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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-82907
4,000,000 Shares
CALICO COMMERCE, INC.
Common Stock
[CALICO LOGO]
----------------------
This is an initial public offering of shares of common stock of Calico
Commerce, Inc. All of the 4,000,000 shares of common stock are being sold by
Calico.
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "CLIC".
See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the Common Stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial public offering price............................... $14.00 $56,000,000
Underwriting discount....................................... $ 0.98 $ 3,920,000
Proceeds, before expenses, to Calico........................ $13.02 $52,080,000
</TABLE>
To the extent that the underwriters sell more than 4,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
600,000 shares from Calico at the initial public offering price less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares on October 13, 1999.
GOLDMAN, SACHS & CO. MERRILL LYNCH & CO.
HAMBRECHT & QUIST
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Prospectus dated October 6, 1999.
<PAGE> 2
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Calico and the consolidated financial statements and notes
appearing elsewhere in this prospectus. Except as set forth in the consolidated
financial statements or as otherwise specified in this prospectus, all
information in this prospectus:
- - assumes no exercise of the underwriters' over-allotment option;
- - gives effect to the conversion of each outstanding share of preferred stock
into one share of common stock upon the completion of this offering;
- - reflects a 3-for-2 stock split and our reincorporation into Delaware; and
- - gives effect to the sale of 1,843,200 shares of common stock to two investors
contemporaneously with this offering.
CALICO COMMERCE, INC.
We provide software and services that enable our customers to engage in
electronic commerce by selling complex products and services over the Internet
and through intranets, extranets and corporate networks. Our software and
services allow our customers to interact directly with users to create a
web-based, guided selling experience. Based on the number of our customers, we
believe that we are a leading provider of software and services that enable our
customers to implement greater electronic business strategies. With an
electronic business strategy, a company combines the opportunities provided by
the Internet with emerging technologies to expand their existing business.
With our software, companies are able to design sales programs that evolve
beyond basic transactions and focus on enhanced interactions with their
customers. We believe that we have 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 Internet has created a new means for businesses to interact directly
with new and existing customers worldwide, thereby transforming the ways
companies market, sell and support their product and service offerings. The
Internet allows for enhanced interactivity, greater personalization and the
ability to offer a broad array of complex, configurable goods and services, all
at the time of purchase. In order to capitalize on the opportunities offered by
the Internet, companies are adopting more sophisticated approaches to electronic
commerce in their strategies, and are increasing their investment in electronic
commerce infrastructure.
The Calico eSales Suite can be implemented on our customers' web sites to
improve selling effectiveness and customer satisfaction. Our software
facilitates the selling process by dynamically assessing customer requirements,
providing tailored information, identifying constraints, proposing alternatives
and delivering quotes. Our 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, our software is designed to improve sales
effectiveness and order accuracy, thereby enhancing operating efficiency and
reducing costs.
The key elements of our strategy are to:
- - increase the breadth, depth and functionality of our software;
- - align with electronic commerce leaders and expand into additional industry
market segments;
- - enhance and expand our sales and services through additional partnerships
and alliances;
- - extend our technology leadership; and
- - identify and capitalize on new opportunities offered by expansion of
electronic commerce.
Our software is broadly applicable to a wide range of industries and
markets. Our current customers include companies that have adopted aggressive
electronic business strategies.
We were incorporated in California in 1994 and reincorporated in Delaware
on September 23, 1999. Our principal executive offices are located at 333 West
San Carlos Street, Suite 300, San Jose, California 95110 and our telephone
number is (408) 975-7400. Our worldwide website is at
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www.calico.com. The information contained on our website does not constitute a
part of this prospectus.
We incurred net losses of approximately $15.3 million for fiscal 1999 and
$4.7 million for the three months ended June 30, 1999. As of June 30, 1999, we
had an accumulated deficit of $34.4 million.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by Calico.................. 4,000,000 shares
Common Stock to be outstanding after this
offering........................................ 32,963,327 shares
Nasdaq National Market symbol................... "CLIC"
Use of proceeds................................. General corporate purposes, including working
capital, sales and marketing activities, product
development and capital expenditures. See "Use
of Proceeds".
</TABLE>
The above information is based on 27,120,127 shares outstanding as of June 30,
1999. Of this number, 2,302,561 shares are subject to a repurchase option held
by Calico. This information does not include 5,293,237 shares of common stock
issuable upon the exercise of outstanding common stock options, 31,463 shares of
common stock issuable upon exercise and conversion of preferred stock options,
and 133,249 shares of common stock issuable upon exercise and conversion of
preferred stock warrants. This information includes the sale of an aggregate of
1,843,200 shares of common stock to two investors in two concurrent private
placements, at $13.02 per share, which is less than the price paid by the
investors in this offering. See "Capitalization", "Management -- Executive
Compensation", and "-- Benefit Plans".
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------------------- -----------------
1996 1997 1998 1999 1998 1999
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total net revenue........................................... $ 2,270 $ 5,903 $11,859 $ 21,413 $ 4,653 $ 7,433
Gross profit................................................ 1,830 3,603 8,479 12,962 3,185 4,636
Loss from operations........................................ (2,070) (6,921) (5,458) (15,238) (1,610) (4,794)
Net loss.................................................... (1,970) (6,900) (5,499) (15,261) (1,645) (4,723)
Net loss per share:
Basic and diluted......................................... $ (0.69) $ (2.12) $ (1.08) $ (2.27) $ (0.27) $ (0.59)
Weighted average shares................................... 2,856 3,248 5,079 6,710 6,040 7,961
Pro forma net loss per share:
Basic and diluted......................................... $ (0.74) $ (0.20)
Weighted average shares................................... 20,689 23,588
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 10,528 $10,528 $ 84,708
Working capital............................................. 5,276 5,276 79,456
Total assets................................................ 27,223 27,223 101,403
Debt and capital leases, long-term portion.................. 622 622 622
Total Mandatorily Redeemable Convertible Preferred Stock.... 32,541 -- --
Total stockholders' equity (deficit)........................ (20,972) 11,569 85,749
</TABLE>
Consolidated statement of operations data for the three month period ended June
30, 1999 and for year ended March 31, 1999 includes the results of operations of
FirstFloor Software subsequent to our acquisition of FirstFloor in August 1998.
Shares used in computing unaudited pro forma basic and diluted net loss per
share include the shares used in computing basic and diluted net loss per share
adjusted for the conversion of preferred stock to common stock, as if the
conversion occurred on April 1, 1998 or the date of original issuance, if later.
