,954)
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL NET
REVENUE:
Net revenue:
License....................... 62% 46% 67% 58% 63% 50% 45% 41%
Services...................... 38 54 33 42 37 50 55 59
------- ------- ------- ------- ------- ------- ------- -------
Total net revenue......... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- -------
Cost of net revenue:
License....................... 1 2 3 2 2 5 6 8
Services...................... 39 24 24 23 30 33 36 37
------- ------- ------- ------- ------- ------- ------- -------
Total cost of net
revenue................. 40 26 27 25 32 38 42 45
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 60 74 73 75 68 62 58 55
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........... 86 77 53 55 59 58 65 80
Research and development...... 32 31 27 25 21 23 29 31
General and administrative.... 26 24 16 13 14 28 17 17
Stock compensation............ 1 6 7 9 9 9 10 9
Acquired in-process research
and development............. -- -- -- -- -- 35 -- --
Amortization of goodwill...... -- -- -- -- -- 1 4 4
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................ 145 138 103 102 103 154 125 141
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations............ (85) (64) (30) (27) (35) (92) (67) (86)
Interest and other income,
net........................... (2) -- -- -- -- (1) 1 --
------- ------- ------- ------- ------- ------- ------- -------
Net loss.................. (87)% (64)% (30)% (27)% (35)% (93)% (66)% (86)%
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
QUARTER ENDED
--------------------
JUNE 30, SEPT. 30,
1999 1999
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenue:
License....................... $ 3,457 $ 3,502
Services...................... 3,976 4,674
------- -------
Total net revenue......... 7,433 8,176
Cost of net revenue:
License....................... 137 236
Services...................... 2,660 3,473
------- -------
Total cost of net
revenue................. 2,797 3,709
------- -------
Gross profit.................... 4,636 4,467
------- -------
Operating expenses:
Sales and marketing........... 4,558 4,641
Research and development...... 2,666 3,801
General and administrative.... 1,452 1,900
Stock compensation............ 514 420
Acquired in-process research
and development............. -- --
Amortization of goodwill...... 240 236
------- -------
Total operating
expenses................ 9,430 10,998
------- -------
Loss from operations............ (4,794) (6,531)
Interest and other income,
net........................... 71 66
------- -------
Net loss.................. $(4,723) $(6,465)
======= =======
AS A PERCENTAGE OF TOTAL NET
REVENUE:
Net revenue:
License....................... 47% 43%
Services...................... 53 57
------- -------
Total net revenue......... 100 100
------- -------
Cost of net revenue:
License....................... 2 3
Services...................... 36 42
------- -------
Total cost of net
revenue................. 38 45
------- -------
Gross profit.................... 62 55
------- -------
Operating expenses:
Sales and marketing........... 61 57
Research and development...... 36 47
General and administrative.... 20 23
Stock compensation............ 7 5
Acquired in-process research
and development............. -- --
Amortization of goodwill...... 3 3
------- -------
Total operating
expenses................ 127 135
------- -------
Loss from operations............ (65) (80)
Interest and other income,
net........................... 1 1
------- -------
Net loss.................. (64)% (79)%
======= =======
</TABLE>
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<PAGE> 106
Total net revenue has increased during each of the ten quarters ended
September 30, 1999 due to an increase in the number of Calico's customers, an
increase in the average transaction size and an increase in follow-on orders
from existing customers. Calico experiences significant variability in license
revenue from quarter to quarter due to the timing and size of transactions.
License revenue declined sequentially in each of the three quarters ended March
31, 1999, primarily due to delays in recognition of revenue under a few large
contracts entered into during those quarters. License revenue increased
significantly in the quarter ended June 30, 1999, due to the recognition of
revenue associated with one significant order, as well as progress on several
other percentage-of-completion and milestone-based contracts.
Services revenue has increased significantly during the comparison periods,
but is also subject to significant variability driven by transaction timing,
contract terms and billing rate realization. Services revenue declined in the
quarter ended December 31, 1997 due to the recognition of services revenue in
the previous quarter upon completion of one large project. Services revenue
increased significantly as a percentage of total net revenue in the six quarters
ended September 30, 1999 primarily as a result of several large implementation
projects during those periods and increased international deployments in the
quarter ended September 30, 1999.
Cost of license revenue increased in the three quarters ended March 31,
1999 as a result of the amortization of acquired products and core technology
subsequent to Calico's acquisition of FirstFloor. Cost of license revenue
declined significantly in the quarter ended June 30, 1999 due to the completion
of amortization of one of the two products acquired, and increased in the
quarter ended September 30, 1999 as a result of two new sublicense agreements
entered into during the period. Cost of services revenue increased significantly
in the quarter ended June 30, 1998 primarily due to costs associated with the
hiring and training of new professional services personnel who were not yet
fully utilized.
Sales and marketing expenses increased significantly in the quarter ended
June 30, 1998 primarily due to the expansion of Calico's domestic sales force,
as well as the establishment of its international sales office, and increased in
the quarter ended March 31, 1999 due to commissions related to the signing of a
few large orders and further expansion of its sales force. Research and
development expenses increased significantly in the five quarters ended
September 30, 1999 due to an increase in product development personnel added in
conjunction with Calico's acquisition of FirstFloor and through new hires.
General and administrative expenses increased significantly in the quarter ended
September 30, 1998 due to the relocation of Calico's corporate headquarters
which resulted in a $660,000 charge for the minimum lease payments committed
under our previous leased facility and losses on disposal of fixed assets, and
increased in the quarter ended June 30, 1999 primarily as a result of increased
legal and financial advisory fees, which represented 45% of the increase.
Calico's quarterly operating results have varied significantly in the past
and Calico expects that they will vary significantly from quarter to quarter in
the future. These variations are caused by a number of factors, including the
length Calico's sales cycle, demand for and market acceptance of its products
and services, the timing of orders and deployment of its products and services,
the impact of its revenue recognition policies, changes in technology and
changes caused by the rapidly evolving electronic commerce market and the impact
of year 2000 investments by Calico and its customers.
As a result of these and other factors, Calico believes that
period-to-period comparisons of its historical results of operations are not
necessarily meaningful and are not a good predictor of its future performance.
Calico's operating results may be below the expectations of public market
analysts and investors in future quarters, which could cause volatility in the
price of its stock.
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<PAGE> 107
LIQUIDITY AND CAPITAL RESOURCES
In October 1999, Calico completed an initial public offering of 4,600,000
shares of common stock (including the exercise of the underwriters'
overallotment option) at $14.00 per share. Net proceeds to Calico, before
offering expenses, were $59.9 million or $13.02 per share. Simultaneous with the
closing of the initial public offering, Calico received an additional $24.0
million from the sale of an aggregate of 1,843,200 shares of common stock at
$13.02 per share in private placements to Dell U.S.A., L.P., a Texas limited
partnership ($20.0 million) and Andersen Consulting LLP ($4.0 million). Calico
has used, and continues to expect to use, the proceeds from the sale of stock
for general corporate purposes, including working capital as well as expenses
incurred in connection with its acquisition of ConnectInc.com. A portion of the
proceeds may also be used to acquire or invest in other complementary companies,
product lines, products or technologies. Pending such uses, Calico has invested
the net proceeds from the sale of stock in investment grade, interest-bearing
securities. Prior to its initial public offering, Calico had financed its
operations and met its capital expenditure requirements primarily through the
sale of private equity securities, and to a lesser extent, notes payable and
capital equipment leases.
As of September 30, 1999, Calico had $5.4 million of cash and cash
equivalents, compared with $15.4 million as of March 31, 1999. Cash used in
operating activities was $7.4 million for fiscal 1999, $3.3 million for fiscal
1998 and $4.3 million for fiscal 1997, and was $8.7 million in the six months
ended September 30, 1999 and $2.0 million in the six months ended September 30,
1998. Cash used in operations resulted primarily from net losses net of non-cash
expenses including depreciation and stock compensation, and increases in its
accounts receivable, offset in part by the growth in accounts payable and
accrued liabilities.
Net cash used in investing activities of $1.8 million for fiscal 1999, $1.4
million for fiscal 1998, $930,000 for fiscal 1997, $2.2 million for the six
months ended September 30, 1999 and $571,000 for the six months ended September
30, 1998, related to purchases of computer equipment and to a lesser extent
software and office furniture to support our expanding operations.
Financing activities provided net cash of $22.1 million for fiscal 1999,
$5.3 million for fiscal 1998, $5.4 million for fiscal 1997, $763,000 in the six
months ended September 30, 1999 and $10.7 million for the six months ended
September 30, 1998. Financing activities were primarily the sale of Calico's
common and preferred stock. Calico has also used debt and leases to partially
finance its operations and capital purchases. At September 30, 1999 Calico also
had $2.0 million in current and non-current debt as well as $305,000 in current
and non-current lease obligations.
Included in the amounts above are four variable rate installment notes with
a bank that are secured by the equipment financed by the bank. The notes bear
interest at the bank prime rate and are due between March 2001 and February
2002. Also included are three notes payable to an equipment financing company
that bear interest at 7% per year and are due between June 2000 and October
2000, and three capital leases for the lease of computer and office equipment
due through January 2003.
In September 1999, Calico entered into a commitment with the bank issuing
the variable rate installment notes described above in connection with a
proposed $3.0 million equipment financing credit line expiring June 30, 2000,
which Calico completed in October 1999. Each advance bears interest at the
bank's prime rate plus 0.5% per year, with principal to be repaid in 36 equal
monthly installments. The bank advanced Calico $1.0 million under this
commitment on September 30, 1999. Calico issued warrants to the bank to purchase
5,263 shares of common stock at $9.50 per share in connection with this
commitment.
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<PAGE> 108
Under the above commitment, which was finalized in October 1999 with the
same terms stated above, Calico required to meet certain monthly and quarterly
financial tests, including minimum operating results and certain liquidity,
leverage and debt service ratios. All previous agreements with the above
financial institution are now under these same covenants. At September 30, 1999
Calico was in compliance with all of the new financial covenants.
In August 1999, Calico entered into a new office lease for its corporate
headquarters, as the previous sub-lease had expired. At September 30, 1999,
Calico had noncancelable operating leases for office space and equipment of
approximately $9.3 million, which are payable through fiscal 2004.
Although Calico has no material long-term commitments for capital
expenditures, it anticipates a substantial increase in its capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. Calico intends to fund the intended increase in
expenses and capital expenditures through the proceeds of the completed October
1999 initial public offering, together with existing cash and cash equivalents,
and believes that these funds will be sufficient to meet its working capital
needs for at least the next 12 months. However, Calico may need to raise
additional funds in order to support more rapid expansion of its sales force,
develop new or enhanced products or services, respond to competitive pressures,
acquire complementary businesses or technologies or respond to unanticipated
requirements. If Calico seeks to raise additional funds, Calico may not be able
to obtain funds on terms which are favorable or otherwise acceptable to it. If
Calico raises additional funds through the issuance of equity securities, the
percentage ownership of its stockholders would be reduced. Furthermore, these
securities may have rights, preferences or privileges senior to Calico's common
stock.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities". This statement
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 will become effective during the year ending
March 31, 2001. The adoption of SFAS No. 133 is not expected to have a material
effect on Calico's results of operations, financial position or cash flows.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Calico develops products in the United States and markets its products in
North America, and to a lesser extent in Europe and Asia. As a result, Calico's
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. Because
nearly all of its revenue is currently denominated in U.S. dollars, a
strengthening of the dollar could make Calico's products less competitive in
foreign markets. Calico's interest income is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of its investments
are in short-term instruments. Due to the short-term nature of its investments,
Calico does not believe that it has a material risk exposure. Because some of
its debt arrangements are based on variable rates of interest, Calico's interest
expense is sensitive to changes in the general level of U.S. interest rates.
Since these obligations represent a small percentage of its total
capitalization, Calico believes that there is not a material risk exposure.
YEAR 2000 COMPLIANCE
The "year 2000" issue refers generally to the problems that some software
may have in determining the correct century for the year. Software with date
sensitive information that is not year
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<PAGE> 109
2000 compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in system failures or the creation of erroneous results. Calico
is subject to potential year 2000 problems affecting its products, its internal
systems and the systems of its suppliers and customers, any of which could harm
Calico's business.
Calico believes that all current versions of its products are year 2000
compliant, so long as they are configured and used in accordance with its
specifications, and provided that the underlying operating systems and any other
software used with its products are also year 2000 compliant. However, since its
products are integrated with its customers' systems, the failure of Calico's
customers' systems to be year 2000 compliant could impede the success of its
applications in their systems. Accordingly, known or unknown defects or errors
that affect the operation of its software, including any defects or errors in
systems that include its products, could result in delay or loss of revenue,
diversion of development resources, damage to its reputation, or increased
service or warranty costs, any of which could harm Calico's business.
Calico has completed an assessment of its internal systems and is not
currently aware of any material operational issues or costs associated with its
internal systems for the year 2000. However, Calico may experience material
unanticipated problems and costs caused by undetected errors or defects in the
technology used in its internal systems.
In conjunction with its year 2000 assessment, Calico has contacted its
major suppliers to determine whether their operations and the products and
services they provide are year 2000 compliant. Where practicable, Calico has
attempted to mitigate its risks with respect to the failure of suppliers to be
year 2000 compliant. However, these failures remain a possibility and could harm
Calico's business.
Calico has developed a series of contingency plans to address situations
that may result if its products, its internal systems, or the systems of its
suppliers or customers are not year 2000 compliant.
Calico has funded its year 2000 plan from available cash and has not
separately accounted for these costs. Through September 30, 1999, these costs
have not been material and are not expected to be material. However, Calico may
experience unanticipated problems and costs with year 2000 compliance that could
harm its business.
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<PAGE> 110
MANAGEMENT AND ADDITIONAL INFORMATION
OFFICERS AND DIRECTORS
Calico's current executive officers, other officers and directors are:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Alan P. Naumann(1)....................... 39 President, Chief Executive Officer and
Director
David E. Barrett(1)...................... 43 Executive Vice President and Chief
Operating Officer
Matthew S. DiMaria(1).................... 38 Vice President, Marketing
Arthur F. Knapp, Jr.(1).................. 51 Vice President and Chief Financial
Officer
H. Tayloe Stansbury(1)................... 38 Vice President, Engineering
David J. Cardinal........................ 40 Vice President and Chief Technical
Officer
Lynn Butler Corsiglia.................... 41 Vice President, Human Resources
Paul S. Greenfield....................... 48 Vice President and Managing Director,
Eurasia
Steve P. Leahy........................... 40 Vice President, Americas
Alan W. MacMurray........................ 42 Vice President, Professional Services
Michael M. Ouye.......................... 45 Vice President, Advanced Development
William G. Paseman....................... 44 Vice President, Research and Development
and Chairman of the Board
Beverly A. Powell-Goldman................ 45 Vice President, Business Development
Joseph B. Costello....................... 45 Director
Bernard J. Lacroute...................... 56 Director
William D. Unger......................... 50 Director
</TABLE>
- -------------------------
(1) Executive Officer. The individuals identified above who are not executive
officers or directors are deemed to be significant employees who make or are
expected to make significant contributions to its business.
ALAN P. NAUMANN has served as President, Chief Executive Officer and a
director of Calico since September 1997. From November 1995 to September 1997,
Mr. Naumann served as Vice President and General Manager at Cadence Design
Systems, a software company. From 1988 to November 1995, Mr. Naumann held
director and vice president positions in sales and field operations at Cadence.
From 1982 to 1987, Mr. Naumann served in various sales and business development
positions at Hewlett-Packard. Mr. Naumann holds a B.S. degree in Computer
Engineering from Iowa State University.
DAVID E. BARRETT has served as Calico's Executive Vice President and Chief
Operating Officer since May 1999, and from February 1998 to May 1999, as
Executive Vice President, Business Operations. From December 1996 until he
joined Calico, Mr. Barrett served as Senior Vice President, Worldwide Sales and
Customer Services at Pure Atria/Rational Software Corporation, an enterprise
software development automation company. From March 1996 to December 1996, Mr.
Barrett served as Vice President, Sales, Marketing and Services at Nets, Inc.,
an electronic commerce company. Mr. Barrett served as Vice President, Field
Sales & Services for Lotus Development Corporation from July 1994 to March 1996.
From June 1984 to July 1994, Mr. Barrett held various senior management
positions in sales, marketing and services at Lotus. Mr. Barrett holds a B.S.
degree in Marketing Management from the University of Rhode Island.
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<PAGE> 111
MATTHEW S. DIMARIA has served as Calico's Vice President, Marketing since
September 1998. Mr. DiMaria joined Calico as Vice President of Product Marketing
in March 1998. From March 1995 to February 1998, Mr. DiMaria served as Vice
President of Americas, Marketing for Symantec Corporation, a software company.
From July 1994 to February 1995, Mr. DiMaria served as a partner of Presence
Corporation, a high technology consulting company which he co-founded. From June
1986 to June 1994, Mr. DiMaria held various sales and marketing positions at
Ingres Corporation, a software provider. Mr. DiMaria holds a B.S. degree in
Information Systems Management from the University of Maryland.
ARTHUR F. KNAPP, JR. has served as Calico's Vice President and Chief
Financial Officer since June 1999. From 1991 to March 1999 Mr. Knapp served as
Senior Vice President and Chief Financial Officer at Boole & Babbage, a systems
management software company. From 1984 to 1991, Mr. Knapp served as Chief
Financial Officer at Legent Corporation, a systems management software company.
Mr. Knapp holds a B.S. degree in Finance from the Pennsylvania State University
and is a Certified Public Accountant and a Certified Management Accountant.
H. TAYLOE STANSBURY has served as Calico's Vice President, Engineering
since January 1999. From July 1996 to January 1999, Mr. Stansbury served as Vice
President, Document Management Systems for Xerox Corporation. From December 1994
to June 1996, Mr. Stansbury served as Director, then Vice President, of Software
Engineering for Xerox's XSoft division. Mr. Stansbury holds a B.S. degree in
Applied Mathematics and Computer Science from Harvard University.
DAVID J. CARDINAL has served as Calico's Vice President and Chief Technical
Officer since August 1998 when we acquired FirstFloor, which Mr. Cardinal
co-founded in October 1992. From October 1992 to April 1996, Mr. Cardinal was
Chairman, Chief Executive Officer and President of FirstFloor, and from April
1996 to August 1998, Mr. Cardinal was Chairman and Chief Technical Officer of
FirstFloor. Prior to that time, Mr. Cardinal served as General Manager of
Desktop Software at Sun Microsystems and held various positions at Amdahl
Corporation and MICA, Inc., a supplier of training and consulting solutions. Mr.
Cardinal holds a B.S. degree in Electrical Engineering from Princeton
University.
LYNN BUTLER CORSIGLIA has served as Calico's Vice President, Human
Resources since March 1998. From November 1995 until she joined Calico, Ms.
Butler Corsiglia served as Director of Human Resources at Netscape
Communications Corporation. Ms. Butler Corsiglia held human resource management
positions at Sybase Incorporated from October 1992 to October 1995 and served in
various human resource management positions at Ungermann-Bass from July 1986 to
October 1992.
PAUL S. GREENFIELD has served as Calico's Vice President and Managing
Director, Eurasia since June 1998. From May 1994 to June 1998, Mr. Greenfield
was Vice President, European Operations at Avant! Corporation, a provider of
software used to implement integrated circuits on silicon chips. From June 1993
to May 1994, Mr. Greenfield served as Vice President, Northern European
Operations at Redwood Design Automation. Mr. Greenfield holds an H.N.C. degree
from Hammersmith College of Commerce in London.
STEVE P. LEAHY has served as Calico's Vice President, Americas since August
1998. From August 1997 until he joined Calico, Mr. Leahy served as Vice
President, Northeast at Informix Software, an enterprise database and data
management company. From August 1994 to August 1997, Mr. Leahy was Director of
Sales for Pure Software, which later merged to become Pure Atria/Rational
Software Corporation, where he continued as Director of Sales for the Eastern US
and Canada. During the five year period prior to that date, Mr. Leahy held
various positions at Sun Microsystems in various sales capacities. Mr. Leahy
holds a B.A. degree in History from Bowdoin College.
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<PAGE> 112
ALAN W. MACMURRAY has served as Calico's Vice President, Professional
Services since April 1997. From January 1995 until he joined Calico, Mr.
MacMurray served as Vice President, Professional Services at TravelNet, Inc., an
electronic commerce software company. From March 1988 to December 1994, Mr.
MacMurray held four services and support positions at Aspect Telecommunications,
a supplier of automated call distributors. From December 1984 to March 1988, he
was employed by the Rolm Division of IBM where he held various sales and
services roles including Branch Manager. He has a B.S. degree in Economics from
Harvard College and an M.B.A. degree in Marketing and Finance from the
University of Chicago.
MICHAEL M. OUYE has served as Calico's Vice President, Advanced
Development, since August 1996 when Calico acquired FirstFloor, where he had
been Vice President, Engineering since April 1994. From February 1987 to April
1994, Mr. Ouye was involved in the formation of GO Corporation and EO, Inc.,
developing the concepts and software around pen-based computing as Director of
Engineering and Vice President, Engineering, respectively. Mr. Ouye has a B.S.
degree in Computer Science from California State University in Sacramento and an
M.S. degree in Computer Science from the University of Santa Clara.
WILLIAM G. PASEMAN, the Chairman of the board of directors of Calico and a
director since he founded Calico, served as Calico's President until January
1996, and has since served as Calico's Vice President, Research and Development.
From 1990 to 1994, Mr. Paseman was a consultant at Paseman & Associates, a
consulting firm that he co-founded. From 1986 to 1990, Mr. Paseman co-founded
Atherton Technology, Inc., a software company, where he served as Vice President
of Technology. Mr. Paseman holds a B.S. degree in Chemical Engineering, a B.S.
degree in Electrical Engineering, and an M.S. degree in Chemical Engineering
from Rice University. He also holds an M.S. degree in Computer Science from
Massachusetts Institute of Technology.
BEVERLY A. POWELL-GOLDMAN has served as Calico's Vice President, Business
Development since December 1998. From October 1997 to December 1998, Ms.
Powell-Goldman served as Executive Vice President, Worldwide Sales and Business
Development at Extricity Software, a provider of business-to-business
integration software. From June 1996 to October 1997, Ms. Powell-Goldman served
as Vice President, Strategic Alliances at Siebel Systems, a supplier of
enterprise relationship management software. From September 1991 to October
1995, Ms. Powell-Goldman served as General Manager and Senior Vice President at
Hyperion Software/Pillar Corp. Ms. Powell-Goldman holds a B.S. degree in
Business Administration and Economics from San Jose State University.
JOSEPH B. COSTELLO has been a director of Calico since August 1999. Since
February 1998, Mr. Costello has served as Managing Director and Chairman of the
Board of Think3 (formerly named Cad.Lab, Inc.), a computer- aided design
company. From 1988 to October 1997, Mr. Costello served as President and Chief
Executive Officer of Cadence Design Systems. Before the formation of Cadence,
Mr. Costello served as President and Chief Operation Officer of SDA Systems, an
electronic design automation company and predecessor company to Cadence. Mr.
Costello also serves as Chairman of the Board of Zamba (formerly Racotek, Inc.),
a systems integration company; and a member of the board of Clarify, a systems
integration company. Mr. Costello holds a B.S. degree in Mathematics and Physics
from Harvey Mudd College, an M.S. degree in Physics from Yale University, and an
M.S. degree in Physics from the University of California, Berkeley.
BERNARD J. LACROUTE has been a director of Calico since June 1995. Mr.
Lacroute has been a partner with Kleiner Perkins Caufield & Byers since 1989.
Prior to joining Kleiner Perkins Caufield & Byers, Mr. Lacroute held a number of
senior executive positions in high technology firms including Digital Equipment
Corporation and Sun Microsystems. Mr. Lacroute is a director of Brio Technology,
Inc., a software provider, and a director of several privately held companies.
Mr. Lacroute holds graduate degrees in Physics from the University of Grenoble
and in Engineering
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<PAGE> 113
from the Ecole Nationale Superiere d'Ingenieurs, as well as an M.S. degree in
Electrical Engineering from the University of Michigan.
WILLIAM D. UNGER has been a director of Calico since June 1995. Mr. Unger
joined Mayfield Fund, a venture capital firm, in 1983, and has been a general
partner of several venture capital firms affiliated with Mayfield Fund since
1987. Before joining Mayfield, Mr. Unger founded the executive recruitment firm
Positek. Mr. Unger is a director of several privately held companies. Mr. Unger
holds a B.A. degree in Elementary Education from the University of Illinois.
BOARD OF DIRECTORS
The terms of the board of directors are divided into three classes: Class
I, whose term will expire at the annual meeting of stockholders to be held in
2000; Class II, whose term will expire at the annual meeting of stockholders to
be held in 2001; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2002. The Class I directors are Mr. Naumann and Mr.
Paseman, the Class II directors are Mr. Lacroute and Mr. Unger, and the Class
III director is Mr. Costello. At each annual meeting of stockholders after the
initial classification, the successors to directors whose term expires will be
elected to serve a term of three years. This classification of directors may
have the effect of delaying or preventing changes in Calico's control. Calico's
board of directors consists of five members. Calico's bylaws provide that the
authorized number of directors may be changed by resolution of the board of
directors.
Calico has agreed to appoint a representative of Andersen Consulting to its
board of directors. Once appointed, this representative would be a Class III
director.
Executive officers are elected by the board of directors annually. There
are no family relationships among any of Calico's directors, officers or key
executives.
BOARD COMMITTEES
Calico's board of directors has established an audit committee and a
compensation committee.
Calico's audit committee reviews and monitors its corporate financial
reporting and its external audits, including, among other things, its control
functions, the results and scope of the annual audit and other services provided
by its independent accountants and its compliance with legal matters that have a
significant impact on its financial reports. The audit committee also consults
with management and Calico's independent accountants prior to the presentation
of financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of Calico's financial affairs. In addition, the audit committee has
the responsibility to consider and recommend the appointment of, and to review
fee arrangements with Calico's independent accountants. The current members of
Calico's audit committee are Messrs. Lacroute and Unger.
Calico's compensation committee reviews and makes recommendations to its
board of directors regarding its compensation policies and all forms of
compensation to be provided to Calico's executive officers and directors,
including among other things, annual salaries and bonuses and stock option and
other incentive compensation arrangements. The current members of Calico's
compensation committee are Messrs. Lacroute and Unger. Prior to the creation of
Calico's compensation committee in February 1999, all compensation decisions
were made by Calico's full board. Neither Mr. Naumann nor Mr. Paseman
participated in discussions by Calico's board of directors with respect to his
compensation.
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<PAGE> 114
DIRECTOR COMPENSATION
Calico's directors do not currently receive any compensation for their
service as directors, other than reimbursement of all reasonable out-of-pocket
expenses for attendance at meetings of the board of directors. Members of the
board of directors are eligible to receive discretionary option grants and stock
issuances under Calico's 1997 Stock Option Plan and employee-directors are able
to participate in Calico's 1999 Employee Stock Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
No member of Calico's compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of Calico's board of directors or
compensation committee. During fiscal 1999, all compensation decisions were made
by Calico's full board. In August 1999, Calico issued 198,752 shares of Calico's
Series D preferred stock to entities affiliated with Mr. Unger in connection
with Calico's acquisition of FirstFloor, and in September 1999 Calico issued
329,090 shares of its Series E preferred stock to entities affiliated with Mr.
Lacroute and 548,488 shares of its Series E preferred stock to entities
affiliated with Mr. Unger in connection with its Series E preferred stock
financing.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to Calico's chief
executive officer and each of its other executive officers whose total salary
and bonus exceeded $100,000 for the fiscal year ended March 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS OPTIONS
------------------------------ ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Alan P. Naumann................................... 1999 $175,000 $ 37,148 300,000
President and Chief Executive Officer
David E. Barrett.................................. 1999 175,000 179,018 --
Executive Vice President and Chief
Operating Officer
Matthew S. DiMaria................................ 1999 155,000 19,380 --
Vice President, Marketing
</TABLE>
OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 1999
The following table sets forth information for stock options granted during
the fiscal year ended March 31, 1999 to Calico's chief executive officer and
each of its other executive officers who earned in excess of $100,000.
All of these options were granted under Calico's 1997 Stock Option Plan.
Options granted under the 1997 Option Plan generally vest over a four-year
period with 25% of the shares vesting at the first
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<PAGE> 115
anniversary of the grant date and the remaining shares vesting in equal monthly
installments over the next 36 months.
The percentages in the column entitled "Percent of Total Options Granted to
Employees in Fiscal 1999" was based on an aggregate of 3,687,955 common stock
options granted during fiscal 1999. The exercise price of each option is equal
to the fair market value of Calico's common stock as determined by the board of
directors on the date of grant, taking into account the purchase price paid by
investors for shares of Calico's preferred stock, the liquidation preferences
and other rights, privileges and preferences associated with the preferred stock
and an evaluation by the board of directors of Calico's revenues, operating
history and prospects.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. For purposes of these columns, we assumed stock
appreciation of 5% and 10% as required by the Securities and Exchange
Commission. These rates of appreciation do not represent Calico's prediction of
its stock price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the estimated fair market value on
the date of grant, based upon the initial public offering price of $14.00,
appreciates at the indicated rate for the entire term of the options and that
the option is exercised at the exercise price and sold on the last day of its
term at the appreciated price.
OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS DURING FISCAL PRICE PER EXPIRATION -----------------------
NAME GRANTED 1999 SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alan P. Naumann......... 300,000 8.1% $1.73 4/29/08 $5,995,961 $9,547,566
David E. Barrett........ -- -- -- -- -- --
Matthew S. DiMaria...... -- -- -- -- -- --
</TABLE>
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<PAGE> 116
AGGREGATE OPTION EXERCISES AND OPTION VALUES
The following table presents for Calico's chief executive officer and each
of its other highest-paid executive officers the number of options exercised
during the fiscal year ended March 31, 1999 and the number and value of
securities underlying unexercised options that are held by Calico's chief
executive officer and other highest-paid executive officers as of March 31,
1999. Each of the options listed in the table is immediately exercisable in full
at the date of grant, but shares purchased on exercise of unvested options are
subject to a repurchase right in Calico's favor that entitles Calico to
repurchase unvested shares at their original exercise price on termination of
the employee's services with Calico. The heading "Vested" refers to shares no
longer subject to repurchase; the heading "Unvested" refers to shares subject to
repurchase as of March 31, 1999. The numbers in the column "Value of Unexercised
In-the-Money Options at March 31, 1999" are based on the initial public offering
price of $14.00 per share, less the exercise price payable for the shares.
OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1999 AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY OPTIONS AT
SHARES AT MARCH 31, 1999 MARCH 31, 1999
ACQUIRED ON VALUE -------------------- --------------------
NAME EXERCISE REALIZED VESTED UNVESTED VESTED UNVESTED
---- ----------- -------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Alan P. Naumann........... 300,000 $180,000 -- -- $-- $--
David E. Barrett.......... 412,500 68,950 -- -- -- --
Matthew S. DiMaria........ -- -- -- -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
All options granted to Mr. Naumann may accelerate in full upon a change in
Calico's control. Acceleration will occur if (i) the acquiring corporation does
not assume the options or replace them with substantially equivalent options or
(ii) within 36 months following the change in control, Mr. Naumann is terminated
without cause or resigns for good reason.
The options granted to Mr. Barrett may also accelerate upon a change in
Calico's control. Mr. Barrett's options will accelerate from 70% to full
acceleration, depending on the date of the change in Calico's control.
Acceleration will occur if (i) the acquiring corporation does not assume the
options or replace them with substantially equivalent options or (ii) within 12
months following the change in Calico's control, Mr. Barrett is terminated
without cause or resigns for good reason.
BENEFIT PLANS
1995 STOCK OPTION PLAN
Calico's 1995 stock option plan provides for the grant of incentive stock
options to employees, within the meaning of Section 422 of the Internal Revenue
Code, and for the grant of nonstatutory stock options to employees, non-employee
directors and consultants. The terms of the 1995 stock option plan are
substantially identical to the terms of Calico's 1997 stock option plan.
Calico's board of directors has determined that no further options will be
granted under the 1995 stock option plan, although options granted under the
1995 stock option plan will remain outstanding in accordance with their terms.
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<PAGE> 117
1997 STOCK OPTION PLAN
Calico's 1997 stock option plan was adopted by Calico's board of directors
in June 1997 and by its stockholders in July 1997. The 1997 stock option plan
provides for the grant of incentive stock options to employees, within the
meaning of Section 422 of the Internal Revenue Code, and for the grant of
nonstatutory stock options to employees, non-employee directors and consultants.
However, no incentive stock options may be granted under the 1997 stock option
plan after June 2007.
The maximum number of shares issuable under the plan is 14,715,000 shares.
The share reserve will automatically be increased on the first day of each
fiscal year beginning on or after April 1, 2001 by an amount equal to 5% of the
number of shares of Calico's common stock which were issued and outstanding on
the last day of the preceding fiscal year. Notwithstanding the foregoing, the
maximum number of shares issuable at any time under the plan will be reduced by
the number of outstanding shares that were issued under the 1995 stock option
plan, plus the number of shares subject to outstanding options which were
granted under the 1995 stock option plan, which together was 3,867,925 shares as
of September 30, 1999. As of September 30, 1999, 7,478,954 shares had been
issued upon the exercise of options under Calico's 1995 and 1997 stock option
plans, options to purchase a total of 6,630,779 shares at a weighted average
exercise price of $7.75 per share were outstanding under these plans, and
1,415,548 shares were available for future grants under the 1997 stock option
plan.
The 1997 stock option plan is administered by the board of directors, or a
committee of the board. Subject to the provisions of the plan, the board of
directors or its committee has the authority to select the persons to whom
options are granted and determine the terms of each option, including:
- the number of shares of common stock covered by the option;
- when the option becomes exercisable;
- the per share option exercise price, which, in the case of incentive
stock options, must be at least 100% of the fair market value of a share
of common stock as of the date of grant or 110% of fair market value for
incentive stock options granted to 10% stockholders, and, in the case of
nonstatutory stock options, must be at least 85% of the fair market value
of a share of common stock as of the date of grant; and
- the duration of the option, which may not exceed ten years, or five years
for incentive stock options granted to a 10% stockholder.
Generally, options granted under the 1997 stock option plan vest over four
years, and are non-transferable other than by will or the laws of descent and
distribution. In the event of a change in Calico's control, if the acquiring or
successor corporation does not assume or substitute for options outstanding
under the plan, the options shall terminate. Options granted to four of Calico's
executive officers provide for acceleration upon a change in Calico's control.
FIRSTFLOOR OPTIONS
In connection with the acquisition of FirstFloor, Calico assumed the
options granted under the FirstFloor 1993 stock option plan and converted the
options into options to purchase 47,203 shares of Calico's common stock. At
September 30, 1999, options to purchase 24,935 shares of common stock were
outstanding at a weighted average exercise price of $2.55 per share.
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<PAGE> 118
401(K) PLAN
In 1995, Calico adopted a tax-qualified employee savings and retirement
plan which covers its eligible full-time U.S. employees. Under the 401(k) plan,
employees may elect to reduce their current annual compensation up to the lesser
of 15% or the statutorily prescribed limit, which is $10,000 in calendar year
1999, and have the amount of the reduction contributed to the 401(k) plan. The
plan permits, but does not require Calico to make matching contributions to the
401(k) plan. To date Calico has not made any matching contributions to the
401(k) plan. The 401(k) plan is intended to qualify under Sections 401(a) and
401(k) of the Internal Revenue Code, so that contributions by Calico or its
employees to the 401(k) plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) plan. Salary deferred
contributions are held in trust. Each participant may direct the investment of
his or her account among the investment options offered by the 401(k) plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
In July 1999, Calico's board of directors adopted the 1999 employee stock
purchase plan, which was approved by the stockholders in September 1999. Calico
has reserved a total of 750,000 shares of common stock for issuance under the
employee stock purchase plan, none of which has yet been issued. The employee
stock purchase plan became effective on October 6, 1999 and will be administered
by Calico's board of directors or by a committee appointed by the board of
directors. Employees are eligible to participate if they are customarily
employed by Calico for at least 20 hours per week and more than five months in
any fiscal year.
The employee stock purchase plan permits an eligible employee to purchase
Calico's common stock at a discount through accumulated payroll deductions of up
to 15% of his or her compensation. Participants generally may not purchase more
than 750 shares on any purchase date or stock having a value, measured at the
beginning of the offering period, greater than $25,000 in any calendar year. The
employee stock purchase plan also provides that all participants, in aggregate,
may not purchase more than 150,000 shares on any purchase date.
The first offering period started on October 6, 1999 and will run for
approximately 24 months and is divided into four consecutive purchase periods of
approximately six months. The first offering period and the first purchase
period commenced on October 6, 1999. Subsequent offering periods will generally
have a duration of 12 months and will be divided into two consecutive purchase
periods of approximately six months. Offering periods and purchase periods after
the initial offering will commence on May 1 and November 1 of each year.
Calico's board of directors may change the dates or duration of one or more
offerings, but no offering period may exceed 27 months. Participants will
purchase shares on the last day of each purchase period.
The price at which shares are purchased under the employee stock purchase
plan is equal to 85% of the lower of the fair market value of a share of common
stock on the first day of the offering period, or the last day of the purchase
period. In the event of a change in Calico's control, its board of directors may
accelerate the purchase date of the then current purchase period to a date prior
to the change in control, or the acquiring corporation may assume or replace the
outstanding purchase rights under the employee stock purchase plan. Participants
may end their participation in the employee stock purchase plan at any time, and
participation automatically ends on termination of employment. The board of
directors may amend or terminate the employee stock purchase plan at any time as
long as such amendment or termination does not impair outstanding purchase
rights.
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LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law, Calico has adopted
provisions in its certificate of incorporation and bylaws that limit or
eliminate the personal liability of its directors for a breach of their
fiduciary duty of care as a director. The duty of care generally requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably available to
them. Consequently, a director will not be personally liable to Calico or its
stockholders for monetary damages or breach of fiduciary duty as a director,
except liability for:
- any breach of the director's duty of loyalty to Calico or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful stock repurchases, redemptions or other distributions or
unlawful payments of dividends; or
- any transaction from which the director derived an improper personal
benefit.
Calico's certificate of incorporation and bylaws also allow Calico to
indemnify its officers, directors and other agents to the fullest extent
permitted by Delaware law. Calico has entered into separate indemnity agreements
with each of its officers and directors which gives these officers and directors
additional indemnification. The indemnity agreements may require Calico, among
other things, to:
- indemnify its officers and directors against liabilities that may arise
by reason of their status or service as directors or officers;
- advance expenses as incurred to its officers and directors in connection
with any legal proceeding as to which they could be indemnified, subject
to limited exceptions; or
- obtain directors' and officers' liability insurance.
Calico has purchased an insurance policy covering its directors and
officers for claims they may otherwise be required to pay or for which Calico
may be required to indemnify them.
At present, there is no pending litigation or proceeding involving any of
Calico's directors, officers, employees or agents where indemnification is
sought. Calico is not aware of any threatened litigation or proceeding which may
result in a claim for indemnification.
TRANSACTIONS WITH RELATED PARTIES AND INSIDERS
Calico has raised capital primarily through the sale of its stock. On May
26, 1995 and May 31, 1995, Calico sold 6,000,000 shares of Series A preferred
stock at a price of $0.67 per share. On June 7, 1996, Calico sold an aggregate
of 3,600,000 shares of Series B preferred stock at a price of $1.60 per share.
On July 23, 1997, Calico sold an aggregate of 2,083,331 shares of Series C
preferred stock at a price of $2.40 per share. On August 21, 1998 Calico
exchanged 1,248,423 shares of Series D preferred stock for all of the issued and
outstanding shares of capital stock of FirstFloor in connection with Calico's
acquisition of FirstFloor. From September 4, 1998 through September 23, 1998,
Calico sold an aggregate of 2,687,580 shares of Series E preferred stock at a
price of $4.558 per share.
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<PAGE> 120
The following holders of more than 5% of Calico's voting securities
purchased shares of Series A, Series B, Series C and Series E preferred stock or
were shareholders of FirstFloor and received shares of Series D preferred stock
in exchange for their shares of capital stock of FirstFloor:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
PURCHASER STOCK STOCK STOCK STOCK STOCK
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Entities Affiliated with Kleiner Perkins
Caufield & Byers........................... 3,000,000 1,500,000 520,832 -- 329,090
Entities Affiliated with Mayfield Fund..... 3,000,000 1,500,000 520,832 198,752 513,390
Entities Affiliated with Integral Capital
Partners................................. -- 600,000 1,041,667 -- 175,515
</TABLE>
The preferred stock purchased by these affiliates was purchased on the same
terms and conditions as the preferred stock purchased by other investors, and
was converted into shares of Calico's common stock at the time of Calico's
initial public offering in October 1999.
Entities affiliated with Kleiner Perkins Caufield & Byers are together
considered a 5% stockholder of Calico's. Bernard J. Lacroute, a director of
Calico, is a general partner of Kleiner Perkins Caufield & Byers. Entities
affiliated with Mayfield Fund are together considered a 5% stockholder of
Calico's. William D. Unger, a director of Calico, is a general partner of
Mayfield Fund. Entities affiliated with Integral Capital Partners are together
considered a 5% stockholder of Calico's.
In connection with Calico's offering of the Series A and Series B preferred
stock, 1,650,000 shares and 600,000 shares of common stock held by William G.
Paseman, one of Calico's founders, were exchanged for 1,650,000 shares of Series
A and 600,000 shares of Series B preferred stock which were then sold by Mr.
Paseman independently of the shares sold by Calico.
At the time of Calico's acquisition of FirstFloor, Mayfield Fund held
approximately 22.5% of Calico's outstanding capital stock, and approximately
17.6% of the outstanding capital stock of FirstFloor. At the time of the
acquisition, the Series D preferred stock issued to Mayfield Fund in exchange
for shares of FirstFloor's capital stock was valued at $4.558 per share, or
approximately $905,900.
In connection with Calico's acquisition of FirstFloor, David J. Cardinal,
Calico's Chief Technology Officer and a co-founder of FirstFloor, exchanged his
existing shares of FirstFloor capital stock for 91,654 shares of Calico Series D
preferred stock.
Calico's preferred stockholders, its 5% stock holders and its director
William G. Paseman, are entitled to registration rights in respect of their
common stock issued or issuable upon conversion of preferred stock held by them.
On July 18, 1997, Calico loaned $240,000 to Alan P. Naumann, its Chief
Executive Officer, in connection with his purchase of 1,200,000 shares of its
common stock for $0.20 per share upon exercise of stock options. The notes
accrue interest at the rate of 6.65% per year and are due on July 18, 2001. On
June 30, 1998, Calico loaned $520,000 to Mr. Naumann, in connection with the
purchase of 300,000 shares of its common stock for $1.73 per share upon exercise
of stock options. The notes accrue interest at 5.77% per year and are due on
June 30, 2002. The principal amount of the notes remain outstanding. This loan
is full recourse and is secured by a pledge of the stock purchased upon exercise
of the stock option.
On April 28, 1998, Calico loaned $343,750 to David E. Barrett, its
Executive Vice President and Chief Operating Officer, in connection with his
purchase of 412,500 shares of its common stock for $0.83 per share upon exercise
of stock options. The notes accrue interest at the rate of 5.59% per year
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and are due on April 28, 2002. The principal amount of the notes remain
outstanding. This loan is full recourse and is secured by a pledge of the stock
purchased upon exercise of the stock option.
On February 26, 1998, Calico loaned $141,750 to Matthew DiMaria, its Vice
President, Marketing, in connection with his purchase of 202,500 shares of its
common stock for $0.70 per share upon exercise of stock options. The notes
accrue interest at the rate of 5.69% per year and are due on February 26, 2002.
The principal amount of the notes remain outstanding. This loan is full recourse
and is secured by a pledge of the stock purchased upon exercise of the stock
option.
All loan amounts outstanding as of June 30, 1999 are reflected as a
reduction of equity in the consolidated balance sheet.
On August 24, 1999, Calico granted options to purchase 150,000 shares of
common stock to Joseph Costello, one of its directors, at an exercise price of
$12.00 per share.
Calico entered into a joint marketing agreement with Andersen Consulting in
September 1999 to form a global alliance. Under this alliance, Andersen
Consulting acquired rights to market integration services related to its
software and Calico has agreed to promote Andersen Consulting as the preferred
integrator of its software. As part of this relationship and in connection with
its private placement of 307,200 shares of its common stock to Andersen
Consulting in October 1999, Calico has agreed to appoint a representative of
Andersen Consulting to Calico's board of directors.