The pro forma as adjusted information above reflects the application of the
estimated net proceeds from the sale of the shares of common stock that we are
offering at the initial public offering price of $14.00 per share, after
deducting the estimated underwriting discount and our estimated offering
expenses. It also gives effect to two concurrent private placements to two
investors of an aggregate of $24.0 million, or 1,843,200 shares of common stock,
at $13.02 per share. See "Capitalization".
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RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus, before deciding whether to
invest in our common stock.
If any of the following risks actually occurs, our business could be
harmed. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
WE HAVE A FIVE YEAR HISTORY OF LOSSES, WE EXPECT TO CONTINUE TO INCUR LOSSES AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
We have incurred quarterly and annual losses in each of the five years
since we were formed, and we expect to continue to incur losses on both a
quarterly and annual basis for the foreseeable future. We incurred net losses of
$6.9 million for fiscal 1997, $5.5 million for fiscal 1998, $15.3 million for
fiscal 1999 and $4.7 million for the three months ended June 30, 1999. As of
June 30, 1999, we had an accumulated deficit of $34.4 million. Moreover, we
expect to continue to incur significant sales and marketing and research and
development expenses, and, as a result, we will need to generate significant
revenue to achieve and maintain profitability. Although our revenue has grown in
recent quarters, we cannot be certain that we can sustain this growth or that we
will generate sufficient revenue for profitability. If we do achieve
profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future. See "Selected
Consolidated Financial Data" on page 21 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 22 for more
detailed information about our operating results.
OUR 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 OUR COMMON STOCK
Our quarterly operating results have varied significantly in the past and
we expect that they will continue to vary significantly from quarter to quarter
in the future.
In addition, we receive a major portion of our orders near the end of each
quarter. Therefore, we have difficulty predicting the volume and timing of
orders, and short delays in closing orders or implementation of products can
cause our operating results to fall substantially short of anticipated levels
for that quarter.
We also expect to experience seasonal fluctuations in the sales of our
software products. For example, our quarterly results may fluctuate based upon
our customers' calendar year budgeting cycles. These seasonal variations may
lead to fluctuations in our quarterly operating results.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not necessarily
meaningful and are not a good predictor of our future performance. In some
future quarter our operating results may be below the expectations of public
market analysts and investors, which could cause volatility or decline in the
price of our common stock.
OUR PRODUCTS HAVE A LONG SALES AND IMPLEMENTATION CYCLE WHICH MAKES IT DIFFICULT
TO PREDICT OUR QUARTERLY RESULTS AND MAY CAUSE OPERATING RESULTS TO VARY
SIGNIFICANTLY
The sales cycle for our products is long, typically ranging from three
months to a year, making it difficult to predict the quarter in which revenue
recognition may occur. Our products have a relatively high sales price per unit,
and often are part of a significant strategic decision by our customers
regarding their information systems infrastructure. Accordingly, the decision to
purchase our products typically requires significant pre-purchase evaluation. We
spend significant time educating and providing information to prospective
customers regarding the use and benefits of our products. During this evaluation
period, we may expend substantial funds in sales, marketing and management
efforts.
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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, our
operating results may vary significantly and we may miss our revenue forecast.
IF WE ARE UNABLE TO COMPLETE SUBSTANTIAL LICENSE SALES WHEN ANTICIPATED OR
EXPERIENCE DELAYS IN THE PROGRESS ON A PROJECT OR IN THE SATISFACTION OF
CONTRACT TERMS, WE MAY HAVE TO DEFER REVENUE UNTIL LATER QUARTERS, CAUSING OUR
QUARTERLY RESULTS TO FLUCTUATE AND FALL BELOW ANTICIPATED LEVELS
Even after purchase of our products, it often takes substantial time and
resources to implement our software and to integrate it with our customers'
existing computer systems. We 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. We have 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 we are unable to
complete one or more substantial anticipated license sales or experience delays
in the progress on a project or product or in the satisfaction of contract terms
required for revenue recognition in a particular quarter, we may not be able to
recognize revenue when anticipated, causing our quarterly results to fluctuate
and fall below anticipated levels. This could cause our stock price to decline.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR
REVENUE, OUR REVENUE COULD DECLINE IF WE LOSE A MAJOR CUSTOMER
We derive a significant portion of our 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 our revenue and ten
customers accounted for 81% of our revenue. Many of our contracts are in excess
of $1.0 million. We expect that a limited number of customers will continue to
account for a substantial portion of our revenue for the foreseeable future. As
a result, if we lose a major customer, if a contract is delayed, cancelled or
deferred or if an anticipated sale is not made, our 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.
WE MAY NOT ACHIEVE ANTICIPATED REVENUE IF WE DO NOT SUCCESSFULLY INTRODUCE, AND
IF OUR CUSTOMERS DO NOT ACCEPT, UPGRADES AND ENHANCEMENTS TO OUR PRODUCTS,
INCLUDING OUR NEW VERSION RELEASED IN JUNE 1999
We currently derive substantially all of our 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 June 1999.
Our business depends on the success and customer acceptance of this introduction
as well as future enhancements. Although our products have been subject to our
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.
We expect that we will continue to depend on revenue from new and enhanced
versions of the Calico eSales Suite for the foreseeable future, and if our
target customers do not continue to adopt and expand their use of the Calico
eSales Suite, we may not achieve anticipated revenue.
WE COULD FAIL TO ACHIEVE ANTICIPATED REVENUE IF WE EXPERIENCE DELAYS IN
INTRODUCTION AND MARKET ACCEPTANCE OF NEW PRODUCTS
We expect to add new products by acquisition or internal development and
by developing enhancements to our existing products. We have in the past
experienced delays in the planned release dates of our software products and
upgrades. New products may not be released on schedule or may contain defects
when released. The introduction of enhancements to our suite of products may
cause customers to defer
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orders for our existing products. New and enhanced products may not meet the
requirements of the marketplace and achieve market acceptance. If we are unable
to ship or implement new or enhanced products when planned, or fail to achieve
timely market acceptance of our new or enhanced products, we may suffer lost
sales and could fail to achieve anticipated revenue.
WE HAVE LIMITED EXPERIENCE WITH LARGE-SCALE DEPLOYMENTS, THE CALICO ESALES
CONFIGURATOR OPERATES ONLY ON WINDOWS NT AND NOT ON UNIX-BASED WEB SERVERS, AND
IF OUR PRODUCTS DO NOT SCALE TO OPERATE IN A COMPANY-WIDE ENVIRONMENT, WE MAY
LOSE SALES AND SUFFER DECREASED REVENUE
Our strategy requires that our software be highly scalable, or able to
accommodate substantial increases in the number of users concurrently using the
product. However, we are 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. We are developing user interface
components to allow our customers to use either a Unix-based or Windows NT-based
web server. If we are unable to promptly or successfully develop the Unix
version, the scalability of our Calico eSales Configurator may be limited for
larger customer applications due to the scalability limitations of Windows NT.
If our solutions do not perform adequately in large-scale implementations, we
may lose customer sales resulting in a decline in revenue.
In addition, the computer software for our larger customer applications is
often implemented together with computer software applications from other
companies. Some of these implementations are performed by third parties. If our
customers experience delays or difficulties implementing our software together
with these computer software applications in large scale complex integrations,
we may lose sales, incur customer dissatisfaction and suffer decreased revenue.
TO DATE, OUR SALES HAVE BEEN CONCENTRATED IN THE COMPUTER HARDWARE AND NETWORK
AND TELECOMMUNICATIONS EQUIPMENT MARKETS AND IF WE ARE UNABLE TO SUCCESSFULLY
PENETRATE NEW MARKETS, WE MAY NOT BE ABLE TO ACHIEVE EXPECTED SALES GROWTH
Sales of our products and services in two markets -- computer hardware and
network and telecommunications equipment -- accounted for over 80% of our total
net revenue in the fiscal year ended March 31, 1999. We expect that revenue from
these two markets will continue to account for a substantial portion of our
total net revenue in fiscal 2000. We are targeting expansion in additional
market segments defined by industry where eCommerce software is highly strategic
and promote competitive advantage, including manufacturing, retail,
telecommunications services and financial services. If we are unable to
successfully increase penetration of our existing markets or expand in these
additional markets, or if the overall economic climate of our target markets
deteriorates, we may not be able to achieve expected sales growth.
IN ORDER TO INCREASE SALES OF OUR PRODUCTS, WE MUST INCREASE OUR DIRECT SALES
FORCE; HOWEVER, HIRING AND INTEGRATING SALES PERSONNEL TAKES TIME AND THERE IS A
SHORTAGE OF QUALIFIED PERSONNEL
Our future growth depends on the ability of our direct sales force to
develop customer relationships and increase sales to a level that will allow us
to reach and maintain profitability. Our ability to increase our sales will
depend on our ability to recruit, train and retain top quality sales people who
are able to target prospective customers' senior
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management, and who can productively generate and service large accounts.
There is a shortage of the sales personnel we need, and competition for
qualified personnel is intense. In addition, it will take time for new sales
personnel to achieve full productivity. If we are unable to hire or retain
qualified sales personnel, or if newly hired personnel fail to develop the
necessary skills or to reach productivity when anticipated, we may not be able
to expand our sales organization and increase sales of our products.
IF WE DO NOT EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION AND ESTABLISH AND
MAINTAIN RELATIONSHIPS WITH THIRD PARTY CONSULTANTS, WE MAY NOT BE ABLE TO
PROVIDE ADEQUATE IMPLEMENTATION SERVICES TO OUR CUSTOMERS
Growth in the license of our products depends on our ability to provide
our customers with professional services to assist with design, implementation
and maintenance. If we are 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 our competitors rather than our products, we
may not be able to provide sufficient implementation services to our customers.
This could result in decreased customer satisfaction and loss of sales. In
addition, if we have to retain third party consultants to provide services for
our customers for which we have previously committed, the resulting increased
costs could have an adverse impact on the gross margins for our professional
services.
YEAR 2000 CONSIDERATIONS MAY CAUSE OUR CUSTOMERS AND POTENTIAL CUSTOMERS TO
DELAY PURCHASES OF OUR PRODUCTS UNTIL LATER IN 2000, AND MAY REDUCE OUR SALES
We 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 our products may be particularly volatile and unpredictable for the
remainder of calendar 1999 and 2000.
OUR DEPENDENCE ON SERVICES REVENUE, WHICH HAS A LOWER GROSS MARGIN THAN LICENSE
REVENUE, COULD ADVERSELY IMPACT OUR GROSS MARGIN AND OPERATING RESULTS
We anticipate that services revenue will continue to represent a
significant percentage of total net revenue as we continue to provide consulting
and training services that complement our products and as our installed base of
customers grows. To increase services revenue, we must expand our services
organization, successfully recruit and train a sufficient number of qualified
services personnel, and obtain renewals of current maintenance contracts by our
customers.
Although services revenue is important to our 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 our
overall gross margins and our operating results.
WE NEED TO ESTABLISH AND MAINTAIN KEY MARKETING ALLIANCES TO COMPLEMENT OUR
DIRECT SALES FORCE IN ORDER TO GROW SALES; HOWEVER, FEW POTENTIAL PARTNERS HAVE
FOCUSED ON OUR SOFTWARE MARKET AND WE HAVE 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, we must complement our 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 we have only established a limited number of such key
alliances. To date, we have not generated significant revenue from these
alliances. If we fail to maintain our existing relationships and to establish
new key alliances, or if our partners do not perform to our or our customers'
expectations, we may not be able to expand our sales as anticipated.
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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 OUR SALES AND PREVENT US FROM ACHIEVING PROFITABILITY
The market for software and services that enable electronic commerce is
new, intensely competitive, highly fragmented, and rapidly changing. We expect
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 our competitors and potential competitors have a
number of significant advantages over us, including:
- - a longer operating history;
- - preferred vendor status with our 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.
Our competitors may also bundle their products in a manner that may
discourage users from purchasing our 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 us to reduce the prices of our products and services. We may not be
able to maintain or expand our sales if competition increases and we are unable
to respond effectively.
MANY OF OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE RELATIVELY NEW AND MUST BE
INTEGRATED INTO OUR ORGANIZATION, AND WE NEED TO IMPROVE AND IMPLEMENT NEW
SYSTEMS, PROCEDURES AND CONTROLS AND HIRE ADDITIONAL PERSONNEL IN ORDER TO
CONTINUE TO MANAGE OUR RAPID GROWTH
We have recently experienced a period of rapid growth and expansion, which
places significant demands on our managerial administrative, operational,
financial and other resources. All members of our management team, other than
our Vice President, Research and Development have joined Calico since June 1997.
Our Vice President, Engineering joined Calico in January 1999, and our Vice
President and Chief Financial Officer joined Calico in June 1999. From September
30, 1997 to June 30, 1999, we expanded from 85 to 210 employees. Our new
employees include a number of key managerial, marketing, planning, technical and
operations personnel who have not yet been fully integrated into our
organization.
We also plan to expand the geographic scope of our operations. Our rapid
growth and expansion places significant demands on our managerial,
administrative, operational, financial and other resources. To accommodate
continued anticipated growth and expansion, we 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.
These measures may place additional burdens on our management and our
internal resources.