Calico has entered into indemnity agreements with each of its directors and
officers. These indemnity agreements will require Calico to indemnify these
officers and directors against liabilities that may arise by reason of their
status or service as officers or directors, and to advance expenses incurred as
a result of any proceedings against them as to which they could be indemnified.
Calico believes that all transactions with its officers, directors,
principal stockholders and other affiliates described above were made on terms
no less favorable to Calico than could have been obtained from unaffiliated
third parties.
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Calico's common
stock as of November 30, 1999, by:
- each person who is known by Calico to beneficially own more than 5% of
its common stock;
- its chief executive officer, each of the executive officers named in the
summary compensation table and each of its directors; and
- all of its executive officers and directors as a group.
Unless otherwise indicated, the address of each of the named individuals is
c/o Calico Commerce, Inc., 333 West San Carlos Street, Suite 300, San Jose,
California 95110. Unless otherwise indicated below, and subject to the rights of
any spouse under applicable community property laws, Calico believes that the
persons named in the table have sole voting and investment power with respect to
all shares shown as beneficially owned by them.
Percentage of shares outstanding is based on 33,610,069 shares outstanding
as of November 30, 1999. Of the total shares outstanding, 1,641,274 shares are
subject to Calico's right of repurchase. Beneficial ownership is determined
under the rules and regulations of the Securities and Exchange Commission. All
shares of common stock subject to options currently exercisable or exercisable
within 60 days after November 30, 1999 are deemed to be outstanding for the
purpose of computing
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the percentage of ownership of the person holding the options, but are not
deemed to be outstanding for computing the percentage of ownership of any other
person. Entries denoted by an asterisk represent an amount less than 1%.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES SHARES
BENEFICIALLY OWNED OUTSTANDING
------------------ -------------
<S> <C> <C>
Mayfield Fund(1)......................................... 5,732,974 17.1%
2800 Sand Hill Road,
Menlo Park, California 94025
Kleiner Perkins Caufield & Byers(2)...................... 5,349,922 15.9
2750 Sand Hill Road,
Menlo Park, California 94025
Integral Capital Partners(3)............................. 1,817,182 5.4
Sand Hill Road,
Menlo Park, California 94025
Alan P. Naumann(4)....................................... 1,500,000 4.5
David E. Barrett(5)...................................... 412,500 1.2
Matthew S. DiMaria(6).................................... 203,000 0.6
William G. Paseman....................................... 3,745,800 11.1
Bernard J. Lacroute(2)................................... 5,357,422 15.9
2750 Sand Hill Road,
Menlo Park, California 94025
William D. Unger(7)...................................... 5,583,782 16.6
2800 Sand Hill Road,
Menlo Park, California 94025
Joseph B. Costello....................................... -- --
2880 Lakeside Drive -- Suite 250
Santa Clara, California 95054
All executive officers and directors as a group (9
persons)(8)............................................ 17,211,204 51.2
</TABLE>
- -------------------------
(1) The shares listed represent 4,996,192 shares held by Mayfield VII; 262,825
shares held by Mayfield Associates Fund II; 289,667 shares held by Mayfield
Software Partners; and 184,290 shares held by e-trust, a revocable trust.
Voting and dispositive power over these shares is exercised by committee.
Mr. Unger, one of Calico's directors, is a general partner of Mayfield
Associates Fund II and Mayfield VII Management Partners, a California
Limited Partnership, which is the general partner of Mayfield VII. Mayfield
VII is one of the general partners of Mayfield Software Partners. Mr. Unger
disclaims beneficial ownership of all other shares except for his pecuniary
interest.
(2) The shares listed represent 4,055,224 shares held by Kleiner Perkins
Caufield & Byers VII, 1,174,961 shares held by KPCB Java Fund, and 127,237
shares held by KPCB Information Sciences Zaibatsu Fund II. Voting and
dispositive power over these shares is exercised by committee. Mr. Lacroute,
one of Calico's directors, is a partner of Kleiner Perkins Caufield & Byers.
Mr. Lacroute disclaims beneficial ownership of all shares except for his
pecuniary interest.
(3) The shares listed represent 1,462,620 shares held by Integral Capital
Partners III, L.P., and 354,562 shares held by Integral Capital Partners
International III, L.P. The general partner of Integral Capital Partners
III, L.P. and Integral Capital Partners International III, L.P., is Integral
Capital Management III, L.P. A majority of the general partners of Integral
Capital Management III, L.P. is required to exercise voting and dispositive
control of these shares.
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<PAGE> 123
(4) Includes 389,583 shares subject to a right of repurchase by Calico which
right lapses over time.
(5) Includes 232,032 shares subject to a right of repurchase by Calico which
right lapses over time.
(6) Includes 113,906 shares subject to a right of repurchase by Calico which
right lapses over time. Also includes 500 shares held by Mr. DiMaria as
custodian for .
(7) The shares listed represent 4,996,191 shares held by Mayfield VII; 262,824
shares held by Mayfield Associates Fund II; 289,667 shares held by Mayfield
Software Partners; and 35,098 shares held by the Unger-Luchsinger Family
Trust U/D/T 12/1999, a revocable trust for the benefit of the
Unger-Luchsinger Family. Except for those shares held by the Unger-
Luchsinger Family Trust U/D/T 12/1999, Mr. Unger disclaims beneficial
ownership of all other shares except for his pecuniary interest.
(8) Includes 735,521 shares subject to a right of repurchase by Calico and
options to purchase 412,500 shares that are immediately exercisable.
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<PAGE> 124
INFORMATION ABOUT CONNECTINC.COM
GENERAL
ConnectInc.com provides integration solutions to enable its customers to
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applications and Web time-driven professional services are designed to enable
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ConnectInc.com historically designed, developed, marketed and supported
application software for Internet-based interactive commerce. In October 1998,
ConnectInc.com announced a shift in business direction and focus, to providing
Internet systems and systems integration services based on technologies from
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ConnectInc.com provides services and software to enable Internet-based
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<PAGE> 125
LICENSING AND THIRD-PARTY SOFTWARE. ConnectInc.com typically provides its
software on a component basis to its customers on a non-exclusive object code
basis. A variety of software products may be integrated for its customers on an
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customers also may obtain licenses for such software directly from third party
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the application software that resides at the application server level in the
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business functionality that their application needs.
AGREEMENT WITH CALICO
In October 1999, Calico and ConnectInc.com entered into an OEM Software
License Agreement. Pursuant to this agreement, ConnectInc.com granted Calico a
non-exclusive license to copy, market and distribute ConnectInc.com's
MarketStream software to end users either separately or included with Calico's
products or services. The agreement, which terminates on December 31, 2000, also
provides that Calico may grant sublicenses to distributors to copy, market and
distribute ConnectInc.com's MarketStream software to end users.
TECHNOLOGY PROVIDERS
A key element of ConnectInc.com's strategy is to continue to expand its
strategic alliances with other companies that offer complimentary products or
services. ConnectInc.com refers to these companies as its solution partners.
ConnectInc.com believes that such relationships promote the visibility of its
applications and services and enable ConnectInc.com to supplement its core
products and services to provide a complete solution to customers' electronic
commerce integration needs.
ConnectInc.com offers Websphere and MQ Messaging software from IBM. In
addition, ConnectInc.com has a licensing agreement with BEA Systems, Inc.
ConnectInc.com has engaged in joint marketing activities with other technology
companies, including Hewlett-Packard Company, Sun Microsystems, Inc. and IBM.
As of September 30, 1999, ConnectInc.com had 38 full-time employees
worldwide.
ConnectInc.com is a Delaware corporation founded in 1987. Its principal
executive offices are located at 515 Ellis Street, Mountain View, California
94043, and its telephone number is (650) 254-4000.
MANAGEMENT AND ADDITIONAL INFORMATION
Information relating to executive compensation, various benefit plans,
including stock option plans, voting securities and the principal holders
thereof, relationships and related transactions between ConnectInc.com and its
management or major stockholders and other related matters as to ConnectInc.com
is incorporated by reference or set forth in ConnectInc.com's annual report on
Form 10-K for the year ended December 31, 1998, incorporated into this proxy
statement/prospectus by reference. ConnectInc.com stockholders desiring copies
of such documents may contact ConnectInc.com at its address or telephone number
indicated under "Where You Can Find More Information."
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CALICO CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS
When Calico and ConnectInc.com complete the merger, ConnectInc.com
stockholders will become Calico stockholders.
The following is a description of the Calico common stock to be issued in
the merger and a summary of the significant differences between the rights of
holders of Calico common stock and ConnectInc.com common stock.
DESCRIPTION OF CALICO CAPITAL STOCK
As of November 30, 1999, there were 33,610,069 shares of Calico's common
stock outstanding held by approximately 8,800 stockholders of record. Calico's
authorized capital stock consists of 150,000,000 shares of common stock, $0.001
par value per share, and 15,000,000 shares of preferred stock, $0.001 par value
per share.
CALICO COMMON STOCK. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of Calico's common stock
are entitled to the following rights:
- to receive dividends at such times and in such amounts as the board of
directors may determine out of funds legally available for dividends;
- one vote for each share held on all matters submitted to a vote of
stockholders; and
- upon Calico's liquidation, dissolution or winding up, to share ratably in
all assets remaining after payment of liabilities and the liquidation
preference of any preferred stock.
Calico common stockholders are entitled to one vote per share on all
matters to be voted upon by Calico stockholders. Because Calico's certificate of
incorporation does not authorize cumulative voting for the election of
directors, the holders of a majority of the shares voted can elect all of the
directors then standing for election. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption. All
outstanding shares of Calico's common stock is, and the shares of Calico common
stock to be outstanding after the merger will be, fully paid and nonassessable.
CALICO PREFERRED STOCK. The Calico board of directors has the authority,
without further action or authorization by the stockholders, to designate and
issue up to 15,000,000 shares of preferred stock in one or more series. The
Calico board of directors can fix the rights, preferences and privileges of the
shares of each series of preferred stock and any qualifications, limitations or
restrictions on these shares.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of entrenching Calico's board of
directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of Calico's outstanding
voting stock. Furthermore, the preferred stock may have other rights, including
economic rights, senior to the common stock. Calico has no current plans to
issue any shares of preferred stock.
CALICO WARRANTS. As of November 30, 1999, Calico had outstanding one
warrant to purchase a total of 5,263 shares of common stock at $9.50 per share,
which expires in September 2002.
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CALICO REGISTRATION RIGHTS. The holders of approximately 20,599,535 shares
of Calico's common stock have rights to require Calico to register those shares
under the Securities Act. Subject to limitations in the investor rights
agreement governing these rights, the holders of at least 30% of these shares
may require, on two occasions, that Calico use its best efforts to register
these shares for public resale. The holders of these shares may also require
Calico to register all or a portion of their registrable securities on Form S-3
when it is eligible to use this form, provided, among other limitations, that
the proposed aggregate price of the offering to the public is at least $500,000.
If Calico registers any common stock for its own account, other than a
registration relating solely to employee benefit plans, a registration relating
solely to transactions under Rule 145 of the Securities Act, or a registration
on any registration form which does not permit secondary sales, or for the
account of other security holders, the holders of 22,135,535 shares are entitled
to include their shares of common stock in the registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering. Calico is required to pay all fees, costs and expenses of these
registrations, other than underwriting discounts and commissions.
COMPARISON OF RIGHTS OF CALICO STOCKHOLDERS AND CONNECTINC.COM STOCKHOLDERS
The rights of holders of Calico common stock are governed by Delaware law,
Calico's certificate of incorporation and Calico's bylaws, while the rights of
ConnectInc.com stockholders are governed by Delaware law, ConnectInc.com's
certificate of incorporation and ConnectInc.com's bylaws. In most respects, the
rights of ConnectInc.com stockholders are similar to those of Calico
stockholders. The following discussion summarizes the significant differences
between the companies' charter documents. This summary is not a complete
discussion of, and is qualified by reference to, Calico's certificate of
incorporation, Calico's bylaws, ConnectInc.com's certificate of incorporation,
ConnectInc.com's bylaws and Delaware law.
CAPITAL STOCK. ConnectInc.com's certificate provides that ConnectInc.com's
authorized capital stock consists of 60,000,000 shares of common stock, $0.001
par value, and 3,500,000 shares of preferred stock, $0.001 par value. As of
November 30, 1999, there were 14,894,308 shares of ConnectInc.com common stock
outstanding held by approximately 219 stockholders of record and no shares of
ConnectInc.com preferred stock outstanding. As of December 9, 1999, there were
2,694,378 shares of ConnectInc.com common stock subject to outstanding options
and 35,000 shares of ConnectInc.com common stock subject to an outstanding
warrant. For a description of Calico's capital stock, see "Description of Calico
Capital Stock" on page 120.
CLASSIFIED BOARD. The Calico certificate of incorporation provides that the
Calico board of directors be divided into three classes with staggered
three-year terms. As a result, only one of the three classes of Calico's board
of directors will be elected each year. The ConnectInc.com certificate of
incorporation provides that the ConnectInc.com board of directors be divided
into two classes with staggered two-year terms.
DIRECTORS. Calico's bylaws provide that Calico's board of directors
consists of five members. The board has the exclusive right to set the
authorized number of directors and to fill vacancies on the board of directors.
Subject to the rights of the holders of any series of preferred stock then
outstanding:
- directors may be removed for cause, but only by an affirmative vote of
holders of at least a majority of the voting power of all of the then
outstanding shares of capital stock of Calico entitled to vote generally
in the election of directors, voting together as a single class;
- board vacancies resulting from the removal of a director by the
stockholders may be filled at a special meeting of the stockholders held
for that purpose; and
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- board vacancies resulting from any increase in the authorized number of
directors or any vacancies in the board resulting from death, resignation
or other cause (other than removal by the stockholders) may only be
filled by the affirmative vote of a majority of the directors then in
office.
ConnectInc.com's bylaws provide that the ConnectInc.com board of directors
consists of ten members. ConnectInc.com's certificate of incorporation provides
that, until changed by a board resolution, the first class of directors shall
consist of five members and the second class of directors shall consist of five
members. Directors may be removed from office with cause by the affirmative vote
of the holders of at least a majority of the voting power of the outstanding
shares entitled to vote or without cause by the affirmative vote of the holders
of at least 66 2/3% of the voting power of the outstanding shares entitled to
vote. Board vacancies may be filled by the affirmative vote of a majority of the
voting power of the outstanding shares entitled to vote or by the affirmative
vote of a majority of the remaining directors then in office. However, newly
created directorships resulting from any increase in the number of directors
shall, unless the board determines by resolution that any such newly created
directorship shall be filled by the stockholders, be filled only by the
affirmative vote of the directors then in office.
DIRECTORS' COMMITTEES. The Calico bylaws provide that the board of
directors may by vote of a majority of the board of directors delegate powers
normally held by the board of directors to a committee comprised of one or more
members of the Calico board to the extent permitted by resolution of the board
of directors or the bylaws. To the extent provided in the resolution which
designates the committee or in a supplemental resolution, these committees may
exercise the power and authority to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger.
The ConnectInc.com bylaws provide that a majority of the board of directors
may designate committees of the board. These committees may exercise all the
powers and authority of the board in the management of the business and affairs
of ConnectInc.com, including the power or authority to declare a dividend,
authorize the issuance of stock, or adopt a certificate of ownership and merger.
However, the committee may not:
- amend the certificate of incorporation, other than to designate and to
fix the rights, preferences and privileges of the shares of each series
of preferred stock and any qualifications, limitations or restrictions on
these shares;
- adopt an agreement of merger or consolidation;
- recommend to the stockholders the sale, lease or exchange of all or
substantially all of ConnectInc.com's property and assets;
- recommend to the stockholders a dissolution of ConnectInc.com or a
revocation of a dissolution; or
- amend the bylaws.
STOCKHOLDER PROPOSALS. Calico's bylaws require that in order to properly
bring nominations for the election of directors or other business before a
stockholder meeting, a stockholder must give timely notice in writing of his or
her intent to bring the nomination or business before the meeting. To be timely,
the stockholder's notice must be delivered to the secretary of Calico not less
than 120 days before the anniversary of the date on which Calico mailed its
proxy materials for the previous year's annual meeting of Calico stockholders.
If no annual meeting was held the previous year, if the date of the annual
meeting is set more than 30 calendar days before or after the anniversary of the
previous year's annual meeting, or in the event of a special meeting, to be
timely,
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the stockholder's notice must be delivered not later than the close of business
on the tenth day following the day the notice of the date of the meeting was
publicly announced. The stockholder notice must include:
- a brief description of the business desired to be brought before the
annual or special meeting and the reasons for conducting such business at
the special meeting;
- the name and address of the stockholder proposing such business;
- the class and number of shares of Calico stock which are beneficially
owned by the stockholder; and
- any material interest of the stockholder in such business.
The ConnectInc.com bylaws require that in order to properly bring
nominations for the election of directors or other business before a stockholder
meeting, a stockholder must give timely notice in writing of his or her intent
to bring the nomination or business before the meeting. To be timely, the
stockholder's notice must be delivered to the secretary of ConnectInc.com not
less than 20 days nor more than 60 days prior to the meeting. However, if less
than 30 days notice or prior public disclosure of the date of the meeting is
given or made to the stockholders, notice by the stockholder must be received by
the close of business on the tenth day following the day the notice of the date
of the meeting was mailed or publicly announced. The stockholder notice must
include:
- as to each nominee whom the stockholder proposes to nominate for election
or re-election as a director:
1. the name, age, business address, and residence address of such
person;
2. the principal occupation or employment of such person;
3. the class and number of shares of the corporation which are
beneficially owned by such person;
4. any other information relating to such person that is required by law
to be disclosed in solicitations of proxies for election of
directors; and
5. such person's written consent to being named as nominee and to
serving as a director if elected.
- as to the stockholder giving notice:
1. the name and address, as they appear on ConnectInc.com's books;
2. the class and number of shares of ConnectInc.com stock which are
beneficially owned by such stockholder; and
3. a description of all arrangements or understandings between such
stockholder and each nominee and any other person or persons (naming
such person or persons) relating to the nomination.
The ConnectInc.com stockholder notice of business to be conducted must
state:
- a brief description of the business desired to be brought before the
meeting and the reasons for conducting such business at the meeting;
- the name and address of the stockholder proposing such business at the
meeting;
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- the class and number of shares of ConnectInc.com stock which are
beneficially owned by the stockholder;
- any material interest of the stockholder in such business; and
- any other information that is required by law to be provided by the
stockholder in his capacity as a proponent of the stockholder proposal.
RIGHT TO CALL SPECIAL MEETINGS OF STOCKHOLDERS. Calico's bylaws provide
that special meetings of Calico's stockholders may only be called by a majority
of the total number of authorized directors of Calico's board or by stockholders
holding not less than 10% of the outstanding shares entitled to vote at the
meeting. The meeting shall be held at a place, date, and time as they shall fix.
Written notice of the meeting shall be given to the stockholders entitled to
vote at the special meeting not less than 10 nor more than 60 days before the
date on which the meeting is to be held.
ConnectInc.com's bylaws provide that special meetings of ConnectInc.com's
stockholders may be called by the board, the chairman of the board, the
president, or by stockholders not less than 10% of the outstanding shares
entitled to vote at the meeting. Upon request by any person entitled to call a
special meeting of ConnectInc.com's stockholders, the chairman of the board,
president, vice president or secretary shall cause notice of the meeting to be
given to the stockholders entitled to vote at the special meeting within 20 days
after receipt of the request. The special meeting will be held at a time
requested by the person or persons calling the meeting, but not less than 35 nor
more than 60 days after receipt of the request.
NO WRITTEN CONSENT BY STOCKHOLDERS. Calico's certificate of incorporation
provides that any action required or permitted to be taken by Calico's
stockholders must be taken at a duly called annual or special meeting of
stockholders and may not be done by written consent. ConnectInc.com's
certificate of incorporation provides that so long as ConnectInc.com has a class
of stock registered pursuant to the provisions of the Exchange Act, any action
by the stockholders of such class must be taken at an annual or special meeting
of stockholders and may not be taken by written consent.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. In addition to any
vote required by law, the approval of at least 66 2/3% of the total outstanding
shares entitled to vote is required to amend or repeal the provisions of
Calico's certificate or incorporation relating to:
- its amendment;
- management of Calico's business, the conduct of its affairs or the
limitation and regulation of its powers or the powers of its directors
and stockholders;
- the number of directors, filling vacancies on the board or removal of
directors;
- amendment of Calico's bylaws; and
- indemnification of Calico's directors, officers, employees and agents.
Calico's bylaws may be amended by vote of a majority of its directors.
Calico's stockholders may only adopt, amend or repeal Calico's bylaws upon the
affirmative vote of at least 66 2/3% of the voting power of all of the then
outstanding shares entitled to vote.
The affirmative vote of at least 66 2/3% of all of the voting power of all
outstanding shares entitled to vote is required to amend any provision of
ConnectInc.com's certificate of incorporation relating to:
- its amendment;
- amendment of ConnectInc.com's bylaws;
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- number and election of directors;
- meetings of stockholders and the keeping of its books;
- limitation on the ability of stockholders to act by written consent;
- advance notice of new business and stockholder nominations for the
election of directors;
- indemnification of ConnectInc.com's directors, officers, employees and
agents; and
- the staggered board of directors, prohibition on the right to cumulate
votes, and removal of directors.
Subject to the rights of the ConnectInc.com stockholders, the
ConnectInc.com board of directors may amend the bylaws. The affirmative vote of
at least 66 2/3% of the total outstanding shares entitled to vote must approve
any amendment to the provisions of the bylaws relating to:
- special meetings;
- the advance notice of stockholder nominees; and
- the advance notice of stockholder business.
INTERESTED DIRECTOR TRANSACTION. The Calico and ConnectInc.com certificates
of incorporation do not specifically provide for interested director
transactions. Under Delaware law, certain contracts or transactions in which one
or more of the directors of Calico or ConnectInc.com has an interest are void or
voidable unless the following conditions are met:
- the stockholders approve the contract or transaction after full
disclosure of material facts;
- the board of directors approves the transaction after full disclosure of
material facts and the transaction is fair, and approved by a majority of
the disinterested directors, even though less than a quorum; or
- the contract or transaction must have been fair as to Calico or
ConnectInc.com at the time it was approved.
INTERESTED STOCKHOLDER TRANSACTION. Both Calico and ConnectInc.com are
subject to the provisions of Delaware law which prohibit a corporation from
engaging in a business combination with an interested stockholder for three
years following the date the stockholder became an interested stockholder,
unless:
- prior to that date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction began; or
- on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock not owned by the
interested stockholder.
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A business combination is defined to include:
- any merger or consolidation involving the corporation and the interested
stockholders;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholders;
- subject to limited exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholders;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholders; or
- the receipt by the interested stockholders of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Generally, an interested stockholder is a person who, together with its
affiliates and associates, owns 15% or more of the corporation's voting stock or
owned 15% of such voting stock within three years before the proposed business
combination, or is affiliated with the corporation.
DIRECTORS' LIABILITY. The Calico and ConnectInc.com certificates of
incorporation eliminate the liability of directors to the fullest extent
permitted by Delaware law.
DISSENTERS' APPRAISAL RIGHTS
ConnectInc.com stockholders will not be entitled to dissenters' appraisal
rights under Delaware law or any other statute in connection with the merger.
LEGAL MATTERS
An opinion that the Calico shares to be issued in connection with the
merger will be legally issued, fully paid and non-assessable has been delivered
by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain tax
consequences of the merger have been passed upon for Calico by Gray Cary Ware &
Freidenrich LLP, Palo Alto. An investment partnership of Gray Cary Ware &
Freidenrich owns an aggregate of 5,485 shares of Calico common stock.
Certain tax consequences of the merger have been passed upon for
ConnectInc.com by Cooley Godward LLP, Palo Alto, California. Cooley Godward
holds a warrant to purchase an aggregate of 35,000 shares of ConnectInc.com
common stock. Alan C. Mendelson, a partner at Cooley Godward, is
ConnectInc.com's secretary.
EXPERTS
The consolidated financial statements of Calico Commerce, Inc. as of March
31, 1998 and 1999 and for each of the three years in the period ended March 31,
1999 included in this Prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of ConnectInc.com, Co. at December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998,
incorporated by reference in the Proxy Statement of ConnectInc.com, Co. which is
referred to and made a part of this Prospectus and
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Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report incorporated by reference therein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements of FirstFloor Software, Inc., at December 31, 1996
and 1997, and for each of the two years in the period ended December 31, 1997,
included in the Proxy Statement of ConnectInc.com, Co. which is referred to and
made a part of this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon,
appearing elsewhere in this Prospectus, which contains an explanatory paragraph
describing conditions that raise substantial doubt about FirstFloor's ability to
continue as a going concern as described in note 1 to the financial statements,
and are included in reliance upon such report, given upon the authority of such
firm as experts in accounting and auditing.
TRANSFER AGENT
The Transfer Agent and Registrar for Calico's common stock is BankBoston,
N.A., whose address is 150 Royall Street, Canton, Massachusetts 02021 and whose
telephone number is (781) 575-2200.
STOCKHOLDER PROPOSALS
ConnectInc.com will hold a 2000 annual meeting of stockholders only if the
merger does not occur before the time of the meeting. In the event that the
meeting is held, the secretary of ConnectInc.com must receive any proposals of
ConnectInc.com stockholders intended to be presented at the 2000 annual meeting
by no later than March 10, 2000 in order for the proposals to be considered for
inclusion in the ConnectInc.com proxy materials relating to the meeting.
OTHER MATTERS
As of the date of this proxy statement/prospectus, the ConnectInc.com board
of directors and the Calico board of directors know of no matters that will be
presented for consideration at the ConnectInc.com special meeting other than as
described in this proxy statement/prospectus. If any other matters shall
properly come before the ConnectInc.com special meeting or any adjournment or
postponement of the special meeting and be voted upon, the enclosed proxies will
be deemed to confer discretionary authority on the individuals named as proxies
therein to vote the shares represented by such proxies as to any such matters.
The individuals named as proxies intend to vote or not to vote in accordance
with the recommendation of the management of ConnectInc.com.
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WHERE YOU CAN FIND MORE INFORMATION
Calico has filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act that registers the distribution
to the ConnectInc.com stockholders of the shares of Calico common stock to be
issued in connection with the merger. This proxy statement/prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedule filed with it. For further information with respect to
Calico and the common stock to be issued in connection with the merger, please
read the registration statement and the exhibits and schedules that Calico has
filed. A copy of the registration statement and the exhibits and schedules filed
with it may be inspected without charge at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Seven World Trade Center, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611-2511, and copies of all or any part of the registration
statement may be obtained from these offices upon the payment of the fees
prescribed by the Securities and Exchange Commission.
Calico and ConnectInc.com are subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith Calico and ConnectInc.com file reports, proxy statements
and other information with the Securities and Exchange Commission under the
Exchange Act. You may read and copy this information at the public reference
facilities maintained by the Securities and Exchange Commission and at the
Securities and Exchange Commission's regional offices described above. The
Securities and Exchange Commission also maintains a worldwide website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of the site is http:\\www.sec.gov.
The Securities and Exchange Commission allows ConnectInc.com to incorporate
by reference information into this proxy statement/prospectus. This means that
ConnectInc.com can disclose important information to you by referring you to
another document filed separately with the Securities and Exchange Commission.
The information incorporated by reference is considered to be a part of this
proxy statement/prospectus, except for any information that is superseded by
information that is included directly in this document.
This proxy statement/prospectus incorporates by reference the documents
listed below that ConnectInc.com has previously filed with the Securities and
Exchange Commission. They contain important information about ConnectInc.com and
its financial condition.
<TABLE>
<CAPTION>
CONNECTINC.COM SEC FILINGS PERIOD
-------------------------- ------
<S> <C>
Annual report on Form 10-K............................. Year ended December 31, 1998
The description of ConnectInc.com common stock
contained in ConnectInc.com's Registration Statement on
Form 8-A (File No. 0-026592)........................... Filed: August 12, 1996
Quarterly reports on Form 10-Q......................... Quarter ended March 31, 1999
Quarter ended June 30, 1999
Quarter ended September 30, 1999
Current reports on Form 8-K............................ Filed: February 4, 1999,
February 26, 1999,
November 24, 1999
</TABLE>
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ConnectInc.com incorporates by reference additional documents that it may
file with the Securities and Exchange Commission between the date of this proxy
statement/prospectus and the date of the ConnectInc.com special meeting. These
documents include periodic reports, such as annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, as well as proxy
statements.
Calico common stock and ConnectInc.com common stock are quoted on the
Nasdaq National Market. Accordingly, you may inspect the information the
companies' file with the Securities and Exchange Commission at the offices of
The Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
Calico has supplied all information contained in this proxy
statement/prospectus relating to Calico, as well as all pro forma financial
information, and ConnectInc.com has supplied all such information relating to
ConnectInc.com.
You can obtain any of the documents incorporated by reference in this
document through ConnectInc.com or from the Securities and Exchange Commission
through the Securities and Exchange Commission's web site at the address
described above. Documents incorporated by reference are available from the
companies without charge, excluding any exhibits to those documents unless the
exhibit is specifically incorporated by reference as an exhibit in this proxy
statement/ prospectus. You can obtain documents incorporated by reference in
this proxy statement/prospectus without charge by requesting them in writing or
by telephone from the appropriate company at the following addresses:
CALICO
ATTENTION: INVESTOR RELATIONS
333 WEST SAN CARLOS STREET, SUITE 300
SAN JOSE, CALIFORNIA 95110
TELEPHONE: (408) 808-7610
CONNECTINC.COM
ATTENTION: INVESTOR RELATIONS
515 ELLIS STREET
MOUNTAIN VIEW, CALIFORNIA 94043
TELEPHONE: (650) 254-4000
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY JANUARY 24, 2000 TO
RECEIVE THEM BEFORE THE CONNECTINC.COM SPECIAL MEETING. If you request any
incorporated documents from us, we will mail them to you by first class mail, or
another equally prompt means, within one business day after we receive your
request.
Information contained in Calico's and ConnectInc.com's web sites is not a
part of this proxy statement/prospectus.
We have not authorized anyone to give any information or make any
representation about the merger or our companies that is different from, or in
addition to, that contained in this proxy statement/prospectus or in any of the
materials that we have incorporated into this document. Therefore, if anyone
does give you information of this sort, you should not rely on it. If you are in
a jurisdiction where offers to exchange or sell, or solicitations of offers to
exchange or purchase, the securities offered by this document or the
solicitation of proxies is unlawful, or if you are a person to whom it is
unlawful to direct these types of activities, then the offer presented in this
document does not extend to you. The information contained in this document
speaks only as of the date of this document unless the information specifically
indicates that another date applies.
129
<PAGE> 136
CALICO COMMERCE, INC.
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL
INFORMATION
Overview.................................................... F-2
Pro Forma Combined Consolidated Balance Sheet............... F-4
Pro Forma Combined Consolidated Statement of Operations..... F-5
Notes to Pro Forma Combined Consolidated Financial
Information............................................... F-7
CALICO COMMERCE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-8
Consolidated Balance Sheet.................................. F-9
Consolidated Statement of Operations........................ F-10
Consolidated Statement of Stockholders' Deficit............. F-11
Consolidated Statement of Cash Flows........................ F-12
Notes to Consolidated Financial Statements.................. F-13
PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
Overview.................................................... F-38
Pro Forma Combined Consolidated Statement of Operations..... F-39
Notes to Pro Forma Combined Consolidated Financial
Information............................................... F-40
FIRSTFLOOR SOFTWARE, INC.
Report of Independent Auditors.............................. F-41
Balance Sheets.............................................. F-42
Statements of Operations.................................... F-43
Statements of Shareholders' Equity (Net Capital
Deficiency)............................................... F-44
Statements of Cash Flows.................................... F-45
Notes to Financial Statements............................... F-46
</TABLE>
F-1
<PAGE> 137
PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
On November 19, 1999, Calico Commerce, Inc. ("Calico" or the "Company")
reached a definitive agreement to acquire ConnectInc.com in a transaction
assumed to be accounted for using the purchase method of accounting. Calico will
issue 1,203,544 shares of Calico Common Stock (based on 14.9 million shares of
ConnectInc.com shares outstanding at October 31, 1999 which will be exchanged at
the ratio of 0.081) with an assumed value of $79.6 million based on the average
closing prices of Calico's Common Stock for the few days before and after the
agreement date of November 19, 1999. Calico will also assume all outstanding
stock options and a warrant granted by ConnectInc.com. The fair value of the
assumed options and a warrant is approximately $10.4 million, and is included as
a component of the purchase price. The Black-Scholes option pricing model was
used to determine the fair value of the assumed options and warrant. The Company
also anticipates incurring approximately $2.0 million in acquisition expenses,
including financial advisory and legal fees and other direct transaction costs
which will also be included as a component of the purchase price.
The allocation of the aggregate purchase price of approximately $92.0
million will be finalized following receipt of the closing balance sheet of
ConnectInc.com and a final independent appraisal of certain intangible assets of
ConnectInc.com.
The aggregate purchase price is expected to be allocated as follows, based
upon a preliminary independent appraisal of ConnectInc.com (in thousands):
<TABLE>
<S> <C>
Net tangible assets of ConnectInc.com....................... $ 3,220
In-process research and development......................... 230
Customer base............................................... 150
Workforce-in-place.......................................... 2,580
Existing technology......................................... 5,000
Goodwill.................................................... 80,851
-------
$92,031
=======
</TABLE>
Because the valuation has not been completed, the actual amount of the
allocations could vary from the estimates above. The net tangible assets of
ConnectInc.com consist primarily of cash and cash equivalents and accounts
receivable. In-process research and development has not reached technological
feasibility at the acquisition date and will be immediately charged to
operations. The amount allocated to customer base, workforce-in-place and
existing technology will be amortized over the estimated useful life of three
years. The purchase price in excess of tangible assets and identifiable
intangible assets will be allocated to goodwill and amortized over its expected
useful life of three years.
The accompanying unaudited pro forma combined consolidated balance sheet
gives effect to the merger of Calico and ConnectInc.com as if such transaction
occurred on September 30, 1999. The unaudited pro forma combined balance sheet
combines the unaudited consolidated balance sheet of Calico as of September 30,
1999, adjusted for the proceeds from its initial public offering completed on
October 6, 1999 and the automatic conversion of its Mandatorily Redeemable
Convertible Preferred Stock which occurred upon such initial public offering,
and the unaudited consolidated balance sheet of ConnectInc.com as of September
30, 1999.
The accompanying unaudited pro forma combined consolidated statements of
operations present the results of operations of Calico for the year ended March
31, 1999 and the six-month period ended September 30, 1999, combined with the
statement of operations of ConnectInc.com for the year
F-2
<PAGE> 138
ended December 31, 1998 and the six-month period ended September 30, 1999. The
unaudited pro forma combined consolidated statements of operations give effect
to this acquisition as if it had occurred as of April 1, 1998.
The unaudited pro forma combined consolidated balance sheet and statements
of operations are not necessarily indicative of the financial position and
operating results that would have been achieved had the transaction been in
effect as of the dates indicated and should not be construed as being a
representation of financial position or future operating results of the combined
companies.
The unaudited pro forma combined consolidated financial information should
be read in conjunction with the audited consolidated financial statements and
related notes of Calico which are included elsewhere in this proxy
statement/prospectus and the audited consolidated financial statements and
related notes of ConnectInc.com which are incorporated in this proxy
statement/prospectus by reference.
F-3
<PAGE> 139
CALICO COMMERCE, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALICO CALICO
ACTUALS PRO FORMA CONNECTINC.COM PRO FORMA
------------- ------------- -------------- -------------------------
SEPTEMBER 30, IPO SEPTEMBER 30, SEPTEMBER 30,
1999 ADJUSTMENTS 1999 1999 ADJUSTMENTS COMBINED
------------- ----------- ------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............ $ 5,366 $ 83,890 $ 89,256 $ 5,086 $ 94,342
Accounts receivable, net............. 7,751 7,751 1,172 8,923
Other current assets................. 2,506 2,506 358 2,864
------- -------- -------- -------- ------- --------
Total current assets............... 15,623 83,890 99,513 6,616 106,129
Property and equipment, net............ 3,763 3,763 444 4,207
Intangible assets and other assets..... 3,654 3,654 50 $88,581(A) 92,285
------- -------- -------- -------- ------- --------
$23,040 $ 83,890 $106,930 $ 7,110 $88,581 $202,621
======= ======== ======== ======== ======= ========
Current liabilities:
Accounts payable..................... $ 2,867 $ 2,867 $ 448 $ 3,315
Accrued expenses and other
liabilities........................ 6,731 6,731 803 $ 3,674(B) 11,208
Deferred revenue..................... 4,867 4,867 355 5,222
Current portion of notes payable..... 952 952 381 1,333
Current portion of capital lease
obligations........................ 207 207 -- 207
Current portion of extended vendor
liabilities........................ -- -- 118 118
------- -------- -------- -------- ------- --------
Total current liabilities.......... 15,624 15,624 2,105 3,674 21,403
Notes payable, noncurrent.............. 1,065 1,065 111 1,176
Capital lease obligations,
noncurrent........................... 98 98 -- 98
Other liabilities...................... 468 468 468
------- -------- -------- -------- ------- --------
17,255 -- 17,255 2,216 3,674 23,145
Mandatorily Redeemable Preferred
Stock.............................. 32,551 (32,551) -- -- -- --
------- -------- -------- -------- ------- --------
Commitments and contingencies
Stockholders' Equity:
Common stock......................... 12 22 34 15 (14)(C)(D) 35
Additional paid-in capital........... 18,347 116,419 134,766 75,468 14,562(C)(D) 224,796
Notes receivable from stockholders... (2,414) (2,414) -- -- (2,414)
Unearned stock compensation.......... (1,846) (1,846) (28) 28(D) (1,846)
Accumulated deficit.................. (40,865) (40,865) (70,561) 70,331(A)(D) (41,095)
------- -------- -------- -------- ------- --------
Total stockholders' (deficit)
equity........................... (26,766) 116,441 89,675 4,894 84,907 179,476
------- -------- -------- -------- ------- --------
$23,040 $ 83,890 $106,930 $ 7,110 $88,581 $202,621
======= ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined consolidated financial
information.
F-4
<PAGE> 140
CALICO COMMERCE, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
CALICO CONNECTINC.COM
------------- -------------- PRO FORMA
SEPTEMBER 30, SEPTEMBER 30, ----------------------
1999 1999 ADJUSTMENTS COMBINED
------------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Revenues
License............................. $ 6,959 $ 1,314 $ 8,273
Services.......................... 8,650 1,521 10,171
-------- ------- -------- --------
Net revenues................... 15,609 2,835 18,444
-------- ------- -------- --------
Cost of net revenues
License........................... 373 282 $ 833(E) 1,488
Services.......................... 6,133 909 7,042
-------- ------- -------- --------
Cost of net revenues................ 6,506 1,191 833 8,530
-------- ------- -------- --------
Gross profit...................... 9,103 1,644 (833) 9,914
-------- ------- -------- --------
Operating expenses:
Sales and marketing............... 9,199 707 9,906
Research and development.......... 6,467 1,142 7,609
General and administrative........ 3,352 1,282 455(E) 5,089
Amortization of stock
compensation................... 934 -- 934
Goodwill amortization............. 476 -- 13,475(F) 13,951
-------- ------- -------- --------
Total operating expenses....... 20,428 3,131 13,930 37,489
-------- ------- -------- --------
Operating loss...................... (11,325) (1,487) (14,763) (27,575)
Interest expense, net............... 137 114 251
-------- ------- -------- --------
Net loss............................ $(11,188) $(1,373) $(14,763) $(27,324)
======== ======= ======== ========
Net loss per share:
Basic and diluted................. $ (0.45) $ (1.05)
======== ========
Weighted average shares........... 24,811(G) 26,015(H)
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined consolidated financial
information.
F-5
<PAGE> 141
CALICO COMMERCE, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
CALICO CONNECTINC.COM
--------- --------------- PRO FORMA
MARCH 31, DECEMBER 31, -------------------------
1999 1998 ADJUSTMENTS COMBINED
--------- --------------- ----------- --------
<S> <C> <C> <C> <C>
Revenues
License........................ $ 10,482 $ 1,828 $ 12,310
Services..................... 10,931 4,650 15,581
-------- ------- -------- --------
Net revenues.............. 21,413 6,478 27,891
-------- ------- -------- --------
Cost of net revenues
License...................... 1,179 413 $ 1,667(E) 3,259
Services..................... 7,272 4,333 11,605
-------- ------- -------- --------
Cost of revenues............... 8,451 4,746 1,667 14,864
-------- ------- -------- --------
Gross profit................. 12,962 1,732 (1,667) 13,027
-------- ------- -------- --------
Operating expenses:
Sales and marketing.......... 14,138 3,051 17,189
Research and development..... 5,677 3,153 8,830
General and administrative... 3,988 2,263 910(E) 7,161
Termination & distribution
rights.................... -- 1,098 1,098
Amortization of stock
compensation.............. 2,007 -- 2,007
In-process research and
development............... 1,840 -- 1,840
Goodwill amortization........ 550 -- 26,950(F) 27,500
-------- ------- -------- --------
Total operating
expenses................ 28,200 9,565 27,860 65,625
-------- ------- -------- --------
Operating loss................. (15,238) (7,833) (29,527) (52,598)
Interest income, net........... (23) (71) (94)
-------- ------- -------- --------
Net loss....................... $(15,261) $(7,904) $(29,527) $(52,692)
======== ======= ======== ========
Net loss per share:
Basic and diluted............ $ (0.74) $ (2.41)
======== ========
Weighted average shares...... 20,689(G) 21,893(H)
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined consolidated financial
information.
F-6
<PAGE> 142
NOTES TO PROFORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited pro forma combined consolidated statements of operations have
been prepared to reflect the acquisition of ConnectInc.com by Calico as if the
acquisition had occurred as of April 1, 1998. The pro forma combined
consolidated statement of operations for the year ended March 31, 1999 reflects
the combination of the separate historical statement of operations of Calico for
the year ended March 31, 1999 and of ConnectInc.com for the year ended December
31, 1998. The pro forma combined consolidated statement of operations for the
six months ended September 30, 1999 reflects the combination of the separate
historical statement of operations of Calico and of ConnectInc.com for the six
months ended September 30, 1999. Revenues of ConnectInc.com of approximately
$2.0 million and net income of approximately $274,000 for the period of January
1, 1999 through March 31, 1999 are not included in either of the pro forma
combined consolidated statements of operations.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
(A) To record the anticipated value of intangible assets as described in
the overview. The in-process research and development cost is treated as an
expense and therefore increases the accumulated deficit.
(B) To reflect anticipated acquisition expenses of $2.0 million and $1.7
million for anticipated additional liabilities assumed.
(C) To reflect the issuance of 1.2 million shares of Calico's Common Stock
valued at approximately $79.6 million and the assumption of outstanding
ConnectInc.com options and a warrant valued at approximately $10.4 million.
(D) To eliminate the historical equity accounts of ConnectInc.com.
(E) To record the amortization of identifiable intangible assets related to
the acquisition of ConnectInc.com as if the transaction occurred on April 1,
1998. Identifiable intangible assets recorded in relation to the acquisition
were approximately $7.7 million and are being amortized on a straight-line basis
over three years.
(F) To record the amortization of goodwill related to the acquisition of
ConnectInc.com as if the transaction occurred on April 1, 1998. Goodwill
recorded in relation to the acquisition was approximately $80.9 million and is
being amortized on a straight-line basis over three years.
(G) Weighted average shares used to calculate basic and diluted net loss
per share for the period presented is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of Calico's Series A, Series B, Series C, Series D and Series E
Mandatorily Redeemable Convertible Preferred Stock into shares of Calico's
Common Stock effective upon the closing of its initial public offering as if
such conversion occurred on April 1, 1998, or at date of original issuance, if
later.
(H) Weighted average shares used to calculate pro forma basic and diluted
net loss per share for the period presented is computed using the weighted
average number of Common Stock outstanding for the period presented and the
shares to be issued in conjunction with the acquisition of ConnectInc.com as if
such shares were outstanding as of April 1, 1998.