THE MARKET FOR OUR ELECTRONIC COMMERCE
PRODUCTS AND SERVICES IS NEW AND EVOLVING AND CUSTOMERS MAY NOT ACCEPT OUR
PRODUCTS
The market for our 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 our products and services rather
than attempt to develop applications internally or through other
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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. We expect that we will
continue to need intensive marketing and sales efforts to educate prospective
customers about the uses and benefits of our products and services. Therefore,
demand for and market acceptance of our products and services will be subject to
a high level of uncertainty.
NEW TECHNOLOGIES COULD RENDER OUR PRODUCTS OBSOLETE OR REQUIRE US TO REWRITE OUR
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 our products and could render our
products obsolete and unmarketable. In addition, if a new software language or
operating system becomes standard or is widely adopted in our industry, we may
need to rewrite portions of our products in another computer language or for
another operating system to remain competitive. If we are unable to develop
products that respond to changing technology, our 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 our product lines, competitors with large
market capitalizations or cash reserves would be better positioned than we are
to acquire such new technology or product.
IF WE LOSE KEY PERSONNEL, WE COULD EXPERIENCE REDUCED SALES, DELAYED PRODUCT
DEVELOPMENT AND DIVERSION OF MANAGEMENT RESOURCES
Our success depends largely on the continued contributions of our key
management, engineering, sales and marketing and professional services
personnel, many of whom would be difficult to replace. We do not have employment
agreements with most of our key personnel. Although we have not experienced
significant turnover in our key personnel in the recent past, if one or more
members of our 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, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN PERSONNEL, WHICH COULD IMPACT THE DEVELOPMENT OR SALES OF OUR
PRODUCTS
Our success depends on our 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 we are unable to retain our existing key personnel, or attract and
train additional qualified personnel, our growth may be limited due to our lack
of capacity to develop and market our products.
ACQUISITIONS, SUCH AS OUR ACQUISITION OF FIRSTFLOOR, MAY BE COSTLY AND DIFFICULT
TO INTEGRATE, DIVERT MANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE
As part of our business strategy, we have in the past and may in the
future make acquisitions of, or investments in companies, products or
technologies that complement our current products, augment our market coverage,
enhance our technical capabilities or that may otherwise offer growth
opportunities. For example, in 1998 we acquired FirstFloor Software. We
encountered the following difficulties in our acquisition of
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FirstFloor and would anticipate similar difficulties in future acquisitions:
- - 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 we
have no or limited prior experience and require us to use substantial portions
of our available cash to consummate the acquisition.
In addition, in connection with any future acquisitions, we could:
- - issue equity securities which would dilute current stockholders' percentage
ownership;
- - incur substantial debt; or
- - assume significant liabilities.
These actions by us could materially adversely affect our operating
results and/or the price of our common stock.
WE INTEND TO PURSUE RELATIONSHIPS WITH EMERGING ELECTRONIC COMMERCE BUSINESSES
THAT MAY HAVE NO PROVEN RECORD OF SUCCESS
We intend to pursue relationships with and foster development of emerging
electronic commerce-based businesses at an early stage of their development. We
may pursue these new ventures by acquisition, joint venture, or other
alternative investment. We cannot be certain that these new ventures will be
successful, or that we 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 us to lose our
investment, and may divert management time and resources.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES FOR OUR 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 OUR PRODUCTS
We license technology from several software providers for our application
servers, our search capability software, a licensing mechanism, and quote grid
technology. We anticipate that we 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 we license from
third parties could be difficult to replace. The loss of any of these technology
licenses could result in delays in the license of our products until equivalent
technology, if available, is developed or identified, licensed and integrated.
In addition, the effective implementation of our products depends upon the
successful operation of third-party licensed products in conjunction with our
products, and therefore any undetected errors in these licensed products could
prevent the implementation or impair the functionality of our products, delay
new product introductions and/or injure our reputation. The use of additional
third-party software would require us to enter into license agreements with
third parties, which could result in higher royalty payments and a loss of
product differentiation.
SOFTWARE DEFECTS IN OUR SOFTWARE PRODUCTS AND SYSTEM ERRORS IN OUR CUSTOMERS'
SYSTEMS AFTER INSTALLING OUR SOFTWARE COULD DIMINISH DEMAND FOR OUR PRODUCTS AND
RESULT IN LOSS OF REVENUE, DELAY IN MARKET ACCEPTANCE AND INJURY TO OUR
REPUTATION
Complex software products like ours may contain undetected errors or
defects, including year 2000 related errors, that may be detected at any point
in the life of the product. We have in the past discovered software errors in
our products and as a result have 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
12
<PAGE> 12
1999. Errors may be found from time to time in our new or enhanced products
after commencement of commercial shipments, such as this latest version of our
suite, resulting in loss of revenue, delay in market acceptance and sales,
diversion of development resources, injury to our reputation or increased
warranty and repair costs.
Our products are generally used in systems with other vendors' products,
and as a result our products must integrate successfully with these existing
systems. System errors, whether caused by our products or those of another
vendor, could adversely affect the market acceptance of our products, and any
necessary revisions could cause us to incur significant expenses.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY LITIGATION, IT COULD BE COSTLY AND
TIME CONSUMING TO DEFEND
Since our products are used for company-wide, integral computer
applications with potentially strong impact on our customers' sales of their
products, errors, defects or other performance problems could result in
financial or other damages to our customers. Although our license agreements
generally contain provisions designed to limit our 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.
IF OUR SYSTEMS AND THE SYSTEMS OF OUR KEY SUPPLIERS AND CUSTOMERS ARE NOT YEAR
2000 COMPLIANT, WE COULD INCUR INCREASED COSTS, DELAY OR LOSS OF REVENUE,
DIVERSION OF DEVELOPMENT RESOURCES OR DAMAGE TO OUR REPUTATION
Our products are generally integrated into computer systems involving
sophisticated hardware and complex software products, which may not be year 2000
compliant. The failure of our customers' systems to be year 2000 compliant could
impede the success of applications that we or our partners have developed for
them. Accordingly, known or unknown defects that affect the operation of our
software, including any defects or errors in applications that include our
products, could result in delay or loss of revenue, diversion of development
resources, damage to our reputation, or increased service or warranty costs and
litigation costs.
We need to ensure year 2000 compliance of our own internal computer and
other systems, to continue testing our software products and to audit the year
2000 compliance status of our suppliers and business partners. We have not
completed our year 2000 investigation and overall compliance initiative, and the
total cost of our year 2000 compliance may be substantial. We may experience
material unanticipated problems and costs caused by undetected errors or defects
in the technology used in our internal systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance" on page 35 for a discussion of the status of our year 2000
compliance review.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY LOSE A VALUABLE
ASSET OR INCUR COSTLY LITIGATION TO PROTECT OUR RIGHTS
Our success and ability to compete depend upon our proprietary technology.
We rely on patent, trademark, trade secret and copyright laws to protect our
intellectual property. Despite our efforts to protect our intellectual property,
a third party could copy or otherwise obtain our software or other proprietary
information without authorization, or could develop software competitive to
ours. Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around our patents or other intellectual property. In addition, the
laws of some foreign countries do not protect our proprietary rights to as great
an extent as do the laws of the United States, and we expect that it will become
more difficult to monitor the use of our products if we increase our
international presence.
13
<PAGE> 13
We may have to litigate to enforce our intellectual property rights, to
protect our trade secrets or know-how or to determine their scope, validity or
enforceability. Enforcing or defending our proprietary technology is expensive,
could cause the diversion of our resources and may not prove successful. Our
protective measures may prove inadequate to protect our proprietary rights. Any
failure to enforce or protect our rights could cause us to lose a valuable
asset. If we are unable to protect our intellectual property, we may lose a
valuable asset or incur costly litigation to protect our rights.
IF THE FUNCTIONALITY OF OUR PRODUCTS OVERLAPS A COMPETITORS' PRODUCTS AND WE
BECOME 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 we or our current or potential future
products infringe their intellectual property. We expect 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 our
industry grows and the functionality of products overlaps. Any claims, with or
without merit, could be costly and time-consuming to defend, divert our
management's attention, or cause product delays. If our products were found to
infringe a third party's proprietary rights, we could be required to enter into
royalty or licensing agreements in order to be able to sell our 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 US TO FAIL TO ACHIEVE ANTICIPATED SALES GROWTH
Growth in sales of our 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 us to increase sales.
14
<PAGE> 14
INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT THE MARKET FOR OUR
PRODUCTS AND SERVICES, OR IMPOSE ON US GREATER TAX BURDENS OR LIABILITY FOR
TRANSMISSION OF PROTECTED DATA
As electronic commerce and the Internet continue to evolve, we expect 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 our products and services. Although many of these
regulations may not apply directly to our business, we expect that laws
regulating the solicitation, collection or processing of personal or consumer
information could indirectly affect our 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 us and other software and service
providers of potential liability for information carried on or disseminated
through our applications could require us to implement measures to reduce our
exposure to this liability. These measures could require us 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 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 US TO INCUR DELAYS IN
INTERNATIONAL PRODUCT SALES
Our software utilizes encryption technology, the export of which is
regulated by the United States government. If our export authority is revoked or
modified, if our software is unlawfully exported or if the United States adopts
new legislation restricting export of software and encryption technology, we may
experience delay or reduction in shipment of our products internationally.
Current or future export regulations could limit our ability to distribute our
products outside of the United States. While we take precautions against
unlawful exportation of our software, we cannot effectively control the
unauthorized distribution of software across the Internet.
IF WE DO NOT EXPAND OUR INTERNATIONAL OPERATIONS, WE MAY NOT ACHIEVE ANTICIPATED
SALES GROWTH
In order to increase our international sales opportunities, we will need
to develop further our international sales, professional services and support
organizations, and we will need to form additional relationships with partners
worldwide. If we are unable to expand our international operations and
international sales on a timely basis, we may not achieve anticipated sales
growth. This expansion may be more difficult or take longer than we anticipate,
and we may not be able to successfully market, sell, deliver and support our
products internationally.
INTERNATIONAL EXPANSION COULD BE DIFFICULT AND PRESENT RISKS TO OUR BUSINESS
If successful in our international expansion, we 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;
15
<PAGE> 15
- - 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
Our 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 our products less competitive in international markets. In
the future, we may elect to invoice some of our international customers in local
currencies. Doing so will subject us to fluctuations in exchange rates between
the U.S. dollar and the particular local currency. Our operating results could
also be adversely affected by the seasonality of international sales and the
economic conditions of our overseas markets.
WE HAVE DISCRETION AS TO THE USE OF THE PROCEEDS FROM THIS OFFERING AND MAY NOT
OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS
Our management has complete discretion as to how to spend the proceeds
from this offering and may spend these proceeds in ways with which our
stockholders may not agree. We do not have a specific plan for use of the
proceeds of this offering; however, we will likely need to use the proceeds to
fund our operations. We cannot predict that investment of the proceeds will
yield a favorable return. See "Use of Proceeds" on page 18 for further
discussion of how we intend to use the proceeds from this offering.
OUR DIRECTORS AND EXECUTIVE OFFICERS WILL
RETAIN SIGNIFICANT CONTROL OVER CALICO AFTER THE OFFERING, WHICH MAY LEAD TO
CONFLICTS WITH OTHER STOCKHOLDERS OVER CORPORATE GOVERNANCE
Following the completion of this offering, our directors, executive
officers, and holders of 5% or more of our outstanding common stock will
beneficially own approximately 51.6% of our outstanding common stock. These
stockholders, acting together, would be able to significantly influence all
matters requiring approval by our 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 us.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER OR CHANGE IN OUR
CONTROL THAT A STOCKHOLDER MAY CONSIDER FAVORABLE
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a merger or acquisition of us or a change in
our control or changes in our management. See "Description of Capital
Stock -- Delaware Anti-Takeover Law and Charter Provisions" on page 66 for
further discussion of the specific provisions in our charter documents and of
Delaware law that may delay or prevent a change in our control.
16
<PAGE> 16
OUR STOCK PRICE MAY BE VOLATILE, WHICH MAY LEAD TO LOSSES BY INVESTORS
There has been no public market for our shares prior to this offering, and
after the offering, an active public market for the shares may not develop. We
will negotiate and determine the initial public offering price with the
representatives of the underwriters based on several factors. This price will
likely vary from the market price of the common stock after the offering. The
stock market has experienced price and volume fluctuations and the market prices
of securities of technology companies in particular have been highly volatile.
You may not be able to resell your shares at or above the initial public
offering price.
WE MAY BE SUBJECT TO SECURITIES CLASS ACTION LITIGATION IF OUR 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 OUR STOCK COULD CAUSE OUR STOCK PRICE TO FALL
Sales of a substantial number of shares of our common stock in the public
market after this offering could cause the market price of our common stock to
decline. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional equity securities. Upon completion of
this offering, we will have approximately 32,963,327 shares of common stock
outstanding, approximately 33,563,327 if the underwriters' over-allotment option
is exercised in full, based on shares outstanding as of June 30, 1999.