F-7
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Calico Commerce, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of Calico
Commerce, Inc. and its subsidiaries at March 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999, 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
San Jose, California
July 13, 1999, except for Note 12,
which is as of September 30, 1999
F-8
<PAGE> 144
CALICO COMMERCE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
-------------------- SEPTEMBER 30,
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 2,514 $ 15,441 $ 5,366
Accounts receivable, net.............................. 2,952 7,443 7,751
Other current assets.................................. 379 1,417 2,506
-------- -------- --------
Total current assets............................... 5,845 24,301 15,623
Property and equipment, net............................. 1,847 2,532 3,763
Intangible and other assets, net........................ -- 4,535 3,654
-------- -------- --------
$ 7,692 $ 31,368 $ 23,040
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...................................... $ 1,197 $ 1,728 $ 2,867
Accrued liabilities................................... 1,813 5,448 6,731
Deferred revenue...................................... 2,361 6,054 4,867
Current portion of notes payable...................... 330 628 952
Current portion of capital lease obligations.......... 100 256 207
-------- -------- --------
Total current liabilities.......................... 5,801 14,114 15,624
Notes payable, non-current.............................. 644 700 1,065
Capital lease obligations, non-current.................. 170 177 98
Other liabilities....................................... -- 622 468
-------- -------- --------
6,615 15,613 17,255
-------- -------- --------
Mandatorily Redeemable Convertible Preferred Stock (Note
6).................................................... 14,505 32,535 32,551
-------- -------- --------
Commitments and contingencies (Notes 10 and 12)
Stockholders' equity (deficit):
Preferred Stock; $0.001 par value; 15,000 shares
authorized; no shares issued and outstanding actual
and pro forma (unaudited).......................... -- -- --
Common Stock; $0.001 par value; 150,000 shares
authorized; 9,498, 11,436 and 11,588 (unaudited)
shares issued and outstanding...................... 9 11 12
Additional paid-in capital............................ 3,658 17,877 18,347
Notes receivable from stockholders.................... (712) (2,211) (2,414)
Unearned compensation................................. (1,966) (2,779) (1,846)
Accumulated deficit................................... (14,417) (29,678) (40,865)
-------- -------- --------
Total stockholders' equity (deficit)............... (13,428) (16,780) (26,766)
======== ======== ========
$ 7,692 $ 31,368 $ 23,040
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 145
CALICO COMMERCE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
------------------------------ --------------------
1997 1998 1999 1998 1999
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
License......................... $ 3,940 $ 6,965 $ 10,482 $ 5,589 $ 6,959
Services........................ 1,963 4,894 10,931 4,349 8,650
------- ------- -------- -------- --------
Total net revenue............ 5,903 11,859 21,413 9,938 15,609
------- ------- -------- -------- --------
Cost of net revenue:
License......................... 178 265 1,179 366 373
Services........................ 2,122 3,115 7,272 3,109 6,133
------- ------- -------- -------- --------
Total cost of net revenue.... 2,300 3,380 8,451 3,475 6,506
------- ------- -------- -------- --------
Gross profit...................... 3,603 8,479 12,962 6,463 9,103
------- ------- -------- -------- --------
Operating expenses:
Sales and marketing............. 5,950 7,593 14,138 5,824 9,199
Research and development........ 2,224 3,342 5,677 2,204 6,467
General and administrative...... 1,486 2,222 3,988 2,100 3,352
Stock compensation (Notes 8 and
9)........................... 864 780 2,007 893 934
Acquired in-process research and
development (Note 2)......... -- -- 1,840 1,840 --
Amortization of goodwill (Note
2)........................... -- -- 550 78 476
------- ------- -------- -------- --------
Total operating expenses..... 10,524 13,937 28,200 12,939 20,428
------- ------- -------- -------- --------
Loss from operations.............. (6,921) (5,458) (15,238) (6,476) (11,325)
Interest expense.................. (40) (154) (314) (150) (86)
Interest income and other......... 61 113 291 69 223
------- ------- -------- -------- --------
Net loss.......................... $(6,900) $(5,499) $(15,261) $ (6,557) $(11,188)
======= ======= ======== ======== ========
Net loss per share:
Basic and diluted............... $ (2.12) $ (1.08) $ (2.27) $ (1.04) $ (1.21)
======= ======= ======== ======== ========
Weighted average shares......... 3,248 5,079 6,710 6,303 9,184
======= ======= ======== ======== ========
Pro forma net loss per share:
Basic and diluted............... $ (0.74) $ (0.35) $ (0.45)
======== ========
Weighted average shares......... 20,689 18,636 24,811
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 146
CALICO COMMERCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON NOTES
STOCK ADDITIONAL RECEIVABLE TOTAL
--------------- PAID-IN FROM UNEARNED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT DEFICIT
------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996............. 4,416 $ 4 $ 2 $ -- $ -- $ (2,018) $ (2,012)
Exercise of stock options............. 2,823 3 186 (166) -- -- 23
Exchange of founder's Common Stock for
Preferred Stock (Note 9)............ (600) (1) 1 -- -- -- --
Issuance of Common Stock.............. 218 -- 35 -- -- -- 35
Net loss.............................. -- -- -- -- -- (6,900) (6,900)
------ --- ------- ------- ------- -------- --------
Balance at March 31, 1997............. 6,857 6 224 (166) -- (8,918) (8,854)
Exercise of stock options............. 2,936 3 707 (574) -- -- 136
Repayments of notes receivable........ -- -- (16) 28 -- -- 12
Issuance of Common Stock.............. 8 -- 2 -- -- -- 2
Repurchase of Common Stock............ (303) -- (5) -- -- -- (5)
Unearned compensation (Note 8)........ -- -- 2,746 -- (2,746) -- --
Amortization of unearned compensation
(Note 8)............................ -- -- -- -- 780 -- 780
Net loss.............................. -- -- -- -- -- (5,499) (5,499)
------ --- ------- ------- ------- -------- --------
Balance at March 31, 1998............. 9,498 9 3,658 (712) (1,966) (14,417) (13,428)
Exercise of stock options............. 1,526 2 1,811 (1,660) -- -- 153
Issuance of Common Stock.............. 1,053 1 9,999 -- -- -- 10,000
Repayments of notes receivable........ -- -- (92) 161 -- -- 69
Repurchase of Common Stock............ (641) (1) (501) -- -- -- (502)
Issuance of Common Stock options to
non-employees....................... -- -- 148 -- -- -- 148
Unearned compensation (Note 8)........ -- -- 2,854 -- (2,854) -- --
Amortization of unearned compensation
(Note 8)............................ -- -- -- -- 2,041 -- 2,041
Net loss.............................. -- -- -- -- -- (15,261) (15,261)
------ --- ------- ------- ------- -------- --------
Balance at March 31, 1999............. 11,436 11 17,877 (2,211) (2,779) (29,678) (16,780)
Exercise of stock options
(unaudited)......................... 194 1 476 (285) -- -- 192
Repurchase of Common Stock
(unaudited)......................... (42) -- (89) 82 -- 1 (6)
Issuance of Common Stock options to
non-employees (unaudited)........... -- -- 83 -- -- -- 83
Amortization of unearned compensation
(unaudited)......................... -- -- -- -- 933 -- 933
Net loss (unaudited).................. -- -- -- -- -- (11,188) (11,188)
------ --- ------- ------- ------- -------- --------
Balance at September 30, 1999
(unaudited)......................... 11,588 $12 $18,347 $(2,414) $(1,846) $(40,865) $(26,766)
====== === ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 147
CALICO COMMERCE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(6,900) $(5,499) $(15,261) $(6,557) $(11,188)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts......................... 200 200 200 74 450
Provision for sales returns............................. 500 200 330 150 329
Depreciation, amortization and other.................... 350 664 2,641 591 1,682
Stock compensation and other............................ 899 780 2,189 893 1,016
Loss on disposal of assets.............................. -- -- 260 260 36
Acquired in-process research and development............ -- -- 1,840 1,840 --
Changes in assets and liabilities, net of acquisition:
Accounts receivable................................... (1,214) (2,248) (4,904) (1,423) (1,087)
Other current assets.................................. (9) (103) (1,072) (118) (1,089)
Accounts payable...................................... 496 406 531 675 1,139
Accrued liabilities................................... 422 1,202 2,662 342 1,283
Deferred revenue...................................... 915 1,062 3,130 1,142 (1,187)
Other liabilities..................................... -- -- 91 101 (60)
------- ------- -------- ------- --------
Net cash used in operating activities.............. (4,341) (3,336) (7,363) (2,030) (8,676)
------- ------- -------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (930) (1,403) (1,829) (571) (2,162)
------- ------- -------- ------- --------
Net cash used in investing activities.............. (930) (1,403) (1,829) (571) (2,162)
------- ------- -------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock.................... 23 133 10,153 80 186
Common stock repurchases.................................. -- -- (502) (482) --
Proceeds from repayments of stockholder loans............. -- 12 69 41 --
Net proceeds from issuance of preferred stock............. 4,769 4,952 12,217 10,925 16
Proceeds from issuance of notes payable................... 702 443 763 413 1,000
Repayments of notes payable............................... (27) (144) (409) (169) (311)
Principal payments under capital lease obligations........ (55) (64) (172) (61) (128)
------- ------- -------- ------- --------
Net cash provided by financing activities.......... 5,412 5,332 22,119 10,747 763
------- ------- -------- ------- --------
Net increase in cash and cash equivalents................... 141 593 12,927 8,146 (10,075)
Cash and cash equivalents at beginning of period............ 1,780 1,921 2,514 2,514 15,441
------- ------- -------- ------- --------
Cash and cash equivalents at end of period.................. $ 1,921 $ 2,514 $ 15,441 $10,660 $ 5,366
======= ======= ======== ======= ========
Supplemental cash flow disclosures:
Cash paid for interest.................................... $ 40 $ 154 $ 192 $ 97 $ 88
======= ======= ======== ======= ========
Non cash transactions:
Issuance of Common Stock for notes receivable............. $ 166 $ 574 $ 1,660 $ 1,639 $ 292
======= ======= ======== ======= ========
Cancellation of notes receivable related to forfeited
unvested restricted Common Stock........................ $ -- $ 16 $ 92 $ 9 $ 89
======= ======= ======== ======= ========
Equipment acquired through capital lease obligations...... $ 287 $ -- $ 136 $ 136 $ --
======= ======= ======== ======= ========
Issuance of Series B Mandatorily Redeemable Convertible
Preferred Stock warrants................................ $ 25 $ 53 $ -- $ -- $ --
======= ======= ======== ======= ========
Acquired net assets associated with FirstFloor acquisition
includes:
Fair value of tangible assets............................. $ 360 $ 360
Fair value of existing products and core technology....... 1,547 1,547
Acquired in-process research and development.............. 1,840 1,840
Goodwill.................................................. 4,266 4,266
Fair value of liabilities assumed......................... (1,951) (1,951)
-------- -------
$ 6,062 $ 6,062
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 148
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Calico Commerce, Inc. ("Calico" or the "Company") was incorporated on April
14, 1994 as an S-corporation. In May 1995, the Company was reorganized as a
C-corporation under California law.
Calico Commerce, Inc., headquartered in San Jose, California, is a leading
provider of electronic commerce software and services that enable its customers
to sell complex products and services over the Internet and other platforms.
Calico's products enable companies to create a guided selling experience that
allows their customers to interactively affect the on-line purchasing process.
The Company has incurred losses and generated operating cash shortfalls
since its inception. It has financed its operations and met its capital
expenditure requirements primarily through the sale of private equity
securities, and to a lesser extent, notes payable and equipment leases. The
Company intends to fund planned increases in expenses and capital expenditures
through the proceeds of an initial public offering of shares of its Common Stock
(See Note 12).
REINCORPORATION
In July 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 150,000,000 shares of $0.001
par value Common Stock and 15,000,000 shares of $0.001 par value Preferred
Stock. The Board of Directors has the authority to issue the undesignated
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. Share and per share information for each of
the three years in the period ended March 31, 1999 and the three months ended
June 30, 1999 has been retroactively adjusted to reflect the reincorporation.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Calico Technology UK Limited, which commenced
operations in April 1998, and FirstFloor Software, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet as of September 30, 1999, the
consolidated statements of operations and cash flows for the six months ended
September 30, 1999 and 1998 and the consolidated statements of stockholders'
deficit for the six months ended September 30, 1999 are unaudited. In the
opinion of management, these statements have been prepared on the same basis as
the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of these periods. The data disclosed in the notes to
the consolidated financial statements for these periods are unaudited.
F-13
<PAGE> 149
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks and money market funds that
are stated at cost.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable.
The Company by policy and practice maintains its cash and cash equivalents
with financial institutions the Company believes are of high credit quality. The
Company generally requires no collateral from its customers. To reduce its risk,
the Company periodically reviews the credit worthiness of its customers. The
Company establishes reserves for potential credit losses, and such losses have
been within management's estimations.
The following table sets forth customers comprising 10% or more of the
Company's net revenue for each of the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------- -------------
CUSTOMER 1997 1998 1999 1998 1999
- -------- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A....................................... 22% --% --% --% --%
B..................................... 19 -- -- -- --
C..................................... 12 -- -- -- --
D..................................... -- 11 -- -- --
E..................................... -- -- 22 23 --
F..................................... -- -- 13 21 --
G..................................... -- -- -- 16 --
H..................................... -- -- -- 11 --
I..................................... -- -- -- -- 26
J..................................... -- -- -- -- 16
</TABLE>
At March 31, 1998, three customers represented 27%, 14% and 12%,
respectively, of gross accounts receivable. At March 31, 1999, three customers
represented 32%, 12% and 11%, respectively, of gross accounts receivable. At
September 30, 1999 (unaudited) three customers represented 15%, 15% and 11%,
respectively, of gross accounts receivable.
F-14
<PAGE> 150
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are carried
at cost, which approximates their fair value because of the short-term maturity
of these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally two to five years. The cost of equipment acquired under a capital
lease is amortized over the life of the lease, or the estimated useful life of
the assets. Maintenance and repairs are charged to operations as incurred and
major improvements are capitalized. The cost of assets retired or otherwise
disposed of and the accumulated depreciation thereon are removed from the
accounts with any gain or loss realized upon sale or disposal credited or
charged to operations, respectively.
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price of the acquired
business over the fair value of the identifiable net costs acquired and is
amortized using the straight-line method over an estimated useful life of four
years. Acquired existing products and core technology are being amortized over
the period of benefit ranging from seven to 36 months.
The Company evaluates the recoverability of its intangible assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets.
FOREIGN CURRENCY
The functional currency of the Company's subsidiaries is the local
currency. The balance sheet accounts are translated into United States dollars
at the exchange rates prevailing at the balance sheet dates. Revenues, costs and
expenses are translated into United States dollars at average rates for the
periods. Gains and losses resulting from translation are accumulated as a
component of stockholder's deficit. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations
and were not significant during any of the periods presented.
REVENUE RECOGNITION
The Company's revenues are derived from licenses for its software and
related services, which include implementation and integration, technical
support, training and consulting. For contracts with multiple elements, and for
which vendor-specific objective evidence of fair value for the undelivered
elements exists, the Company recognizes revenue for the delivered elements based
upon the residual contract value as prescribed by Statement of Position No.
98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions".
F-15
<PAGE> 151
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations with regard to implementation or integration exist, the fee is fixed
or determinable and collectibility is probable. Provisions for sales returns are
provided at the time of revenue recognition based upon estimated returns. The
Company has not incurred charges for product returns to date.
Services revenue primarily comprises revenue from consulting fees,
maintenance contracts and training. Services revenue from consulting and
training is recognized as the service is performed. Maintenance contracts
include the right to unspecified upgrades and ongoing support. Maintenance
revenue is deferred and recognized on a straight-line basis as services revenue
over the life of the related contract, which is typically one year.
License and services revenue on contracts involving significant
implementation, customization or services which are essential to the
functionality of the software is recognized over the period of each engagement,
primarily using the percentage-of-completion method. Labor hours incurred is
generally used as the measure of progress towards completion. The Company
classifies revenue for these arrangements as license revenue and services
revenue based upon its estimates of fair value for each element and recognizes
the revenue based on the percentage-of-completion ratio for the arrangement. A
provision for estimated losses on engagements is made in the period in which the
loss becomes probable and can be reasonably estimated.
Customer billing occurs in accordance with contract terms. Customer
advances and amounts billed to customers in excess of revenue recognized are
recorded as deferred revenue. Amounts recognized as revenue in advance of
billing (typically under percentage-of-completion accounting) are recorded as
unbilled receivables.
RESEARCH AND DEVELOPMENT COSTS
Expenditures for research and development are charged to expense as
incurred. Under Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
certain software development costs are capitalized after technological
feasibility has been established. Development costs incurred in the period
between achievement of technological feasibility, which the Company defines as
the establishment of a working model, until the general availability of such
software to customers, has been short and software development costs qualifying
for capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs to date.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price.
Unearned compensation is amortized and expensed in accordance with Financial
Accounting Standards Board ("FASB") Interpretation No. 28. The Company accounts
for stock issued to non-employees in accordance with the provisions of SFAS No.
123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity
F-16
<PAGE> 152
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
The Company uses the Black-Scholes option pricing model to value options
granted to consultants. The related expense is recorded on the option grant date
as the options are fully vested at such time.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred and totaled $238,000, $92,000,
and $339,000 during the years ended March 31, 1997, 1998 and 1999, respectively.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
COMPREHENSIVE INCOME
Effective April 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. To date, the Company has not had any significant transactions that are
required to be reported in comprehensive income.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128")
and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the provisions of
SFAS No. 128 and SAB No. 98, basic and diluted net loss per share is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of shares of Common Stock outstanding during the period.
The calculation of diluted net loss per share excludes potential shares of
Common Stock if the effect is antidilutive. Potential shares of Common Stock
consist of unvested restricted Common Stock, incremental shares of Common Stock
issuable upon the exercise of stock options and warrants and shares issuable
upon conversion of the Series A, Series B, Series C, Series D and Series E
Mandatorily Redeemable Convertible Preferred Stock.
F-17
<PAGE> 153
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
---------------------------- -------------------
1997 1998 1999 1998 1999
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss......................... $(6,900) $(5,499) $(15,261) $ (6,557) $(11,188)
======= ======= ======== ======== ========
Denominator:
Weighted average shares........ 5,755 8,136 10,327 10,299 11,483
Weighted average unvested
shares of Common Stock
subject to repurchase....... (2,507) (3,057) (3,617) (3,996) (2,299)
------- ------- -------- -------- --------
Denominator for basic and
diluted calculation......... 3,248 5,079 6,710 6,303 9,184
======= ======= ======== ======== ========
Net loss per share:
Basic and diluted.............. $ (2.12) $ (1.08) $ (2.27) $ (1.04) $ (1.21)
======= ======= ======== ======== ========
</TABLE>
The following table sets forth potential shares of Common Stock that are
not included in the diluted net loss per share calculation above because to do
so would be anti-dilutive for the periods indicated (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------ ---------------
1997 1998 1999 1998 1999
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average effect of Common Stock
equivalents:
Series A Preferred Stock............... 6,000 6,000 6,000 6,000 6,000
Series B Preferred Stock............. 2,940 3,600 3,600 3,600 3,600
Series C Preferred Stock............. -- 1,441 2,083 2,083 2,083
Series D Preferred Stock............. -- -- 766 277 1,256
Series E Preferred Stock............. -- -- 1,530 373 2,688
Preferred Stock warrants............. 49 124 133 133 133
Preferred Stock options.............. -- -- 24 10 29
Unvested shares of Common Stock
subject to repurchase............. 2,507 3,057 3,617 3,996 2,299
Common Stock options................. 2,037 1,646 2,245 1,726 4,959
------ ------ ------ ------ ------
13,533 15,868 19,998 18,198 23,047
====== ====== ====== ====== ======
</TABLE>
F-18
<PAGE> 154
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended March 31, 1999 and the six
months ended September 30, 1999 is computed using the weighted average number of
shares of Common Stock outstanding, including the pro forma effects of the
automatic conversion of the Company's Series A, Series B, Series C, Series D
(excluding approximately 4,422 and 2,287, weighted average repurchasable shares
at March 31, 1999 and September 30, 1999, respectively) and Series E Mandatorily
Redeemable Convertible Preferred Stock into shares of the Company's Common Stock
effective upon the closing of the Company's initial public offering as if such
conversion occurred on April 1, 1998, or at the date of original issuance, if
later. The resulting pro forma adjustment includes an increase of 13,979,000 in
the weighted average shares used to compute basic net loss per share for the
year ended March 31, 1999 and 15,628,000 increase for the six months ended
September 30, 1999. The calculation of diluted net loss per share excludes
potential shares of Common Stock as their effect would be antidilutive. Pro
forma potential shares of Common Stock consist of unvested Common Stock subject
to repurchase rights and incremental shares of Common Stock issuable upon the
exercise of stock options and warrants.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP
No. 98-1"). SOP No. 98-1 will become effective during the year ending March 31,
2000. SOP No. 98-1 provides guidance on accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The Company does not expect the
adoption of SOP No. 98-1 to have a material effect on the Company's results of
operations, financial position or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133").
This statement establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 will become effective during
the year ending March 31, 2001. The adoption of SFAS No. 133 is not expected to
have a material effect on the Company's results of operations, financial
position or cash flows.
F-19
<PAGE> 155
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- ACQUISITION OF FIRSTFLOOR SOFTWARE, INC.:
As discussed in Note 1, the Company completed the acquisition of all
outstanding capital stock of FirstFloor on August 21, 1998. The transaction was
completed pursuant to the Agreement and Plan of Reorganization, dated as of June
23, 1998 among the Company, Calico Acquisition Corporation, FirstFloor and
certain stockholders of Calico and certain shareholders of FirstFloor. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of FirstFloor have been
included in the Company's consolidated financial statements since the
acquisition date.
The purchase consideration included 1,248,423 shares of Series D
Mandatorily Redeemable Convertible Preferred Stock valued at approximately
$5,690,000. In addition, all of the outstanding stock options granted under the
FirstFloor 1993 Stock Option Plan were converted into stock options to purchase
47,203 shares of the Company's Series D Mandatorily Redeemable Convertible
Preferred Stock at $4.558 per share. The Black-Scholes option pricing model was
used to determine the fair value of the converted options. The fair value of the
stock options, of approximately $122,000, was included as a component of the
purchase price. The Company also incurred approximately $250,000 in acquisition
expenses.
The total purchase price of $6.1 million was allocated to assets acquired,
including tangible and intangible assets, and liabilities assumed, based on
their respective estimated fair values at the acquisition date. The estimate of
fair value of the net assets acquired is based on an independent appraisal and
management estimates.
The total purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of tangible assets............................... $ 360
Fair value of existing products and core technology......... 1,547
Acquired in-process research and development................ 1,840
Goodwill.................................................... 4,266
Fair value of liabilities assumed........................... (1,951)
-------
$ 6,062
=======
</TABLE>
The acquisition was structured as a tax free exchange of stock, therefore,
the differences between the recognized fair values of acquired net assets, and
their historical tax bases are not deductible for tax purposes. Accordingly, a
deferred tax liability has been recognized for the differences between the
assigned value of intangible assets (excluding goodwill) for book purposes and
the tax basis of such assets in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition, the Company acquired one existing
product and two in-process projects. The existing product provides customers
with the ability to automatically update their sales force with the latest
information. The first acquired in-process project, a marketing information
delivery system, is a complete rewrite of the acquired product, and replaced the
product
F-20
<PAGE> 156
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
upon its release. While the solution remains the same, the functionality has
been completely reengineered. This development effort increased the product's
utility as well as its scalability on larger intranets, which increases the
possible number of users, and provides a variety of data sources instead of just
one central database. The second in-process project, a personalization solution,
provides customers with the ability to obtain in-depth information and critical
data needed to build stronger customer relationships with the objective of
increasing revenue and reducing sales cost.
In connection with the acquisition, the Company recorded a $1.8 million
charge in the year ended March 31, 1999 for acquired in-process research and
development. This represents the value of purchased in-process research and
development on projects that have not yet reached technological feasibility and
have no alternative future use.
The amount of purchase price allocated to in-process research and
development was determined using appropriate valuation techniques, including
percentage-of-completion which utilizes research and development cost metrics
and key milestones to estimate the stage of development of each in-process
research and development project at the date of acquisition, estimating cash
flows resulting from the expected revenues generated from such projects, and
discounting the net cash flows back to their present value. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the purchased in-process technology. The remaining
identified intangibles, including the value of acquired existing products and
core technology, will be amortized over the periods of benefit ranging from
seven to 36 months.
The value assigned to acquired in-process research and development was
determined by identifying the two specific research and development projects
discussed above, for which technological feasibility had not been established.
The first project reached technological feasibility and was commercially
released in December 1998. The second project reached technological feasibility
and was commercially released in May 1999. In assigning value to the in-process
projects, consideration was given, as appropriate, to the stage of completion,
the complexity of the work completed to date, the difficulty of completing the
remaining development, costs already incurred and the projected cost to complete
the projects, adjusting for the relative value and contribution of the core
technology. The value assigned to acquired in-process research and development
was based on the assumptions set forth in the following paragraph.
Net cash flows from such projects were determined based on the Company's
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes associated with such
projects. Revenue growth rates for each technology was developed considering,
among other things, the current and expected industry trends, acceptance of the
technologies and historical growth rates for similar industry products.
Estimated total revenue from the acquired in-process research and development
projects are expected to generally peak in fiscal year 2000 and decline through
fiscal year 2001 as other new products are expected to be introduced. These
revenue projections were based on management's estimates of market size and
growth, expected trends in technology and the expected timing of new product
introductions. The Company assumed no synergies as a result of the acquisition
and the revenue projections are within the historical growth rates of FirstFloor
product introductions. Projected gross margins for the marketing delivery system
and personalization solution averaged 74% and 69%, respectively, over the
estimated product lives. The estimated selling, general and administrative costs
for the marketing delivery system and the personalization solution averaged 41%
and 47%, respectively, as a percentage of revenue over the estimated product
lives, and are consistent with FirstFloor's historical operating cost
F-21
<PAGE> 157
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
structure. The estimated net cash flows of each project were discounted back to
their present value using discount rates of 30% and 40%, respectively, which
represent premiums over the Company's cost of capital of 20% to reflect the risk
associated with the stage of completion of the in-process technologies. The
estimated percentage-of-completion of the in-process research and development
projects were 82% and 47%, respectively.
The actual development timeline and costs of approximately $200,000 for the
marketing information delivery system and approximately $1.2 million for the
personalization solution were in line with the estimates used to compute the
estimated percentage-of-completion used in the valuation of the in-process
research and development projects. These products were just recently released
and it is too premature to compare the actual revenues with those projected. To
date, management's cash flow and other assumptions have not materially changed.
CORE TECHNOLOGY
The amount of purchase price allocated to acquired core technology was
determined based upon royalty streams that were assigned as revenue to such
technology, recognizing the value of that core technology to the expected
product resulting from the in-process research and development. Royalty rates
were developed based on published documentation of royalty rates and the
specific facts and circumstances, and in Calico's view, are considered
reasonable approximations of fair value rates for the respective types of
technology under exclusive, perpetual, worldwide licenses.
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The following table presents the unaudited pro forma consolidated results
of operations of the Company for the years ended March 31, 1998 and 1999 as if
the acquisition had been consummated at the beginning of each fiscal year. The
pro forma consolidated results of operations include certain pro forma
adjustments, including the amortization of intangible assets and the elimination
of the charge related to in-process research and development.
Pro forma basic net loss per share for each year presented is computed
using the weighted average number of common shares outstanding, including the
pro forma effects of the automatic conversion of the Company's Series A, Series
B, Series C and Series E Mandatorily Redeemable Convertible Preferred Stock into
shares of the Company's Common Stock effective upon the closing of the Company's
initial public offering as if such conversion occurred at the beginning of each
fiscal year, or at date of original issuance, if later. The shares of Series D
Mandatorily Redeemable Convertible Preferred Stock, issued as consideration for
the acquisition, are assumed to be converted into the Company's Common Stock
under the automatic conversion feature and outstanding at the beginning of each
fiscal year. Pro forma diluted net loss per share excludes potential shares of
Common Stock, consisting of options and warrants, as their effect would be
antidilutive.
The unaudited pro forma consolidated results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would
have occurred had the acquisition
F-22
<PAGE> 158
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
occurred at the beginning of the periods presented or the results which may
occur in the future (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Net revenues.............................................. $ 13,577 $ 21,737
Net loss.................................................. (12,221) (16,305)
Net loss per share:
Basic and diluted....................................... (0.72) (0.79)
</TABLE>
NOTE 3 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1998 1999 1999
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable............................ $2,518 $ 8,561 $ 8,761
Unbilled receivables......................... 1,714 571 1,057
Allowance for doubtful accounts.............. (580) (659) (1,109)
Allowance for sales returns.................. (700) (1,030) (958)
------ ------- -------
$2,952 $ 7,443 $ 7,751
====== ======= =======
</TABLE>
Write-offs of accounts receivable charged against the allowance for
doubtful accounts were $0, $0 and $121,000 for the years ended March 31, 1997,
1998 and 1999 and $0 for the nine months ended September 30, 1999, respectively.
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1998 1999 1999
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment and software................ $2,534 $ 3,878 $ 5,733
Furniture, fixtures and leasehold
improvements.............................. 291 1,223 1,034
------ ------- -------
2,825 5,101 6,767
Less: Accumulated depreciation and
amortization.............................. (978) (2,569) (3,004)
------ ------- -------
$1,847 $ 2,532 $ 3,763
====== ======= =======
</TABLE>
Property and equipment includes $395,000, $700,000 and $700,000 of computer
and office equipment under capital leases at March 31, 1998 and 1999 and
September 30, 1999, respectively. Accumulated depreciation of assets under
capital leases totaled $209,000, $360,000 and $485,000 at March 31, 1998 and
1999 and September 30, 1999, respectively.
F-23
<PAGE> 159
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1998 1999 1999
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
INTANGIBLE AND OTHER ASSETS, NET:
Existing and core technology................... $ -- $ 1,547 $ 1,547
Goodwill..................................... -- 4,329 4,329
------ ------- -------
-- 5,876 5,876
Less: Accumulated amortization............... -- (1,341) (2,222)
------ ------- -------
$ -- $ 4,535 $ 3,654
====== ======= =======
ACCRUED LIABILITIES:
Accrued compensation and benefits............ $ 379 $ 1,149 1,359
Accrued commissions.......................... 540 1,573 1,649
Other........................................ 894 2,726 3,723
------ ------- -------
$1,813 $ 5,448 $ 6,731
====== ======= =======
</TABLE>
NOTE 4 -- BORROWINGS:
NOTES PAYABLE
Notes payable consist of amounts payable to an equipment financing company
and bank and are collateralized by the underlying assets as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------
1998 1999
----- ------
<S> <C> <C>
7% note; principal and interest payable monthly; matures
June 2000................................................. $ 368 $ 236
7% note; principal and interest payable monthly; matures
August 2000................................................. 179 120
7% note; principal and interest payable monthly; matures
October 2000.............................................. 90 63
Bank prime (7.75% at March 31, 1999) plus 0.5% note;
principal and interest payable monthly; matures March
2001...................................................... 337 230
Bank prime (7.75% at March 31, 1999) plus 0.5% note;
principal and interest payable monthly; matures May
2001...................................................... -- 121
Bank prime (7.75% at March 31, 1999) plus 0.5% note;
principal and interest payable monthly; matures September
2001...................................................... -- 218
Bank prime (7.75% at March 31, 1999) plus 0.5% note;
principal and interest payable monthly; matures February
2002...................................................... -- 340
----- ------
974 1,328
Less: current portion of notes payable...................... (330) (628)
----- ------
Notes payable, non-current.................................. $ 644 $ 700
===== ======
</TABLE>
Under the bank prime plus 0.5% notes above, the Company is required to meet
certain monthly and quarterly financial tests, including minimum operating
results and certain liquidity, leverage and debt service ratios. At March 31,
1999 and through August 31, 1999, the Company was not in compliance with the
minimum operating results covenant and other monthly financial tests. The
Company obtained a waiver for the periods in which it was in default.
F-24
<PAGE> 160
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum principal payments under the notes at March 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
2000........................................................ $ 628
2001...................................................... 538
2002...................................................... 162
2003...................................................... --
------
Total payments......................................... $1,328
======
</TABLE>
NOTE 5 -- INCOME TAXES:
At March 31, 1999, the Company had approximately $12,093,000 of federal and
$9,731,000 of state net operating loss carryforwards available to offset future
taxable income which expire in varying amounts beginning in 2011 and 2003,
respectively. At March 31, 1999, the Company had approximately $389,000 of
federal and $301,000 of state research and development credit carryforwards
available to offset future taxable income which expire in varying amounts
beginning in 2011 and indefinitely, respectively. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%,
as defined, over a three year period. Due to cumulative ownership changes, at
March 31, 1999, the net operating loss carryforwards will be limited to
approximately $6,000,000 annually to offset future taxable income.
Deferred taxes are composed of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Depreciation................................................ $ -- $ 250
Other accruals and liabilities......................... 725 3,146
Net operating loss and credit carryforwards............ 4,460 5,399
------- -------
5,185 8,795
Less: Valuation allowance................................. (5,134) (8,795)
------- -------
$ 51 $ --
======= =======
Deferred tax liabilities:
Non-deductible intangible assets....................... $ -- $ 531
Depreciation........................................... 51 --
------- -------
$ 51 $ 531
======= =======
</TABLE>
The acquisition of FirstFloor was structured as a tax-free exchange of
stock, therefore, the differences between the recognized fair values of acquired
net assets and their historical tax bases are not deductible for tax purposes. A
deferred tax liability has been recognized for the differences
F-25
<PAGE> 161
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
between the assigned fair values of intangible assets (excluding goodwill) for
book purposes and the tax bases of such assets.
For financial reporting purposes the Company has incurred a loss in each
period since its inception. Based on the available objective evidence, including
the Company's history of losses, management believes it is more likely than not
that the net deferred tax assets will not be fully realizable. Accordingly, the
Company has provided a full valuation allowance against its net deferred tax
assets at March 31, 1998 and 1999. The Company's operating losses are generated
domestically and amounts attributable to its foreign operations have been
insignificant for all periods presented. A reconciliation between the amount of
income tax benefit determined by applying the applicable U.S. statutory income
tax rate to pre-tax loss is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate..................................... (35)% (35)% (35)%
State tax, net of federal impact........................... (6) (6) (6)
Provision for valuation allowance on deferred tax assets... 41 36 26
Permanent differences...................................... -- 5 15
--- --- ---
--% --% --%
=== === ===
</TABLE>
NOTE 6 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Mandatorily Redeemable Convertible Preferred Stock ($0.001 par value) at
March 31, 1999 was comprised of the following (in thousands):
<TABLE>
<CAPTION>
SHARES
------------------------- LIQUIDATION REDEMPTION
AUTHORIZED OUTSTANDING AMOUNT AMOUNT
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Series A....................... 6,045 6,000 $16,000 $ 3,942
Series B....................... 3,692 3,600 23,040 5,729
Series C....................... 2,084 2,084 13,334 4,952
Series D....................... 1,298 1,254 8,035 5,695
Series E....................... 2,694 2,688 17,203 12,217
Undesignated................... 36 -- -- --
------ ------ ------- -------
15,849 15,626 $77,612 $32,535
====== ====== ======= =======
</TABLE>
Of the 1,254,128 shares of Series D Mandatorily Redeemable Convertible
Preferred Stock outstanding at March 31, 1999, 3,762 were subject to repurchase.
The holders of Series A, Series B, Series C, Series D and Series E
Mandatorily Redeemable Convertible Preferred Stock, have certain rights as
follows:
VOTING
Each share of Series A, Series B, Series C, Series D and Series E
Mandatorily Redeemable Convertible Preferred Stock has voting rights equal to an
equivalent number of shares of Common Stock into which it is convertible and
votes together as one class with the Common Stock.
F-26
<PAGE> 162
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DIVIDENDS
Holders of Series A, Series B, Series C, Series D and Series E Mandatorily
Redeemable Convertible Preferred Stock are entitled to receive noncumulative
annual dividends of $0.03, $0.08, $0.12, $0.20 and $0.23 per share,
respectively, when and if declared by the Board of Directors. The holders of
Series A, Series B, Series C, Series D and Series E Mandatorily Redeemable
Convertible Preferred Stock will also be entitled to participate in dividends on
Common Stock, when and if declared by the Board of Directors, based on the
number of shares of Common Stock into which the Mandatorily Redeemable
Convertible Preferred Stock is convertible. As of March 31, 1999, no dividends
on Mandatorily Redeemable Convertible Preferred Stock or Common Stock have been
declared or paid.
LIQUIDATION
In the event of any liquidation, dissolution, winding up of affairs, merger
or other business combination where the stockholders of the Company retain less
than a majority of the voting power in the surviving entity, the holders of
Series A, Series B, Series C, Series D and Series E Mandatorily Redeemable
Convertible Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Company to the holders of the Common Stock, the amounts of $0.67, $1.60, $2.40,
$4.558 and $4.558 per share, respectively, adjusted for any stock split, stock
dividends, or the like, plus all declared but unpaid dividends. Thereafter, the
holders of Mandatorily Redeemable Convertible Preferred Stock and Common Stock
share proceeds pro rata, on an as-converted basis, until holders of Series A
Mandatorily Redeemable Convertible Preferred Stock have recovered an amount of
$2.67 per share and holders of Series B, Series C, Series D and Series E
Mandatorily Redeemable Convertible Preferred Stock have recovered an amount of
$6.40 per share. All further proceeds shall be distributed to the holders of
Common Stock.
REDEMPTION
Holders of two-thirds of the Series A, Series B, Series C and Series E
Mandatorily Redeemable Convertible Preferred Stock may require the Company to
redeem the respective series of Mandatorily Redeemable Convertible Preferred
Stock at any time. The redemption price for the Series A, Series B, Series C and
Series E Mandatorily Redeemable Convertible Preferred Stock shall be $0.67,
$1.60, $2.40 and $4.558 per share, respectively, adjusted for any stock split,
stock dividends, or the like, plus all declared but unpaid dividends.
Holders of two-thirds of the Series D Mandatorily Redeemable Convertible
Preferred Stock may require the Company to redeem the respective series of
Mandatorily Redeemable Convertible Preferred Stock if the requisite percentage
of Series A, Series B, Series C, and Series E Mandatorily Redeemable Convertible
Preferred Stock have previously requested redemption. The redemption price for
the Series D Mandatorily Redeemable Convertible Preferred Stock shall be $4.558
per share adjusted for any stock split, stock dividends, or the like, plus all
declared but unpaid dividends.
CONVERSION
Each share of Series A, Series B, Series C, Series D and Series E
Mandatorily Redeemable Convertible Preferred Stock is convertible, at the option
of the stockholder, into the number of shares
F-27
<PAGE> 163
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Common Stock according to a conversion ratio, subject to antidilution. The
initial share price of the Mandatorily Redeemable Convertible Preferred Stock
used in the conversion ratio shall be $0.67, $1.60, $2.40, $4.558 and $4.558 per
share for Series A, Series B, Series C, Series D and Series E Mandatorily
Redeemable Convertible Preferred Stock, respectively.
Automatic conversion will occur upon the consummation of an underwritten
public offering priced in excess of $4.80 per share and with total proceeds in
excess of $15,000,000. The Series A, Series B, Series D and Series E Mandatorily
Redeemable Convertible Preferred Stock shall automatically convert upon written
consent of a majority of the holders of Series A, Series B, Series D and Series
E Mandatorily Redeemable Convertible Preferred Stock, together. The Series C
Mandatorily Redeemable Convertible Preferred Stock shall automatically convert
upon written consent of a majority of the Series C stockholders.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK OPTIONS AND WARRANTS
In connection with certain financing arrangements, the Company issued
warrants to purchase shares of the Company's Mandatorily Redeemable Convertible
Preferred Stock to a capital lessor and lender. These warrants were immediately
exercisable after issuance. The Company estimated the fair value of the warrants
using the Black-Scholes option pricing model. The Company records the expense
related to the warrants over the life of the associated financing instrument as
additional interest expense. The following table summarizes the outstanding
warrants:
<TABLE>
<CAPTION>
EXERCISE ESTIMATED FISCAL YEAR
DATE OF GRANT SHARES PRICE FAIR VALUE OF EXPIRATION
------------- ------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Series A Preferred Stock
warrants................. December 1995 42,000 $0.67 $10,000 2003
Series B Preferred Stock
warrants................... January 1997 34,999 1.60 25,000 2005
Series B Preferred Stock
warrants................. June 1997 56,250 1.60 53,000 2008
</TABLE>
In connection with the acquisition of FirstFloor in August 1998, the
Company exchanged the options granted under the FirstFloor 1993 Stock Option
Plan into options to purchase 47,203 shares of Company's Series D Mandatorily
Redeemable Convertible Preferred Stock. These options had a weighted average
exercise price of $2.63 per share. At March 31, 1999, 33,354 of such options
were outstanding with a weighted average exercise price of $2.70 per share. The
options expire upon the earlier of the respective employee termination or 10
years from grant date. See Note 2.
NOTE 7 -- COMMON STOCK:
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 150,000,000 shares of $0.001 par value Common Stock.
On March 5, 1999, the Company sold 1,052,632 shares of Common Stock to a
third party for $9.50 per share.
Certain Common Stock option holders have the right to exercise unvested
options, subject to a repurchase right held by the Company, in the event of
voluntary or involuntary termination of
F-28
<PAGE> 164
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employment of the stockholder. As of March 31, 1999, approximately 2,670,712
shares of outstanding Common Stock were subject to repurchase by the Company at
the original exercise price. Of the 2,670,712 shares of unvested restricted
Common Stock repurchaseable, 2,583,212 are available for reissuance under the
1997 Stock Option Plan. As of June 30, 1999 (unaudited), approximately 2,300,274
shares of Common Stock were subject to repurchase by the Company at the original
exercise price, all of which are available for reissuance under the 1997 Stock
Option Plan.
At March 31, 1999, the Company had reserved shares of Common Stock for
future issuance as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
Conversion of Series A Preferred Stock and warrants......... 6,045
Conversion of Series B Preferred Stock and warrants......... 3,692
Conversion of Series C Preferred Stock...................... 2,084
Conversion of Series D Preferred Stock and options.......... 1,298
Conversion of Series E Preferred Stock...................... 2,694
Exercise of options under stock option plans................ 8,199
Undesignated................................................ 125,988
</TABLE>
NOTE 8 -- EMPLOYEE BENEFIT PLANS:
401(K) SAVINGS PLAN
The Company sponsors a 401(k) defined contribution plan covering eligible
employees who elect to participate. The Company may elect to contribute matching
and discretionary contributions to the plan; however, no contributions were made
by the Company since the inception of the plan.
STOCK OPTION PLANS
In July 1995 and April 1997, the Board of Directors adopted the 1995 Stock
Option Plan and 1997 Stock Option Plan, respectively, (collectively, the
"Plans") which provide for the issuance of incentive and nonstatutory stock
options to employees, officers, directors, and consultants of the Company. The
Company has reserved 14,715,000 shares of Common Stock for issuance under the
Plans. The share reserve will automatically be increased on the first day of
each fiscal year beginning on or after April 1, 2001 by an amount equal to 5% of
the number of shares of the Company's Common Stock which were issued and
outstanding on the last day of the preceding fiscal year.
Options under the Plans are generally for periods not to exceed ten years,
and must be issued at prices not less than 100% and 85%, for incentive and
nonstatutory stock options, respectively, of the estimated fair value of the
underlying shares of Common Stock on the date of grant as determined by the
Board of Directors. Options granted to stockholders who own greater than 10% of
the outstanding stock are for periods not to exceed five years, and must be
issued at prices not less than 110% of the estimated fair value of the
underlying shares of Common Stock on the date of grant. The plan provides for
grants of immediately exercisable options, however, the Company has the right to
repurchase any unvested Common Stock upon termination of employment at the
original exercise price. Options become exercisable at such times and under such
conditions as determined by the
F-29
<PAGE> 165
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Board of Directors. Options generally vest over four years. The Board of
Directors has determined that no further options will be granted under the 1995
Option Plan.
In December 1998, the Company granted immediately exercisable options to a
charitable organization to purchase 15,000 shares of Common Stock at an exercise
price of $4.50 per share. The Company recorded a charge associated with these
options of $45,000, measured using the Black-Scholes option pricing model, which
is included in the total stock-based compensation charge for the year ended
March 31, 1999.
EMPLOYEE STOCK PURCHASE PLAN
In July 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"), subject to stockholder approval. There are
750,000 shares of Common Stock reserved for issuance under the Purchase Plan,
none of which has yet been issued. Employees generally will be eligible to
participate in the Purchase Plan if they are customarily employed by the Company
for more than 20 hours per week and more than five months in a fiscal year.
Under the Purchase Plan, eligible employees may select a rate of payroll
deduction up to 15% of their compensation, but may not purchase more than 750
shares on any purchase date or stock having a value measured at the beginning of
the offering period greater than $25,000 in any calendar year. The first
Offering Period commences on the date of the prospectus, will run for
approximately 24 months and will be divided into four consecutive purchase
periods of approximately six months. Offering Periods and Purchase Periods
thereafter will begin on May 1 and November 1 of each year. The price at which
the Common Stock is purchased under the Purchase Plan is 85% of the lower of the
fair market value of the Company's Common Stock on the first day of the
applicable Offering Period or on the last day of that Purchase Period.
F-30
<PAGE> 166
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock option activity under the Plans and
non -- plan options (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT OPTIONS PRICE
--------- --------- --------
<S> <C> <C> <C>
Balance at March 31, 1996....................... 669 3,873 $0.07
Additional shares authorized.................... 315 -- --
Options granted................................. (804) 804 0.12
Options exercised............................... -- (2,823) 0.07
Options canceled................................ 414 (414) 0.09
------ ------
Balance at March 31, 1997....................... 594 1,440 0.09
Additional shares authorized.................... 3,393 -- --
Options granted................................. (3,847) 3,847 0.41
Repurchase of restricted Common Stock........... 303 -- 0.07
Options exercised............................... -- (2,936) 0.24
Options canceled................................ 411 (411) 0.14
------ ------
Balance at March 31, 1998....................... 854 1,940 0.49
Additional shares authorized.................... 6,465 -- --
Options granted................................. (3,688) 3,688 4.59
Repurchase of restricted Common Stock........... 466 -- 0.23
Options exercised............................... -- (1,526) 1.19
Options canceled................................ 605 (605) 0.69
------ ------
Balance at March 31, 1999....................... 4,702 3,497 4.47
Options granted (unaudited)..................... (3,586) 3,586 10.46
Repurchase of restricted Common Stock
(unaudited)................................... 42 -- 2.15
Options exercised (unaudited)................... -- (194) 2.46
Options canceled (unaudited).................... 258 (258) 5.00
------ ------
Balance at September 30, 1999 (unaudited)....... 1,416 6,631 7.75
====== ======
</TABLE>
F-31
<PAGE> 167
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the information about stock options
outstanding and exercisable as of March 31, 1999 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND
--------------------------------------- EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.07 -- $0.83....... 432 7.9 $0.34 215 $0.23
1.00 -- 2.63....... 805 8.9 2.30 14 1.19
2.67 -- 3.17....... 660 9.4 3.02 11 3.11
4.50 -- 9.50....... 1,600 9.8 7.28 62 5.23
----- ---
3,497 9.3 4.47 302 1.40
===== ===
</TABLE>
The following table summarizes the information about stock options
outstanding and exercisable as of September 30, 1999 (unaudited) (shares in
thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND
--------------------------------------- EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.07 -- $ 0.83...... 311 7.5 $0.35 177 $ 0.25
1.00 -- 2.63...... 687 8.3 2.33 266 2.40
2.67 -- 3.17...... 613 8.9 3.02 114 2.96
4.50 -- 12.00...... 5,020 9.6 9.53 102 7.00
----- ---
6,631 9.3 7.75 659 2.64
===== ===
</TABLE>
F-32
<PAGE> 168
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE DISCLOSURE
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed by SFAS
No. 123 with the following underlying assumptions:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------- --------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Stock option plans:
Dividend yield......................... -- -- -- -- --
Expected volatility.................. -- -- -- -- --
Average risk free interest rate...... 5.87% 6.06% 4.72% 4.72% 5.90%
Expected life (in years)............. 4 4 4 4 4
Weighted average fair value of
options granted................... $0.03 $0.11 $1.22 $0.72 $3.37
</TABLE>
PRO FORMA NET LOSS
Had the Company recorded compensation based on the estimated grant date
fair value, as defined by SFAS No. 123, for awards granted under its Plans, the
Company's net loss would have been increased to the pro forma amounts below for
the fiscal years ended March 31, 1997, 1998 and 1999, and the six months ended
September 30, 1998 and 1999, respectively, (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss as reported....... $(6,900) $(5,499) $(15,261) $(6,557) $(11,188)
Pro forma net loss......... (6,914) (5,546) (16,207) (6,790) (13,582)
Net loss per share as
reported................. (2.12) (1.08) (2.27) (1.04) (1.21)
Pro forma net loss per
share.................... (2.12) (1.08) (2.41) (1.08) (1.48)
</TABLE>
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
option grants on reported net income for future years.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants during the year ended March
31, 1998 and 1999, the Company recorded unearned compensation cost totaling
$2,746,000 and $2,854,000, respectively, which is being recognized over the
vesting periods of the related options, usually four years.
F-33
<PAGE> 169
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- RELATED PARTY TRANSACTIONS:
In exchange for the issuance of Common Stock upon the exercise of options
in the years ended March 31, 1998 and 1999, the Company received notes
receivable from certain employees of the Company which bear simple interest at
various rates ranging from 5.54% to 6.65% per annum. The notes, which are
collateralized by the underlying shares of Common Stock, are full recourse and
mature on various dates through fiscal 2002.
In connection with the offering of the Series B Mandatorily Redeemable
Convertible Preferred Stock, a founder exchanged 600,000 shares of Common Stock
for 600,000 shares of Series B Mandatorily Redeemable Convertible Preferred
Stock. The Company recognized the difference between the original issue price of
the Series B Mandatorily Redeemable Convertible Preferred Stock and the
estimated fair value of the shares of Common Stock on the date of exchange of
$864,000 as compensation expense for the year ended March 31, 1997.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
CAPITAL LEASES
In January 1996, the Company entered into a lease financing agreement that
provides for the lease of computers and office equipment up to $400,000,
collateralized by the underlying assets. Equipment financed under this agreement
is subject to repayment at various times through October 2000. At March 31,
1999, purchases of computers and office equipment under this agreement totaled
$395,000.
In September 1998, the Company entered into a lease financing agreement
that provides for the lease of office equipment of $136,000, collateralized by
the underlying assets. Equipment financed under this agreement is subject to
repayment through January 2003. At March 31, 1999, purchases of office equipment
under this agreement totaled $136,000.
In connection with the FirstFloor acquisition, the Company assumed an
equipment financing agreement entered into in March 1997 which provides for the
lease of office equipment of up to $360,000, in one or more leases. Each lease
is repayable over 36 months and is secured by a first priority security interest
in certain assets of the Company. At March 31, 1999, the fair value of office
equipment purchased under this agreement totaled $169,000.
OPERATING LEASES
The Company leases office space and equipment under certain noncancellable
operating leases expiring through the year 2004. Total rent expense was
$286,000, $580,000, and $1,141,000 for the years ended March 31, 1997, 1998 and
1999, respectively.
As a part of an approved plan, the Company relocated its corporate
headquarters to a new leased facility in August 1998. As a result, the Company
recorded a charge, classified in general and administrative expenses, of
approximately $660,000 for the minimum lease payments committed under the
previous leased facility and losses on the disposal of certain fixed assets in
the quarter ended September 30, 1998. At March 31, 1999, there was approximately
$230,000 of minimum lease payments remaining.
F-34
<PAGE> 170
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LETTER OF CREDIT
At March 31, 1999, the Company maintained a $296,000 letter of credit to
secure the lease deposit on its corporate headquarters. The letter of credit
expires on October 31, 1999, and is included in other current assets.
Future minimum payments under noncancelable operating and capital leases at
March 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
MARCH 31, LEASES LEASES
- ----------- ------- ---------
<S> <C> <C>
2000........................................................ $305 $1,129
2001...................................................... 135 374
2002...................................................... 41 52
2003...................................................... 30 7
2004...................................................... -- 5
---- ------
Total minimum lease obligations........................ 511 $1,567
======
Less: Amount representing interest.......................... (78)
----
Present value of minimum lease obligations.................. 433
Less: Current portion....................................... (256)
----
Capital lease obligations, non-current...................... $177
====
</TABLE>
CONTINGENCIES
From time to time, in the normal course of business, various claims are
made against the Company. In the opinion of management, based on consultation
with legal counsel, there are no pending claims for which the outcome is
expected to result in a material adverse effect on the financial position or
results of operations of the Company.
NOTE 11 -- INFORMATION CONCERNING BUSINESS SEGMENTS:
The Company operates in one single industry segment. The Company does not
have separate operating segments for which discrete financial statements are
prepared. The Company's management makes operating decisions and assesses
performance primarily based upon product revenues and related gross margins.
The majority of the Company's sales to other foreign countries are
originated in the United States and therefore represent export sales. The
following is a breakdown of revenues by shipment destination for the years ended
March 31, 1997, 1998 and 1999, respectively:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
---------------------------- -------------------
1997 1998 1999 1998 1999
------ ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States.................. $5,903 $11,827 $20,108 $9,837 $13,836
Other foreign countries........ -- 32 1,305 101 1,773
------ ------- ------- ------ -------
$5,903 $11,859 $21,413 $9,938 $15,609
====== ======= ======= ====== =======
</TABLE>
F-35
<PAGE> 171
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- SUBSEQUENT EVENTS:
INITIAL PUBLIC OFFERING
In July 1999, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its Common Stock to the public.
On September 3, 1999, the Company entered into an agreement to sell $20.0
million worth of shares of Common Stock to Dell U.S.A., L.P. in a private
placement, representing 1,536,000 shares of common stock at $13.02 per share.
The private placement is contingent upon the consummation of the initial public
offering.
On September 29 1999, the Company entered into an agreement to sell $4.0
million worth of shares of Common Stock to Andersen Consulting LLP in a private
placement, representing 307,200 shares of Common Stock at $13.02 per share. The
private placement is contingent upon the consummation of the initial public
offering. The Company has agreed to appoint a representative of Andersen
Consulting to its Board of Directors upon the closing of this private placement.
Additionally, on September 16, 1999, the Company entered into a consulting
services agreement and a joint marketing agreement with Andersen Consulting.
Pursuant to the consulting services agreement, the Company has a binding
commitment to purchase $1.0 million of consulting services over the next 18
months, to include the creation of prototypes and external presentations,
development of training materials, product testing and other activities
supporting the Company's future product releases. Pursuant to the joint
marketing agreement, Andersen Consulting acquires rights to market integration
services related to the Company's software and the Company agrees to promote
Andersen Consulting as the preferred integrator of the Company's software.
STOCK SPLIT
On August 24, 1999, the Board of Directors of the Company approved a
3-for-2 stock split of the Company's outstanding Common Stock. Share and per
share information for all periods presented has been retroactively adjusted to
reflect the stock split.
STOCK OPTION GRANTS
During the period from April 1, 1999 through September 28, 1999, the
Company granted stock options to employees to purchase an aggregate of 3,586,049
shares of Common Stock ranging from $9.50 to $12.00 per share. The Company has
not recorded any deferred compensation relative to these grants.
WARRANTS
In September 1999, the Company entered into a commitment with a bank to
issue variable rate installment notes in connection with a proposed $3.0 million
equipment financing credit line expiring June 30, 2000, which the Company
expects to complete in October 1999. The loan bears interest at the bank's prime
rate plus 0.50% per year, and interest is repayable only during the draw period,
with principal amortizing over the subsequent 36 months. The bank advanced the
Company $1.0 million under this commitment on September 30, 1999. In connection
with this commitment, the Company issued warrants to the bank to purchase 5,263
shares of Common Stock at $9.50 per share, expiring
F-36
<PAGE> 172
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on September 24, 2002. The Company estimated the fair value of the warrants at
$30,000 using the Black-Scholes option pricing model assuming a fair value of
the Company's Common Stock of $12.00, risk-free interest rate of 5.5%,
volatility factor of 50% and life of three years. The Company will record the
expense related to the warrants over the life of the associated financing
instrument as additional interest expense.
NOTE 13 -- SUBSEQUENT EVENTS (UNAUDITED):
COMPLETION OF INITIAL PUBLIC OFFERING
On October 7, 1999, the Company completed an initial public offering of its
common stock. The initial public offering price for the 4,600,000 shares offered
by the Company, including the over-allotment option exercised by the
underwriters, was $14.00 per share. Net proceeds to the Company, before offering
expenses, were $59.9 million or $13.02 per share.
Simultaneous with the closing of the initial public offering, the Company
received an additional $24.0 million from the sale of an aggregate of 1,843,200
shares of common stock at $13.02 per share in private placements to Dell U.S.A.,
L.P., a Texas limited partnership ($20.0 million) and Andersen Consulting LLP
($4.0 million).
BORROWINGS
In October 1999, the bank commitment discussed in Note 12 was completed
with the same terms stated above as discussed in Note 12. The Company is
required to meet certain monthly and quarterly financial tests, including
minimum operating results and certain liquidity, leverage and debt service
ratios. All previous agreements with the financial institution are now under
these same covenants. At September 30, 1999 the Company was not in compliance
with the quick ratio covenant for which the Company obtained a waiver.
ACQUISITION
On November 19, 1999, Calico reached a definitive agreement to acquire
ConnectInc.com in a transaction assumed to be accounted for using the purchase
method of accounting. Calico will issue 1,203,544 shares of Calico Common Stock
with an assumed value of $79.6 million based on the average closing prices of
Calico's Common Stock for the few days before and after the agreement date of
November 19, 1999. Calico will also assume all outstanding stock options granted
by ConnectInc.com. The fair value of the assumed options and a warrant is
approximately $10.4 million, and is included as a component of the purchase
price. The Black-Scholes option pricing model was used to determine the fair
value of the converted options. The Company also anticipates incurring
approximately $2.0 million in acquisition expenses, including financial advisory
and legal fees and other direct transaction costs.
F-37
<PAGE> 173
CALICO COMMERCE, INC.
PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
The Company completed the acquisition of all outstanding capital stock of
FirstFloor Software, Inc. ("FirstFloor") on August 21, 1998. The transaction was
completed pursuant to the Agreement and Plan of Reorganization, dated as of June
23, 1998 among the Company, Calico Acquisition Corporation, FirstFloor and
certain stockholders of the Company and certain shareholders of FirstFloor. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of FirstFloor have been
included in the Company's consolidated financial statements since the
acquisition date.
The purchase consideration included 1,248,423 shares of Series D
Mandatorily Redeemable Convertible Preferred Stock, valued at $4.558 per share
based on the value of the Series E Mandatorily Redeemable Convertible Preferred
Stock which were sold to third party investors shortly after the acquisition, at
approximately $5,690,000. In addition, all of the outstanding options granted
under the FirstFloor 1993 Stock Option Plan were converted into options to
purchase 47,203 shares of the Company's Series D Mandatorily Redeemable
Convertible Preferred Stock. The Black-Scholes option pricing model was used to
determine the fair value of the converted options. The fair value, of
approximately $122,000, was included as a component of the purchase price. The
Company also incurred approximately $250,000 in acquisition expenses.
The total purchase price of $6.1 million was allocated to assets acquired,
including tangible and intangible assets, and liabilities assumed, based on
their respective estimated fair values at the acquisition date. The estimate of
fair value of the net assets acquired is based on an independent appraisal and
management estimates.
The total purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of tangible assets............................... $ 360
Fair value of existing products and core technology......... 1,547
Acquired in-process research and development................ 1,840
Goodwill.................................................... 4,266
Fair value of liabilities assumed........................... (1,951)
-------
$ 6,062
=======
</TABLE>
The acquisition has been structured as a tax-free exchange of stock,
therefore, the differences between the recognized fair values of required
assets, including tangible and intangible assets, and their historical tax bases
are not deductible for tax purposes.
The following unaudited pro forma consolidated statement of operations
gives effect to this acquisition as if it had occurred as of April 1, 1998, by
consolidating the results of operations of FirstFloor with the operations of
Calico.
The unaudited pro forma consolidated statement of operations is not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect as of the beginning of the period presented
and should not be construed as being a representation of future operating
results.
The historical consolidated financial statements for the Company and
FirstFloor are included elsewhere in this prospectus and the unaudited pro forma
consolidated financial information presented herein should be read in
conjunction with those consolidated financial statements and related notes.
F-38
<PAGE> 174
CALICO COMMERCE, INC.
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
---------------------------------------------------
CALICO FIRSTFLOOR ADJUSTMENTS PRO FORMA
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
License................................... $ 10,482 $ 283 $ (21)(A) $ 10,744
Services................................ 10,931 150 (88)(A) 10,993
-------- ------- ------- --------
Net revenues......................... 21,413 433 (109) 21,737
Cost of net revenues
Licenses.................................. 1,179 3 196(A)(B) 1,378
Services................................ 7,272 295 (88)(A) 7,479
-------- ------- ------- --------
Cost of net revenues................. 8,451 298 108 8,857
-------- ------- ------- --------
Gross profit.............................. 12,962 135 (217) 12,880
Operating expenses:
Sales and marketing..................... 14,138 574 -- 14,712
Research and development................ 5,677 774 -- 6,451
General and administrative.............. 3,988 1,058 -- 5,046
Stock compensation...................... 2,007 -- -- 2,007
Acquired in-process research and
development.......................... 1,840 -- (1,840)(C) --
Amortization of goodwill................ 550 -- 401(B) 951
-------- ------- ------- --------
Total operating expenses............. 28,200 2,406 (1,439) 29,167
-------- ------- ------- --------
Loss from operations...................... (15,238) (2,271) 1,222 (16,287)
Interest and other income, net............ (23) 5 -- (18)
-------- ------- ------- --------
Net loss.................................. $(15,261) $(2,266) $ 1,222 $(16,305)
======== ======= ======= ========
Pro forma net loss per share(D):
Basic and diluted............................................................ $ (0.79)
========
Weighted average shares...................................................... 20,689
========
</TABLE>
See accompanying notes to Pro Forma Combined Consolidated Financial Information
F-39
<PAGE> 175
CALICO COMMERCE, INC.
NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited pro forma combined consolidated statement of operations has
been prepared to reflect the acquisition of FirstFloor Software, Inc. by Calico
as if the acquisition had occurred as of April 1, 1998. The pro forma combined
consolidated statement of operations for the year ended March 31, 1999 reflects
the combination of the separate historical statement of operations of Calico for
the year ended March 31, 1999, which include the results of FirstFloor
subsequent to its acquisition, and of FirstFloor for the period from April 1,
1998 through the date of acquisition. Revenues of approximately $329,000 and net
loss of approximately $1.4 million of FirstFloor for the period of January 1,
1998 through March 31, 1998 are not included in the pro forma combined
consolidated statement of operations.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
The following adjustments were applied to the historical statements of
operations to arrive at the pro forma combined consolidated statement of
operations:
(A) Reflects the elimination of license revenues recognized by
FirstFloor related to royalty payments paid by Calico to FirstFloor for
sub-licensing of FirstFloor's products, prior to the Company's acquisition
of FirstFloor. Additionally, the related cost of license revenues
recognized by Calico has been eliminated.
(B) Reflects the amortization expense related to existing products and
core technology and goodwill acquired in the acquisition for the period
April 1, 1998 through the date of acquisition.
(C) The in-process research and development charge related to the
acquisition has been reflected in the historical statements of operations
on the date upon which the acquisition was consummated. The pro forma
combined consolidated statement of operations excludes the nonrecurring
charge for acquired in-process research and development totaling $1.8
million.
(D) Pro forma basic net loss per share for the year ended March 31,
1999 is computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic conversion of
the Company's Series A, Series B, Series C and Series E Mandatorily
Redeemable Convertible Preferred Stock into shares of the Company's Common
Stock effective upon the closing of the Company's initial public offering
as if such conversion occurred on April 1, 1998, or at date of original
issuance, if later. The shares of Series D Mandatorily Redeemable
Convertible Preferred Stock, issued as consideration for the acquisition,
are assumed to be converted into the Company's Common Stock under the
automatic conversion feature and outstanding as of April 1, 1998.
Pro forma diluted net loss per share excludes potential shares of Common
Stock, consisting of options and warrants, as their effect would be
antidilutive.
F-40
<PAGE> 176
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
FirstFloor Software, Inc.
We have audited the accompanying balance sheets of FirstFloor Software,
Inc. (the "Company") as of December 31, 1996 and 1997 and the related statements
of operations, shareholders' equity (net capital deficiency) and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FirstFloor Software, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring losses from operations. This raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans as to these matters are also described in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability or classification of assets or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Palo Alto, California
April 10, 1998
F-41
<PAGE> 177
FIRSTFLOOR SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 4,883,027 $ 2,119,784
Short-term investments.................................... 1,987,171 --
Accounts receivable....................................... 99,628 78,233
Prepaid expenses and other current assets................. 44,366 48,163
----------- ------------
Total current assets................................... 7,014,192 2,246,180
Property and equipment, net................................. 257,812 311,201
Other assets................................................ 15,956 18,554
----------- ------------
$ 7,287,960 $ 2,575,935
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................................... $ 87,357 $ 66,135
Accrued compensation and related liabilities.............. 108,012 110,588
Accrued royalties......................................... 55,470 --
Other accrued liabilities................................. 96,559 145,416
Current portion of deferred revenue....................... 320,699 219,901
Current portion of capital leases......................... -- 79,431
----------- ------------
Total current liabilities.............................. 668,097 621,471
Deferred revenue............................................ 229,163 --
Noncurrent portion of capital leases........................ -- 172,545
Commitments
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value, 15,000,000 shares
authorized, issuable in series:
Series A, 750,000 shares designated, issued and
outstanding; aggregate liquidation preference of
$750,000............................................... 740,493 740,493
Series B, 1,794,117 shares designated, issued and
outstanding; aggregate liquidation preference of
$3,050,000............................................. 3,033,754 3,033,754
Series C, 3,000,000 shares designated, issued and
outstanding; aggregate liquidation preference of
$1,500,000............................................. 1,490,985 1,490,985
Series D, 4,000,000 shares designated, 3,588,898 and
3,567,143 shares issued and outstanding in 1997 and
1996, respectively; aggregate liquidation preference of
$10,228,359............................................ 9,647,105 9,709,107
Common stock, no par value, 30,000,000 shares authorized,
3,254,904 and 3,055,481 shares issued and outstanding
in 1997 and 1996, respectively......................... 196,080 256,909
Accumulated deficit....................................... (8,717,717) (13,449,329)
----------- ------------
Total shareholders' equity............................. 6,390,700 1,781,919
----------- ------------
$ 7,287,960 $ 2,575,935
=========== ============
</TABLE>
See accompanying notes.
F-42
<PAGE> 178
FIRSTFLOOR SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
License and product.............. $ 2,251,311 $ 1,581,577 $ 906,644 $ 517,791
Contract and service........... 205,000 158,655 79,790 184,139
----------- ----------- ----------- -----------
Total revenue............... 2,456,311 1,740,232 986,434 701,930
Costs and expenses:
Royalties...................... 257,764 -- -- --
Research and development....... 2,311,178 2,895,805 1,324,550 1,575,250
Marketing and sales............ 2,471,827 2,634,378 1,344,678 1,166,648
General and administrative..... 966,368 1,191,809 561,497 636,095
----------- ----------- ----------- -----------
Total costs and expenses.... 6,007,137 6,721,992 3,230,725 3,377,993
----------- ----------- ----------- -----------
Loss from operations............. (3,550,826) (4,981,760) (2,244,291) (2,676,063)
Interest income, net............. 114,929 250,148 158,948 17,777
----------- ----------- ----------- -----------
Net loss......................... $(3,435,897) $(4,731,612) $(2,085,343) $(2,658,286)
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-43
<PAGE> 179
FIRSTFLOOR SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
------------------ ---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995... 750,000 $740,493 1,794,117 $3,033,754 3,000,000 $1,490,985 -- $ --
Issuance of Series D
convertible preferred stock for
cash and conversion of notes
payable and accrued interest,
net of issuance costs of
$519,252....................... -- -- -- -- -- -- 3,567,143 9,647,105
Issuance of common stock for
the exercise of stock
options...................... -- -- -- -- -- -- -- --
Repurchase of unvested
shares....................... -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- --
------- -------- --------- ---------- --------- ---------- --------- ----------
Balance at December 31, 1996... 750,000 740,493 1,794,117 3,033,754 3,000,000 1,490,985 3,567,143 9,647,105
Issuance of Series D
convertible preferred stock
to consultants for services
rendered..................... -- -- -- -- -- -- 21,755 62,002
Issuance of common stock for
the exercise of stock
options...................... -- -- -- -- -- -- -- --
Repurchase of unvested
shares....................... -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- --
------- -------- --------- ---------- --------- ---------- --------- ----------
Balance at December 31, 1997... 750,000 740,493 1,794,117 3,033,754 3,000,000 1,490,985 3,588,898 9,709,107
Issuance of common stock for
the exercise of stock options
(unaudited).................. -- -- -- -- -- -- -- --
Repurchase of unvested shares
(unaudited).................. -- -- -- -- -- -- -- --
Net loss (unaudited)........... -- -- -- -- -- -- -- --
------- -------- --------- ---------- --------- ---------- --------- ----------
Balance at June 30, 1998
(unaudited).................. 750,000 $740,493 1,794,117 $3,033,754 3,000,000 $1,490,985 3,588,898 $9,709,107
======= ======== ========= ========== ========= ========== ========= ==========
<CAPTION>
TOTAL
SHAREHOLDERS'
COMMON STOCK EQUITY
-------------------- ACCUMULATED (NET CAPITAL
SHARES AMOUNT DEFICIT DEFICIENCY)
--------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995... 1,298,642 $ 14,242 $ (5,281,820) $ (2,346)
Issuance of Series D
convertible preferred stock for
cash and conversion of notes
payable and accrued interest,
net of issuance costs of
$519,252....................... -- -- -- 9,647,105
Issuance of common stock for
the exercise of stock
options...................... 1,926,503 206,930 -- 206,930
Repurchase of unvested
shares....................... (169,664) (25,092) -- (25,092)
Net loss....................... -- -- (3,435,897) (3,435,897)
--------- -------- ------------ -----------
Balance at December 31, 1996... 3,055,481 196,080 (8,717,717) 6,390,700
Issuance of Series D
convertible preferred stock
to consultants for services
rendered..................... -- -- -- 62,002
Issuance of common stock for
the exercise of stock
options...................... 216,561 63,203 -- 63,203
Repurchase of unvested
shares....................... (17,138) (2,374) (2,374)
Net loss....................... -- -- (4,731,612) (4,731,612)
--------- -------- ------------ -----------
Balance at December 31, 1997... 3,254,904 256,909 (13,449,329) 1,781,919
Issuance of common stock for
the exercise of stock options
(unaudited).................. 46,616 13,234 -- 13,234
Repurchase of unvested shares
(unaudited).................. (22,324) (3,142) -- (3,142)
Net loss (unaudited)........... -- -- (2,658,286) (2,658,286)
--------- -------- ------------ -----------
Balance at June 30, 1998
(unaudited).................. 3,279,196 $267,001 $(16,107,615) $ (866,275)
========= ======== ============ ===========
</TABLE>
See accompanying notes.
F-44
<PAGE> 180
FIRSTFLOOR SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- -------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(3,435,897) $(4,731,612) $(2,085,343) $(2,658,286)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 137,245 182,008 105,644 88,919
Issuance of Series D preferred stock to consultants
for services rendered........................... -- 62,002 -- --
(Gain) loss on disposal of capital equipment....... 21,214 (5,865) 8,205 --
Accrued interest on convertible notes payable
converted to preferred stock.................... 20,938 -- -- --
Changes in assets and liabilities:
Accounts receivable................................ 285,926 21,395 94,628 (223,680)
Prepaid expenses and other current assets.......... (15,713) (3,797) (20,804) 24,318
Other assets....................................... (6,081) (2,598) (59,857) (12,482)
Accounts payable................................... 9,067 (21,222) (57,951) (4,067)
Accrued compensation and related liabilities....... 78,828 2,576 98,113 4,590
Accrued royalties.................................. 5,470 (55,470) (55,470) --
Other accrued liabilities.......................... 28,393 48,857 112,351 (62,490)
Deferred revenue................................... (74,537) (329,961) 173,518 375,079
----------- ----------- ----------- -----------
Net cash used in operating activities................ (2,945,147) (4,833,687) (1,686,966) (2,468,099)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Sales (purchases) of short-term investments.......... (1,987,171) 1,987,171 (19,716) --
Capital expenditures................................. (239,616) (27,961) (165,523) (119,123)
Proceeds from sale of capital equipment.............. -- 93,108 -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities......................................... (2,226,787) 2,052,318 (185,239) (119,123)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Payments under capital lease obligations............. -- (42,703) 183,167 (39,752)
Proceeds from issuance of convertible notes
payable............................................ 2,000,000 -- -- 1,150,000
Net proceeds from issuance of preferred stock........ 7,626,167 -- -- --
Proceeds from issuance of common stock, net of
repurchases........................................ 181,838 60,829 4,261 10,092
----------- ----------- ----------- -----------
Cash flows provided by financing activities.......... 9,808,005 18,126 187,428 1,120,340
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 4,636,071 (2,763,243) (1,684,777) (1,466,882)
Cash and cash equivalents at beginning of period..... 246,956 4,883,027 4,883,027 2,119,783
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period........... $ 4,883,027 $ 2,119,784 $ 3,198,250 $ 652,901
=========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Equipment acquired under capital leases.............. $ -- $ 201,571 $ 17,262 $ 93,107
=========== =========== =========== ===========
Conversion of notes payable to preferred stock....... $ 2,000,000 $ -- $ -- $ --
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................... $ -- $ 18,236 $ 5,605 $ 15,079
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-45
<PAGE> 181
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
FirstFloor Software, Inc. (the "Company"), formerly FirstFloor, Inc., was
incorporated in the state of California on October 19, 1992. The Company
develops and markets interactive marketing systems for business-to-business
communications.
At December 31, 1997, the Company has recorded cumulative operating losses
of $13,449,329 including losses of $4,731,612 and $3,435,897 for the years ended
December 31, 1997 and 1996, respectively. The Company will need to obtain
additional funds from existing or new investors to continue building production,
sales and marketing capabilities, continue its research and development
activities and fund operating expenses, as necessary. Management believes that
it will be able to obtain additional funds through equity or debt financing. If
adequate funds are not available, the Company may be required to reduce its
level of spending, eliminate one of more of its research and development
programs or obtain funds through arrangements with corporate partners or others
which may require the Company to relinquish certain rights of its technologies
or product candidates.
INTERIM FINANCIAL DATA
The accompanying interim financial statements for the six months ended June
30, 1997 and 1998 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on the same basis as the annual
financial statements and reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the results of the Company's
operations for the six months ended June 30, 1997 and 1998.
The results of operations for the six months ended June 30, 1997 and 1998
are not necessarily indicative of results to be expected for the full fiscal
year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts reported in the financial statements as of December 31,
1996 have been reclassified to conform with the presentation adopted by the
Company to report its 1997 financial results.
CUSTOMER CONCENTRATION
A limited number of customers historically have accounted for a substantial
portion of the Company's revenues. Sales of the Company's products and contracts
for its technology will vary as a result of fluctuations in market demand for
such products and technology. Further, the markets in which the Company competes
are characterized by rapid technological change and increased competition.
F-46
<PAGE> 182
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from customers representing 10% or more of total revenue during
fiscal 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Customer:
A........................................................... 48% 46%
B......................................................... 24 17
C......................................................... 6 11
D......................................................... 0 11
E......................................................... 15 3
</TABLE>
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents and
short-term investments consist of money market funds, commercial paper,
corporate notes, and auction rate preferred stock. The fair market value, based
on quoted market prices of the cash equivalents and short-term investments, is
substantially equal to their carrying value at December 31, 1996 and 1997.
Under FAS 115, management classifies investments as available-for-sale at
the time of purchase and periodically reevaluates such designation. Debt
securities are classified as available-for-sale and are reported at fair value.
Unrecognized gains or losses on available-for-sale securities are included, net
of tax, in shareholders' equity until their disposition. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on specific identification.
All cash equivalents and short-term investments are classified as
available-for-sale securities and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash and cash equivalents:
Bank and money market funds................................. $ 350,430 $2,119,784
Commercial paper.......................................... 2,494,447 --
Corporate notes/bonds..................................... 2,038,150 --
---------- ----------
Total.................................................. $4,883,027 $2,119,784
========== ==========
Short-term investments:
Commercial paper.......................................... $ 987,004 $ --
Auction rate preferred stock.............................. 1,000,167 --
---------- ----------
Total.................................................. $1,987,171 $ --
========== ==========
</TABLE>
Unrealized holding gains and losses on available-for-sale securities at
December 31, 1996 and 1997 and gross realized gains and losses on sales of
available-for-sale securities during the year ended December 31, 1996 and 1997
were immaterial.
F-47
<PAGE> 183
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Computer equipment and software......................... $ 405,235 $ 627,380
Furniture and fixtures.................................. 37,793 37,793
Leasehold improvements.................................. 51,555 51,555
--------- ---------
494,583 716,728
Less accumulated depreciation and amortization.......... (236,771) (405,527)
--------- ---------
$ 257,812 $ 311,201
========= =========
</TABLE>
Depreciation is provided using the straight line method over the shorter of
the estimated useful lives or lease term of the respective assets, generally
three years. Property and equipment financed under a capital lease were $294,679
at December 31, 1997. There were no capital leases at December 31, 1996.
Accumulated amortization related to leased assets was $59,906 at December 31,
1997. Amortization related to capital leases is included in depreciation
expense.
CONCENTRATION OF CREDIT RISK
The Company's concentration of credit risk consists principally of cash,
cash equivalents, short-term investments, and receivables. The Company's
investment policy restricts investments to high-credit quality investments and
limits the amounts invested with any one issuer. The Company sells primarily to
original equipment manufacturers in the United States, performs ongoing credit
evaluations of its customers' financial condition, and generally requires no
collateral.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The Company has elected to account for employee stock
options in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25) and to adopt the
"disclosure only" alternative described in FAS 123.
REVENUE RECOGNITION
License fees for the Company's products are generally recognized ratably
over the initial or subsequent renewal periods as unspecified future
deliverables, including product enhancements and new products, are included in
such license agreements. For transactions that do not involve such unspecified
future deliverables, product revenues are recognized at the time of shipment of
the products and fulfillment of acceptance terms, if any, and when no
significant contractual obligations remain outstanding and collection of the
resulting receivable is deemed probable.
Contracts involving custom software development are accounted for using the
percentage-of-completion method. Revenues from services are recognized when the
services are performed. Maintenance contract revenue is recognized ratably over
the term of the maintenance contract. Amounts received in advance of satisfying
revenue recognition criteria are classified as deferred revenue in the
accompanying balance sheets.
F-48
<PAGE> 184
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are generally charged to operations
as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready for
general release have been insignificant. Accordingly, the Company has charged
all such cost to research and development expenses in the accompanying
statements of operations.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
approximately $155,000 and $195,000 in advertising costs during 1996 and 1997,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as
amended by Statement of Position 98-4 ("SOP 98-4," collectively the "SOPs"). The
SOPs supersede SOP 91-1 and are effective for transactions entered into for
fiscal years beginning after December 15, 1997. Based upon its reading and
interpretation of the SOPs, the Company believes its current revenue recognition
policies and practices are materially consistent with the SOPs. However,
implementation guidelines for this standard have not yet been issued. Once
available, such implementation guidance could lead to changes in the Company's
current revenue accounting practices.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes rules
for reporting and displaying comprehensive income and is effective for the
Company during 1998. The Company does not believe that the adoption of SFAS 130
will have a material impact on the Company's results of operations, cash flows
or financial position.
2. COMMITMENTS
CAPITAL LEASE
In March 1997, the Company entered into an Equipment Financing Agreement
which allows the Company to lease up to $360,000 of equipment, in one or more
leases. Each lease is repayable over 36 months and is secured by a first
priority security interest in certain assets of the Company. At December 31,
1997, the Company has borrowed $294,679 against this financing agreement. In
connection with the equipment financing agreement the Company issued a warrant
to the financing company (see Note 3).
F-49
<PAGE> 185
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
The Company leases its corporate offices under operating lease agreements
that expire in 2000. In February 1998, the Company renegotiated and amended
certain of these agreements. The result of these amended agreements is reflected
in the following table.
CAPITAL AND OPERATING LEASES
Future minimum lease payments under capital leases and operating leases are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ -------- ---------
<S> <C> <C>
1998...................................................... $106,656 $253,840
1999...................................................... 106,656 365,327
2000...................................................... 85,281 278,816
2001...................................................... 833 --
-------- --------
Total minimum lease and principal payments,
respectively....................................... 299,426 $897,983
========
Amount representing interest.............................. 47,450
--------
Present value of future lease payments.................... 251,976
Current portion of capital lease obligations.............. 79,431
--------
Noncurrent portion of capital lease obligations........... $172,545
========
</TABLE>
Rent expense was approximately $122,000 and $157,000 for 1996 and 1997,
respectively.
3. CONVERTIBLE PROMISSORY NOTES AND WARRANTS
During 1996, the Company issued $2,000,000 in convertible promissory notes.
The notes bore interest at a rate of 6% per annum, compounded annually, and all
principal and accrued interest were due and payable on September 30, 1996 unless
earlier converted. Upon closing of the Series D convertible preferred stock
offering in August 1996, $2,020,938 of principal and related accrued but unpaid
interest were converted into approximately 709,100 shares of Series D
convertible preferred stock. In connection with the issuance of these
convertible notes payable, the Company issued warrants to purchase 42,094 shares
of Series D convertible preferred stock at an exercise price of $2.85 per share.
The warrants are exercisable through April 30, 1999.
In connection with an equipment financing agreement, the Company issued a
warrant to a financing company which permits the purchase of up to 6,300 shares
of Series D preferred stock at a price per share of $2.85. The warrant was
issued in March 1997 and expires in March 2002.
4. SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
CONVERTIBLE PREFERRED STOCK
Series A, B, C, and D preferred stock have a liquidation preference of
$1.00, $1.70, $0.50, and $2.85 per share, respectively, plus all declared but
unpaid dividends. Series A, B, C, and D preferred shareholders are entitled to
noncumulative dividends at the rate of $0.08, $0.14, $0.04, and $0.23 per share,
per annum, respectively, payable quarterly when and if declared by the board of
directors and in preference to common stock dividends. No dividends have been
declared or paid by the Company.
F-50
<PAGE> 186
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The holders of each share of Series A, B, C, and D preferred stock are
entitled to one vote for each share of common stock into which such share may be
converted. The holders of Series A, B, C, and D preferred stock have the right,
at the option of the holder, at any time to convert their shares into common
stock at a price of approximately $0.793, $1.203, $0.50, and $2.85 per share,
subject to adjustments for future dilution. Series A, B, C, and D preferred
stock automatically convert into common stock, at the then applicable conversion
rate, upon a public offering of the Company's common stock at a per share price
of not less than $6.00, with aggregate proceeds in excess of $5,000,000 or upon
the consent of the holders of a majority of the then outstanding shares of
preferred stock. The conversion rate of the Series A, B, C, and D preferred
stock is subject to adjustment in the event of, among other things, certain
dilutive issuances of stock, business combinations, stock splits, and stock
dividends.
COMMON STOCK
In December 1992, 1,333,333 shares of common stock were issued to the
Company's founders at $0.0075 per share. Thereafter, 80,000 shares were returned
to the Company without consideration. The outstanding shares are subject to
certain transfer restrictions. Certain of these shares are subject to repurchase
at the issuance price upon the occurrence of certain events, including
termination of employment. The Company's right of repurchase expires ratably
over five and one-half years. At December 31, 1997, 94,949 shares remain subject
to repurchase.
SHARES RESERVED
Common stock reserved for future issuance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Stock option plan:
Outstanding................................................. 1,087,764
Available for grant......................................... 154,118
----------
1,241,882
Common stock warrants....................................... 48,394
Conversion of preferred stock............................... 10,068,774
Authorized but unissued preferred stock..................... 5,866,985
----------
Total common stock reserved for future issuances............ 17,226,035
==========
</TABLE>
1993 STOCK OPTION/STOCK ISSUANCE PLAN
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In July 1993, the board of directors adopted the 1993 Stock Option/Stock
Issuance Plan (the "Plan").
F-51
<PAGE> 187
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Plan provides for the direct issuance of common stock and grants of
both incentive and nonqualified stock options to eligible participants. The Plan
provides that direct issuances of stock and grants of incentive stock options
will be made at no less than the fair value of the Company's common stock (no
less than 85% of the fair value for nonqualified stock options), as determined
by the board of directors at the date of the issuance or grant. If, at the time
the Company issues stock or grants an option, the holder owns more than 10% of
the total combined voting power of all the classes of stock of the Company, the
stock or option price shall be at least 110% of the fair value. Options are
exercisable upon grant. No option shall have a term in excess of ten years from
the grant date (five years in the case of an option granted to a 10%
shareholder). Stock issued under the Plan may be, as determined by the board of
directors, subject to repurchase by the Company. This right to repurchase
generally lapses over four years from the original date of issuance or grant.
Activity under the stock option plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
SHARES WEIGHTED
AVAILABLE FOR NUMBER OF AVERAGE
GRANT SHARES EXERCISE PRICE
------------- ---------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995............. 101,480 1,376,968 $0.08
Additional shares authorized............. 1,906,498 -- --
Options granted........................ (1,675,684) 1,675,684 0.20
Options exercised...................... -- (1,926,503) 0.11
Options canceled....................... 276,366 (276,366) 0.12
---------- ----------
Balance at December 31, 1996............. 608,660 849,783 0.24
Options granted........................ (631,409) 631,409 0.30
Options exercised...................... -- (216,561) 0.29
Options canceled....................... 176,867 (176,867) 0.24
---------- ----------
Balance at December 31, 1997............. 154,118 1,087,764 0.27
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED
RANGE OF OF REMAINING AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE
--------------- --------- ---------------- --------------
<S> <C> <C> <C>
$0.05 - $0.05.......................... 61,041 7.56 $0.05
$0.15 - $0.15.......................... 32,500 8.52 0.15
$0.17 - $0.17.......................... 114,375 6.58 0.19
$0.30 - $0.30.......................... 879,848 9.17 0.30
---------
Total............................. 1,087,764 8.79 0.27
=========
</TABLE>
The weighted average fair value of options granted in 1996 and 1997 was
$0.04 and $0.05, respectively.
F-52
<PAGE> 188
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, the Company repurchased 17,138 shares previously exercised
under the Plan. At December 31, 1997, 702,302 shares remain subject to
repurchase.
Pro forma information regarding net loss is required by FAS 123 which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted subsequent to December 31, 1994 under the
fair value method. For all grants subsequent to December 31, 1994, the fair
value of these options was determined using the minimum value method with the
following weighted-average assumptions for 1995, 1996 and 1997, respectively:
risk-free interest rates of 6.04%, 6.29% and 6.17%, no dividend yield, no
volatility factors of the expected market price of the Company's common stock,
and expected life of the options of 4, 3.5 and 3.4 years for 1995, 1996 and
1997, respectively.
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The effect of
determination of the compensation expense was immaterial to the Company's
statement of operations for the years ended December 31, 1997, 1996 and 1995.
Because FAS 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1999.
5. INCOME TAXES
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $13,100,000. The Company also had federal
research and development tax credit carryforwards of approximately $300,000. The
net operating loss and credit carryforwards will expire at various dates
beginning in 2008 through 2012, if not utilized.
Utilization of the net operating losses may be subject to a substantial
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
As of December 31, 1996 and 1997, the Company had deferred tax assets of
approximately $3,500,000 and $5,500,000, respectively. The net deferred tax
asset has been fully offset by a valuation allowance. The valuation allowance
increased by $1,449,000 during the year ended December 31, 1996. Deferred tax
assets relate primarily to net operating loss carryforwards, research credits,
and capitalized research and development costs.
6. YEAR 2000 ISSUE (UNAUDITED)
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to "00". The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. Management
does not anticipate that the Company will incur significant operating expenses
or be required to invest heavily in computer systems improvements to be Year
2000 compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any Year 2000 compliance. Any Year 2000
compliance
F-53
<PAGE> 189
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
problems of either the Company or its vendors could adversely affect the
Company's business, results of operations, financial condition and prospects.
7. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
On August 21, 1998, the acquisition of the Company was completed pursuant
to the agreement and plan of reorganization with Calico Technology, Inc.
("Calico"). Under the terms of the agreement, shareholders of the Company
exchanged all outstanding common stock, preferred stock and common stock options
for 1,248,423 shares of Calico Series D Mandatorily Redeemable Convertible
Preferred Stock and options to purchase 47,203 shares of Calico Series D
Mandatorily Redeemable Convertible Preferred Stock.
F-54
<PAGE> 190
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF NOVEMBER 19, 1999
BY AND AMONG
CALICO COMMERCE, INC.,
CONNECTINC.COM, CO.
AND
CALICO ACQUISITION, INC.