Our officers and directors and substantially all of our existing
stockholders have agreed with Goldman, Sachs & Co. not to sell or otherwise
dispose of any of their shares for a period of 150 days after the date of this
offering, with 70% of their shares remaining subject to the lock-up agreement
for 180 days. When these lock-up agreements expire, these shares and the shares
underlying any options held by these individuals 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. See "Shares Eligible for Future Sale"
on page 68 for further discussion of the shares that will be freely tradeable
after the date of this prospectus.
THE PURCHASERS OF SHARES IN THE OFFERING WILL EXPERIENCE IMMEDIATE DILUTION
We expect that the initial public offering price will be substantially
higher than the pro forma net tangible book value per share of our outstanding
common stock. Accordingly, if we were liquidated for book value immediately
following this offering, each stockholder purchasing in this offering would
receive less than the price they paid for their common stock. In addition,
because our success is so heavily dependent on our ability to attract and retain
talented personnel, we expect to offer a significant number of stock options to
employees in the future. If other stockholders exercise options or warrants to
purchase our common stock, you will experience further dilution. See "Dilution"
on page 20 for further discussion of the dilution that new investors will incur.
17
<PAGE> 17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by words such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates" and similar expressions. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements for a number of reasons, including those discussed under "Risk
Factors" and elsewhere in this prospectus.
You should read statements that contain those words carefully because they
discuss our expectations about our future performance, contain projections of
our future operating results or our future financial condition, or state other
"forward-looking" information. Before you invest in our common stock, you should
be aware that the occurrence of any of the events described in these risk
factors and elsewhere in this prospectus could substantially harm our business,
results of operations and financial condition and that upon the occurrence of
any of these events, the trading price of our common stock could decline and you
could lose all or part of your investment.
USE OF PROCEEDS
We estimate that we will receive net proceeds of $50.2 million from the
sale of the 4,000,000 shares of common stock in this offering, at the initial
public offering price of $14.00 per share and after deducting estimated
underwriting discount and the estimated offering expenses of $5.8 million. If
the underwriters' over-allotment option is exercised in full, we estimate that
our net proceeds will be $58.0 million.
While we cannot predict with certainty how the proceeds of this offering
will be used, we currently intend to use them approximately as follows:
- - $20.4 million for expansion of our sales force, marketing and distribution
activities;
- - $13.2 million for expansion of our research and product development
activities; and
- - $16.6 million for general corporate purposes and working capital, including an
estimated $3.0 million for capital expenditures.
In addition, we may, if appropriate opportunities arise, use an
undetermined portion of the net proceeds to acquire or invest in complementary
companies, product lines, products or technologies. We do not have any
agreements or commitments with respect to any acquisition or investment and we
are not involved in any negotiations with respect to any transaction. Pending
such uses, we will invest the net proceeds in investment grade, interest-bearing
securities.
DIVIDEND POLICY
We have never paid cash dividends. We do not anticipate paying cash
dividends in the forseeable future. Under the terms of our line of credit
facilities, we may not declare or pay any dividends without the prior consent of
the lenders under each of the credit facilities.
18
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- - on an actual basis, which reflects a 3-for-2 stock split of our outstanding
common stock;
- - on a pro forma basis to reflect the conversion of all outstanding shares of
preferred stock into 15,626,928 shares of common stock; and
- - on a pro forma as adjusted basis to reflect this conversion and the
application of the estimated net proceeds from the sale of 4,000,000 shares
of common stock in this offering, after deducting the estimated underwriting
discount and estimated offering expenses, and the sale of an aggregate of
1,843,200 shares of common stock to be issued to two investors for $24.0
million, at $13.02 per share, in two private placements to close
concurrently with this offering.
The outstanding share information excludes 5,293,237 shares of common
stock issuable upon the exercise of outstanding common stock options with a
weighted average exercise price of $6.41 per share, 31,463 shares of common
stock issuable upon exercise and conversion of preferred stock options at a
weighted average exercise price of $2.68 per share, and 133,249 shares of common
stock issuable upon exercise and conversion of outstanding preferred stock
warrants at a weighted average exercise price of $1.31 per share. The
outstanding share information also excludes 2,848,107 shares of common stock
available for issuance under outstanding stock options and 750,000 shares of
common stock reserved for issuance under our 1999 Employee Stock Purchase Plan.
Of the total shares outstanding, 2,302,561 shares are subject to our right of
repurchase.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes to the consolidated financial statements.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------
PRO
FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- --------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
Notes payable, current portion.............................. $ 682 $ 682 $ 682
======== ======== ========
Capital lease obligations, current portion.................. 247 247 247
======== ======== ========
Notes payable, non-current.................................. $ 497 $ 497 $ 497
-------- -------- --------
Capital lease obligations, non-current...................... 125 125 125
-------- -------- --------
Mandatorily Redeemable Convertible Preferred Stock.......... 32,541 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock; $0.001 par value; 15,000,000 shares
authorized; no shares issued and outstanding actual,
pro forma and pro forma as adjusted.................... -- -- --
Common Stock; $0.001 par value; 150,000,000 shares
authorized; 11,493,199 shares issued and outstanding,
actual; 27,120,127 shares issued and outstanding, pro
forma; 32,963,327 shares issued and outstanding, pro
forma as adjusted...................................... 11 27 33
Additional paid-in capital................................ 17,894 50,419 124,593
Notes receivable from stockholders........................ (2,211) (2,211) (2,211)
Unearned compensation..................................... (2,265) (2,265) (2,265)
Accumulated deficit....................................... (34,401) (34,401) (34,401)
-------- -------- --------
Total stockholders' equity (deficit)................... (20,972) 11,569 85,749
-------- -------- --------
Total capitalization.............................. $ 12,191 $ 12,191 $ 86,371
======== ======== ========
</TABLE>
19
<PAGE> 19
DILUTION
Our pro forma net tangible book value at June 30, 1999 was $7.5 million or
$0.28 per share based upon 27,120,127 shares outstanding. Pro forma net tangible
book value per share represents total tangible assets less total liabilities,
divided by the number of shares outstanding as of June 30, 1999, after giving
effect to the conversion into common stock of all of our outstanding shares of
preferred stock. After giving effect to the sale in this offering of 4,000,000
shares of common stock at the initial public offering price of $14.00 per share,
and after deducting the estimated underwriting discount and estimated offering
expenses payable by us, our pro forma net tangible book value as of June 30,
1999 would have been approximately $81.7 million or $2.48 per share. This
represents an immediate increase in net tangible book value of $2.20 per share
to existing stockholders and an immediate dilution in net tangible book value of
$11.52 per share to new investors, including an aggregate of 1,843,200 shares of
common stock to be sold to two corporate investors for $24.0 million, at $13.02
per share, in two private placements to close concurrently with this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 14.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $ 0.28
Increase per share attributable to new investors.......... 2.20
--------
Pro forma net tangible book value per share after this
offering.................................................. 2.48
--------
Dilution per share to new investors......................... $ 11.52
--------
--------
</TABLE>
The following table summarizes, as of June 30, 1999, assuming conversion
into common stock of all of our outstanding shares of preferred stock, the total
cash consideration paid to us and the average price per share paid by existing
stockholders, by new investors at the initial public offering price of $14.00
per share, before deducting the estimated underwriting discount and estimated
offering expenses payable by us, by two corporate investors purchasing an
aggregate of 1,843,200 shares in two private placements to close concurrently
with this offering at $13.02 per share:
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
-------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- -------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 27,120,127 82.3% $ 34,697 30.3% $ 1.28
New investors..................... 5,843,200 17.7 80,000 69.7 13.69
---------- ----- -------- -----
Total................... 32,963,327 100.0% $114,697 100.0%
========== ===== ======== =====
</TABLE>
As of June 30, 1999, there were outstanding options to purchase an
aggregate of 5,293,237 shares of common stock at a weighted average exercise
price of $6.41 per share, options to purchase 31,463 shares of preferred stock
at a weighted average exercise price of $2.68 per share and warrants to purchase
133,249 shares of preferred stock at a weighted average exercise price of $1.31
per share. To the extent that any of these options or warrants is exercised,
there will be further dilution to new investors.