<PAGE> 191
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
THE MERGER................................................................... 1
Section 1.1. The Merger.................................................. 1
Section 1.2. Effective Time.............................................. 1
Section 1.3. Closing of the Merger....................................... 1
Section 1.4. Effects of the Merger....................................... 2
Section 1.5. Certificate of Incorporation and Bylaws..................... 2
Section 1.6. Directors................................................... 2
Section 1.7. Officers.................................................... 2
Section 1.8. Conversion of Shares........................................ 2
Section 1.9. Dissenters' Rights.......................................... 3
Section 1.10. Exchange of Certificates.................................... 3
Section 1.11. Stock Options............................................... 4
Section 1.12. Change of Control Agreements................................ 5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................ 5
Section 2.1. Organization and Qualification; Subsidiaries; Investments... 6
Section 2.2. Capitalization of the Company and its Subsidiaries.......... 6
Section 2.3. Authority Relative to this Agreement; Recommendation........ 7
Section 2.4. SEC Reports; Financial Statements........................... 8
Section 2.5. Information Supplied........................................ 8
Section 2.6. Consents and Approvals; No Violations....................... 8
Section 2.7. No Default.................................................. 9
Section 2.8. No Undisclosed Liabilities; Absence of Changes.............. 9
Section 2.9. Litigation.................................................. 10
Section 2.10. Compliance with Applicable Law.............................. 11
Section 2.11. Employee Benefits........................................... 11
Section 2.12. Labor and Employment Matters................................ 14
Section 2.13. Environmental Laws and Regulations.......................... 15
Section 2.14. Taxes....................................................... 16
Section 2.15. Intellectual Property....................................... 17
Section 2.16. Insurance................................................... 21
Section 2.17. Restrictions on Business Activities......................... 21
Section 2.18. Title to Properties; Absence of Liens and Encumbrances...... 22
Section 2.19. Certain Business Practices.................................. 22
Section 2.20. Product Warranties.......................................... 22
Section 2.21. Agreements, Scheduled Contracts and Commitments............. 22
Section 2.22. Vote Required............................................... 23
Section 2.23. Affiliates.................................................. 23
Section 2.24. Opinion of Financial Adviser................................ 23
Section 2.25. Brokers..................................................... 23
Section 2.26. Takeover Statutes........................................... 23
</TABLE>
i
<PAGE> 192
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 2.27. Representations Complete.................................... 24
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION..................... 24
Section 3.1. Organization................................................ 24
Section 3.2. Capitalization of Parent and its Subsidiaries............... 24
Section 3.3. Authority Relative to this Agreement........................ 25
Section 3.4. SEC Reports; Financial Statements........................... 26
Section 3.5. Information Supplied........................................ 26
Section 3.6. Consents and Approvals; No Violations....................... 26
Section 3.7. Litigation.................................................. 27
Section 3.8. Tax Treatment............................................... 27
Section 3.9. Opinion of Financial Adviser................................ 27
Section 3.10. Brokers..................................................... 27
Section 3.11. No Prior Activities......................................... 27
Section 3.12. No Undisclosed Liabilities; Absence of Changes.............. 27
Section 3.13. Compliance with Applicable Law.............................. 28
Section 3.14. Intellectual Property....................................... 28
Section 3.15. No Default.................................................. 28
Section 3.16. Representations Complete.................................... 28
Section 3.17. Title to Properties; Absence of Liens and Encumbrances...... 28
Section 3.18. Year 2000 Compliance........................................ 29
Section 3.19. Parent Common Stock......................................... 29
ARTICLE IV
COVENANTS.................................................................... 29
Section 4.1. Conduct of Business of the Company.......................... 29
Section 4.2. Preparation of S-4 and the Proxy Statement.................. 32
Section 4.3. No Solicitation or Negotiation.............................. 32
Section 4.4. Meeting of Stockholders..................................... 34
Section 4.5. Nasdaq National Market...................................... 35
Section 4.6. Access to Information....................................... 35
Section 4.7. Certain Filings; Reasonable Efforts......................... 36
Section 4.8. Public Announcements........................................ 37
Section 4.9. Indemnification and Directors' and Officers' Insurance...... 37
Section 4.10. Notification of Certain Matters............................. 38
Section 4.11. Affiliates; Tax-Free Reorganization......................... 38
Section 4.12. Additions to and Modification of Company Disclosure Schedule
and Parent Disclosure Schedule.............................. 39
Section 4.13. Access to Company Employees................................. 39
Section 4.14. Company Compensation and Benefit Plans...................... 39
Section 4.15. Takeover Statutes........................................... 39
Section 4.16. Form S-8.................................................... 40
Section 4.17. Employee Matters............................................ 40
Section 4.18. Further Information......................................... 40
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE MERGER..................................... 40
Section 5.1. Conditions to Each Party's Obligations to Effect the
Merger...................................................... 40
Section 5.2. Conditions to the Obligations of the Company................ 41
Section 5.3. Conditions to the Obligations of Parent and Acquisition..... 42
</TABLE>
ii
<PAGE> 193
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VI
TERMINATION; AMENDMENT; WAIVER............................................... 43
Section 6.1. Termination................................................. 43
Section 6.2. Effect of Termination....................................... 44
Section 6.3. Fees and Expenses........................................... 44
Section 6.4. Amendment................................................... 45
Section 6.5. Extension; Waiver........................................... 45
ARTICLE VII
MISCELLANEOUS................................................................ 45
Section 7.1. Nonsurvival of Representations and Warranties............... 45
Section 7.2. Entire Agreement; Assignment................................ 45
Section 7.3. Validity.................................................... 45
Section 7.4. Notices..................................................... 46
Section 7.5. Governing Law and Venue; Waiver of Jury Trial............... 47
Section 7.6. Descriptive Headings........................................ 47
Section 7.7. Parties in Interest......................................... 47
Section 7.8. Certain Definitions......................................... 48
Section 7.9. Personal Liability.......................................... 50
Section 7.10. Specific Performance........................................ 50
Section 7.11. Counterparts................................................ 51
</TABLE>
TABLE OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A............ Form of Letter Agreement with Company Affiliates
Form of Representations Relating to Tax Matters of the
Exhibit B-1.......... Company
Form of Representations Relating to Tax Matters of Parent
Exhibit B-2.......... and Acquisition
</TABLE>
iii
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of November
19, 1999, is by and among ConnectInc.com, Co., a Delaware corporation (the
"Company"), Calico Commerce, Inc., a Delaware corporation ("Parent"), and Calico
Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of
Parent ("Acquisition"). Capitalized terms not otherwise defined herein shall
have the meanings ascribed to such terms in Section 7.8 of this Agreement.
WHEREAS, the Boards of Directors of the Company, Parent and Acquisition
have each (i) determined that the Merger (as defined below) is advisable and
fair and in the best interests of their respective stockholders and (ii)
approved the Merger upon the terms and subject to the conditions set forth in
this Agreement;
WHEREAS, the combination of the Company and Parent shall be effected by the
terms of this Agreement through a transaction in which Acquisition will merge
with and into the Company, the Company will become a wholly-owned subsidiary of
Parent and the stockholders of the Company will become stockholders of Parent;
and
WHEREAS, for Federal income tax purposes it is intended that the Merger
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, the Company, Parent and Acquisition hereby
agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. At the Effective Time (as defined below) and upon
the terms and subject to the conditions of this Agreement and in accordance with
the Delaware General Corporation Law (the "DGCL"), Acquisition shall be merged
with and into the Company (the "Merger"). Following the Merger, the Company
shall continue as the surviving corporation (the "Surviving Corporation") and
the separate corporate existence of Acquisition shall cease. The Merger is
intended to qualify as a tax-free reorganization under Section 368(a) of the
Code. Parent, as the sole stockholder of Acquisition, hereby approves the Merger
and this Agreement.
SECTION 1.2 Effective Time. Subject to the terms and conditions set forth
in this Agreement, on the Closing Date (as defined in Section 1.3), (a) a
Certificate of Merger shall be duly executed and acknowledged by Acquisition and
the Company and thereafter delivered for filing to the Secretary of State of the
State of Delaware for filing pursuant to Section 251 of the DGCL and (b) the
parties shall make such other filings with the Secretary of State of the State
of Delaware as shall be necessary to effect the Merger. The Merger shall become
effective at such time as a properly executed copy of the Certificate of Merger
is duly filed with the Secretary of State of the State of Delaware in accordance
with Section 251 of the DGCL, or such later time as Parent and the Company may
agree upon and as may be set forth in the Certificate of Merger (the time the
Merger becomes effective being referred to herein as the "Effective Time").
SECTION 1.3 Closing of the Merger. The closing of the Merger (the
"Closing") will take place at a time and on a date (the "Closing Date") to be
specified by the parties, which shall be no later than the second business day
after satisfaction (or waiver) of the latest to occur of the
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conditions set forth in Article 5, at the offices of Gray Cary Ware &
Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, CA 94301, unless another time,
date or place is agreed to in writing by the parties hereto.
SECTION 1.4 Effects of the Merger. The Merger shall have the effects as
provided in this Agreement and in the applicable provisions of the DGCL. Without
limiting the generality of the foregoing and subject thereto, at the Effective
Time, all the properties, rights, privileges, powers and franchises of the
Company and Acquisition shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Acquisition shall become the debts,
liabilities and duties of the Surviving Corporation.
SECTION 1.5 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation of Acquisition in effect at the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation until amended in
accordance with Applicable Law. The parties agree that, by action of Parent at
or after the Effective Time, the bylaws of Acquisition in effect at the
Effective Time shall be the bylaws of the Surviving Corporation.
SECTION 1.6 Directors. The parties agree that, by action of Parent at or
after the Effective Time, the directors of Acquisition at the Effective Time
shall be the initial directors of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and bylaws of the Surviving
Corporation until such director's successor is duly elected or appointed and
qualified.
SECTION 1.7 Officers. The parties agree that, by action of Parent at or
after the Effective Time, the officers of Acquisition at the Effective Time
shall be the initial officers of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and bylaws of the Surviving
Corporation until such officer's successor is duly elected or appointed and
qualified.
SECTION 1.8 Conversion of Shares.
(a) At the Effective Time, each share of common stock, par value $0.001 per
share, of the Company (individually a "Share" and collectively the "Shares")
issued and outstanding immediately prior to the Effective Time (other than (i)
Shares held in the Company's treasury and (ii) Shares held by Parent,
Acquisition or any other subsidiary of Parent) shall, by virtue of the Merger
and without any action on the part of Acquisition, the Company or the holder
thereof, be converted into and shall become a number of fully paid and
nonassessable shares of common stock, $.001 par value per share, of Parent
("Parent Common Stock") equal to the Exchange Ratio (as defined below) (the
"Merger Consideration"). Notwithstanding the foregoing, if, between the date of
this Agreement and the Effective Time, the outstanding shares of Parent Common
Stock or the Shares shall have been changed into a different number of shares or
a different class by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
then the Exchange Ratio shall be correspondingly adjusted to reflect such stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
(b) The "Exchange Ratio" shall be .081.
(c) At the Effective Time, each outstanding share of the common stock of
Acquisition shall be converted into one fully paid and nonassessable share of
common stock of the Surviving Corporation.
(d) At the Effective Time, each Share held in the treasury of the Company
and each Share held by Parent, Acquisition or any subsidiary of Parent or
Acquisition immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of Acquisition, the Company or the
holder thereof, be canceled, retired and cease to exist, and no shares of Parent
Common Stock shall be delivered with respect thereto.
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SECTION 1.9 Dissenters' Rights. In accordance with Section 262 of the
DGCL, the holders of the Shares shall not be entitled to dissenters' or
appraisal rights.
SECTION 1.10 Exchange of Certificates.
(a) From time to time following the Effective Time, as required by
subsections (b) and (c) below, Parent shall deliver to its transfer agent, or a
depository or trust institution of recognized standing selected by Parent and
Acquisition (the "Exchange Agent") for the benefit of the holders of Shares for
exchange in accordance with this Article 1: (i) certificates representing the
appropriate number of shares of Parent Common Stock issuable pursuant to Section
1.8; and (ii) cash to be paid in lieu of fractional shares of Parent Common
Stock (such shares of Parent Common Stock and such cash are hereinafter referred
to as the "Exchange Fund"), in exchange for outstanding Shares.
(b) Not later than three (3) business days after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Time represented
outstanding Shares (the "Certificates") and whose shares were converted into the
right to receive shares of Parent Common Stock pursuant to Section 1.8: (i) a
letter of transmittal (which shall specify that delivery shall be effected and
risk of loss and title to the Certificates shall pass only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent and the Company may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Parent Common Stock and, if applicable,
cash to be paid for fractional shares of Parent Common Stock. Upon surrender of
a Certificate for cancellation to the Exchange Agent together with such letter
of transmittal duly executed, the holder of such Certificate shall be issued a
certificate representing that number of whole shares of Parent Common Stock and,
if applicable, a check representing the cash consideration to which such holder
is entitled on account of a fractional share of Parent Common Stock that such
holder has the right to receive pursuant to the provisions of this Article 1,
and the Certificate so surrendered shall forthwith be canceled. In the event of
a transfer of ownership of Shares that is not registered in the transfer records
of the Company, a certificate representing the proper number of shares of Parent
Common Stock and a check representing the amount of consideration payable in
lieu of fractional shares shall be issued to a transferee if the Certificate
representing such Shares is presented to the Exchange Agent accompanied by all
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 1.10, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the certificate representing shares of Parent Common Stock and cash in
lieu of any fractional shares of Parent Common Stock as contemplated by this
Section 1.10.
(c) No dividends or other distributions declared or made after the
Effective Time with respect to Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid to any such holder pursuant
to Section 1.10(f), until the holder of record of such Certificate shall
surrender such Certificate. Subject to the effect of Applicable Law, following
surrender of any such Certificate there shall be paid to the record holder of
the certificates representing whole shares of Parent Common Stock issued in
exchange therefor without interest (i) the amount of any cash payable in lieu of
a fractional share of Parent Common Stock to which such holder is entitled
pursuant to Section 1.10(f) and the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
such number of whole shares of Parent Common Stock and (ii) at the appropriate
payment date the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Parent Common Stock.
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(d) In the event that any Certificate for Shares shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange therefor upon
the making of an affidavit of that fact by the holder thereof such shares of
Parent Common Stock and cash in lieu of fractional shares, if any, as may be
required pursuant to this Agreement; provided, however, that Parent or the
Exchange Agent may, in its discretion, require the delivery of a customary bond
or indemnity reasonably satisfactory to Parent and the Exchange Agent.
(e) All shares of Parent Common Stock issued upon the surrender for
exchange of Shares in accordance with the terms hereof (including any cash paid
pursuant to Section 1.10(c) or 1.10(f)) shall be deemed to have been issued in
full satisfaction of all rights pertaining to such Shares; subject, however, to
the Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the date hereof that remain unpaid at
the Effective Time, and there shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the Shares that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article 1.
(f) No fractions of a share of Parent Common Stock shall be issued in the
Merger but in lieu thereof each holder of Shares otherwise entitled to a
fraction of a share of Parent Common Stock shall upon surrender of his or her
Certificate or Certificates be entitled to receive an amount of cash (without
interest) equal to such fractional part of a share of Parent Common Stock
multiplied by the average of the last reported sales prices for Parent Common
Stock as reported on the Nasdaq National Market on the ten (10) trading days
immediately preceding the Effective Time. The parties acknowledge that payment
of the cash consideration in lieu of issuing fractional shares was not
separately bargained for consideration, but merely represents a mechanical
rounding off for purposes of simplifying the corporate and accounting
complexities that would otherwise be caused by the issuance of fractional
shares.
(g) Any portion of the Exchange Fund that remains undistributed to the
stockholders of the Company upon the expiration of one (1) year after the
Effective Time shall be delivered to Parent upon demand and any stockholders of
the Company who have not theretofore complied with this Article 1 shall
thereafter look only to Parent as general creditors for payment of their claim
for Parent Common Stock and cash in lieu of fractional shares, as the case may
be, and any applicable dividends or distributions with respect to Parent Common
Stock.
(h) Neither Parent nor the Company shall be liable to any holder of Shares
or Parent Common Stock for such shares (or dividends or distributions with
respect thereto) or cash from the Exchange Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar Applicable
Law.
SECTION 1.11 Stock Options.
(a) At the Effective Time, each outstanding option, warrant or other right
to purchase Shares (a "Company Stock Option" and collectively, "Company Stock
Options") issued pursuant to the 1999 Stock Option Plan for Non-Employee
Directors and Advisors, 1996 Stock Option Plan, as amended, 1989 Stock Option
Plan, as amended, and 1996 Directors' Stock Option Plan, and all other
agreements or arrangements other than the 1996 Employee Stock Purchase Plan,
whether vested or unvested, shall be assumed by Parent and converted as of the
Effective Time into an option, warrant or right, as applicable, to purchase
shares of Parent Common Stock in accordance with the terms of this Section 1.11.
All plans or agreements described above pursuant to which any Company Stock
Option has been issued or may be issued other than outstanding warrants or
rights are referred to collectively as the "Company Plans." Each Company Stock
Option so converted shall be deemed to
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constitute an option to acquire, on the same terms and conditions as were
applicable under such Company Stock Option, a number of shares of Parent Common
Stock equal to the number of shares of Parent Common Stock that the holder of
such Company Stock Option would have been entitled to receive pursuant to the
Merger had such holder exercised such Company Stock Option, whether or not
vested, in full immediately prior to the Effective Time rounded down to the
nearest whole share at a price per share, rounded up to the nearest tenth of a
cent, equal to the exercise price per Share pursuant to such Company Stock
Option immediately prior to the Effective Time divided by the Exchange Ratio;
provided, however, that in the case of any option to which Section 421 of the
Code applies by reason of its qualification under Sections 422 through 424 of
the Code, the option price, the number of shares purchasable pursuant to such
option and the terms and conditions of exercise of such option shall be adjusted
as necessary in order to comply with Section 424(a) of the Code.
(b) As soon as practicable after the Effective Time, Parent shall deliver
to the holders of Company Stock Options appropriate notices setting forth such
holders' rights pursuant to the Company Plans and that the agreements evidencing
the grants of such Company Stock Options shall continue in effect on the same
terms and conditions (subject to the adjustments required by this Section 1.11
after giving effect to the Merger). Parent shall comply with the terms of the
Company Plans and ensure, to the extent required by and subject to the
provisions of such plans, that Company Stock Options that qualified as incentive
stock options prior to the Effective Time continue to qualify as incentive stock
options of Parent after the Effective Time.
(c) At or before the Effective Time, Parent shall take all corporate action
necessary to reserve for issuance a sufficient number of shares of Parent Common
Stock for delivery upon exercise of Company Stock Options assumed in accordance
with this Section 1.11. Promptly following the Effective Time, and in any event
within five business days, Parent shall, if no registration statement is in
effect covering such Parent shares, file a registration statement on Form S-8
(or any successor or other appropriate forms) with respect to the shares of
Parent Common Stock subject to any Company Stock Options held by all persons
with respect to whom registration on Form S-8 is available and shall use all
commercially reasonable efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
options remain outstanding.
(d) At or before the Effective Time, the Company shall cause to be
effected, in a manner reasonably satisfactory to Parent, such amendments, if
any, to the Company Plans that are necessary to give effect to the foregoing
provisions of this Section 1.11.
SECTION 1.12 Change of Control Agreements. A "Change of Control" as such
term is defined in the Change of Control Agreements shall be deemed to occur at
the Effective Time.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of Parent and
Acquisition, subject to the exceptions set forth in the Disclosure Schedule (the
"Company Disclosure Schedule") delivered by the Company to Parent (which
exceptions shall qualify only the Section specifically identified and
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any other Section where it is reasonably clear that the disclosure is intended
to apply to another Section) that:
SECTION 2.1 Organization and Qualification; Subsidiaries; Investments.
(a) Section 2.1(a) of the Company Disclosure Schedule sets forth a true and
complete list of all the Company's directly or indirectly owned subsidiaries and
sales and other offices, together with the jurisdiction of incorporation of each
subsidiary and the percentage of each subsidiary's outstanding capital stock or
other equity interests owned by the Company or another subsidiary of the
Company. Each of the Company and its subsidiaries is duly organized, validly
existing and, except as set forth in Section 2.1(a) of the Company Disclosure
Schedule, in good standing under the laws of the jurisdiction of its
incorporation or organization and has all requisite power and authority to own,
lease and operate its properties and to carry on its businesses as now being
conducted. The Company has heretofore delivered or made available to Acquisition
or Parent accurate and complete copies of the Certificate of Incorporation and
bylaws (or similar governing documents), as currently in full force and effect,
of the Company and each of its subsidiaries. Section 2.1(a) of the Company
Disclosure Schedule specifically identifies each subsidiary of the Company that
contains any material assets or through which the Company conducts any
operations. Except as set forth in Section 2.1(a) of the Company Disclosure
Schedule, the Company has no operating subsidiaries other than those
incorporated in a state of the United States.
(b) Each of the Company and its subsidiaries is duly qualified or licensed
and in good standing to do business in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary except where the failure to
obtain such qualification or license with respect to the Company or any
subsidiary would not adversely affect the Company or any such subsidiary in any
material way.
(c) Section 2.1(c) of the Company Disclosure Schedule sets forth a true and
complete list of each equity investment in an amount of Five Thousand Dollars
($5,000) or more or that represents a five percent (5%) or greater ownership
interest in the subject of such investment made by the Company or any of its
subsidiaries in any person other than the Company's subsidiaries ("Other
Interests"). Except as described in Section 2.1(c) of the Company Disclosure
Schedule, the Other Interests are owned by the Company, by one or more of the
Company's subsidiaries or by the Company and one or more of its subsidiaries, in
each case free and clear of all Liens (as defined below).
SECTION 2.2 Capitalization of the Company and its Subsidiaries.
(a) The authorized capital stock of the Company consists of 60,000,000
Shares, of which, as of October 31, 1999, 14,858,566 Shares were issued and
outstanding and 3,500,000 shares of preferred stock, none of which is
outstanding. All of the outstanding Shares have been validly issued and are
fully paid, nonassessable and free of preemptive rights. As of October 31, 1999,
approximately 617,909 Shares were reserved for future option grants and, as of
October 31, 1999, 2,634,378 were issuable upon or otherwise deliverable in
connection with the exercise of outstanding Company Stock Options issued
pursuant to the Company Plans. The maximum number of shares that may be issued
under the Employee Stock Purchase Plan is 100,000 shares, of which, as of
October 31, 1999, all shares have been issued. Between October 31, 1999 and the
date hereof, no shares of the Company's capital stock have been issued other
than pursuant to Company Stock Options already in existence on such first date,
and between October 31, 1999 and the date hereof, no stock options have been
granted. Except as set forth above, as of the date hereof, there are outstanding
(i) no shares of capital stock or other voting securities of the Company, (ii)
no securities of the Company or any of its subsidiaries convertible into or
exchangeable or exercisable for shares of capital stock or other
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securities of the Company, (iii) no options, preemptive or other rights to
acquire from the Company or any of its subsidiaries, and, except as described in
the Company SEC Reports (as defined below), no obligations of the Company or any
of its subsidiaries to issue, any capital stock, voting securities or securities
convertible into or exchangeable or exercisable for capital stock or other
securities of the Company and (iv) no equity equivalent interests in the
ownership or earnings of the Company or its subsidiaries or other similar rights
(collectively "Company Securities"). Except as set forth in Section 2.2(a) of
the Company Disclosure Schedule, as of the date hereof, there are no outstanding
rights or obligations of the Company or any of its subsidiaries to repurchase,
redeem or otherwise acquire any Company Securities. There are no stockholder
agreements, voting trusts or other agreements or understandings to which the
Company is a party or by which it is bound relating to the voting or
registration of any shares of capital stock of the Company. The Company has not
voluntarily accelerated the vesting of any Company Stock Options as a result of
the Merger or any other change in control of the Company. No Shares are held by
the Company's subsidiaries.
(b) All of the outstanding capital stock of the Company's subsidiaries
owned by the Company is owned, directly or indirectly, free and clear of any
Lien or any other limitation or restriction (including any restriction on the
right to vote or sell the same except as may be provided as a matter of
Applicable Law). Except as set forth in Section 2.2(b) of the Company Disclosure
Schedule, there are no (i) securities of the Company or any of its subsidiaries
convertible into or exchangeable or exercisable for, (ii) options or (iii) other
rights to acquire from the Company or any of its subsidiaries any capital stock
or other ownership interests in or any other securities of any subsidiary of the
Company, and there exists no other contract, understanding, arrangement or
obligation (whether or not contingent) providing for the issuance or sale,
directly or indirectly, of any such capital stock. There are no outstanding
contractual obligations of the Company or its subsidiaries to repurchase, redeem
or otherwise acquire any outstanding shares of capital stock or other ownership
interests in any subsidiary of the Company.
(c) The Shares constitute the only class of equity securities of the
Company or its subsidiaries registered or required to be registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
SECTION 2.3 Authority Relative to this Agreement; Recommendation.
(a) The Company has all necessary corporate power and authority to execute
and deliver this Agreement, to perform its obligations under this Agreement, and
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby,
have been duly and validly authorized by the Board of Directors of the Company
(the "Company Board"), and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement, or to consummate the
transactions contemplated hereby, except the approval of this Agreement by the
holders of a majority of the outstanding Shares. This Agreement has been duly
and validly executed and delivered by the Company and, assuming the due
authorization, execution and delivery of this Agreement by Parent and
Acquisition, constitutes the valid, legal and binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to any
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
now or hereafter in effect relating to creditors' rights generally or to general
principles of equity.
(b) Without limiting the generality of the foregoing, the Company Board has
unanimously (1) determined that the Merger is fair to, and in the best interests
of the Company and the Company's stockholders, (2) approved this Agreement, the
Merger and the other transactions contemplated hereby, (3) resolved to recommend
approval and adoption of this Agreement, the Merger and the other transactions
contemplated hereby by the Company's stockholders, and (4) has
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not withdrawn or modified such approval or resolution to recommend (except as
otherwise permitted in this Agreement).
SECTION 2.4 SEC Reports; Financial Statements.
(a) The Company has filed all required forms, reports and documents
("Company SEC Reports") with the Securities and Exchange Commission (the "SEC")
since August 14, 1996 (the "IPO Date")(which the Company hereby represents is
the date it first became subject to the reporting requirements of the Securities
Exchange Act of 1934), each of which complied at the time of filing in all
material respects with all applicable requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the Exchange Act, each law as in
effect on the dates such forms, reports and documents were filed. None of such
Company SEC Reports, including any financial statements or schedules included or
incorporated by reference therein, contained when filed any untrue statement of
a material fact or omitted to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading,
except to the extent superseded or amended by a Company SEC Report filed
subsequently and prior to the date hereof. The audited consolidated financial
statements of the Company included in the Company SEC Reports fairly present, in
conformity in all material respects with generally accepted accounting
principles applied on a consistent basis (except as may be indicated in the
notes thereto), the financial position of the Company and its subsidiaries as of
the dates thereof and their results of operations and changes in financial
position for the periods then ended. Notwithstanding the foregoing, the Company
shall not be deemed to be in breach of any of the representations or warranties
in this Section 2.4(a) as a result of any changes to the Company SEC Reports
that the Company may make in response to comments received from the SEC on the
S-4 or the Proxy Statement (each as defined below).
(b) The Company has heretofore made, and hereafter will make, available to
Acquisition or Parent a complete and correct copy of any amendments or
modifications that are required to be filed with the SEC but have not yet been
filed with the SEC to agreements, documents or other instruments that previously
had been filed by the Company with the SEC pursuant to the Exchange Act.
SECTION 2.5 Information Supplied. None of the information supplied or to
be supplied by the Company in writing for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 to be filed with the SEC
by Parent in connection with the issuance of shares of Parent Common Stock in
the Merger (the "S-4") will, at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) the proxy statement relating to the
meeting of the Company's stockholders to be held in connection with the Merger
(the "Proxy Statement") will, at the date mailed to stockholders of the Company
and at the time of the meeting of stockholders of the Company to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein in light of the circumstances under which
they are made not misleading. The Proxy Statement insofar as it relates to the
meeting of the Company's stockholders to vote on the Merger will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder. Notwithstanding the foregoing, the Company
makes no representation, warranty or covenant with respect to any information
supplied or required to be supplied by Parent or Acquisition that is contained
in or omitted from any of the foregoing documents.
SECTION 2.6 Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under
applicable requirements of the Securities Act,
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the Exchange Act, state securities or blue sky laws, and the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), any filings
under similar merger notification laws or regulations of foreign Governmental
Entities and the filing and recordation of the Certificate of Merger as required
by the DGCL, no material filing with or notice to and no material permit,
authorization, consent or approval of any United States (federal, state or
local) or foreign court or tribunal, or administrative, governmental or
regulatory body, agency or authority (a "Governmental Entity") is necessary for
the execution and delivery by the Company of this Agreement or the consummation
by the Company of the transactions contemplated hereby. Neither the execution,
delivery and performance of this Agreement by the Company nor the consummation
by the Company of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the respective Certificate of
Incorporation or bylaws (or similar governing documents) of the Company or any
of its subsidiaries, (ii) except as set forth in Section 2.6 of the Company
Disclosure Schedule, result in a material violation or breach of or constitute
(with or without due notice or lapse of time or both) a material default (or
give rise to any material right of termination, amendment, cancellation or
acceleration or Lien) under any of the terms, conditions or provisions of any
material note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which the Company or any of its subsidiaries
is a party or by which any of them or any of their respective properties or
assets are bound or (iii) except as set forth in Section 2.6 of the Company
Disclosure Schedule, materially violate any material order, writ, injunction,
decree, law, statute, rule or regulation applicable to the Company or any of its
subsidiaries or any of their respective properties or assets.
SECTION 2.7 No Default. Except as set forth in Section 2.7 of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries is in
material breach, default or violation (and no event has occurred that with
notice or the lapse of time or both would constitute a material breach, default
or violation) of any term, condition or provision of (i) its Certificate of
Incorporation or bylaws (or similar governing documents), (ii) any material
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which the Company or any of its subsidiaries is now
a party or by which it or any of its properties or assets are bound or (iii) any
material order, writ, injunction, decree, law, statute, rule or regulation
applicable to the Company or any of its subsidiaries or any of its properties or
assets.
SECTION 2.8 No Undisclosed Liabilities; Absence of Changes.
(a) Except as and to the extent publicly disclosed by the Company in the
Company SEC Reports or as set forth in Section 2.8 of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries has any material
liabilities or obligations of any nature, whether or not accrued or contingent,
that would be required by generally accepted accounting principles to be
reflected in the liabilities column of a consolidated balance sheet of the
Company, other than (i) liabilities specifically described in this Agreement or
in the Company Disclosure Schedule, (ii) normal or recurring liabilities
incurred since September 30, 1999 in the ordinary course of business consistent
with past practices, (iii) liabilities permitted by Section 4.1, and (iv) items
required under generally accepted accounting principles to be disclosed in notes
and those items that would result from normal year end adjustments.
(b) Except as publicly disclosed by the Company in the Company SEC Reports
or as set forth in Section 2.8 of the Company Disclosure Schedule, from
September 30, 1999 to the date of this Agreement, there have been no events,
changes or effects with respect to the Company or its subsidiaries that,
individually or in the aggregate, have had or reasonably would be expected to
have had a Material Adverse Effect on the Company. Without limiting the
generality of the foregoing, except as and to the extent publicly disclosed by
the Company in the Company SEC Reports or as set forth in Section 2.8 of the
Company Disclosure Schedule, from September 30, 1999 to the date of
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this Agreement, the Company and its subsidiaries have conducted their respective
businesses in all material respects only in, and have not engaged in any
material transaction other than according to, the ordinary and usual course of
such businesses consistent with past practices, and there has not been any (i)
material adverse change in the financial condition, business or results of
operations of the Company and its subsidiaries; (ii) material damage,
destruction or other casualty loss with respect to any material asset or
property owned, leased or otherwise used by the Company or any of its
subsidiaries, not covered by insurance; (iii) declaration, setting aside or
payment of any dividend or other distribution in respect of the capital stock of
the Company or any of its subsidiaries (other than wholly-owned subsidiaries) or
any repurchase, redemption or other acquisition by the Company or any of its
subsidiaries of any outstanding shares of capital stock or other securities of,
or other ownership interests in, the Company or any of its subsidiaries; (iv)
amendment of any material term of any outstanding security of the Company or any
of its subsidiaries; (v) incurrence, assumption or guarantee by the Company or
any of its subsidiaries of any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with past
practices; (vi) creation or assumption by the Company or any of its subsidiaries
of any Lien on any material asset other than in the ordinary course of business
consistent with past practices; (vii) loan, advance or capital contributions
made by the Company or any of its subsidiaries to, or investment in, any person
other than (1) loans or advances to employees in connection with
business-related travel, (2) loans made to employees consistent with past
practices, and (3) loans, advances or capital contributions to or investments in
wholly-owned subsidiaries, and in each case made in the ordinary course of
business consistent with past practices; (viii) material transaction or
commitment made, or any material contract or agreement entered into, by the
Company or any of its subsidiaries relating to its material assets or business
(including the acquisition (by sale, license or otherwise) or disposition (by
sale, license or otherwise) of any material assets) or any relinquishment by the
Company or any of its subsidiaries of any contract, agreement or other right, in
any such case, material to the Company and its subsidiaries, taken as a whole,
other than transactions, commitments, contracts or agreements in the ordinary
course of business consistent with past practices and those contemplated by this
Agreement or disclosed in the Company Disclosure Schedule; (ix) labor dispute,
other than routine individual grievances, or any activity or proceeding by a
labor union or representative thereof to organize any employees of the Company
or any of its subsidiaries, or any lockouts, strikes, slowdowns, work stoppages
or threats thereof by or with respect to such employees; (x) any exclusive
license, distribution, marketing, sales or other agreement entered into or any
agreement to enter into any exclusive license, distribution, marketing, sales or
other agreement; or (xi) change by the Company or any of its subsidiaries in its
accounting principles, practices or methods. From September 30, 1999 to the date
of this Agreement, except as disclosed in the Company SEC Reports filed prior to
the date hereof or increases in the ordinary course of business consistent with
past practices, there has not been any material increase in the compensation
payable or that could become payable by the Company or any of its subsidiaries
to (a) officers of the Company or any of its subsidiaries (b) any employee of
the Company or any of its subsidiaries whose annual cash compensation is
$100,000 or more, or (c) any other employees, where the aggregate amount of such
increases to such other employees is more than $25,000.
SECTION 2.9 Litigation. Except as publicly disclosed by the Company in
the Company SEC Reports or as set forth in Section 2.9 of the Company Disclosure
Schedule, as of the date of this Agreement, there is no suit, claim, action,
arbitration, proceeding or (to the knowledge of the Company) investigation
pending or, to the knowledge of the Company, threatened against the Company or
any of its subsidiaries or any of their respective properties or assets before
any Governmental Entity or brought by any person that is material or would
reasonably be expected to prevent or delay the consummation of the transactions
contemplated by this Agreement beyond the Final Date. Except as publicly
disclosed by the Company in the Company SEC Reports, as of the date of this
Agreement, neither the Company nor any of its subsidiaries is subject to any
outstanding
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order, writ, injunction or decree that would reasonably be expected to be
material or would reasonably be expected to prevent or delay the consummation of
the transactions contemplated hereby. No Governmental Entity has at any time
challenged or questioned in writing to the Company the legal right of the
Company to design, offer or sell any of its products or services in the present
manner or style thereof.
SECTION 2.10 Compliance with Applicable Law. Except as set forth in
Section 2.10(b) of the Company Disclosure Schedule or publicly disclosed by the
Company in the Company SEC Reports, the Company and its subsidiaries hold all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for the lawful conduct of their respective
businesses (the "Company Permits") the failure of which to hold with would
result in a Material Adverse Effect. Except as publicly disclosed by the Company
in the Company SEC Reports, the Company and its subsidiaries have complied and
are in material compliance with the terms of the Company Permits, except for any
non-compliance that would result in a Material Adverse Effect. Except as
publicly disclosed by the Company in the Company SEC Reports, the businesses of
the Company and its subsidiaries have been and are being conducted in material
compliance with all material Applicable Laws, except for any non-compliance that
would result in a Material Adverse Effect. Except as publicly disclosed by the
Company in the Company SEC Reports, to the knowledge of the Company, no
investigation or review by any Governmental Entity with respect to the Company
or any of its subsidiaries is pending or threatened, nor has any Governmental
Entity indicated an intention to conduct the same, excluding any such
investigation that would result in a Material Adverse Effect.
SECTION 2.11 Employee Benefits.
(a) Definitions. For purposes of this Agreement, the following terms shall
have the meanings set forth below:
(i) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(ii) "Erisa Affiliate" shall mean any other person or entity under
common control with the Company within the meaning of Section 414(b), (c),
(m) or (o) of the Code and the regulations thereunder;
(iii) "Company Employee Plan" shall refer to any written plan,
program, policy, practice, contract, agreement or other arrangement
providing for compensation, severance, termination pay, stock option, stock
purchase, stock bonus, performance awards, membership interest or
membership interest-related awards, retirement, health, life, disability
insurance, dependent care, retirement, medical, fringe benefits or other
employee benefits or remuneration of any kind, funded or unfunded,
including each "employee benefit plan," within the meaning of Section 3(3)
of ERISA, that is or has within the last three (3) years been maintained,
contributed to, or required to be contributed to, by the Company or any
ERISA Affiliate for the benefit of any "Employee" (as defined below) and
pursuant to which the Company or any ERISA Affiliate has or may have any
liability contingent or otherwise;
(iv) "Employee" shall mean any current, former, or retired employee,
director, or officer of the Company or any ERISA Affiliate or any other
person entitled to participate under any Company Employee Plan;
(v) "Employee Agreement" shall refer to each management, employment
and consulting agreement or contract and each severance, signing bonus,
relocation, repatriation, expatriation, visa, work permit or similar
agreement or contract between the Company or any ERISA Affiliate
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and any Employee or consultant, as to which, as of the date of the
Agreement, unsatisfied obligations of the Company are greater than $10,000,
except, for purposes of Section 2.11(i), the term "Employee Agreement"
shall not be limited by the $10,000 amount if the aggregate amount of
unsatisfied obligations of the Company under all such agreements is in
excess of $50,000;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "Multiemployer Plan" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA;
(viii) "Multiple Employer Plan" shall mean any "Pension Plan" (as
defined below) which is a "multiple employer plan," as defined in Section
4063 or 4064 of ERISA;
(ix) "Pension Plan" shall refer to each Company Employee Plan which is
an "employee pension benefit plan," within the meaning of Section 3(2) of
ERISA; and
(x) "Welfare Plan" shall refer to each Company Employee Plan which is
a welfare plan as defined in ERISA Section 3(1).
(b) Employee Plans. Section 2.11(b) of the Company Disclosure Schedule
contains an accurate and complete list of each Company Employee Plan and each
Employee Agreement. The Company has never verbally represented, promised or
contracted to any Employee to maintain or sponsor any Company Employee Plan
other than those listed in Section 2.11(b) of the Company Disclosure Schedule.
There is no verbal Company Employee Plan to which the Company is a party. The
Company has made available to Parent or its counsel, where applicable, true,
complete and correct copies of (1) the most recent plan documents, related trust
documents, adoption agreements, summary plan descriptions, and all amendments
thereto for each Company Employee Plan, (2) the three most recent annual reports
on Form 5500 filed with the IRS with respect to each Company Employee Plan, (3)
each group annuity contract, insurance policy, service agreement, and other
material agreement or policy related to any Company Employee Plan, (4) the three
most recent annual nondiscrimination test reports for each Company Employee
Plan, (5) the three most recent actuarial and audit reports for each Pension
Plan, (6) all IRS determination letters and rulings received by the Company and
copies of all applications and correspondence since January 1, 1999 to or from
the IRS or the Department of Labor ("DOL") with respect to any Company Employee
Plan, (7) all material communications in the Company's possession to any
Employee relating to any Company Employee Plan, or in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any material Liability to the Company, and (8) all registration statements
and prospectuses prepared in connection with each Company Employee Plan.
(c) Employee Plan Compliance. Except as set forth in Section 2.11(c) of
the Company Disclosure Schedule, (i) each Company Employee Plan has been
established and maintained in accordance with its terms and all Applicable Laws,
including ERISA and the Code; (ii) no "prohibited transaction," within the
meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with
respect to any Company Employee Plan; (iii) no Employee of the Company has
committed a material breach of any responsibility or obligation imposed upon
fiduciaries by Title I of ERISA with respect to any Company Employee Plan; (iv)
there are no proceedings pending, or, to the Company's knowledge, threatened or
anticipated (other than routine claims for benefits) against any Company
Employee Plan or against the assets of any Company Employee Plan; (v) each
Company Employee Plan can be amended, terminated or otherwise discontinued in
accordance with its terms, without liability to the Company, Parent or any of
their respective ERISA Affiliates (other than amounts for accrued benefits and
ordinary administration expenses incurred in a termination
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event); (vi) there are no inquiries, investigations, audits or proceedings
pending or, to the Company's knowledge, threatened by the IRS or DOL with
respect to any Company Employee Plan or any related trust; (vii) neither the
Company nor any ERISA Affiliate is subject to any penalty or tax with respect to
any Company Employee Plan under Sections 4975 through 4980 of the Code; (viii)
each Pension Plan that is intended to be qualified under Section 401(a) of the
Code is and has received a favorable determination opinion, notification or
advisory letter with respect to such status from the IRS or has time remaining
to apply under applicable Treasury Regulation or IRS pronouncement for a
determination or opinion letter and to make any necessary amendments, and no
event has occurred and no condition or circumstance has existed or exists which
may reasonably be expected to result in the disqualification of such Pension
Plan; (ix) there is no violation of any reporting or disclosure requirements
imposed by ERISA or the Code with respect to any Company Employee Plan that
would result in a material liability to the Company; (x) all contributions
required to be made to any Company Employee Plan pursuant to Section 412 of the
Code (without regard to any waivers of such requirements) or the terms of the
Employee Plan, have been made on or before their due dates (including any
contractual or statutory grace periods); (xi) neither Company nor any ERISA
Affiliate is, nor do any of them expect to be, subject to (1) a security
interest pursuant to Section 412(f) of the Code or (2) a lien pursuant to
Section 412(n) of the Code or Section 4068 or 302(f) of ERISA; and (xii) no
event has occurred and there exists no condition or set of circumstances which
could reasonably be anticipated to result in any material liability to the
Parent, the Company or its ERISA Affiliates with respect to any Company Employee
Plan.
(d) Pension Plans. At no time have the Company or its ERISA Affiliates
maintained a Pension Plan subject to Code Section 412 or ERISA Section 302.
(e) Multiemployer and Multiple Employer Plans. At no time have the Company
or its ERISA Affiliates contributed to or been required to contribute to any
Multiemployer Plan or Multiple Employer Plan.
(f) Post-Employment Obligations. Except as set forth in Section 2.11(f) of
the Company Disclosure Schedule, no Company Employee Plan provides, or has any
liability to provide, life insurance, medical or other employee welfare benefits
to any Employee upon his or her retirement or termination of employment for any
reason, except as (i) may be required by statute, (ii) to benefits the full cost
of which are borne by Employees of the Company (or such Employees' beneficiaries
or dependents), (iii) death or disability benefits under any of the Company
Employee Plans, or (iv) life insurance benefits for any Employee who dies while
in service with the Company.
(g) Welfare Plans. With respect to any Welfare Plans maintained by the
Company or its ERISA Affiliates, the Company and its ERISA Affiliates have
complied with the provisions of Sections 4980B, 9801 and 9802 of the Code.
(h) Plan Expenses and Amendment. Since the beginning of the current fiscal
year of any Company Employee Plan, no event has occurred and no condition or
circumstance has existed that could result in a material increase in the
benefits under or the expense of maintaining such Company Employee Plan from the
level of benefits or expense incurred for the most recently completed fiscal
year of such Company Employee Plan. Except as provided in Section 2.11(h) of the
Company Disclosure Schedule, no insurance policy or any other contract or
agreement affecting any Company Employee Plan requires or permits a retroactive
increase in premiums or payments due thereunder. Except as set forth in Schedule
2.11(h) of the Company Disclosure Schedule, all amendments and actions required
to bring each of the Company Employee Plans into conformity with all of the
applicable provisions of ERISA and other applicable laws have been made or taken
except to the extent that such amendments or actions are not required by law to
be made or taken until a date after the Effective Time.
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(i) Effect of Transaction.
(i) Except as set forth in Section 2.11(i) of the Company Disclosure
Schedule, the execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the occurrence
of any additional or subsequent events other than events occurring after the
Effective Time which are caused by acts or omissions of Parent or the Company)
constitute an event under any Company Employee Plan, Employee Agreement, trust
or loan that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any
Employee.
(ii) In Section 2.11(i) of the Company Disclosure Schedule, the Company
shall provide compensation information for any Employee identified pursuant to
Section 2.11(i)(i) of this Agreement sufficient to allow the independent public
accountants retained by Parent to calculate each Employee's "base amount" within
the meaning of Section 280G(b)(3) of the Code, as is necessary to determine
whether any payment or benefit which will or would reasonably be expected to be
made by the Company or Parent or any of their respective affiliates with respect
to any Employee will be characterized as an "excess parachute payment," within
the meaning of Section 280G(b)(1) of the Code.
(j) Stock Options. Section 2.11(j) of the Company Disclosure Schedule
lists all outstanding Stock Options as of October 31, 1999, identifying for each
such option: (1) the number of shares issuable, (2) the number of vested shares,
(3) the date of expiration and (4) the exercise price. Other than the automatic
vesting of Stock Options that may occur without any further action on the part
of the Company or its officers or directors, the Company has not taken any
action that would result in any Stock Options that are unvested becoming vested
or their terms being extended in connection with or as a result of the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(k) Foreign Plans. There are no Company Employee Plans maintained for
Employees outside of the United States.
(l) Employee Stock Purchase Plan. There are no options outstanding to
purchase shares of the Company's Common Stock under the Company's 1996 Employee
Stock Purchase Plan.
SECTION 2.12 Labor and Employment Matters. Except as set forth in Section
2.12 of the Company Disclosure Schedule:
(a) No collective bargaining agreement exists that is binding on the
Company or any of its subsidiaries, and the Company has not been officially
apprised that any petition has been filed or proceeding instituted by an
employee or group of employees of the Company, or any of its subsidiaries,
with the National Labor Relations Board seeking recognition of a bargaining
representative.
(b) (i) To the Company's knowledge, there is no labor strike, dispute,
slow down or stoppage pending or threatened against the Company or any of
its subsidiaries; and
(ii) As of the date of this Agreement, neither the Company nor
any of its subsidiaries has received in the last twenty-four (24) months
any demand letters, civil rights charges, suits or drafts of suits with
respect to claims made by any of their respective employees.
(c) All individuals who are currently performing consulting or other
services for the Company or any of its subsidiaries are currently
classified by the Company as either "independent contractors" or
"employees" as the case may be, and, at the Closing Date, will qualify for
such classification.
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(d) Section 2.12(d) of the Company Disclosure Schedule contains a list
as of the date of this Agreement of the name of each officer, employee and
consultant of the Company or any of the Company's subsidiaries, together
with such person's position or function, annual base salary or wages and
any incentives or bonus arrangement with respect to such person. As of the
date hereof, the Company has not received any information that would lead
it to believe that any such person will or may cease to be engaged by the
Company or such subsidiary for any reason, including because of the
consummation of the transactions contemplated by this Agreement.
(e) The Company and each of its subsidiaries has in all material
respects withheld and reported all material amounts required by law or by
agreement to be withheld and reported with respect to wages, salaries and
other payments to employees.
(f) The Company is not liable for any material payment to any trust or
other fund or to any Governmental Authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice).
(g) Section 2.12(g) of the Company Disclosure Schedule sets forth a
complete and correct list as of the date of this Agreement of all Employees
holding visas issued by the United States (or if such Employee works
principally in a foreign country, such foreign country), listing each such
employee by name and type of visa. Section 2.12(g) of the Company
Disclosure Schedule sets forth a complete and correct list as of the date
of this Agreement of all Employees holding visas issued by foreign
countries, listing each such employer by name, and type of visa. Except as
set forth in Section 2.12(g) of the Company Disclosure Schedule, as of the
date of this Agreement, all other Employees of the Company and its
subsidiaries are citizens of the United States or the foreign country in
which such Employee performs services for the Company and its subsidiaries.
(h) Except as set forth in Section 2.12(h) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries is bound by any
agreement, nor has it taken or omitted to take any action, that restricts
its ability to terminate the employment of any of its Employees at any time
without payment or other liability.
SECTION 2.13 Environmental Laws and Regulations.
(a) The term "Environmental Laws" means any applicable federal, state,
local or foreign law, statute, treaty, ordinance, rule, regulation, policy,
permit, consent, approval, license, judgment, order, decree or injunction
relating to: (a) Releases (as defined in 42 U.S.C. sec. 9601(22)) or threatened
Releases of Hazardous Material (as hereinafter defined) into the environment,
(b) the generation, treatment, storage, disposal, use, handling, manufacturing,
transportation or shipment of Hazardous Material, (c) the health or safety of
employees in the workplace, (d) protecting or restoring natural resources or (e)
the environment. The term "Hazardous Material" means (1) "hazardous substances"
(as defined in 42 U.S.C. sec. 9601(14)), including "hazardous waste" as defined
in 42 U.S.C. sec. 6903, (2) petroleum, including crude oil and any fractions
thereof, (3) natural gas, synthetic gas and any mixtures thereof, (4) asbestos
and/or asbestos containing materials, (5) PCBs or materials containing PCBs, (6)
any material regulated as a medical waste, (7) lead containing paint, (8)
radioactive materials and (9) "Hazardous Substance" or "Hazardous Material" as
those terms are defined in any indemnification provision in any contract, lease,
or agreement to which the Company or any of its subsidiaries is a party.
(b) During the period of ownership or operation by the Company and its
subsidiaries of any of their current or previously owned or leased properties,
there have been no Releases of Hazardous Material by the Company or any of its
subsidiaries in, on, under or affecting such properties or any
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surrounding site, and neither the Company nor any of its subsidiaries has
disposed of any Hazardous Material in a manner that has led, or could reasonably
be anticipated to lead to a Release. There have been no Releases of Hazardous
Material by the Company or any of its subsidiaries in, on, under or affecting
their current or previously owned or leased properties or any surrounding site
at times outside of such periods of ownership, operation or lease. The Company
and its subsidiaries have not received any written notice of, or entered into
any order, settlement or decree relating to: (a) any violation of any
Environmental Laws or the institution or pendency of any suit, action, claim,
proceeding or investigation by any Governmental Entity or any third party in
connection with any alleged violation of Environmental Laws or (b) the response
to or remediation of Hazardous Material at or arising from any of the Company's
properties or any subsidiary's properties. There have been no material
violations of any Environmental Laws by the Company or any subsidiary.
(c) Since the IPO Date, there has not occurred any events, conditions,
circumstances, activities, practices, incidents, actions, omissions or plans
that constitute a violation by the Company or any of the Company's subsidiaries
of, or are reasonably likely to prevent or interfere with the Company's or any
of the Company's subsidiaries' future compliance with, any Environmental Laws,
which such violations or non-compliance would result in a Material Adverse
Effect.
SECTION 2.14 Taxes.
(a) Definitions. For purposes of this Agreement:
(i) the term "Tax" (including "Taxes") means (A) all federal, state, local,
foreign and other net income, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties or other taxes, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts with respect thereto, (B) any liability
for payment of amounts described in clause (A) whether as a result of transferee
liability, of being a member of an affiliated, consolidated, combined or unitary
group for any period, or otherwise through operation of law, and (C) any
liability for the payment of amounts described in clauses (A) or (B) as a result
of any tax sharing, tax indemnity or tax allocation agreement or any other
express or implied agreement to indemnify any other person; and
(ii) the term "Tax Return" means any return, declaration, report,
statement, information statement and other document filed or required to be
filed with respect to Taxes.
(b) Except as set forth in Section 2.14(b) of the Company Disclosure
Schedule (i) the Company and its subsidiaries have duly and timely filed all
material Tax Returns required to be filed; (ii) such Tax Returns are complete
and accurate in all material respects and correctly reflect the Tax liability
required to be reported thereon; and (iii) such Tax Returns do not contain a
disclosure statement under Section 6662 of the Code (or any predecessor
provision or comparable provision of state, local or foreign law).
(c) Except as set forth in Section 2.14(c) of the Company Disclosure
Schedule (i) the Company and its subsidiaries have paid all Taxes due and
payable, and have adequately provided in the financial statements included in
the SEC Reports for all material Taxes (whether or not shown on any Tax Return)
accrued but not yet due and payable through the date of such Company SEC
Reports; (ii) all material Taxes the Company and its subsidiaries accrued
following the end of the most recent period covered by the Company SEC Report
have been accrued in the ordinary course of business of the Company consistent
with past practice and each such subsidiary and have been paid when due in the
ordinary course of business consistent with past practices; and (iii) no
material election has been made with respect to Taxes of the Company or its
subsidiaries in any Tax Returns that have not been provided to Parent.
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(d) Except as set forth in Section 2.14(d) of the Company Disclosure
Schedule, no material claim for assessment or collection of Taxes is presently
being asserted against the Company or its subsidiaries and neither the Company
nor any of its subsidiaries is a party to any pending action, proceeding, or
investigation by any governmental taxing authority nor does the Company have
knowledge of any such threatened action, proceeding or investigation.
(e) The Company has not made any payments and is not required to make any
payments that will not be fully deductible under Section 162(m) of the Code.
(f) Neither the Company nor any of its affiliates has taken, proposes to
take or agreed to take any action that would prevent the Merger from
constituting a reorganization qualifying under the provisions of Section 368(a)
of the Code.
(g) Except as set forth in Section 2.14(g) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries is a party to or bound
by any obligation under any Tax sharing, Tax allocation, Tax indemnity or
similar agreement or arrangement.
(h) Except as set forth in Section 2.14(h) of the Company Disclosure
Schedule, there is currently no limitation on the utilization of net operating
losses, built-in losses, tax credits or other similar items of the Company or
its subsidiaries under Section 382, 383, 384 or 1502 of the Code and the
Treasury Regulations thereunder.
(i) Except as set forth in Section 2.14(i) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries has agreed to, or is
required to make, any adjustment under Section 481 of the Code by reason of a
change in accounting method.
(j) Neither the Company nor any of its subsidiaries is a "consenting
corporations" within the meaning of Section 341(j) of the Code.
SECTION 2.15 Intellectual Property.
(a) Section 2.15(a) of the Company Disclosure Schedule sets forth a
complete and accurate list of all of the following (if any) owned by Company and
its subsidiaries, to its actual knowledge: (a) patents and patent applications;
(b) Trademark registrations and applications and material unregistered
Trademarks; and (c) copyright registrations and applications, indicating for
each, the applicable jurisdiction, registration number (or application number)
and date issued (or date filed). For purposes of this Agreement, "Intellectual
Property" means: trademarks and service marks (whether registered or
unregistered), trade names, designs and general intangibles of like nature,
together with all goodwill related to the foregoing (collectively,
"Trademarks"); patents (including any continuations, continuations in part,
renewals and applications for any of the foregoing) (collectively "Patents");
copyrights (including any registrations and applications therefor and whether
registered or unregistered) (collectively "Copyrights"); computer software;
databases; works of authorship; mask works; trade secrets and other confidential
information, know-how, proprietary processes, formulae, algorithms, models, user
interfaces, customer lists, inventions, discoveries, concepts, ideas,
techniques, methods, source codes, object codes, methodologies and, with respect
to all of the foregoing, related confidential data or information (collectively,
"Trade Secrets").
(b) Trademarks.
(i) All Trademark registrations made by the Company or its subsidiaries
are, as of the date hereof, in compliance in all material respects with all
legal requirements (including the timely post-registration filing of affidavits
of use and incontestability and renewal applications) other than any requirement
that, if not satisfied, would not result in a cancellation of any such
registration or otherwise materially affect the priority, validity and
enforceability of the Trademark in question.
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(ii) As of the date hereof, no registered Trademark owned by the Company or
any of its subsidiaries has been within the last three (3) years or is now
involved in any opposition or cancellation proceeding in the United States
Patent and Trademark Office. No such action has been threatened in writing
within the two (2)-year period prior to the date of this Agreement.
(iii) To the knowledge of the Company, there has been no prior use of any
material Trademark by any third party that confers upon said third party
superior rights in any such Trademark.
(c) Patents.
(i) All Patents owned by the Company or any of its subsidiaries are, as of
the date hereof, in compliance with legal requirements (including payment of
filing, examination, and maintenance fees and proofs of working or use) other
than any requirement that, if not satisfied, would not result in a revocation or
otherwise materially affect the enforceability of the Patent in question.
(ii) As of the date hereof, no Patent owned by the Company or any of its
subsidiaries has been or is now involved in any interference, reissue,
reexamination or opposing proceeding in the United States Patent and Trademark
Office. No such action has been threatened in writing within the two (2) year
period prior to the date of this Agreement.
(iii) As of the date hereof, there is no patent or, to the Company's
knowledge, patent application of any person that conflicts in any material
respect with any Patent owned by the Company or any of its subsidiaries, or
invalidates any claim the Company, or any of the Company's subsidiaries, has in
any Patent owned by the Company or any of its subsidiaries.
(d) Copyrights.
(i) To the Company's actual knowledge, no Copyright owned by the Company or
any of its subsidiaries has been infringed or has been challenged or threatened
in any way. To the Company's actual knowledge, none of the subject matter of any
of the Copyrights owned by the Company or any of its subsidiaries infringes or
is alleged to infringe any copyright of any third party.
(e) Trade Secrets.
(i) The Company and each of its subsidiaries has taken reasonable steps in
accordance with normal industry practice to protect their respective rights in
its Trade Secrets, subject to its business judgement in the ordinary course of
business to publicly disclose Trade Secrets.
(ii) Without limiting the generality of Section 2.15(e)(i) and except as
would not be materially adverse to the Company or its business, the Company and
each subsidiary enforces a policy of requiring each relevant employee,
consultant and contractor to execute proprietary information, confidentiality
and assignment agreements substantially in the form of the Company's standard
forms (all of which are valid and enforceable under applicable law) that assign
to the Company all rights to any Intellectual Property rights relating to the
Company's business that are developed by the employee, consultant or contractor,
as applicable, in the course of his or her activities for the Company or are
developed during working hours or using Company resources and that otherwise
appropriately protect the Intellectual Property of the Company and its
subsidiaries. Except under confidentiality obligations (and subject to
subsection(i) above), there has been no disclosure by the Company or any
subsidiary of material confidential information or Trade Secrets, subject to its
business judgement in the ordinary course of business to publicly disclose Trade
Secrets.
(iii) Notwithstanding items (i) and (ii), the Company and each of its
subsidiaries have taken reasonable steps in accordance with normal industry
practice to protect their respective rights in its Trade Secrets contained in
and relating to the product MarketStream 2.0 and all subsequent versions;
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and to the Company's and each of its subsidiaries actual knowledge, the Company
and each of its subsidiaries have taken reasonable steps in accordance with
normal industry practice to protect their respective rights in its Trade Secrets
contained in all other products used, manufactured, marketed, sold or licensed
by the Company and its subsidiaries.
(f) License Agreements. Other than software commercially available on
reasonable terms to any person for a total license fee of no more than $5,000,
Section 2.15(f)(1) of the Company Disclosure Schedule sets forth a complete and
accurate list, as of the date hereof, of all license agreements entered into at
any time since the IPO Date on or before the date hereof granting to the Company
or any of its subsidiaries any material right to use or practice any rights
under any Intellectual Property (collectively, the "Inbound License
Agreements"), indicating for each the title, date and the parties thereto. Other
than licenses with customers that, in the twelve-month period ended prior to the
date hereof, have purchased or licensed products for which the total payments to
the Company and its subsidiaries did not exceed $10,000, Section 2.15(f)(2) of
the Company Disclosure Schedule sets forth a complete and accurate list, as of
the date hereof, of all license agreements under which the Company or any of its
subsidiaries licenses software or grants other rights to use or practice any
rights under any Intellectual Property (collectively, the "Outbound License
Agreements"), indicating for each the title, date and the parties thereto. As of
the date hereof, there is no material outstanding or, to the Company's
knowledge, threatened dispute or disagreement with respect to any Inbound
License Agreement or any Outbound License Agreement.
(g) Ownership; Sufficiency of IP Assets. The Company owns or possesses
adequate licenses or other rights to use, free and clear of Liens, orders and
arbitration awards, all of the Intellectual Property used in and material to its
business. The Company's Intellectual Property, together with the Company's and
its subsidiaries' rights under the licenses granted to the Company or any of its
subsidiaries under the Inbound License Agreements, constitute all the material
Intellectual Property rights used in the operation of the Company's and its
subsidiaries' businesses as they are currently conducted and are all the
Intellectual Property rights necessary to operate such businesses after the
Effective Time in substantially the same manner as such businesses have been
operated by the Company prior hereto.
(h) Protection of IP. The Company has taken reasonable steps to protect
the Intellectual Property of the Company and its subsidiaries.
(i) No Infringement by the Company. The software product known as
MarketStream version 2.0 and all subsequent versions do not infringe upon,
violate or constitute the unauthorized use of any valid and enforceable rights
owned or controlled by any third party, including any Intellectual Property of
any third party. To the Company's actual knowledge, all other products used,
manufactured, marketed, sold or licensed by the Company and its subsidiaries,
and all Intellectual Property used in the conduct of the Company's and its
subsidiaries' businesses on or before the date hereof, do not infringe upon,
violate or constitute the unauthorized use of any valid and enforceable rights
owned or controlled by any third party, including any Intellectual Property of
any third party.
(j) No Pending or Threatened Infringement Claims. Except and to the extent
publicly disclosed in the Company SEC Reports, no litigation is, as of the date
hereof, or within the three (3) years prior to the date of this Agreement was,
pending and, to the Company's knowledge, no notice or other claim has been made
against the Company within the one (1) year prior to the date of this Agreement,
(A) alleging that the Company any of its subsidiaries has engaged in any
activity or conduct that infringes upon, violates or constitutes the
unauthorized use of the Intellectual Property rights of any third party or (B)
challenging the ownership, use, validity or enforceability of any Intellectual
Property owned or licensed by or to the Company. Except as specifically
disclosed in one or more Sections of the Company Disclosure Schedule pursuant to
this Section 2.15, no
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Intellectual Property (a) that is owned by the Company or any of its
subsidiaries or the subject of an Inbound License Agreement, is subject to any
outstanding order, judgment, decree, stipulation or agreement restricting the
use thereof by the Company or any such subsidiary, except as may be provided in
an Inbound License Agreement, or (b) that is the subject of an Outbound License
Agreement, is subject to any outstanding order, judgment, decree, stipulation or
agreement restricting the sale, transfer, assignment or licensing thereof by the
Company or any of its subsidiaries to any person (except any agreement that may
be expressly included in an Outbound License Agreement).
(k) No Infringement by Third Parties. Except as and to the extent publicly
disclosed in the Company SEC Reports, to the actual knowledge of the Company as
of the date hereof, no third party is or has been misappropriating, infringing,
diluting, or violating any Intellectual Property owned by or licensed to the
Company or any of its subsidiaries, and no such claims against any third party
have been made by the Company or any of its subsidiaries as of the date hereof.
(l) Assignment; Change of Control. Except as set forth in Section 2.15(l)
to the Company Disclosure Schedule, the execution, delivery and performance by
the Company of this Agreement, and the consummation of the transactions
contemplated hereby, will not: (1) cause (whether or not with the passage of
time or at the election of any third party) any payment to become due and
payable by the Company or any of its subsidiaries, or Parent or any of its
subsidiaries, that would not otherwise have become due and payable if this
Agreement had not been executed, delivered or performed, under any Inbound
License Agreement or Outbound License Agreement, (2) result in the loss or
impairment of, or give rise to any right of any third party to terminate or
modify, any of the Company's or any of its subsidiaries' rights to own any of
its Intellectual Property or their respective rights under any Inbound License
Agreement or Outbound License Agreement, or (3) require the consent of any
Governmental Authority or third party in respect of any Inbound License
Agreement or Outbound License Agreement.
(m) Software. The Software owned by the Company or any of its subsidiaries
as of the date hereof, was either (i) developed by employees of the Company or
any of its subsidiaries within the scope of their employment; (ii) developed by
independent contractors who have assigned their rights to the Company or any of
its subsidiaries pursuant to legal, valid and enforceable written agreements; or
(iii) otherwise acquired by the Company or a subsidiary from a third party.
Except as set forth in Section 2.15(m) of the Company Disclosure Schedule, such
Software does not contain any programming code, documentation or other materials
or development environments that embody Intellectual Property rights of any
person other than the Company or any of its subsidiaries. For purposes of this
Section 2.15(m), "Software" means any and all (i) computer programs, including
any and all software implementations of algorithms, models and methodologies,
whether in source code or object code, (ii) databases and compilations,
including any and all data and collections of data, whether machine readable or
otherwise, (iii) descriptions, schematics, flow-charts and other work product
used to design, plan, organize and develop any of the foregoing, and (iv) all
documentation, including user manuals and training materials, relating to any of
the foregoing; and includes, without limiting the foregoing, MarketStream
version 2.0 and all subsequent versions (including any under development).
(n) Performance of Existing Software Products. The Company software
product known as MarketStream version 2.0 and all subsequent versions perform in
all material respects, free of significant bugs, viruses or programming errors,
the functions described in any agreed specifications, end user documentation or
warranties provided to customers or other information provided to customers of
the Company or its subsidiaries on which such customers relied when licensing or
otherwise acquiring such products.
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(o) Year 2000 Compliance.
(i) Except as set forth in Section 2.15(o) of the Company Disclosure
Schedule, the Company Year 2000 Compliant Products will record, store, process
and calculate and present calendar dates falling on and after December 31, 1998,
and will calculate any information dependent on or relating to such dates in the
same manner and with the same functionality, data integrity and performance as
the products record, store, process, calculate and present calendar dates on or
before December 31, 1998, or calculate any information dependent on or relating
to such dates (collectively "Year 2000 Compliant"). Except as set forth in
Section 2.15(o) of the Company Disclosure Schedule, the Company Year 2000
Compliant Products will lose no significant functionality with respect to the
introduction of records containing dates falling on or after December 31, 1998.
Except as set forth in Section 2.15(o) of the Company Disclosure Schedule, the
Company Year 2000 Compliant Products may be used prior to, during and after
December 31, 1998, such that such Software will operate prior to, during and
after such time period without error caused by date data that represents or
references different centuries or more than one century. The "Company Year 2000
Compliant Products" are MarketStream 2.0, OneServer 2.6 for Solaris, and
OneServer 2.5 for HP, and all subsequent versions of each such product.
(ii) The Company Year 2000 Compliant Products conform to all
representations and warranties made by the Company and its subsidiaries to
customers with respect to the introduction of records containing dates falling
on or after December 31, 1998, the advent of the year 2000, the advent of the
twenty-first century, the transition from the twentieth century through the year
2000 and into the twenty-first century, and/or otherwise with regard to the
ability to record, store, process, calculate and present dates from, into and
between the twentieth and twenty-first centuries, including the years 1999 and
2000 and leap year calculations.
SECTION 2.16 Insurance. Each of the Company and its subsidiaries
maintains insurance policies (the "Insurance Policies") against all risks of a
character and in such amounts as are customarily insured against by similarly
situated companies in the same or similar businesses. Each material Insurance
Policy is in full force and effect and is valid, outstanding and enforceable,
and all premiums due thereon have been paid in full. Except as set forth in
Section 2.16 of the Company Disclosure Schedule, none of the material Insurance
Policies will terminate or lapse (or be affected in any other materially adverse
manner) by reason of the transactions contemplated by this Agreement. Each of
the Company and its subsidiaries has complied in all material respects with the
provisions of each Insurance Policy under which it is the insured party. No
insurer under any Insurance Policy has canceled or generally disclaimed
liability under any such policy or, to the Company's knowledge, indicated any
intent to do so or not to renew any such policy. All material claims of which
the Company has knowledge under the Insurance Policies have been filed in a
timely fashion.
SECTION 2.17 Restrictions on Business Activities. Except as set forth in
Section 2.17 of the Company Disclosure Schedule, for employees' obligations to
prior employers and for the limitations (express or implied) in any license of
Intellectual Property to the Company, there is no agreement (noncompete or
otherwise), judgment, injunction, order or decree to which the Company is a
party or otherwise binding upon the Company that has or is reasonably likely to
have the effect of prohibiting or impairing any business practice of the
Company, any acquisition of property (tangible or intangible) by the Company or
the conduct of business by the Company. Without limiting the foregoing, the
Company has not entered into any agreement under which the Company is restricted
from selling, licensing or otherwise distributing any of its products or
providing services to any class of customers, in any geographic area, during any
period of time or in any segment of the market.
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SECTION 2.18 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company owns no real property, nor has it ever owned any real
property. Section 2.18 of the Company Disclosure Schedule sets forth a list of
all real property currently leased by the Company as of the date of this
Agreement. All such current leases are in full force and effect, are valid and
effective in accordance with their respective terms, and there is not, under any
of such leases, any existing material default or material event of default (or
event which with notice or lapse of time, or both, would constitute a material
default), in each case, on the part of the Company. Complete and correct copies
of such leases have been made available to Parent or its counsel.
(b) As of the date of this Agreement, the Company has good and valid title
to, or, in the case of leased properties and assets, valid leasehold interests
in, all of the properties and assets, tangible and intangible, real, personal
and mixed, used or held for use in its business, free and clear of any Liens,
except as reflected in the Company SEC Reports, except for Liens for Taxes not
yet due and payable and except for such imperfections of title, if any, that do
not materially interfere with the present value of the subject property or as
may be reflected in Section 2.18 of the Company Disclosure Schedule.
SECTION 2.19 Certain Business Practices. None of the Company, any of its
subsidiaries or any directors or officers or, to the Company's knowledge, agents
or employees of the Company or any of its subsidiaries has (i) used any funds of
the Company for unlawful contributions, gifts, entertainment or other unlawful
expenses related to political activity, (ii) made any unlawful payment on behalf
of the Company to foreign or domestic government officials or employees or to
foreign or domestic political parties or campaigns or violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any other
unlawful payment on behalf of the Company.
SECTION 2.20 Product Warranties. Section 2.20 of the Company Disclosure
Schedule sets forth complete and accurate copies of the forms of written
warranties and guaranties by the Company or any of its subsidiaries currently in
effect with respect to its products for the customers identified in Section 2.20
of the Company Disclosure Schedule. The Company represents and warrants that it
has provided Parent with copies (or written summaries, if oral) of all such
warranties or guaranties. There have not been any material deviations from such
warranties and guaranties (whether written or oral), and neither the Company,
any of its subsidiaries nor any of their respective salesmen, employees,
distributors and agents is authorized to undertake obligations to any customer
or to other third parties materially in excess of such warranties or guaranties.
SECTION 2.21 Agreements, Scheduled Contracts and Commitments. Except as
set forth in Section 2.21 of the Company Disclosure Schedule, as of the date of
this Agreement, the Company does not have, is not a party to nor is it bound by:
(i) any collective bargaining agreements;
(ii) any employment or consulting agreement with an employee or
individual consultant, or any consulting or sales agreement under which a
firm or other organization provides services to the Company other than
those that are terminable by the Company or any of its subsidiaries on no
more than thirty days notice without liability or financial obligation
exceeding $50,000, except to the extent general principles of wrongful
termination law may limit the Company's or any of its subsidiaries' ability
to terminate employees at will, or any consulting agreement;
(iii) any fidelity or surety bond or completion bond;
(iv) any agreement of indemnification other than in the ordinary
course of business consistent with past practice or any guaranty, in either
case, entered into since the IPO Date;
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(v) any agreement entered into since the IPO Date pursuant to which
the Company has granted or may grant in the future, to any party a
source-code license or option or other right to use or acquire source-code;
(vi) any agreement relating to the disposition or acquisition of
assets or any interest in any business enterprise, outside the ordinary
course of the Company's business consistent with past practices;
(vii) any distribution, joint marketing or development agreement;
(viii) any customer agreement, or group of related agreements that
relate to any single customer together with its affiliated entities, that
provides for aggregate future revenue to the Company of more than $50,000;
or
(ix) any other material agreement or commitment, whether written or
oral that has not otherwise been disclosed to Parent and Acquisition.
Neither the Company nor any of its subsidiaries has in any material respect
breached, violated or defaulted under, or received notice that it has materially
breached, violated or defaulted under, any of the terms or conditions of any
agreement, contract or commitment required to be set forth in Section 2.21 of
the Company Disclosure Schedule and each such agreement, contract or commitment
is in full force and effect and is not subject to any material default
thereunder of which the Company has knowledge by any party obligated to the
Company pursuant thereto.
SECTION 2.22 Vote Required. The affirmative vote of the holders of a
majority of the outstanding Shares is the only vote of the holders of any class
or series of the Company's capital stock necessary to approve and adopt this
Agreement.
SECTION 2.23 Affiliates. Except for the directors and executive officers
of the Company, each of whom is listed in Section 2.24 of the Company Disclosure
Schedule, there are no persons who, to the knowledge of the Company, may be
deemed to be affiliates of the Company within the meaning of Rule 145 of the
Securities Act ("Company Affiliates").
SECTION 2.24 Opinion of Financial Adviser. Alliant Partners (the "Company
Financial Adviser") has delivered to the Company Board its written opinion dated
November 18, 1999 to the effect that as of such date the total consideration
received by the Company's stockholders pursuant to this Agreement is fair, from
a financial point of view, to the Company's stockholders (the "Opinion of
Company Financial Advisor"). A true and complete copy of such opinion has been
delivered or made available to Parent.
SECTION 2.25 Brokers. No broker, finder or investment banker (other than
the Company Financial Adviser, a true and correct copy of whose engagement
agreement has been provided to Parent) is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company.
SECTION 2.26 Takeover Statutes. No "fair price," "moratorium," "control
share acquisition" or other similar anti-takeover statute or regulation (each a
"Takeover Statute") is applicable to the Company, the Shares, the Merger or any
of the other transactions contemplated by this Agreement. The Company Board has
approved the Merger and this Agreement, and such approval is sufficient to
render inapplicable to the Merger, this Agreement and the transactions
contemplated by this Agreement, the provisions of DGCL Section 203 to the
extent, if any, such Section is applicable to the Merger, this Agreement, or any
of the transactions contemplated by this Agreement.
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SECTION 2.27 Representations Complete. To the Company's actual knowledge,
the representations and warranties made by the Company in this Agreement, and
the statements made in any Schedules or certificates furnished by the Company
pursuant to this Agreement, do not contain and will not contain, as of their
respective dates, any untrue statement of a material fact, nor do they omit or
will they omit, as of their respective dates, to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
PARENT AND ACQUISITION
Parent and Acquisition hereby jointly and severally represent and warrant
to the Company, subject to the exceptions set forth in the Disclosure Schedule
(the "Parent Disclosure Schedule") delivered by Parent to the Company (which
exceptions shall qualify only the Section specifically identified and any other
Section where it is reasonably clear that the disclosure is intended to apply to
another Section) that:
SECTION 3.1 Organization. Each of Parent, Acquisition and Parent's other
subsidiaries is duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Parent has heretofore made available to the Company accurate and
complete copies of the Certificates of Incorporation and bylaws as currently in
full force and effect, of Parent, Acquisition and Parent's other subsidiaries.
Each of Parent, Acquisition and Parent's other subsidiaries is duly qualified or
licensed and in good standing to do business in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary except where the failure
to obtain such qualification or license with respect to Parent, Acquisition or
Parent's other subsidiaries would not adversely affect Parent, Acquisition or
Parent's other subsidiaries in any material way.
SECTION 3.2 Capitalization of Parent and its Subsidiaries.
(a) The authorized capital stock of the Parent consists of 150,000,000
shares of Parent Common Stock ("Parent Shares"), of which, as of October 31,
1999, 33,685,585 Parent Shares were issued and outstanding, and 15,000,000
shares of preferred stock, none of which is outstanding. All of the outstanding
Parent Shares have been validly issued and are fully paid, nonassessable and
free of preemptive rights. As of October 31, 1999, approximately 14,715,000
Parent Shares were reserved for issuance and, as of October 31, 1999,
approximately 6,670,342 were issuable upon or otherwise deliverable in
connection with the exercise of outstanding options to purchase Parent Common
Stock issued pursuant to the following plans ("Parent Option Plans"): 1995 Stock
Option Plan, 1997 Stock Option Plan. As of October 31, 1999. approximately
23,736 Parent Shares were issuable or otherwise deliverable in connection with
the exercise of outstanding options to purchase Parent Common Stock issued
pursuant to the FirstFloor 1993 Stock Option Plan. The maximum number of shares
that may be issued under the 1999 Employee Stock Purchase Plan is 750,000 shares
of which as of October 31, 1999, 0 shares have been issued and 750,000 shares
are reserved for issuance. Except as set forth in Section 3.2(a) of the Parent
Disclosure Schedule, between October 31, 1999 and the date hereof, no shares of
the Parent's capital stock have been issued other than pursuant to options
already in existence on such first date issued under Parent Option Plans, and
between October 31, 1999 and the date hereof, no stock options have been
granted. Except as set forth above, and as set forth in the Parent Disclosure
Schedule, as of the date hereof, there are outstanding (i) no shares of capital
stock
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or other voting securities of Parent, (ii) no securities of Parent or any of its
subsidiaries convertible into or exchangeable or exercisable for shares of
capital stock or other securities of Parent, (iii) no options, preemptive or
other rights to acquire from Parent or any of its subsidiaries, and, except as
described in the Parent SEC Reports (as defined below), no obligations of Parent
or any of its subsidiaries to issue, any capital stock, voting securities or
securities convertible into or exchangeable or exercisable for capital stock or
other securities of Parent, and (iv) no equity equivalent interests in the
ownership or earnings of the Company or its subsidiaries or other similar rights
(collectively "Parent Securities"). Except as set forth in Section 3.2(a) of the
Parent Disclosure Schedule, as of the date hereof, there are no outstanding
rights or obligations of the Parent or any of its subsidiaries to repurchase,
redeem or otherwise acquire any Parent Securities. There are no stockholder
agreements, voting trusts or other agreements or understandings to which the
Parent is a party or by which it is bound relating to the voting or registration
of any shares of capital stock of Parent.
(b) All of the outstanding capital stock of Parent's subsidiaries owned by
Parent is owned, directly or indirectly, free and clear of any Lien or any other
limitation or restriction (including any restriction on the right to vote or
sell the same except as may be provided as a matter of Applicable Law). Except
as set forth in Section 3.2(b) of the Parent Disclosure Schedule, there are no
(i) securities of Parent or any of its subsidiaries convertible into or
exchangeable or exercisable for, (ii) options or (iii) except for the Parent
Rights, other rights to acquire from Parent or any of its subsidiaries any
capital stock or other ownership interests in or any other securities of any
subsidiary of Parent, and there exists no other contract, understanding,
arrangement or obligation (whether or not contingent) providing for the issuance
or sale, directly or indirectly, of any such capital stock. There are no
outstanding contractual obligations of Parent or its subsidiaries to repurchase,
redeem or otherwise acquire any outstanding shares of capital stock or other
ownership interests in any subsidiary of Parent.
(c) The Parent Shares constitute the only class of equity securities of
Parent or its subsidiaries registered or required to be registered under the
Exchange Act.
SECTION 3.3 Authority Relative to this Agreement.
(a) Each of Parent and Acquisition has all necessary corporate power and
authority to execute and deliver this Agreement, to perform its obligations
under this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
boards of directors of Parent (the "Parent Board") and Acquisition and by Parent
as the sole stockholder of Acquisition, and no other corporate proceedings on
the part of Parent or Acquisition are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby (including the Merger). This
Agreement has been duly and validly executed and delivered by each of Parent and
Acquisition and constitutes, assuming the due authorization, execution and
delivery hereof by the Company, a valid, legal and binding agreement of each of
Parent and Acquisition enforceable against each of Parent and Acquisition in
accordance with its terms, subject to any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditors' rights generally or to general principles of equity.
(b) Without limiting the generality of the foregoing, the Parent Board has
unanimously (1) determined that the Merger is fair to, and in the best interests
of Parent and Parent's stockholders, (2) approved this Agreement, the Merger and
the other transactions contemplated hereby, and (3) has not withdrawn or
modified such approval.
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SECTION 3.4 SEC Reports; Financial Statements.
(a) Parent has filed all required forms, reports and documents ("Parent SEC
Reports") with the SEC since October 6, 1999, each of which complied at the time
of filing in all material respects with all applicable requirements of the
Securities Act and the Exchange Act, each law as in effect on the dates such
forms, reports and documents were filed. None of such Parent SEC Reports,
including any financial statements or schedules included or incorporated by
reference therein, contained when filed any untrue statement of a material fact
or omitted to state a material fact required to be stated or incorporated by
reference therein or necessary in order to make the statements therein in light
of the circumstances under which they were made not misleading, except to the
extent superseded or amended by a Parent SEC Report filed subsequently and prior
to the date hereof. The audited consolidated financial statements of Parent
included in the Parent SEC Reports fairly present in conformity in all material
respects with generally accepted accounting principles applied on a consistent
basis (except as may be indicated in the notes thereto) the consolidated
financial position of Parent and its consolidated subsidiaries as of the dates
thereof and their consolidated results of operations and changes in financial
position for the periods then ended. Notwithstanding the foregoing, Parent shall
not be deemed to be in breach of any of the representations or warranties in
this Section 3.4 as a result of any changes to the Parent SEC Reports that
Parent may make in response to comments received from the SEC on the S-4 or the
Proxy Statement.
(b) Parent has heretofore made, and hereafter will make, available to the
Company a complete and correct copy of any amendments or modifications that are
required to be filed with the SEC but have not yet been filed with the SEC to
agreements, documents or other instruments that previously had been filed by
Parent with the SEC pursuant to the Exchange Act.
SECTION 3.5 Information Supplied. None of the information supplied or to
be supplied by Parent or Acquisition in writing for inclusion or incorporation
by reference in (i) the S-4 will at the time the S-4 is filed with the SEC and
at the time it becomes effective under the Securities Act contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) the Proxy Statement will, at the date mailed to stockholders of the Company
and at the times of the meeting or meetings of stockholders of the Company to be
held in connection with the Merger, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they are made not misleading. The S-4 will comply as to form in all
material respects with the provisions of the Securities Act and the rules and
regulations thereunder. Notwithstanding the foregoing, Parent makes no
representation, warranty or covenant with respect to any information supplied or
required to be supplied by the Company that is contained in or omitted from any
of the foregoing documents.
SECTION 3.6 Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under
applicable requirements of the Securities Act, the Exchange Act, state
securities or blue sky laws, the HSR Act, and any filings under similar merger
notification laws or regulations of foreign Governmental Entities and the filing
and recordation of the Certificate of Merger as required by the DGCL, no
material filing with or notice to, and no material permit, authorization,
consent or approval of any Governmental Entity is necessary for the execution
and delivery by Parent or Acquisition of this Agreement or the consummation by
Parent or Acquisition of the transactions contemplated hereby. Neither the
execution, delivery and performance of this Agreement by Parent or Acquisition
nor the consummation by Parent or Acquisition of the transactions contemplated
hereby will (i) conflict with or result in any breach of any provision of the
respective Certificates of Incorporation or bylaws (or similar governing
documents) of Parent or Acquisition or any of Parent's other subsidiaries, (ii)
result in a violation or breach of or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
amendment, cancellation or acceleration or Lien) under any of the terms,
conditions or
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provisions of any material note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which Parent or
Acquisition or any of Parent's other subsidiaries is a party or by which any of
them or any of their respective properties or assets are bound or (iii) violate
any material order, writ, injunction, decree, law, statute, rule or regulation
applicable to Parent or Acquisition or any of Parent's other subsidiaries or any
of their respective properties or assets.
SECTION 3.7 Litigation. Except as publicly disclosed by the Parent in the
Parent SEC Reports or as set forth in Section 3.7 of the Parent Disclosure
Schedule, there is no suit, claim, action, arbitration, proceeding or
investigation pending or, to the knowledge of Parent, threatened against Parent
or any of its subsidiaries or any of their respective properties or assets
before any Governmental Entity or brought by any person that is material or
would reasonably be expected to prevent or delay the consummation of the
transactions contemplated by this Agreement beyond the Final Date. Except as
publicly disclosed by Parent in the Parent SEC Reports, neither Parent nor any
of its subsidiaries is subject to any outstanding order, writ, injunction or
decree that would reasonably be expected to be material or would reasonably be
expected to prevent or delay the consummation of the transactions contemplated
hereby. No Governmental Entity has at any time challenged or questioned in
writing to Parent the legal right of Parent to design, offer or sell any of its
products or services in the present manner or style thereof.
SECTION 3.8 Tax Treatment. Neither Parent, Acquisition or any of Parent's
other subsidiaries nor, to the knowledge of Parent, any of its affiliates has
taken, proposes to take, or has agreed to take any action that would prevent the
Merger from constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code.
SECTION 3.9 Opinion of Financial Adviser. Hambrecht & Quist (the "Parent
Financial Adviser") has delivered to the Board of Directors of Parent its
opinion to the effect that, as of November 18, 1999, the Merger Consideration is
fair, from a financial point of view, to Parent ("Opinion of Parent Financial
Adviser").
SECTION 3.10 Brokers. Other than the Parent Financial Adviser, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Parent or Acquisition.
SECTION 3.11 No Prior Activities. Except for obligations incurred in
connection with its incorporation or organization or the negotiation and
consummation of this Agreement and the transactions contemplated hereby,
Acquisition has neither incurred any obligation or liability nor engaged in any
business or activity of any type or kind or entered into any agreement or
arrangement with any person.
SECTION 3.12 No Undisclosed Liabilities; Absence of Changes. Except as
and to the extent publicly disclosed by Parent in the Parent SEC Reports,
neither Parent nor any of its subsidiaries has any material liabilities or
obligations of any nature, whether or not accrued, contingent or otherwise, that
would be required by generally accepted accounting principles to be reflected on
a consolidated balance sheet of Parent (including the notes thereto) other than
(i) liabilities specifically described in this Agreement or in the Parent
Disclosure Schedule, and (ii) normal or recurring liabilities incurred since
September 30, 1999 in the ordinary course of business consistent with past
practices. Except as publicly disclosed by Parent in the Parent SEC Reports or
as set forth in Section 3.12 of the Parent Disclosure Schedule, since September
30, 1999, there have been no events, changes or effects with respect to Parent
or its subsidiaries that, individually or in the aggregate, have had or
reasonably would be expected to have had a Material Adverse Effect on Parent.
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SECTION 3.13 Compliance with Applicable Law. Except as publicly disclosed
by Parent in the Parent SEC Reports, Parent and its subsidiaries hold all
material permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for the lawful conduct of their respective
businesses (the "Parent Permits"). Except as publicly disclosed by Parent in the
Parent SEC Reports, Parent and its subsidiaries are in material compliance with
the terms of the Parent Permits. Except as publicly disclosed by Parent in the
Parent SEC Reports, to the knowledge of Parent, the businesses of Parent and its
subsidiaries have been and are being conducted in material compliance with all
material Applicable Laws. Except as publicly disclosed by Parent in the Parent
SEC Reports, no investigation or review by any Governmental Entity with respect
to Parent or any of its subsidiaries is pending or, to the knowledge of Parent,
threatened, nor, to the knowledge of Parent, has any Governmental Entity
indicated an intention to conduct the same.
SECTION 3.14 Intellectual Property. Parent (or one of its subsidiaries)
owns all of the material Intellectual Property, or has a valid and enforceable
right to use all of the material Intellectual Property that is not owned
exclusively by it, that is used in Parent's business. Except as set forth in
Section 3.14 of the Parent Disclosure Schedule, the products used, manufactured,
marketed, sold or licensed by Parent and its subsidiaries, and all Intellectual
Property used in the conduct of Parent's businesses as currently conducted, do
not infringe upon, violate or constitute the unauthorized use of any valid and
enforceable rights owned or controlled by any third party, including any
Intellectual Property of any third party. Except as and to the extent publicly
disclosed in the Parent SEC Reports, to the knowledge of Parent, as of the date
hereof no third party is misappropriating, infringing or violating any
Intellectual Property owned by or licensed to Parent or any of its subsidiaries,
and no such claims against any third party made by Parent or any of its
subsidiaries are outstanding as of the date hereof. All of Parent's and its
subsidiaries' material products conform to all representations and warranties
made by Parent and its subsidiaries to customers with respect to the
introduction of records containing dates falling on or after December 31, 1998,
the advent of the year 2000, the advent of the twenty-first century or the
transition from the twentieth century through the year 2000 and into the
twenty-first century.