20
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes and
other financial information included elsewhere in this prospectus. The selected
consolidated statement of operations data for Calico for each of the years ended
March 31, 1997, 1998 and 1999, and the consolidated balance sheet data as of
March 31, 1998 and 1999, are derived from our consolidated financial statements
included elsewhere in this prospectus. The selected consolidated statement of
operations data for Calico for the period from inception on April 14, 1994 to
March 31, 1995, the year ended March 31, 1996, and the consolidated balance
sheet data as of March 31, 1995, 1996 and 1997, are derived from our
consolidated financial statements that are not included in this prospectus. The
consolidated statements of operations data for the three months ended June 30,
1998 and 1999 and the consolidated balance sheet data as of June 30, 1999 are
derived from unaudited condensed consolidated financial statements included
elsewhere in this prospectus. In the opinion of management, 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 the fiscal year ended March 31, 1999 include the results of
operations of FirstFloor subsequent to our acquisition of FirstFloor in August
1998. Historical results are not necessarily indicative of results to be
expected in any future period.
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS
APRIL 14, 1994 YEAR ENDED MARCH 31, ENDED JUNE 30,
(INCEPTION) TO --------------------------------------- ------------------
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 $ 2,932 $ 3,457
Services........................................ 227 749 1,963 4,894 10,931 1,721 3,976
------- ------- ------- -------- -------- ------- -------
Total net revenue............................. 320 2,270 5,903 11,859 21,413 4,653 7,433
------- ------- ------- -------- -------- ------- -------
Cost of net revenue:
License......................................... 2 7 178 265 1,179 101 137
Services........................................ 66 433 2,122 3,115 7,272 1,367 2,660
------- ------- ------- -------- -------- ------- -------
Total cost of net revenue..................... 68 440 2,300 3,380 8,451 1,468 2,797
------- ------- ------- -------- -------- ------- -------
Gross profit...................................... 252 1,830 3,603 8,479 12,962 3,185 4,636
------- ------- ------- -------- -------- ------- -------
Operating expenses:
Sales and marketing............................. 98 1,972 5,950 7,593 14,138 2,758 4,558
Research and development........................ 132 458 2,224 3,342 5,677 972 2,666
General and administrative...................... 25 480 1,486 2,222 3,988 641 1,452
Stock compensation.............................. -- 990 864 780 2,007 424 514
Acquired in-process research and development.... -- -- -- -- 1,840 -- --
Amortization of goodwill........................ -- -- -- -- 550 -- 240
------- ------- ------- -------- -------- ------- -------
Total operating expenses...................... 255 3,900 10,524 13,937 28,200 4,795 9,430
------- ------- ------- -------- -------- ------- -------
Loss from operations.............................. (3) (2,070) (6,921) (5,458) (15,238) (1,610) (4,794)
Interest and other income, net.................... 31 100 21 (41) (23) (35) 71
------- ------- ------- -------- -------- ------- -------
Net income (loss)................................. $ 28 $(1,970) $(6,900) $ (5,499) $(15,261) $(1,645) $(4,723)
======= ======= ======= ======== ======== ======= =======
Net income (loss) per share:
Basic and diluted............................... $ -- $ (0.69) $ (2.12) $ (1.08) $ (2.27) $ (0.27) $ (0.59)
======= ======= ======= ======== ======== ======= =======
Weighted average shares......................... 6,000 2,856 3,248 5,079 6,710 6,040 7,961
======= ======= ======= ======== ======== ======= =======
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents......................... $ 83 $ 1,780 $ 1,921 $ 2,514 $ 15,441 $10,528
Working capital (deficit)......................... (42) 1,683 353 44 10,187 5,276
Total assets...................................... 252 2,800 4,356 7,692 31,368 27,223
Debt and capital leases, long-term portion........ -- 90 815 814 877 622
Total Mandatorily Redeemable Convertible Preferred
Stock........................................... -- 3,842 9,500 14,505 32,535 32,541
Total stockholders' deficit....................... (21) (2,012) (8,854) (13,428) (16,780) (20,972)
</TABLE>
21
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the notes to those statements included elsewhere in this prospectus. This
discussion contains forward looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
These forward looking statements involve risks and uncertainties. Our actual
results could differ materially from those indicated in these forward looking
statements as a result of certain factors, as more fully described in the "Risk
Factors" section and elsewhere in this prospectus. We undertake no obligation to
update publicly any forward looking statements for any reason, even if new
information becomes available or other events occur in the future.
OVERVIEW
We provide 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.
We were incorporated in April 1994. From May 1994 through March 1997, we
generated revenue primarily from the license of products based upon our first
generation configuration technology. In March 1997, we released our first
product designed for use over the Internet and corporate networks. In December
1998, we 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 our August 1998 acquisition of FirstFloor. In May
1999, we released Calico eSales Loyalty Builder, which incorporates technology
also obtained from our acquisition of FirstFloor. In June 1999, we released
Calico eSales 2.5, an integrated suite that incorporates eSales Loyalty Builder,
eSales Quote and improved versions of our other products.