SECTION 3.15 No Default. Except as set forth in Section 3.15 of the
Parent Disclosure Schedule, neither Parent nor any of its subsidiaries is in
material breach, default or violation (and no event has occurred that with
notice or the lapse of time or both would constitute a breach, default or
violation) of any term, condition or provision of (i) its Certificate of
Incorporation or bylaws (or similar governing documents), (ii) any material
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which Parent or any of its subsidiaries is now a
party or by which it or any of its properties or assets are bound or (iii) any
material order, writ, injunction, decree, law, statute, rule or regulation
applicable to Parent or any of its subsidiaries or any of its properties or
assets.
SECTION 3.16 Representations Complete. To the Parent's and Acquisition's
actual knowledge, the representations and warranties made by Parent and
Acquisition in this Agreement, and the statements made in any certificates
furnished by Parent and Acquisition pursuant to this Agreement do not contain
and will not contain, as of their respective dates, any untrue statement of a
material fact, nor do they omit or will they omit, as of their respective dates,
to state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which they were made,
not misleading.
SECTION 3.17 Title to Properties; Absence of Liens and
Encumbrances. Parent has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its properties and
assets, tangible and intangible, real, personal and mixed, used or held for use
in its business, free and clear of any Liens, except as reflected in the Parent
SEC Reports except for Liens for Taxes not yet due and payable and such
imperfections of title, if any that do not materially
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interfere with the present value of the subject property or as may be reflected
in Section 3.16 of the Parent Disclosure Schedule.
SECTION 3.18 Year 2000 Compliance.
(a) Except as set forth in Section 3.18(a) of the Parent Disclosure
Schedule, all of Parent's and its subsidiaries' material products marketed as of
the date hereof will record, store, process and calculate and present calendar
dates falling on and after December 31, 1998, and will calculate any information
dependent on or relating to such dates in the same manner and with the same
functionality, data integrity and performance as the products record, store,
process, calculate and present calendar dates on or before December 31, 1998, or
calculate any information dependent on or relating to such dates (collectively
"Year 2000 Compliant"). Except as set forth in Section 3.18(a) of the Parent
Disclosure Schedule, all of Parent's and its subsidiaries' material products
marketed as of the date hereof will lose no significant functionality with
respect to the introduction of records containing dates falling on or after
December 31, 1998. Except as set forth in Section 3.18(a) of the Parent
Disclosure Schedule, the versions of Parent's and its subsidiaries' Software
marketed as of the date hereof may be used prior to, during and after December
31, 1998, such that such Software will operate prior to, during and after such
time period without error caused by date data that represents or references
different centuries or more than one century.
(b) All of Parent's and its subsidiaries' material products marketed as of
the date hereof conform to all representations and warranties made by Parent and
its subsidiaries to customers with respect to the introduction of records
containing dates falling on or after December 31, 1998, the advent of the year
2000, the advent of the twenty-first century or the transition from the
twentieth century through the year 2000 and into the twenty-first century.
SECTION 3.19 Parent Common Stock. The Parent Common Stock to be issued in
connection with the Merger (including the Parent Common Stock to be issued in
accordance with Section 1.8 and the Parent Common Stock to be issued in
accordance with Section 1.11) has been duly authorized by all necessary
corporate action, and when issued in accordance with this Agreement, will be
validly issued, fully paid and nonassessable and not subject to preemptive
rights, and will be freely tradable. Without limiting the generality of the
foregoing, none of the shares of Parent Common Stock to be issued in connection
with the Merger will constitute "restricted securities" within the meaning of
Rule 144 of the Securities Act.
ARTICLE IV
COVENANTS
SECTION 4.1 Conduct of Business of the Company. Except as contemplated by
this Agreement or as described in Section 4.1 of the Company Disclosure
Schedule, during the period from the date hereof to the Effective Time, the
Company will, and will cause each of its subsidiaries to, conduct its operations
in the ordinary course of business consistent with past practice with no less
diligence and effort than would be applied in the absence of this Agreement, use
commercially reasonable efforts to preserve intact its current business
organizations, to keep available the service of its current officers and key
employees and to preserve its relationships with customers, suppliers,
distributors, lessors, creditors, employees, contractors and others having
business dealings with it with the intention that its goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Subject to approval of
Parent (which approval shall not be unreasonably withheld), the company may
negotiate, execute and deliver a lease for new principal offices. Without
limiting the generality of the foregoing, except as otherwise expressly provided
in this Agreement and except as described in Section 4.1 of the Company
Disclosure Schedule, prior to the Effective Time, neither the Company
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nor any of its subsidiaries will, without the prior written consent of Parent,
which consent shall not unreasonably be withheld:
(a) amend its Certificate of Incorporation or bylaws (or other similar
governing instrument);
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other debt or equity securities or
equity equivalents (including any stock options or stock appreciation
rights) except for (i) grants of options under the Company Plans up to the
amounts set forth on Section 4.1(b) of the Company Disclosure Schedule, or
(ii) the issuance and sale of Shares pursuant to options granted under the
Company Plans prior to the date hereof;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, make any other actual, constructive or deemed distribution
in respect of its capital stock or otherwise make any payments to
stockholders in their capacity as such, or redeem or otherwise acquire any
of its securities or any securities of any of its subsidiaries except as
may be required under any Company Option or any other agreement set forth
in Section 4.1(c) of the Company Disclosure Schedule;
(d) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its subsidiaries (other than the
Merger);
(e) alter through merger, liquidation, reorganization, restructuring
or any other fashion the corporate structure of any subsidiary;
(f) (i) incur or assume any long-term or short-term debt or issue any
debt securities in each case, except for borrowings under existing lines of
credit in the ordinary course of business consistent with past practices,
or modify or agree to any amendment of the terms of any of the foregoing;
(ii) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person except for obligations of subsidiaries of the Company incurred
in the ordinary course of business consistent with past practices
(excluding intellectual property indemnifications in the ordinary course of
business consistent with past practices); (iii) make any loans, advances or
capital contributions to or investments in any other person (other than to
subsidiaries of the Company or customary loans or advances to employees in
each case in the ordinary course of business consistent with past
practice); (iv) pledge or otherwise encumber shares of capital stock of the
Company or any of its subsidiaries; or (v) mortgage or pledge any of its
material assets, tangible or intangible, or create or suffer to exist any
material Lien thereupon (excluding purchase money security interests
incurred in the ordinary course of business consistent with past
practices);
(g) except as may be required by Applicable Law and except for signing
bonuses for non-officer employees in an amount not to exceed $25,000 per
person and $150,000 in the aggregate), enter into, adopt or amend or
terminate any bonus, special remuneration, compensation, severance, stock
option, stock purchase agreement, retirement, health, life, or disability
insurance, severance or other employee benefit plan agreement, trust, fund
or other arrangement for the benefit or welfare of any director, officer,
employee or consultant in any manner or increase in any manner the
compensation or fringe benefits of any director, officer or employee or pay
any benefit not required by any plan and arrangement as in effect as of the
date
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hereof (including the granting of stock appreciation rights or performance
units), except as set forth in Section 4.1(g) of the Company Disclosure
Schedule;
(h) grant any severance or termination pay to any director, officer,
employee or consultant, except payments made pursuant to written agreements
outstanding on the date hereof, the material terms of which are disclosed
on Section 2.12(h) of the Company Disclosure Schedule or as required by
applicable federal, state or local law or regulations;
(i) exercise its discretion or otherwise voluntarily accelerate the
vesting of any Company Stock Option as a result of the Merger, any other
change of control of the Company (as defined in the Company Plans) or
otherwise;
(j) (1) acquire, sell, lease, license, transfer or otherwise dispose
of any material assets in any single transaction or series of related
transactions (including in any transaction or series of related
transactions having a fair market value in excess of $25,000 in the
aggregate), other than sales of its products and licenses of software in
the ordinary course of business consistent with past practices, (2) enter
into any exclusive license, distribution, marketing, sales or other
agreement, (3) enter into any agreement with a person whereby such person
would provide product development or similar services if the term of such
agreement exceeds sixty (60) days or provides for payments that could
exceed $25,000 for any single agreement or $100,000 for all such
agreements, or (4) sell, transfer or otherwise dispose of any Intellectual
Property, other than sales of its products and licenses of software in the
ordinary course of business consistent with past practices;
(k) except as may be required as a result of a change in law or in
generally accepted accounting principles, materially change any of the
accounting principles, practices or methods used by it;
(l) revalue in any material respect any of its assets, including
writing down the value of inventory or writing-off notes or accounts
receivable, other than in the ordinary course of business consistent with
past practices;
(m) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other entity or division thereof or
any equity interest therein; (ii) enter into any contract or agreement that
would be material to the Company and its subsidiaries, taken as a whole,
other than a non-exclusive license agreement or a service agreement with
end-users entered into in the ordinary course of business consistent with
past practices; (iii) amend, modify or waive any material right under any
material contract of the Company or any of its subsidiaries; (iv) modify
its standard warranty terms for its products or amend or modify any product
warranties in effect as of the date hereof in any material manner that is
adverse to the Company or any of its subsidiaries; (v) authorize any
additional or new capital expenditure or expenditures in excess of $25,000
in the aggregate in any calendar quarter, if any such expenditure or
expenditures are not listed in the capital budget attached as Section
4.1(m)(v) of the Company Disclosure Schedule; provided that nothing in the
foregoing clause (v) shall limit any capital expenditure required pursuant
to existing customer contracts; or (vi) authorize any new or additional
manufacturing capacity expenditure or expenditures for any manufacturing
capacity contracts or arrangements;
(n) make or revoke any material tax election or settle or compromise
any material income tax liability or permit any material insurance policy
naming it as a beneficiary or loss-payable to expire, or to be canceled or
terminated, unless a comparable insurance policy reasonably acceptable to
Parent is obtained and in effect;
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(o) fail to file any Tax Returns when due (or, alternatively, fail to
file for available extensions) or fail to cause such Tax Returns when filed
to be complete and accurate in all material respects;
(p) fail to pay any material Taxes or other material debts when due;
(q) settle or compromise any pending or threatened suit, action or
claim that (i) relates to the transactions contemplated hereby or (ii) the
settlement or compromise of suits, actions, or claims which would involve
more than $25,000 in the aggregate, or that would otherwise be material to
the Company or relates to any Intellectual Property matters;
(r) take any action or fail to take any action that could reasonably
be expected to (i) limit the utilization of any of the net operating
losses, built-in losses, tax credits or other similar items of the Company
or its subsidiaries under Section 382, 383, 384 or 1502 of the Code and the
Treasury Regulations thereunder, or (ii) cause any transaction in which the
Company or any of its subsidiaries was a party that was intended to be
treated as a reorganization under Section 368(a) of the Code to fail to
qualify as a reorganization under Section 368(a) of the Code;
(s) other than licensing and distribution contracts and agreements
with end-user customers entered into in the ordinary course of business
consistent with past practice, enter into any licensing, distribution,
sponsorship, advertising or other similar contracts, agreements, or
obligations which may not be canceled without penalty by the Company or its
subsidiaries upon notice of 60 days or less or which provide for payments
by or to the Company or its subsidiaries in an amount in excess of $25,000
over the term of the agreement;
(t) Fail to make in a timely manner any filings with the SEC required
under the Securities Act or the Exchange Act or the rules and regulations
promulgated thereunder;
(u) Engage in any willful action with the intent to directly or
indirectly adversely impact any of the transactions contemplated by this
Agreement; or
(v) take or agree in writing or otherwise to take any of the actions
described in Sections 4.1(a) through 4.1(u) (and it shall use all
reasonable efforts not to take any action that would make any of the
representations or warranties of the Company contained in this Agreement
(including the exhibits hereto) untrue or incorrect) at Closing such that
the condition set forth in Section 5.3(a) would not be satisfied.
SECTION 4.2 Preparation of S-4 and the Proxy Statement. The Company and
Parent shall diligently work together and promptly prepare and file with the SEC
the Proxy Statement and the S-4, respectively. Each of Parent and the Company
shall use all reasonable efforts to have the S-4 declared effective under the
Securities Act as promptly as practicable after such filing. Parent shall also
take any action (other than qualifying to do business in any jurisdiction in
which it is now not so qualified) required to be taken under any applicable
state securities laws in connection with the issuance of Parent Common Stock in
the Merger and upon the exercise of Company Stock Options, and the Company shall
furnish all information concerning the Company and the holders of Shares as may
be reasonably requested in connection with any such action.
SECTION 4.3 No Solicitation or Negotiation.
(a) The Company shall, and shall cause its subsidiaries, its affiliates and
their respective officers and other employees, directors, representatives
(including the Company Financial Advisor and any other investment banker and any
attorneys and accountants) and agents to, immediately cease any discussions or
negotiations with any parties with respect to any Third Party Acquisition (as
defined
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below). The Company also agrees promptly to request each person that has at any
time heretofore executed a confidentiality agreement that governs such person's
discussions with the Company or any of its representatives concerning an
acquisition of (whether by merger, acquisition of stock or assets or otherwise)
the Company or any of its subsidiaries, if any, to return all confidential
information heretofore furnished to such person by or on behalf of the Company
or any of its subsidiaries and, if requested by Parent, to enforce such person's
obligation to do so. Neither the Company nor any of its affiliates shall, nor
shall the Company authorize or permit any of its or their respective officers,
directors, employees, representatives or agents to, directly or indirectly,
encourage, solicit, participate in or initiate discussions or negotiations with
or provide any non-public information to any person or group (other than Parent
and Acquisition or any designees of Parent and Acquisition) concerning any Third
Party Acquisition; provided, however, that if the Company Board determines in
good faith, acting only after consultation with legal counsel of nationally
recognized standing and in a manner consistent therewith, that the failure to do
so would likely be a breach of its fiduciary duties to the Company's
stockholders under the DGCL, the Company may, in response to a proposal, offer
or Inquiry for a Company Acquisition that was not solicited and that the Company
Board determines, based upon the advice of the Company Financial Advisor (or
another financial advisor of nationally recognized standing), is from a Third
Party that is capable of consummating a Superior Proposal and only for so long
as the Board of Directors so determines that its actions have a substantial
probability of leading to a Superior Proposal, (i) furnish information to any
such person only pursuant to a confidentiality agreement substantially in the
same form as was executed by Parent prior to the execution of this Agreement and
only if copies of such information are concurrently provided to Parent, and (ii)
participate in discussions and negotiations regarding such proposal, offer or
Inquiry; provided, further, nothing herein shall prevent the Company Board from
taking and disclosing to the Company's stockholders a position contemplated by
Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any
tender or exchange offer. The Company shall promptly (and in any event within
twenty-four (24) hours after becoming aware thereof) (i) notify Parent in the
event the Company or any of its subsidiaries or other affiliates or any of their
respective officers, directors, employees and agents receives any proposal,
offer or Inquiry concerning a Third Party Acquisition, including the material
terms and conditions thereof and the identity of the party submitting such
proposal, and any request for confidential information in connection with a
potential Third Party Acquisition, (ii) provide a copy of any written
agreements, proposals or other materials the Company receives from any such
person or group (or its representatives), (iii) provide Parent with copies of
all information furnished to any such Person pursuant to Clause (i) of the
preceding sentence if such information has not been previously furnished to
Parent and (iv) notify Parent of any material changes or developments with
respect to any of the matters described in clauses (i) or (ii). The Company
shall also advise Parent from time to time of the status, at any time upon
Parent's request, of any such matters. Notwithstanding anything to the contrary
contained in this Section 4.3(a) or elsewhere in this Agreement, at any time
after the date hereof, the Company may file with the SEC a report on Form 8-K
with respect to this Agreement and may file a copy of this Agreement and any
related agreements as an exhibit to such report.
(b) Except as set forth in this Section 4.3(b), the Company Board shall not
withdraw or modify its recommendation of the transactions contemplated hereby or
approve or recommend, or cause or permit the Company to enter into any letter of
intent, agreement or obligation with respect to, any Third Party Acquisition.
Notwithstanding the foregoing, if the Company Board by a majority vote
determines in its good faith judgment, acting only after consultation with legal
counsel of nationally recognized standing and in a manner consistent therewith,
that the failure to do so would likely result in a breach of the Board's
fiduciary duties, the Company Board may withdraw its recommendation of the
transactions contemplated hereby and approve or recommend a Superior Proposal
(as defined in Subsection (c) below) and cease efforts to obtain an affirmative
vote of the stockholders of the Company on the approval and adoption of the
Agreement and the Merger, but only (i) after
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providing written notice to Parent (a "Notice of Superior Proposal") advising
Parent that the Company Board has received a Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and identifying the
person making such Superior Proposal and (ii) if Parent does not, within three
(3) business days of Parent's receipt of the Notice of Superior Proposal, make
an offer that the Company Board by a majority vote determines in its good faith
judgment (based on the advice of a financial advisor of nationally recognized
reputation, which may be the Company Financial Advisor) to be at least as
favorable to the Company's stockholders as such Superior Proposal; provided,
however, that the Company shall not be entitled to enter into any binding
agreement with respect to a Superior Proposal unless concurrently therewith this
Agreement is terminated by its terms pursuant to Section 6.1. Any disclosure
that the Company Board may be compelled to make with respect to the receipt of a
proposal for a Third Party Acquisition or otherwise in order to comply with its
fiduciary duties or Rule 14d-9 or 14e-2 will not constitute a violation of this
Agreement, provided that such disclosure does not contain any statements that
violate this Section 4.3(b).
(c) For the purposes of this Agreement, "Third Party Acquisition" means the
occurrence of any of the following events: (i) the acquisition of the Company by
tender offer, exchange offer, merger or otherwise by any person (which includes
a "person" as such term is defined in Section 13(d)(3) of the Exchange Act)
other than Parent, Acquisition or any affiliate thereof (a "Third Party"); (ii)
the acquisition by a Third Party of more than 50% of the assets of the Company
and its subsidiaries taken as a whole, other than the sale of its products in
the ordinary course of business consistent with past practices consistent with
past practices; (iii) the acquisition by a Third Party of 50% or more of the
outstanding Shares; (iv) the adoption by the Company of a plan of liquidation or
the declaration or payment of an extraordinary dividend; (v) the repurchase by
the Company or any of its subsidiaries of more than ten percent (10%) of the
outstanding Shares; or (vi) the acquisition (or any group of acquisitions) by
the Company or any of its subsidiaries by merger, purchase of stock or assets,
joint venture or otherwise of a direct or indirect ownership interest or
investment in any business (or businesses) whose annual revenues, net income or
assets is equal or greater than ten percent (10%) of the annual revenues, net
income or assets of the Company. For purposes of this Agreement, a "Superior
Proposal" means any bona fide proposal (1) to acquire, directly or indirectly,
for consideration consisting solely of cash and/or securities, all of the Shares
then outstanding, or all or substantially all the assets, of the Company, (2)
that contains terms that the Company Board by a majority vote determines in its
good faith judgment (taking into account, as to the financial terms, the advice
of the Company Financial Advisor or another financial advisor of nationally
recognized reputation) to be more favorable to the Company's stockholders than
the Merger, taking into account all aspects of the transaction, including
taxation, form of consideration, conditions to closing and strategic synergies,
(3) that the Company Board by a majority vote determines in its good faith
judgment (following and based on consultation with the Company Financial Adviser
or another financial advisor of nationally recognized reputation and its legal
and other advisors) to be reasonably capable of being completed (taking into
account all legal, financial, regulatory and other aspects of the proposal and
the person making the proposal) and (4) that does not contain a "right of first
refusal" or "right of first offer" with respect to any counter-proposal that
Parent might make. "Inquiry" means an inquiry that could reasonably be expected
to lead to a Superior Proposal.
SECTION 4.4 Meeting of Stockholders. The Company shall take all actions
necessary in accordance with the DGCL and its Certificate of Incorporation and
bylaws to duly call, give notice of, convene and hold a meeting of its
stockholders as promptly as practicable to consider and vote upon the adoption
and approval of this Agreement and the transactions contemplated hereby (the
"Meeting"). The Company's obligation to call, give notice of, convene and hold
the Meeting in accordance with this Section 4.5 shall not be limited to or
otherwise affected by the commencement, disclosure, announcement or submission
to the Company of any proposal for a Third Party
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Acquisition (as defined in Section 4.3), or by any withdrawal, amendment or
modification of the recommendation of the Company Board with respect to the
Merger. The stockholder vote required for the adoption and approval of the
transactions contemplated by this Agreement shall be the vote required by the
DGCL and the Company's Certificate of Incorporation and bylaws. The Company
will, through the Company Board, recommend to its stockholders approval of such
matters subject to the provisions of Section 4.3(b). The Company and Parent
shall promptly prepare and file with the SEC the Proxy Statement and the S-4 for
the solicitation of a vote of the holders of Shares approving the Merger, which,
subject to the provisions of Section 4.3(b), shall include the recommendation of
the Company Board that stockholders of the Company vote in favor of the approval
and adoption of this Agreement and a copy of the written opinion of the Company
Financial Advisor, dated as of the date of the meeting of the Company Board at
which this Agreement was approved and in the form delivered to the Company
Board, that the Exchange Ratio is fair from a financial point of view to the
holders of the Shares. The Company shall use all reasonable efforts to have the
Proxy Statement cleared by the SEC as promptly as practicable after filing, and
promptly thereafter mail the Proxy Statement to the stockholders of the Company.
Parent shall use all reasonable efforts to have the S-4 declared effective by
the SEC as promptly as practicable after such filing. Whenever any event occurs
which is required to be set forth in an amendment or supplement to the S-4
and/or the Proxy Statement, the Company or Parent, as the case may be, will
promptly inform the other of such occurrence and cooperate in filing with the
SEC or its staff or any other government officials, and/or mailing to
stockholders of the Company, such amendment or supplement. Notwithstanding
anything to the contrary contained in this Agreement, the Company may adjourn or
postpone (i) the Meeting to the extent necessary to ensure that any necessary
supplement or amendment to the S-4 and/or the Proxy Statement is provided to the
Company's stockholders in advance of a vote on the Merger and this Agreement or
(ii) the time for which the Meeting is originally scheduled (as set forth in the
S-4 and the Proxy Statement), if there are insufficient Shares represented,
either in person or by proxy, to constitute a quorum necessary to conduct the
business of the Meeting. Parent shall use all reasonable efforts to obtain all
necessary state securities law or "blue sky" permits and approvals required in
connection with the Merger and to consummate the other transactions contemplated
by this Agreement and will pay all expenses incident thereto, provided that the
Company shall cooperate with Parent in obtaining such permits and approvals as
reasonably requested. The Company agrees to use all reasonable efforts to obtain
the approval and adoption by its stockholders of this Agreement and the Merger
(including retaining a recognized proxy solicitation firm), subject to the
provisions of Section 4.3(b).
SECTION 4.5 Nasdaq National Market. Parent shall use all reasonable
efforts to cause the shares of Parent Common Stock to be issued in the Merger
and the shares of Parent Common Stock to be reserved for issuance upon exercise
of Company Stock Options to be approved for listing on the Nasdaq National
Market, subject to official notice of issuance, prior to the Effective Time.
SECTION 4.6 Access to Information.
(a) Between the date hereof and the Effective Time, upon reasonable notice,
the Company will give Parent and its authorized representatives reasonable
access to all employees, plants, offices, warehouses and other facilities and to
all books and records and personnel files of current employees of the Company
and its subsidiaries as Parent may reasonably require, and will cause its
officers and those of its subsidiaries to furnish Parent with such financial and
operating data and other information with respect to the business and properties
of the Company and its subsidiaries as Parent may from time to time reasonably
request. Between the date hereof and the Effective Time, upon reasonable notice,
Parent will give the Company and its authorized representatives reasonable
access to all employees, plants, offices, warehouses and other facilities and to
all books and records and personnel files of current employees of Parent and its
subsidiaries as the Company may reasonably request, and
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will cause its officers and those of its subsidiaries to furnish the Company
with such financial and operating data and other information with respect to the
business and properties of Parent and its subsidiaries as the Company may from
time to time reasonably request.
(b) (1) Between the date hereof and the Effective Time, the Company shall
furnish to Parent (I) within two (2) business days following preparation thereof
(and in any event within twenty (20) business days after the end of each fiscal
quarter) an unaudited balance sheet as of the end of such quarter and the
related statements of earnings, stockholders' equity (deficit) and cash flows
for the quarter then ended, and (II) within two (2) business days following
preparation thereof (and in any event within ninety (90) calendar days after the
end of each fiscal year) an audited balance sheet as of the end of such year and
the related statements of earnings, stockholders' equity (deficit) and cash
flows, all of such financial statements referred to in clauses (I) and (II) to
prepared in accordance with generally accepted accounting principles in
conformity with the practices consistently applied by the Company with respect
to such financial statements. All the foregoing shall fairly present, in all
material respects, the Company's financial position (taking into account the
differences between the monthly, quarterly and annual financial statements
prepared by the Company in conformity with its past practices) as of the last
day of the period then ended.
(2) Between the date hereof and the Effective Time, Parent shall furnish to
the Company (I) within two (2) business days following preparation thereof (and
in any event within twenty (20) business days after the end of each fiscal
quarter) an unaudited balance sheet as of the end of such quarter and the
related statements of earnings, stockholders' equity (deficit) and cash flows
for the quarter then ended, and (II) within two (2) business days following
preparation thereof (and in any event within ninety (90) calendar days after the
end of each fiscal year) an audited balance sheet as of the end of such year and
the related statements of earnings, stockholders' equity (deficit) and cash
flows, all of such financial statements referred to in clauses (I) and (II) to
prepared in accordance with generally accepted accounting principles in
conformity with the practices consistently applied by Parent with respect to
such financial statements. All the foregoing shall fairly present, in all
material respects, the Parent's financial position (taking into account the
differences between the monthly, quarterly and annual financial statements
prepared by Parent in conformity with its past practices) as of the last day of
the period then ended.
(c) Each of the parties hereto will hold, and will cause its consultants
and advisers to hold, in confidence all documents and information furnished to
it by or on behalf of another party to this Agreement in connection with the
transactions contemplated by this Agreement pursuant to the terms of that
certain Mutual Non-Disclosure Agreement entered into between the Company and
Parent.
SECTION 4.7 Certain Filings; Reasonable Efforts.
(a) Subject to the terms and conditions herein provided, including Section
4.3(b), each of the parties hereto agrees to use all reasonable efforts to take
or cause to be taken all action and to do or cause to be done all things
reasonably necessary, proper or advisable under Applicable Law to consummate and
make effective the transactions contemplated by this Agreement, including using
all reasonable efforts to do the following, (i) cooperate in the preparation and
filing of the Proxy Statement and the S-4 and any amendments thereto, any
filings that may be required under the HSR Act and any filings under similar
merger notification laws or regulations of foreign Governmental Entities; (ii)
obtain consents of all third parties and Governmental Entities necessary,
proper, advisable or reasonably requested by Parent or the Company, for the
consummation of the transactions contemplated by this Agreement; (iii) contest
any legal proceeding relating to the Merger; and (iv) execute any additional
instruments necessary to consummate the transactions contemplated hereby.
Subject to the terms and conditions of this Agreement, Parent and Acquisition
agree to use all reasonable efforts to cause the Effective Time to occur as soon
as practicable after
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the Company stockholder vote with respect to the Merger. The Company agrees to
use all reasonable efforts to encourage its employees to accept any offers of
employment extended by Parent. If at any time after the Effective Time any
further action is necessary to carry out the purposes of this Agreement the
proper officers and directors of each party hereto shall take all such necessary
action.
(b) Parent and the Company will consult and cooperate with one another, and
consider in good faith the views of one another, in connection with any
analyses, appearances, presentations, letters, white papers, memoranda, briefs,
arguments, opinions or proposals made or submitted by or on behalf of any party
hereto in connection with proceedings under or relating to the HSR Act or any
other foreign, federal, or state antitrust, competition, or fair trade law. In
this regard, each party hereto shall promptly inform the other of any material
communication between such party and the Federal Trade Commission, the Antitrust
Division of the United States Department of Justice, or any other federal,
foreign or state antitrust or competition Governmental Entity regarding the
transactions contemplated herein.
SECTION 4.8 Public Announcements. Neither Parent, Acquisition nor the
Company shall issue any press release or otherwise make any public statements
with respect to the transactions contemplated by this Agreement, including the
Merger, or any Third Party Acquisition, without the prior consent of Parent (in
the case of the Company) or the Company (in the case of Parent or Acquisition),
except (i) as may be required by Applicable Law, or by the rules and regulations
of, or pursuant to any agreement with, the Nasdaq National Market, or (ii) the
filing of a Form 8-K containing the press release discussed below and a copy of
this Agreement, or (iii) following a change, if any, of the Company Board's
recommendation of the Merger (in accordance with Section 4.3(b)). The first
public announcement of this Agreement and the Merger shall be a joint press
release agreed upon by Parent, Acquisition and the Company.
SECTION 4.9 Indemnification and Directors' and Officers' Insurance.
(a) From and after the Effective Time, Parent shall cause the Surviving
Corporation to indemnify, defend and hold harmless (and shall also cause the
Surviving Corporation to advance expenses as incurred to the fullest extent
permitted under Applicable Law to), to the extent not covered by insurance, each
person who is now or has been prior to the date hereof or who becomes prior to
the Effective Time an officer or director of the Company or any of the Company's
subsidiaries (the "Indemnified Persons") against (i) all losses, claims,
damages, costs, expenses (including counsel fees and expenses), settlement,
payments or liabilities arising out of or in connection with any claim, demand,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was an
officer or director of the Company or any of its subsidiaries, whether or not
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether or not asserted or claimed prior to or at or after the Effective
Time ("Indemnified Liabilities"); and (ii) all Indemnified Liabilities based in
whole or in part on or arising in whole or in part out of or pertaining to this
Agreement or the transactions contemplated hereby to the fullest extent required
or permitted under Applicable Law. Nothing contained herein shall make Parent,
Acquisition, the Company or the Surviving Corporation, an insurer, a co-insurer
or an excess insurer in respect of any insurance policies that may provide
coverage for Indemnified Liabilities, nor shall this Section 4.9 relieve the
obligations of any insurer in respect thereto. The parties hereto intend, to the
extent not prohibited by Applicable Law, that the indemnification provided for
in this Section 4.9 shall apply to negligent acts or omissions by an Indemnified
Person. Each Indemnified Person is intended to be a third party beneficiary of
this Section 4.9 and may specifically enforce its terms. This Section 4.9 shall
not limit or otherwise adversely affect any rights any Indemnified Person may
have under any agreement with the Company or under the Company's Certificate of
Incorporation or bylaws as presently in effect.
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(b) From and after the Effective Time, Parent shall cause the Surviving
Corporation to fulfill and honor in all respects the obligations of the Company
pursuant to any indemnification agreements between the Company and its directors
and officers as of or prior to the date hereof (or indemnification agreements in
the Company's customary form for directors joining the Company Board prior to
the Effective Time) and any indemnification provisions under the Company's
certificate of incorporation or bylaws as in effect immediately prior to the
Effective Time; provided, however, that Parent's aggregate obligation to
indemnify and hold harmless all Indemnified Persons for all matters to which
such Indemnified Persons may be entitled to be indemnified or held harmless
under subsections (a) and (b) of this Section 4.9 shall in no event exceed the
Company's net worth as of September 30, 1999.
(c) For a period of six years after the Effective Time, Parent will
maintain or cause the Surviving Corporation to maintain in effect, if available,
directors' and officers' liability insurance covering those persons who, as of
immediately prior to the Effective Time, are covered by the Company's directors'
and officers' liability insurance policy (the "Insured Parties") on terms no
less favorable to the Insured Parties than those of the Company's present
directors' and officers' liability insurance policy; provided, however, that in
no event shall Parent or the Company be required to expend on an annual basis in
excess of 200% of the annual premium currently paid by the Company for such
coverage (or such coverage as is available for 200% of such annual premium);
provided further, that, in lieu of maintaining such existing insurance as
provided above, Parent, at its election, may cause coverage at least as
favorable in all material respects to the Insured Parties to be provided under
any policy maintained for the benefit of Parent or any of its subsidiaries.
(d) Neither Parent nor any of its affiliates shall be obligated to
guarantee the payment or performance of the Company's obligations under
subsection (a) or (b) of this Section 4.9, so long as the Surviving Corporation
honors such obligations to the extent of the Company's net worth at September
30, 1999. In no event, however, shall Parent or any such affiliate have any
liability or obligation to any Indemnified Person arising from the Company's
breach of, or inability to perform its obligations under, subsection (a) or (b)
of this Section 4.9 in excess of the difference between the net worth of the
Company at September 30, 1999 and the aggregate of all amounts paid by the
Company in satisfaction of such obligation. The provisions of this Section 4.9
are intended to be for the benefit of, and will be enforceable by, each person
entitled to indemnification hereunder and the heirs and representatives of such
person. Parent will not permit the Company to merge or consolidate with any
other Person (including Parent) unless Parent ensures that the surviving or
resulting entity assumes the obligations imposed by this Section 4.9, provided
that if the Company shall be merged with Parent, the net worth limitations
contained above shall no longer apply.
SECTION 4.10 Notification of Certain Matters. The Company shall give
prompt notice to Parent, and Parent shall give prompt notice to the Company, of
(i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence
of which has caused or would be likely to cause any condition contained in
Article 5 to not be satisfied at or prior to the Effective Time and (ii) any
material failure by such first party to comply with or satisfy in any material
respect any covenant condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 4.10 shall not cure such breach or non-compliance or limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
SECTION 4.11 Affiliates; Tax-Free Reorganization.
(a) The Company shall use all reasonable efforts to obtain from all Company
Affiliates, and from each person who becomes a Company Affiliate after the date
of this Agreement and on or prior to the Effective Time, a letter agreement
substantially in the form of Exhibit A hereto as soon as practicable.
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(b) Parent shall not be required to maintain the effectiveness of the S-4
for the purpose of resale of shares of Parent Common Stock by stockholders of
the Company who may be affiliates of the Company or Parent pursuant to Rule 145
under the Securities Act.
(c) The Company, on the one hand, and Parent and Acquisition, on the other
hand, shall execute and deliver to legal counsel to the Company and Parent
certificates substantially in the form attached hereto as Exhibits B-1 and B-2,
respectively, at such time or times as reasonably requested by such legal
counsel in connection with its delivery of an opinion with respect to the
transactions contemplated hereby, and the Company and Parent shall each provide
a copy thereof to the other parties hereto. Prior to the Effective Time, none of
the Company, Parent or Acquisition shall take or cause to be taken any action
that would cause to be untrue (or fail to take or cause not to be taken any
action that would cause to be untrue) any of the representations in Exhibits B-1
or B-2.
SECTION 4.12 Additions to and Modification of Company Disclosure Schedule
and Parent Disclosure Schedule.
(a) The Company shall deliver to Parent and Acquisition such additions to
or modifications of any Sections of the Company Disclosure Schedule necessary to
make the information set forth therein true, accurate and complete in all
material respects as soon as practicable after such information is available to
the Company after the date of execution and delivery of this Agreement;
provided, however, that such disclosure shall not be deemed to constitute an
exception to its representations and warranties under Article 2, nor limit the
rights and remedies of Parent and Acquisition under this Agreement for any
breach by the Company of such representation and warranties.
(b) Parent shall deliver to the Company such additions to or modifications
of any Sections of the Parent Disclosure Schedule necessary to make the
information set forth therein true, accurate and complete in all material
respects as soon as practicable after such information is available to Parent or
Acquisition after the date of execution and delivery of this Agreement;
provided, however, that such disclosure shall not be deemed to constitute an
exception to its representations and warranties under Article 3, nor limit the
rights and remedies of the Company under this Agreement for any breach by Parent
or Acquisition of such representation and warranties.
SECTION 4.13 Access to Company Employees. The Company agrees to provide
Parent with, and to cause each of its subsidiaries to provide Parent with,
reasonable access to its employees during normal working hours following the
date of this Agreement, to among other things, deliver offers of continued
employment and to provide information to such employees about Parent. All
communications by Parent with Company employees shall be conducted in a manner
that does not disrupt or interfere with the Company's efficient and orderly
operation of its business.
SECTION 4.14 Company Compensation and Benefit Plans. The Company agrees
to take all reasonable actions, subject to Applicable Law, necessary to amend,
merge, freeze or terminate all compensation and benefit plans, effective at the
Closing Date, as requested in writing by Parent.
SECTION 4.15 Takeover Statutes. If any Takeover Statute or any similar
statute, law, rule or regulation in any State of the United States (including
under the DGCL or any other law of the State of Delaware) is or may become
applicable to the Merger or any of the other transactions contemplated by this
Agreement, the Company and the Company Board shall promptly grant such approvals
and use all reasonable efforts to take such lawful actions as are necessary so
that such transactions may be consummated as promptly as practicable on the
terms contemplated by this Agreement, as the case may be, or by the Merger and
use all reasonable efforts to otherwise take such lawful actions to eliminate or
minimize the effects of such statute, law, rule or regulation, on such
transactions.
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SECTION 4.16 Form S-8. Parent agrees to file a registration statement on
Form S-8 for the shares of Parent Common Stock issuable with respect to assumed
Company Stock Options as soon as is reasonably practicable after the Effective
Time, and in any event within 5 business days after the Effective Time, and
shall use its best efforts to maintain the effectiveness of such registration
statement thereafter for so long as any of such options or other rights remain
outstanding.
SECTION 4.17 Employee Matters.
(a) After the Closing Date, Parent will use all reasonable efforts to give
each employee of Parent domiciled in the United States, who immediately prior to
the Closing Date was on the payroll of the Company (each such employee, a
"Continuing Employee"), full credit for services performed for the Company prior
to the Closing Date, for purposes of eligibility, vesting, benefit accrual and
determination of the level of benefits under Parent benefit plans and employee
arrangements under which such Continuing Employee is entitled to participate
("Parent Employee Plans") , if and to the extent permitted by such Parent
Employee Plans. Pursuant to the terms of Parent's 401(k) plan (the "Parent
401(k) Plan"), any matching contributions made by Parent under the Parent 401(k)
Plan for any Continuing Employee shall be calculated based only with respect to
such Continuing Employee's contributions to the Parent 401(k) Plan after the
Effective Time and not with respect to contributions made by the Continuing
Employee to the Company's 401(k) plan prior to the Effective Time. No Continuing
Employee or dependent of such Continuing Employee who is covered by the
Company's group health plan prior to the Closing Date will experience any gap in
medical coverage as a result of the transaction contemplated by this Agreement,
provided such Continuing Employee or dependent of such Continuing Employee
complies with all terms and procedures necessary to ensure continued coverage.
(b) Parent will use reasonable efforts to the extent permitted by any
Parent "welfare benefit plan" (as defined in Section 3(1) of ERISA) ("Parent
Welfare Plan") to (i) waive all limitations as to pre-existing condition
exclusions and waiting periods with respect to participation and coverage
requirements applicable to Continuing Employees under any Parent Welfare Plan in
which such Continuing Employees are eligible to participate after the Closing
Date, and (ii) provide each Continuing Employee with credit for the remaining
short plan year for any co-payments and deductibles paid under each comparable
welfare benefit plan maintained by the Company prior to the Closing Date in
satisfying any applicable deductible or co-payment requirements under any of
Parent Welfare Plan that such Continuing Employees are eligible to participate
in after the Closing Date.
SECTION 4.18 Further Information.
To the extent that a representation in Article II is provided "as of the
date of this Agreement", information shall be provided by the Company to Parent
as necessary to make the representation accurate as if the representation was
made at the Effective Time without the phrase "as of the date of this
Agreement."
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 5.1 Conditions to Each Party's Obligations to Effect the
Merger. The respective obligations of each party hereto to effect the Merger
are subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) this Agreement shall have been approved and adopted by the
requisite vote of the stockholders of the Company;
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(b) no statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
United States federal or state or foreign court or United States federal or
state or foreign Governmental Entity that prohibits, restrains, enjoins or
restricts the consummation of the Merger;
(c) any waiting period applicable to the Merger under the HSR Act and
any foreign antitrust or similar laws shall have terminated or expired;
(d) any other governmental or regulatory notices, approvals or other
requirements necessary to consummate the transactions contemplated hereby
and to operate the Company's business after the Effective Time in all
material respects as it is presently conducted, shall have been given,
obtained or complied with, as applicable; and
(e) the S-4 shall have become effective under the Securities Act and
shall not be the subject of any stop order or proceedings seeking a stop
order, and Parent shall have received all state securities laws or "blue
sky" permits and authorizations necessary to issue shares of Parent Common
Stock in exchange for Shares in the Merger.
SECTION 5.2 Conditions to the Obligations of the Company. The obligation
of the Company to effect the Merger is subject to the satisfaction at or prior
to the Effective Time of the following conditions:
(a) the representations and warranties of Parent and Acquisition
contained in this Agreement (other than those contained in Section 3.10)
shall be true and correct as of the Effective Time with the same effect as
if made at and as of the Effective Time (except to the extent such
representations specifically relate to an earlier date, in which case such
representations shall be true and correct as of such earlier date, and in
any event and except to the extent that the aggregate of all breaches
thereof would not have a Material Adverse Effect) and the representations
and warranties of Parent and Acquisition contained in Section 3.10 shall be
true and correct in all respects at and as of the Effective Time, and, at
the Closing, Parent and Acquisition shall have delivered to the Company a
certificate to that effect, executed by two (2) executive officers of
Parent and Acquisition;
(b) each of the covenants and obligations of Parent and Acquisition to
be performed at or before the Effective Time pursuant to the terms of this
Agreement shall have been duly performed in all material respects at or
before the Effective Time, and, at the Closing, Parent and Acquisition
shall have delivered to the Company a certificate to that effect, executed
by two (2) executive officers of Parent and Acquisition; provided, however,
that in connection with the compliance by Parent or Acquisition with any
Applicable Law (including the HSR Act) or obtaining the consent or approval
of any Governmental Entity whose consent or approval may be required to
consummate the transactions contemplated by this Agreement, Parent shall
not be (i) required, or be construed to be required, to sell or divest any
material assets or business or to restrict in any material respect any
business operations in order to obtain the consent or successful
termination of any review of any such Governmental Entity regarding the
transactions contemplated hereby or (ii) prohibited from owning, and no
material limitation shall be imposed on Parent's ownership of, any material
portion of the Company's business or assets;
(c) the shares of Parent Common Stock issuable to the Company's
stockholders pursuant to this Agreement and such other shares required to
be reserved for issuance in connection with the Merger shall have been
approved for quotation on the Nasdaq National Market, upon official notice
of issuance; and
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(d) the Company shall have received the opinion of tax counsel to the
Company or tax counsel to Parent to the effect that (i) the Merger will be
treated for Federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code and (ii) each of Parent, Acquisition
and the Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code, which opinion may rely on the representations
set forth in Exhibits B-1 and B-2 and such other representations as such
counsel reasonably deems appropriate and such opinion shall not have been
withdrawn or modified in any material respect.
SECTION 5.3 Conditions to the Obligations of Parent and Acquisition. The
respective obligations of Parent and Acquisition to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) the representations and warranties of the Company contained in
this Agreement (other than those contained in Section 2.25) shall be true
and correct as of the Effective Time with the same effect as if made at and
as of the Effective Time (except to the extent such representations
specifically relate to an earlier date, in which case such representations
shall be true and correct as of such earlier date, and in any event, and
except to the extent that the aggregate of all breaches thereof would not
have a Material Adverse Effect) and the representations and warranties of
the Company contained in Section 2.25 shall be true and correct in all
respects as of the Effective Time, and, at the Closing, the Company shall
have delivered to Parent and Acquisition a certificate to that effect,
executed by two (2) executive officers of the Company;
(b) each of the covenants and obligations of the Company to be
performed at or before the Effective Time pursuant to the terms of this
Agreement shall have been duly performed in all material respects at or
before the Effective Time and, at the Closing, the Company shall have
delivered to Parent and Acquisition a certificate to that effect, executed
by two (2) executive officers of the Company;
(c) since the date of this Agreement, there shall have been no
material adverse change in the Intellectual Property owned by or licensed
to the Company, other than such changes resulting from requests from Parent
and other than such changes resulting from this Agreement or the
announcement of this Agreement or the consummation of the Merger or the
transactions contemplated hereby;
(d) the Company's officers and directors shall have entered into
lock-up agreements in substantially the form entered into by officers and
directors of Parent in connection with its initial public offering (and
with release and expiration dates identical thereto) covering all Parent
Shares issued in the Merger and all stock options assumed in the Merger,
which total approximately 150,000 shares;
(e) since the date of this Agreement, there shall have been no
litigation commenced against the Company that would be required to be
disclosed by Item 103 of Regulation S-K (other than any litigation brought
against the Company, any member of the Company Board or any officer of the
Company in respect of the discussions or negotiations relating to this
Agreement or the announcement of this Agreement or the consummation of the
Merger or the transactions contemplated hereby); provided, that for the
purposes of this Subsection, Item 03, Instruction 2 shall be 20% rather
than 10%;
(f) Parent shall have received the opinion of tax counsel to Parent or
tax counsel to the Company to the effect that (i) the Merger will be
treated for Federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code and (ii) each of Parent, Acquisition
and the Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code, which opinion may rely on the representations
set forth in
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Exhibits B-1 and B-2 and such other representations as such counsel
reasonably deems appropriate, and such opinion shall not have been
withdrawn or modified in any material respect; and
(g) Parent shall have received amendments to the License Agreements
with the customers identified as having licenses in the last paragraph of
Section 2.7 of the Company Disclosure Schedule establishing that each of
these agreements provide for the grant of a nonexclusive license.
ARTICLE VI
TERMINATION; AMENDMENT; WAIVER
SECTION 6.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time whether before or after approval and adoption of
this Agreement by the Company's stockholders:
(a) by mutual written consent of Parent, Acquisition and the Company;
(b) by Parent and Acquisition or the Company if (i) any court of
competent jurisdiction in the United States or other United States federal
or state Governmental Entity shall have issued a final order, decree or
ruling, or taken any other final action, restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action is or shall have become nonappealable or (ii) the Merger has not
been consummated by May 31, 2000 (the "Final Date"); provided that no party
may terminate this Agreement pursuant to this clause (ii) if such party's
failure to fulfill any of its obligations under this Agreement shall have
been a principal reason that the Effective Time shall not have occurred on
or before said date;
(c) by the Company if (i) there shall have been a breach of any
representations or warranties on the part of Parent or Acquisition set
forth in this Agreement or if any representations or warranties of Parent
or Acquisition shall have become untrue, such that the conditions set forth
in Section 5.2(a) would be incapable of being satisfied by the Final Date,
provided that the Company has not breached any of its obligations hereunder
in any material respect; (ii) there shall have been a breach by Parent or
Acquisition of any of their respective covenants or agreements hereunder
having, in the aggregate, a Material Adverse Effect on Parent (or, in the
case of Sections 4.2 and 4.8, any material breach thereof) or materially
adversely affecting the ability of Parent, Acquisition or the Company to
consummate the Merger, and Parent or Acquisition, as the case may be, has
not cured such breach within thirty (30) business days after notice by the
Company thereof, provided that the Company has not breached any of its
obligations hereunder in any material respect; (iii) the Company shall have
convened a meeting of its stockholders to vote upon the Merger in
accordance with this Agreement and shall have failed to obtain the
requisite vote of its stockholders at such meeting (including any
adjournments thereof); or (iv) the Company Board has received a Superior
Proposal, and has complied with the provisions of Section 4.3(b); or
(d) by Parent and Acquisition if (i) there shall have been a breach of
any representations or warranties on the part of the Company set forth in
this Agreement or if any representations or warranties of the Company shall
have become untrue, such that the conditions set forth in Section 5.3(a)
would be incapable of being satisfied by the Final Date, provided that
neither Parent nor Acquisition has breached any of their respective
obligations hereunder in any material respect; (ii) there shall have been a
breach by the Company of one or more of its covenants or agreements
hereunder having, in the aggregate, a Material Adverse Effect on the
Company (or,
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in the case of Sections 4.2, 4.3, 4.5 or 4.8, any material breach thereof)
or materially adversely affecting the ability of Parent, Acquisition or the
Company to consummate the Merger, and the Company has not cured such breach
within thirty (30) business days after notice by Parent or Acquisition
thereof, provided that neither Parent nor Acquisition has breached any of
their respective obligations hereunder in any material respect; (iii) the
Company Board shall have recommended to the Company's stockholders a
Superior Proposal; (iv) the Company Board shall have withdrawn or adversely
modified its approval or recommendation of this Agreement or the Merger; or
(v) the Company shall have convened a meeting of its stockholders to vote
upon the Merger and shall have failed to obtain the requisite vote of its
stockholders at such meeting (including any adjournments thereof).
SECTION 6.2 Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 6.1:
(a) Parent may use the Residuals of any Company Intellectual Property
that is disclosed to Company after the Effective Date and before
termination without restriction for any purpose, including without
limitation development or marketing of other applications, software, or
components thereof. However, Parent may not use Residuals to recreate a
product that is substantially similar to any Company product with only
minimal differences in design, features, and function. "Residuals" means
any knowledge, ideas, concepts or inventions that may be retained in the
minds of Parent's employees or contractors who have accessed any of
Company's Intellectual Property, excluding any Company rights under
copyright, patent or trademark law, for which no license is granted
hereunder, and except as expressly stated herein, neither Company nor
Parent, nor any subsidiary of either party, shall acquire any license in
the other party's Intellectual Property as a result of any termination of
this Agreement; and
(b) this Agreement shall forthwith become void and have no effect
without any liability on the part of any party hereto or its affiliates,
directors, officers or stockholders other than the provisions of this
Section 6.2 and Sections 4.6(c) and 6.3 and the provisions of all of
Article 7 which shall survive any such termination (other than Section 7.8,
in which case the only clauses that shall survive shall be the clauses in
such Section that contain defined terms that are referenced in the
foregoing surviving sections). Nothing contained in this Section 6.2 shall
relieve any party from liability for any fraudulent misconduct or willful
breach of this Agreement prior to such termination.
SECTION 6.3 Fees and Expenses.
(a) In the event that this Agreement shall be terminated pursuant to:
(i) Section 6.1(c)(iv) or 6.1(d)(iii) or (iv);
(ii) Section 6.1(d)(i) or (ii) and within 9 months after termination
of this Agreement the Company enters into an agreement with respect to a
Company Acquisition or a Company Acquisition involving any Third Party (or
any affiliate thereof) is closed; or
(iii) Section 6.1(c)(iii) or 6.1(d)(v) and within 6 months following
the stockholders' meeting, the Company enters into an agreement with
respect to a Company Acquisition or a Company Acquisition involving any
Third Party (or an affiliate thereof) is closed;
Parent and Acquisition would suffer direct and substantial damages, which
damages cannot be determined with reasonable certainty. To compensate Parent and
Acquisition for such damages: (A) the Company shall pay to Parent the amount of
$5,000,000 within ten (10) business days of the occurrence of the event
described in this Section 6.3(a) giving rise to such damages.
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(b) Except as specifically provided in this Section 6.3, each party shall
bear its own expenses in connection with this Agreement and the transactions
contemplated hereby.
(c) Each of the Company, Parent and Acquisition acknowledge that the
agreements contained in this Article 6 (including this Section 6.3) are an
integral part of the transactions contemplated by this Agreement and that,
without these agreements, Company, Parent and Acquisition would not enter into
this Agreement. Accordingly, if the Company, or Parent and Acquisition, fails
promptly to pay the amounts required pursuant to Section 6.3 when due (including
circumstances where, in order to obtain such payment the party owed such payment
commences a suit that results in a final nonappealable judgment for such amounts
against the party that failed to make such payment), the party that failed to
make such payment shall pay to the party owed such payment (i) its costs and
expenses (including attorneys' fees) in connection with such suit and (ii)
interest on the amount that was determined to be due and payable hereunder at
the rate announced by Bank of America NT&SA as its "reference rate" in effect on
the date such payment was required to be made from the date such payment first
became due until paid.
SECTION 6.4 Amendment. This Agreement may be amended by action taken by
the Company, Parent and Acquisition at any time before or after approval of the
Merger by the stockholders of the Company but after any such approval no
amendment shall be made that requires the approval of such stockholders under
Applicable Law without such approval. This Agreement (including, subject to
Section 4.12, the Company Disclosure Schedule and the Parent Disclosure
Schedule) may be amended only by an instrument in writing signed on behalf of
the parties hereto.
SECTION 6.5 Extension; Waiver. At any time prior to the Effective Time,
each party hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document certificate or writing delivered pursuant hereto or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of any party hereto to any such extension or
waiver shall be valid only if set forth in an instrument, in writing, signed on
behalf of such party. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 Nonsurvival of Representations and Warranties. The
representations and warranties made herein shall not survive beyond the
Effective Time or a termination of this Agreement. This Section 7.1 shall not
limit any covenant or agreement of the parties hereto that by its terms requires
performance after the Effective Time.
SECTION 7.2 Entire Agreement; Assignment. This Agreement (a) constitutes
the entire agreement between the parties hereto with respect to the subject
matter hereof and supersedes all other prior and contemporaneous agreements and
understandings both written and oral between the parties with respect to the
subject matter hereof and (b) shall not be assigned by operation of law or
otherwise; provided, however, that Acquisition may assign any or all of its
rights and obligations under this Agreement to any direct or indirect wholly
owned subsidiary of Parent, but no such assignment shall relieve Acquisition of
its obligations hereunder if such assignee does not perform such obligations.
SECTION 7.3 Validity. If any provision of this Agreement or the
application thereof to any person or circumstance is held invalid or
unenforceable, the remainder of this Agreement and the
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application of such provision to other persons or circumstances shall not be
affected thereby and to such end the provisions of this Agreement are agreed to
be severable.
SECTION 7.4 Notices. All notices and other communications pursuant to
this Agreement shall be in writing and shall be deemed given if delivered
personally, telecopied, sent by nationally-recognized overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the addresses set forth below or to such other
address as the party to whom notice is to be given may have furnished to the
other parties hereto in writing in accordance herewith. Any such notice or
communication shall be deemed to have been delivered and received (A) in the
case of personal delivery, on the date of such delivery, (B) in the case of
telecopier, on the date sent if confirmation of receipt is received and such
notice is also promptly mailed by registered or certified mail (return receipt
requested), (C) in the case of a nationally-recognized overnight courier in
circumstances under where such courier is expected to provide next business day
delivery, on the next business day after the date when sent and (D) in the case
of mailing, on the third business day following that on which the piece of mail
containing such communication is posted:
if to Parent or Acquisition:
Calico Commerce, Inc.
333 West San Carlos Street, Suite 300
San Jose, CA 95110
Attention: Chief Financial Officer
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: Gregory Gallo
if to the Company to:
ConnectInc.com, Co.
515 Ellis Street
Mountain View, CA 94043
Attention: President
with a copy to:
Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: James R. Jones
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
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SECTION 7.5 Governing Law and Venue; Waiver of Jury Trial.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL
BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The
parties hereby irrevocably submit to the jurisdiction of the courts of the State
of Delaware and the Federal courts of the United States of America located in
the State of Delaware solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred to in this
Agreement, and in respect of the transactions contemplated hereby, and hereby
waive, and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof or of any such document, that it is
not subject thereto or that such action, suit or proceeding may not be brought
or is not maintainable in said courts or that the venue thereof may not be
appropriate or that this Agreement or any such document may not be enforced in
or by such courts, and the parties hereto irrevocably agree that all claims with
respect to such action or proceeding shall be heard and determined in such a
Delaware State or Federal court. The parties hereby consent to and grant any
such court jurisdiction over the person of such parties and over the subject
matter of such dispute and agree that mailing of process or other papers in
connection with any such action or proceeding in the manner provided in Section
7.4 or in such other manner as may be permitted by Applicable Law, shall be
valid and sufficient service thereof.
(b) The parties agree that irreparable damage would occur and that the
parties would not have any adequate remedy at law in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions of this
Agreement in any Federal court located in the State of Delaware or in Delaware
state court, this being in addition to any other remedy to which they are
entitled at law or in equity.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS IN THIS SECTION 7.5.
SECTION 7.6 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 7.7 Parties in Interest. Except as otherwise provided herein,
this Agreement shall be binding upon and inure solely to the benefit of each
party hereto and its successors and permitted assigns and, except as expressly
provided herein, nothing in this Agreement is intended to or shall
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confer upon any other person any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement nor shall any such person be
entitled to assert any claim hereunder. Except as otherwise provided herein, in
no event shall this Agreement constitute a third party beneficiary contract.
SECTION 7.8 Certain Definitions. For the purposes of this Agreement the
term:
(a) "affiliate" means (except as otherwise provided in Sections 2.23
and 4.11) a person that, directly or indirectly, through one or more
intermediaries controls, is controlled by or is under common control with
the first-mentioned person;
(b) "actual knowledge" means with respect to any matter in question,
the actual knowledge of such matter of (i) with respect to the Company,
those persons listed on Section 7.8(f)(i) of the Company Disclosure
Schedule and (ii) with respect to Parent, those persons listed on Section
7.8(f)(ii) of the Parent Disclosure Schedule. Any such individual will be
deemed to have actual knowledge of a particular fact, circumstance, event
or other matter only to the extent of such individual's actual conscious
actual knowledge of such fact, circumstance, event or other matter;
(c) "Applicable Law" means, with respect to any person, any domestic
or foreign, federal, state or local statute, law, ordinance, rule,
regulation, order, writ, injunction, judgment, decree or other requirement
of any Governmental Entity existing as of the date hereof or as of the
Effective Time applicable to such Person or any of its respective
properties, assets, officers, directors, employees, consultants or agents;
(d) "business day" means any day other than a day on which the Nasdaq
National Market is closed;
(e) "capital stock" means common stock, preferred stock, partnership
interests, limited liability company interests or other ownership interests
entitling the holder thereof to vote with respect to matters involving the
issuer thereof;
(f) "Change of Control Agreements" shall mean the following
agreements: Change of Control Agreement by and between the Company and
Lucille Hoger, dated as of April 30, 1998; Amended and Restated Change of
Control Agreement by and between the Company and Craig D. Norris, dated as
of April 30, 1998; Change of Control Agreement by and between the Company
and David Wippich, dated September 10, 1999; Change of Control Agreement by
and between the Company and Kevin Berry, dated May 10, 1999; Change of
Control Agreement by and between the Company and Preetham Gopalaswamy,
dated as of July 23, 1998; Change of Control Agreement by and between the
Company and William Whitney, dated as of July 23, 1998; Change of Control
Agreement by and between the Company and Rohit Saxena, dated as of July 23,
1998; Change of Control Agreement by and between the Company and Vimal
Goel, dated as of August 30, 1999;
(g) "Company Acquisition" means the occurrence of any of the following
events: (i) the acquisition by a Third Party of 50% or more of the assets
of the Company and its subsidiaries taken as a whole; (ii) the acquisition
by a Third Party of 50% or more of the outstanding Shares, or any
securities convertible into or exchangeable for Shares that would
constitute 50% or more of the outstanding Shares upon such conversion or
exchange, or any combination of the foregoing; (iii) the acquisition by the
Company of the assets or stock of a Third Party if, as a result of which
the outstanding shares of the Company immediately prior thereto are
increased by 100% or more; or (iv) the merger, consolidation or business
combination of the Company with or into a Third Party, where, following
such merger, consolidation or business combination,
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the stockholders of the Company prior to such transaction do not hold,
immediately after such transaction, securities of the surviving entity or
Parent constituting more than 50% of the total voting power of such
surviving entity;
(h) "knowledge" or "known" means, with respect to any matter in
question, the actual knowledge of such matter of (i) with respect to the
Company, those persons listed on Section 7.8(f)(i) of the Company
Disclosure Schedule and (ii) with respect to Parent, those persons listed
on Section 7.8(f)(ii) of the Parent Disclosure Schedule. Any such
individual will be deemed to have knowledge of a particular fact,
circumstance, event or other matter if (1) such individual has actual
knowledge of such fact, circumstance, event or other matter, or (2) such
fact, circumstance, event or other matter is reflected in one or more
documents (whether written or electronic, including e-mails sent to or by
such individual) in, or that have been in, such individual's possession,
including personal files of such person;
(i) "include" or "including" means "include, without limitation" or
"including, without limitation," as the case may be, and the language
following "include" or "including" shall not be deemed to set forth an
exhaustive list;
(j) "Lien" means, with respect to any asset (including any security),
any mortgage, lien, pledge, charge, security interest or encumbrance of any
kind in respect of such asset; provided, however, that the term "Lien"
shall not include (i) statutory liens for Taxes that are not yet due and
payable or are being contested in good faith by appropriate proceedings and
are disclosed in Section 2.14 of the Company Disclosure Schedule or that
are otherwise not material, (ii) statutory or common law liens to secure
obligations to landlords, lessors or renters under leases or rental
agreements confined to the premises rented, (iii) deposits or pledges made
in connection with, or to secure payment of, workers' compensation,
unemployment insurance, old age pension or other social security programs
mandated under Applicable Laws, (iv) statutory or common law liens in favor
of carriers, warehousemen, mechanics and materialmen, to secure claims for
labor, materials or supplies and other like liens, and (v) restrictions on
transfer of securities imposed by applicable state and federal securities
laws;
(k) "Material Adverse Effect on the Company" means any circumstance,
change in, or effect on the Company and its subsidiaries, taken as a whole,
that is, or is reasonably likely in the future to be, materially adverse to
the financial condition, results of operations, or the business or
operations (financial or otherwise), of the Company and its subsidiaries,
taken as a whole, provided that none of the following shall be deemed,
either alone or in combination, to constitute a Material Adverse Effect on
the Company: (i) a change in the market price or trading volume of the
Company Common Stock, (ii) a failure by the Company to meet the revenue or
earnings predictions of equity analysts as reflected in the First Call
consensus estimate, or any other revenue or earnings predictions or
expectations, for any period ending (or for which earnings are released) on
or after the date of this Agreement and prior to the Effective Time,
provided further that this Section 7.8(i)(ii) shall not exclude any
underlying change, effect, event, occurrence, state of facts or
developments that resulted in such failure to meet such estimates,
predictions or expectations, (iii) general industry or economic conditions
affecting the U.S. or world economy as a whole, (iv) conditions affecting
the e-commerce industry, so long as such conditions do not affect the
Company in a disproportionate manner as compared to companies of a similar
size, (v) any disruption of customer, supplier or employee relationships
resulting from the announcement of this Agreement or the consummation of
the Merger or transactions contemplated hereby, (vi) any litigation brought
or threatened against the Company, any member of Company Board or any
officer of Company in respect of the discussions or negotiations relating
to this Agreement or the announcement of this Agreement or the
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consummation of the Merger or the transactions contemplated hereby, or
(vii) any change resulting from any action contemplated or permitted by
this Agreement;
(l) "Material Adverse Effect on Parent" means any circumstance, change
in, or effect on Parent and its subsidiaries, taken as a whole, that is, or
is reasonably likely in the future to be, materially adverse to the
financial condition, results of operations, or the business or operations
(financial or otherwise), of Parent and its subsidiaries, taken as a whole,
provided that none of the following shall be deemed, either alone or in
combination, to constitute a Material Adverse Effect on the Parent: (i) a
change in the market price or trading volume of the Parent Common Stock,
(ii) a failure by the Parent to meet the revenue or earnings predictions of
equity analysts as reflected in the First Call consensus estimate, or any
other revenue or earnings predictions or expectations, for any period
ending (or for which earnings are released) on or after the date of this
Agreement and prior to the Effective Time, provided further that this
Section 7.8(j)(ii) shall not exclude any underlying change, effect, event,
occurrence, state of facts or developments that resulted in such failure to
meet such estimates, predictions or expectations, (iii) general industry or
economic conditions affecting the U.S. or world economy as a whole, (iv)
conditions affecting the e-commerce industry, so long as such conditions do
not affect the Parent in a disproportionate manner as compared to companies
of a similar size, (v) any disruption of customer, supplier or employee
relationships resulting from the announcement of this Agreement or the
consummation of the Merger or transactions contemplated hereby, (vi) any
litigation brought or threatened against the Parent, any member of Parent
Board or any officer of Parent in respect of the discussions or
negotiations relating to this Agreement or the announcement of this
Agreement or the consummation of the Merger or the transactions
contemplated hereby, or (vii) any change resulting from any action
contemplated or permitted by this Agreement;
(m) "person" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization or other
legal entity including any Governmental Entity;
(n) "subsidiary" or "subsidiaries" of the Company, Parent, the
Surviving Corporation or any other person means any corporation,
partnership, limited liability company, association, trust, unincorporated
association or other legal entity of which the Company, Parent, the
Surviving Corporation or any such other person, as the case may be (either
alone or through or together with any other subsidiary), owns, directly or
indirectly, 50% or more of the capital stock the holders of which are
generally entitled to vote for the election of the board of directors or
other governing body of such corporation or other legal entity;
(o) "agreement", "contract" and commitment" each means a legally
binding written agreement, contract or commitment.
SECTION 7.9 Personal Liability. This Agreement shall not create or be
deemed to create or permit any personal liability or obligation on the part of
any direct or indirect stockholder of the Company or Parent or Acquisition or
any officer, director, employee, agent, representative or investor of any party
hereto.
SECTION 7.10 Specific Performance. The parties hereby acknowledge and
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties, for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder.
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SECTION 7.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
CALICO COMMERCE, INC.
By: /s/ ARTHUR F. KNAPP, JR.
---------------------------------------
Name: Arthur F. Knapp, Jr.
Title: Vice President and Chief Financial
Officer
Date: November 19, 1999
CONNECTINC.COM, CO.
By: /s/ CRAIG D. NORRIS
---------------------------------------
Name: Craig D. Norris
Title: President and Chief Executive
Officer
Date: November 19, 1999
CALICO ACQUISITION, INC.
By: /s/ ARTHUR F. KNAPP, JR.
---------------------------------------
Name: Arthur F. Knapp, Jr.
Title: President
Date: November 19, 1999
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Appendix B
LOGO
November 18, 1999
Board of Directors
ConnectInc.Com
515 Ellis Street
Mountain View, CA 94043-2242
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of ConnectInc.com ("CNKT") for the consideration
received in the acquisition (the "Acquisition") of CNKT by Calico Commerce, Inc.
("CLIC"). As contemplated by the draft Agreement and Plan of Merger (the
"Agreement") distributed on November 18th, 1999, CNKT shareholders will receive
.081 shares of registered CLIC common stock in exchange for each share of common
stock of CNKT.
For purposes of the opinion set forth herein, we have:
(a) Reviewed public financial statements and other information of CNKT
and CLIC;
(b) Reviewed certain internal financial statements and other financial
and operating data concerning CNKT and CLIC, prepared by the managements of
CNKT and CLIC respectively;
(c) Analyzed certain financial projections prepared by the managements
of CNKT and CLIC;
(d) Discussed the past and current operations, financial condition,
and the prospects of CNKT with senior executives of CNKT;
(e) Discussed with the senior management of CNKT the strategic
objectives of the Acquisition and the strategic alternatives available to
CNKT;
(f) Discussed with the senior management of CLIC the strategic
objectives of the Acquisition;
(g) Compared the financial performance of CNKT with that of certain
other comparable publicly-traded companies and the prices paid for
securities in those publicly-traded companies;
435 Tasso Street, Third Floor, Palo Alto, California 94301 Telephone:
650.325.1541, Facsimile: 650.325.0460
<PAGE> 247
ConnectInc.com
Board of Directors
November 18, 1999
Page 2
(h) Reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(i) Assessed CNKT's forecast and future cash flows using a discounted
cash flow analysis;
(j) Reviewed the Agreement and Plan of Merger, and certain related
documents; and
(k) Performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections of CNKT and CLIC, we
have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the future financial
performance of each company. The financial and other information regarding CNKT
reviewed by Alliant Partners in connection with the rendering of this opinion
was limited to information provided by CNKT's management and certain discussions
with CNKT's senior management regarding CNKT's financial condition and prospects
and their strategic objectives of the Acquisition as well as the strategic
alternatives available to CNKT. In addition, we have assumed that the
Acquisition will be consummated in accordance with the terms set forth in the
Agreement. We have not made any independent valuation appraisal of the assets or
liabilities of CNKT, nor have we been furnished with any such appraisals. Our
opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of the date hereof.
Our opinion addresses only the fairness of the transaction, from a
financial point of view, to the stockholders of CNKT, and we do not express any
views on any other terms of the Agreement or the business and strategic bases
underlying the Agreement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the total consideration received by the CNKT stockholders pursuant
to the Agreement is fair, from a financial point of view, to the CNKT
stockholders.
Very truly yours,
Alliant Partners
<PAGE> 248
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. Our certificate of incorporation and bylaws
provide that we shall indemnify our officers, directors, employees and agents to
the full extent permitted by the Delaware General Corporation Law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law.
Calico has entered into separate indemnification agreements with its
officers, directors and certain employees which require Calico, among other
things, to indemnify them against certain liabilities which may arise by reason
of their status or service as directors, officers or employees.
Calico also maintains a policy of directors' and officers' liability
insurance that insures its directors and officers against the cost of defense,
settlement or payment of a judgment under certain circumstances.
II-1
<PAGE> 249
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
2.1* Agreement and Plan of Merger dated as of November 19, 1999
by and among Calico Commerce, Inc., ConnectInc.com, Co. and
Calico Acquisition, Inc.
2.2** Agreement and Plan of Reorganization dated as of June 23,
1998 by and among Calico Technology, Inc., Calico
Acquisition Corporation, FirstFloor Software, Inc., Certain
Shareholders of FirstFloor Software, Inc., and Certain
Shareholders of Calico Technology, Inc.
3.1** Certificate of Incorporation
3.2** Bylaws
3.3** Form of Certificate of Elimination and Certificate of
Amendment
4.1** Form of Registrant's Specimen Common Stock Certificate
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
8.1 Opinion of Gray Cary Ware & Freidenrich LLP as to tax
matters
8.2 Opinion of Cooley Godward LLP as to tax matters
10.1** Office Lease between Metropolitan Life Insurance Company and
Calico Commerce, Inc. dated as of August 18, 1999
10.2** 1997 Stock Option Plan and forms of agreements thereunder
10.3** 1995 Stock Option Plan and forms of agreements thereunder
10.4** 1999 Employee Stock Purchase Plan
10.5** Form of Indemnity Agreement for directors and officers
10.6** Investors' Rights Agreement, dated as of May 26, 1995, as
amended, among Calico Technology, Inc., William G. Paseman,
and the persons identified on the schedules attached thereto
10.7** Loan Agreement dated as of January 21, 1997, between Calico
Technology, Inc. and Venture Lending and Leasing, Inc.
10.8** Four Variable Rate Installment Notes between Calico
Technology, Inc. and Comerica Bank -- California
10.9** Common Stock Purchase Agreement dated September 3, 1999
between Calico Commerce, Inc. and Dell U.S.A., L.P.
10.10** Letter Agreement between Andersen Consulting LLP and Calico
Commerce, Inc. dated September 17, 1999
10.11** Common Stock Purchase Agreement dated September 29, 1999
between Calico Commerce, Inc. and AC II Technology (ACT II)
B.V.
10.12** Amendment Number Nine to Investors' Rights Agreement
21.1** List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
</TABLE>
II-2
<PAGE> 250
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
23.2 Consent of Ernst & Young LLP, Independent Auditors as to
ConnectInc.com
23.3 Consent of Ernst & Young LLP, Independent Auditors, as to
FirstFloor Software, Inc.
23.4 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1 and Exhibit 8.1)
23.5 Consent of Cooley Godward LLP (included in Exhibit 8.2)
24.1 Powers of Attorney (see signature page to this Registration
Statement)
99.1 Form of Proxy for holders of ConnectInc.com stock
99.2 Consent of Alliant Partners
</TABLE>
- -------------------------
* Incorporated by reference to Calico's Current Report on Form 8-K filed
November 29, 1999.
** Incorporated by reference to Calico's Form S-1 Registration Statement No.
333-82907 originally filed July 15, 1999.
(b) FINANCIAL STATEMENT SCHEDULE
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes attached thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE> 251
(d)(1) that prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) that every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415 will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(e) to respond to requests for information that is incorporated by
reference into the proxy statement/prospectus pursuant to Item 4, 10(b), 11
or 13 of this Form within one business day of receipt of such request and
to send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(g) insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 252
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on the 20th day of December 1999.
CALICO COMMERCE, INC.
By: /s/ ALAN P. NAUMANN
--------------------------------------
Alan P. Naumann,
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Alan P. Naumann and Arthur F.
Knapp, Jr. and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this registration
statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
DATE SIGNATURES TITLE
---- ---------- -----
<S> <C> <C>
December 20, 1999 /s/ ALAN P. NAUMANN President, Chief Executive
------------------------------------------------ Officer and Director
Alan P. Naumann (Principal Executive Officer)
December 20, 1999 /s/ ARTHUR F. KNAPP, JR. Vice President and Chief
------------------------------------------------ Financial Officer (Principal
Arthur F. Knapp, Jr. Financial and Accounting
Officer)
December 20, 1999 /s/ WILLIAM G. PASEMAN Director
------------------------------------------------
William G. Paseman
December 20, 1999 /s/ BERNARD J. LACROUTE Director
------------------------------------------------
Bernard J. Lacroute
December 16, 1999 /s/ WILLIAM D. UNGER Director
------------------------------------------------
William D. Unger
December 20, 1999 /s/ JOSEPH B. COSTELLO Director
------------------------------------------------
Joseph B. Costello
</TABLE>
II-5
<PAGE> 253
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<S> <C>
2.1* Agreement and Plan of Merger dated as of November 19, 1999
by and among Calico Commerce, Inc., ConnectInc.com, Co. and
Calico Acquisition, Inc.
2.2** Agreement and Plan of Reorganization dated as of June 23,
1998 by and among Calico Technology, Inc., Calico
Acquisition Corporation, FirstFloor Software, Inc., Certain
Shareholders of FirstFloor Software, Inc., and Certain
Shareholders of Calico Technology, Inc.
3.1** Certificate of Incorporation
3.2** Bylaws
3.3** Form of Certificate of Elimination and Certificate of
Amendment
4.1** Form of Registrant's Specimen Common Stock Certificate
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
8.1 Opinion of Gray Cary Ware & Freidenrich LLP as to tax
matters
8.2 Opinion of Cooley Godward LLP as to tax matters
10.1** Office Lease between Metropolitan Life Insurance Company and
Calico Commerce, Inc. dated as of August 18, 1999
10.2** 1997 Stock Option Plan and forms of agreements thereunder
10.3** 1995 Stock Option Plan and forms of agreements thereunder
10.4** 1999 Employee Stock Purchase Plan
10.5** Form of Indemnity Agreement for directors and officers
10.6** Investors' Rights Agreement, dated as of May 26, 1995, as
amended, among Calico Technology, Inc., William G. Paseman,
and the persons identified on the schedules attached thereto
10.7** Loan Agreement dated as of January 21, 1997, between Calico
Technology, Inc. and Venture Lending and Leasing, Inc.
10.8** Four Variable Rate Installment Notes between Calico
Technology, Inc. and Comerica Bank -- California
10.9** Common Stock Purchase Agreement dated September 3, 1999
between Calico
10.10** Letter Agreement between Andersen Consulting LLP and Calico
Commerce, Inc. dated September 17, 1999
10.11** Common Stock Purchase Agreement dated September 29, 1999
between Calico Commerce, Inc. and AC II Technology (ACT II)
B.V.
10.12** Amendment Number Nine to Investors' Rights Agreement
21.1** List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors as to
ConnectInc.com
23.3 Consent of Ernst & Young LLP, Independent Auditors, as to
FirstFloor Software, Inc.
23.4 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1 and Exhibit 8.1)
23.5 Consent of Cooley Godward LLP (included in Exhibit 8.2)
24.1 Powers of Attorney (see signature page to this Registration
Statement)
99.1 Form of Proxy for holders of ConnectInc.com stock
99.2 Consent of Alliant Partners
</TABLE>
- -------------------------
* Incorporated by reference to Calico's Current Report on Form 8-K filed
November 29, 1999.
** Incorporated by reference to Calico's Form S-1 Registration Statement No.
333-82907 originally filed July 15, 1999.
<PAGE> 1
EXHIBIT 5.1
[GRAY CARY WARE FREIDENRICH LLP LETTERHEAD]
Our File No.: 1030935-903900
December 20, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: CALICO COMMERCE, INC. REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
This opinion is furnished to you in connection with the filing of a
Registration Statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended, for the registration of 1,430,151 shares of Common Stock,
par value $0.001 per share (the "Common Stock"), of the Company.
We have acted as counsel for the Company in connection with the issuance
of such shares of Common Stock pursuant to the Agreement and Plan of Merger,
dated as of November 19, 1999 by and among the Company, Calico Acquisition,
Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, and
ConnectInc.com, Co., a Delaware corporation. We have examined all instruments,
documents and records which we deemed relevant and necessary for the basis of
our opinion hereinafter expressed. In such examination, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals and the conformity to the originals of all documents submitted
to us as copies.
Based on such examination, we are of the opinion that the shares of
Common Stock to be issued by the Company pursuant to this Registration Statement
are validly authorized by the Company, and that such shares of Common Stock of
the Company, when issued in accordance with the terms of the Merger Agreement,
will be legally issued, fully paid, and nonassessable.
<PAGE> 2
December 20, 1999
Page Two
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever it appears in said
Registration Statement.
This opinion is to be used only in connection with the issuance of the
Common Stock while the Registration Statement is in effect.
Very truly yours,
GRAY CARY WARE & FREIDENRICH LLP
<PAGE> 1
Exhibit 8.1
[GRAY CARY WARE & FREIDENRICH LLP LETTERHEAD]
December 20, 1999
Calico Commerce, Inc.
333 West San Carlos Street, Suite 300
San Jose, CA 95110
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with the requirements of
Item 601(b)(8) of Regulation S-K under the Securities Act of 1933, as amended,
in connection with the filing of a registration statement on Form S-4 of a Proxy
Statement/Prospectus (the "Registration Statement") pursuant to the Agreement
and Plan of Merger dated as of November 19, 1999 (the "Merger Agreement") by and
among Calico Commerce, Inc., a Delaware corporation ("Parent"), Calico
Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of
Parent ("Acquisition") and ConnectInc.com, Co., a Delaware corporation (the
"Company"). Pursuant to the Merger Agreement, Acquisition will merge with and
into the Company (the "Merger").
Unless otherwise defined, capitalized terms referred to herein have the meanings
set forth in the Merger Agreement. All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended (the "Code").
We have acted as legal counsel to Parent in connection with the preparation and
execution of the Merger Agreement. As such, and for the purpose of rendering
this opinion, we have examined and are relying upon (without any independent
investigation or review thereof) the truth and accuracy, at all relevant times,
of the statements, covenants, representations and warranties contained in the
following documents (including all schedules and exhibits thereto): (1) the
Merger Agreement; (2) representations and warranties made to us by Parent,
Acquisition and the Company in certain tax representation letters dated December
20, 1999 (the "Tax Representation Letters"); (3) the facts, statements,
descriptions and representations set forth in the Registration Statement; and
(4) such other instruments and documents related to the formation, organization
and operation of Parent, Acquisition and the Company or to the consummation of
the Merger and the transactions contemplated thereby as we have deemed necessary
or appropriate.
<PAGE> 2
GRAY CARY WARE & FREIDENRICH LLP
Calico Commerce, Inc.
December 20, 1999
Page Two
In connection with rendering this opinion, we have assumed (and are relying
thereon, without any independent investigation or review thereof):
1. the truth and accuracy, as of the date hereof and at the Effective Time,
of the statements, covenants, representations and warranties contained in the
Merger Agreement, in the Tax Representation Letters that have been provided to
us and that were issued in support of this opinion, and in the Registration
Statement and other documents related to Parent, Acquisition and Company as we
have deemed necessary or appropriate for purposes of issuing this opinion;
2. consummation of the Merger in accordance with the Merger Agreement,
without any waiver, breach or amendment of any material provisions of the Merger
Agreement, the effectiveness of the Merger under applicable state law, and the
performance of all covenants contained in the Merger Agreement and the Tax
Representation Letters without waiver or breach of any material provisions
thereof;
3. the accuracy, without qualification, of any representation or statement
made "to the knowledge of" or similarly qualified, and as to all matters in
which a person or entity is making a representation, that such person or entity
is not a party to, does not have, or is not aware of, any plan or intention,
understanding or agreement inconsistent with such representation, and there is
no such plan, intention, understanding, or agreement inconsistent with such
representation;
4. the reporting of the Merger as a reorganization, within the meaning of
Section 368(a) of the Code, by Parent and Company in their respective federal
income returns; and
5. the authenticity of original documents (including signatures),
conformity to the originals of documents submitted to us as copies, and due
execution and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof.
Based on the foregoing, we are of the opinion that the discussion in the Joint
Proxy Statement/Prospectus, which forms part of the Registration Statement,
under the caption "Material Federal Income Tax Consequences," to the extent it
constitutes descriptions of legal matters or legal conclusions regarding the
federal income tax laws of the United States, is accurate in all material
respects.
This opinion addresses only the matters described above. No opinion is expressed
as to any other matter, including any other tax consequences of the Merger or
any other transaction (including any transaction undertaken in connection with
the Merger) under any foreign, federal, state or local tax law.
No opinion is expressed as to any transaction other than the Merger as described
in the Merger Agreement or to any transaction whatsoever, including the Merger,
if any of the transactions
<PAGE> 3
GRAY CARY WARE & FREIDENRICH LLP
Calico Commerce, Inc.
December 20, 1999
Page Three
described in the Merger Agreement are not consummated in accordance with the
terms of such Merger Agreement and without waiver or breach of any material
provision thereof or if any of the representations, warranties, statements and
assumptions upon which we relied are not true and accurate at all relevant
times. In the event any one of the statements, covenants, representations,
warranties or assumptions upon which we have relied to issue this opinion is
incorrect, our opinion might be adversely affected and may not be relied upon.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and the
Internal Revenue Service is not precluded from successfully asserting a contrary
position. Furthermore, no assurance can be given that future legislative,
judicial or administrative changes, on either a prospective or retroactive
basis, would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax
laws.
This opinion has been delivered to you only for the purpose stated. It is
intended for the benefit of the Company and the stockholders of the Company and
may not be relied upon for any other purpose or by any other person or entity,
and may not be made available to any other person or entity without our prior
written consent. We hereby consent, however, to the use of this opinion as an
exhibit to the Registration Statement and further consent to the use of our name
wherever appearing in the Registration Statement, including the Proxy
Statement/Prospectus constituting a part thereof, and any amendments thereto.
Very truly yours,
GRAY CARY WARE & FREIDENRICH LLP
<PAGE> 1
Exhibit 8.2
[COOLEY GODWARD LLP LETTERHEAD]
December 20, 1999
ConnectInc.com
515 Ellis Street
Mountain View, California 94043-2242
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger dated as of November 19, 1999, (the "Reorganization
Agreement") by and among Calico Commerce, Inc., a Delaware corporation
("Parent"), Calico Acquisition, Inc., a Delaware corporation and wholly owned
subsidiary of Parent ("Merger Sub"), and ConnectInc.com, Co., a Delaware
corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined, and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents (including all exhibits and
schedules attached thereto):
(a) the Reorganization Agreement;
(b) the Registration Statement;
(c) those certain tax representation letters dated December 20, 1999 and
delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and
(d) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
<PAGE> 2
ConnectInc.com
December 20, 1999
Page Two
(a) Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;
(b) All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and stockholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters are true and accurate at
all relevant times;
(c) All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
(d) The Merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the opinion
set forth below;
(e) Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification; and
(f) The opinion dated December 20, 1999, rendered by Gray Cary Ware &
Freidenrich LLP to the Company pursuant to the Reorganization Agreement has been
delivered and has not been withdrawn.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a) of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Material Federal Income Tax Consequences" contained in the
Registration Statement and believe that, insofar as it relates to statements of
law and legal conclusions, it is correct in all material respects.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. No opinion is expressed as to
the federal income tax treatment that
<PAGE> 3
ConnectInc.com
December 20, 1999
Page Three
may be relevant to a particular investor in light of personal circumstances or
to certain types of investors subject to special treatment under the federal
income tax laws (for example, financial institutions, insurance companies,
foreign individuals and entities, tax-exempt entities, dealers in securities,
persons who are subject to the alternative minimum tax provisions of the Code,
persons who acquired their shares of Company capital stock pursuant to the
exercise of an employee option (or otherwise as compensation), persons whose
shares of Company capital stock are qualified small business stock for purposes
of Section 1202 of the Code, or persons who acquired Company capital stock as
part of an integrated investment, such as a "hedge," "straddle," or other risk
reduction transaction, composed of Company capital stock and one or more other
positions).
No opinion is expressed as to any transaction other than the Merger as described
in the Reorganization Agreement, or as to any transaction whatsoever, including
the Merger, if all of the transactions described in the Reorganization Agreement
are not consummated in accordance with the terms of the Reorganization Agreement
and without waiver of any material provision thereof. To the extent that any of
the representations, warranties, statements and assumptions material to our
opinion and upon which we have relied are not accurate and complete in all
material respects at all relevant times, our opinion would be adversely affected
and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given that
future legislative, judicial or administrative changes or interpretations would
not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered solely in connection with the filing of the
Registration Statement. It is intended for the benefit of the Company and the
stockholders of the Company and may not be relied upon or utilized for any other
purpose or by any other person and may not be made available to any other person
without our prior written consent.
<PAGE> 4
ConnectInc.com
December 20, 1999
Page Four
We consent to the reference to our firm under the caption "Material Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the reproduction and filing of this opinion as an exhibit to
the Registration Statement.
Sincerely,
COOLEY GODWARD LLP
/s/ ROBERT H. MILLER
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Robert H. Miller
RHM:ls
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Calico Commerce, Inc. of our report dated July 13, 1999, except for Note 12,
which is as of September 30, 1999, relating to the consolidated financial
statements of Calico Commerce, Inc., which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
December 17, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the Proxy
Statement of ConnectInc.com, Co. that is made a part of the Registration
Statement (Form S-4) and related Prospectus of Calico Commerce, Inc. for the
registration of shares of its common stock and to the incorporation by reference
therein of our report dated January 25, 1999 with respect to the financial
statements and the related financial statement schedule included in its Annual
Report (Form 10-K) for the year ended December 31, 1998 filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
San Jose, California
December 20, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the Proxy
Statement of ConnectInc.com, Co. that is made a part of the Registration
Statement (Form S-4) and related Prospectus of Calico Commerce, Inc. for the
registration of shares of its common stock and to the use of our report dated
April 10, 1998, with respect to the financial statements of FirstFloor Software,
Inc.
/s/ Ernst & Young LLP
Palo Alto, California
December 20, 1999
<PAGE> 1
CONNECTINC.COM, CO., A DELAWARE CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 31, 2000
The undersigned hereby appoints Mr. Craig Norris and Mr. Kevin Berry, and
each of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of ConnectInc.com, Co., a
Delaware corporation, which the undersigned may be entitled to vote at the
Special Meeting of Stockholders of ConnectInc.com, Co. to be held at 515 Ellis
Street, Mountain View, California 94043 on January 31, 2000 at 2:00 p.m. local
time, and at any and all postponements, continuations and adjournments thereof,
with all powers that the undersigned would possess if personally present, upon
and in respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
PROPOSAL 1 AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS. IF
SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE
THEREWITH.
PROPOSAL 1: To approve and adopt (i) the Agreement and Plan of Merger, dated as
of November 19, 1999, by and among ConnectInc.com, Co., Calico
Commerce, Inc., a Delaware corporation, and Calico Acquisition,
Inc., a Delaware corporation and wholly-owned subsidiary of Calico
Commerce, Inc., and (ii) the merger of ConnectInc.com, Co. and
Calico Acquisition, Inc. and the other transactions contemplated in
the Agreement and Plan of Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Management recommends a vote FOR Proposal 1
<PAGE> 2
Please complete, date and sign this proxy and return it in the enclosed
return envelope, which is postage prepaid if mailed in the United States.
Dated:
- -------------------------------------------------- --------------------------
--------------------------
Signature(s)
Please sign exactly as
your name appears hereon.
If the stock is registered
in the names of two or
more persons, each should
sign. Executors,
administrators, trustees,
guardians and
attorneys-in-fact should
add their title. If signer
is a corporation, please
give full corporate name
and have a duly authorized
officer sign, stating
title. If signer is a
partnership, please sign
in partnership name by
authorized person.
<PAGE> 1
EXHIBIT 99.2
Consent of Alliant Partners
December 20, 1999
We hereby consent to the inclusion of our opinion letter dated November 18, 1999
to the Board of Directors of ConnectInc.com, Co. as Appendix B to the Proxy
Statement/Prospectus which forms a part of the Registration Statement on Form
S-4 relating to the proposed merger of Calico Acquisition, Inc. a wholly-owned
subsidiary of Calico Commerce, Inc., with and into ConnectInc.com, Co., and to
the references to such opinion in the Proxy Statement/Prospectus.
Alliant Partners
By: /s/ James L. Kochman
----------------------------
Name: James L. Kochman
----------------------------
Title: Managing Partner
----------------------------