We derive revenue principally from the license of our 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 our 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, we
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 74% of license revenue in the fourth quarter of fiscal 1999 and more
than 86% of license revenue in the first quarter of fiscal 2000. The mix of
products and services sold varies by customer, and follow-on sales typically
reflect an expansion of the use of our products within the customer's business,
rather than a migration to different products. To date, our 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 our 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 our annual maintenance contracts are
based on a percentage of the related product license price and is 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
22
<PAGE> 22
of fair value exists for the undelivered
elements, we recognize 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 or 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 our license revenue was generated from new customer implementations,
during fiscal 1998, 91% of our license revenue was generated from new customer
implementations, and in fiscal 1999, 78% of our 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. Our 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. We classify revenue for these
arrangements as license revenue and services revenue based upon our 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.
We bill 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, 37% in the quarter ended June 30,
1998 and 53% in the quarter ended June 30, 1999. As we develop additional
relationships with service partners, we anticipate that an increasing share of
professional services will be provided by third parties. As a result, we expect
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 we increase the professional services we provide, services
revenue has a lower gross margin than license revenue. Our overall gross profit
can therefore fluctuate based on the mix of license revenue compared to services
revenue.
Our 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. Our cost of services revenue consists
primarily of salary expense and other related costs for our consulting and
support organizations, as well as third-party contractor expenses.
Our operating expenses are classified as sales and marketing, research and
development, and general and administrative. We classify 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
23
<PAGE> 23
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 our employees, we have
recorded unearned stock compensation totaling $5.6 million through June 30,
1999, of which $2.3 million remains to be amortized. This amount represents the
difference between the exercise price and the estimated fair value of our 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. We recorded amortization of unearned stock compensation of $780,000 for
fiscal 1998, $2.0 million for fiscal 1999, $424,000 for the three months ended
June 30, 1998 and $514,000 for the three months ended June 30, 1999. The
amortization of the remaining unearned stock compensation at March 31, 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, we 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, we assumed
all of the outstanding options to purchase FirstFloor common stock and converted
them into options to acquire 47,203 shares of our Series D preferred stock. We
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. We 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 our acquisition of FirstFloor, we 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.
At the time of the acquisition, an entity affiliated with Mr. Unger, one
of our directors, was a principal shareholder of both Calico and FirstFloor.
Since our inception, we have incurred quarterly and annual losses, and we
expect to
24
<PAGE> 24
continue to incur losses on both a quarterly and annual basis for the
foreseeable future. We incurred net losses of $6.9 million for fiscal 1997, $5.5
million for fiscal 1998, $15.3 million for fiscal 1999 and $4.7 million for the
three months ended June 30, 1999. As of June 30, 1999, we had an accumulated
deficit of $34.4 million. We expect that our operating expenses will continue to
increase substantially in future quarters as we increase sales and marketing
operations, develop new distribution channels, expand our professional services
organization, and continue to fund research and development.
We have recently experienced a period of rapid growth and expansion, and
expect to continue to expand through multiple growth strategies. To manage this
growth effectively, we will have to improve our existing operational and
financial systems and hire additional qualified personnel. In addition, we
expect to expand our current headquarters or move to new facilities during the
first half of fiscal 2000. The expenses related to this expansion or move may be
greater than our obligations for our current facility.
25
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, selected
consolidated
financial data as a percentage of total net revenue.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------- ------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue:
License............................................ 67% 59% 49% 63% 47%
Services........................................... 33 41 51 37 53
---- --- --- --- ---
Total net revenue............................... 100 100 100 100 100
---- --- --- --- ---
Cost of net revenue:
License............................................ 3 2 6 2 2
Services........................................... 36 26 33 30 36
---- --- --- --- ---
Total cost of net revenue....................... 39 28 39 32 38
---- --- --- --- ---
Gross profit......................................... 61 72 61 68 62
---- --- --- --- ---
Operating expenses:
Sales and marketing................................ 101 64 65 59 61
Research and development........................... 38 28 27 21 36
General and administrative......................... 25 19 19 14 20
Stock compensation................................. 14 7 9 9 7
Acquired in-process research and development....... -- -- 9 -- --
Amortization of goodwill........................... -- -- 3 -- 3
---- --- --- --- ---
Total operating expenses........................ 178 118 132 103 127
---- --- --- --- ---
Loss from operations................................. (117) (46) (71) (35) (65)
Interest and other income, net....................... -- -- -- -- 1
---- --- --- --- ---
Net loss............................................. (117)% (46)% (71)% (35)% (64)%
==== === === === ===
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUE
Total net revenue increased 60% from $4.7 million in the three months
ended June 30, 1998 to $7.4 million in the three months ended June 30, 1999.
This increase is attributable to a significant increase in services revenue
associated with an increase in the number and scope of consulting engagements.
LICENSE. License revenue increased 18% from $2.9 million in the three
months ended June 30, 1998 to $3.5 million in the three months ended June 30,
1999. License revenue as a percentage of total net revenue was 63% in the three
months ended June 30, 1998 and 47% in the three months ended June 30, 1999. The
increase in license revenue in absolute dollars is attributable to an increase
in the average size of license transactions recognized during the quarter.
During the three months ended June 30, 1999, 97% of our license revenue was
attributable to new customer implementations.
SERVICES. Services revenue increased 131% from $1.7 million in the three
months ended June 30, 1998 to $4.0 million in the three months ended June 30,
1999. Services revenue as a percentage of total net revenue was 37% in the three
months ended June 30, 1998 and 53% in the three months ended June 30, 1999. 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
26
<PAGE> 26
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 three months
ended June 30, 1999, 66% of our maintenance revenue came from initial
maintenance contracts, with the remainder from maintenance renewals. As of June
30, 1999 we had 32 customers on active maintenance contracts, compared with 26
as of June 30, 1998. In some cases, a single customer consists of multiple
implementations within one corporate entity.
COST OF REVENUE
LICENSE. Cost of license revenue increased 36% from $101,000 in the three
months ended June 30, 1998 to $137,000 in the three months ended June 30, 1999.
Cost of license revenue as a percentage of license revenue was 3% in the three
months ended June 30, 1998 and 4% in the three months ended June 30, 1999. The
increase in cost of license revenue in absolute dollars and as a percentage of
license revenue is primarily due to the amortization of existing products and
core technology acquired in the acquisition of FirstFloor.
SERVICES. Cost of services revenue increased 95% from $1.4 million in the
three months ended June 30, 1998 to $2.7 million in the three months ended June
30, 1999. Cost of services revenue as a percentage of services revenue was 79%
in the three months ended June 30, 1998 and 67% in the three months ended June
30, 1999. The increase in cost of services revenue in absolute dollars is
primarily due to costs associated with increased personnel in our services
organization, representing 42% of the increase, as well as increased costs for
third-party contractors used to staff consulting engagements, representing 40%
of the increase. The decrease in cost of services revenue as a percentage of
services revenue is primarily due to economies of scale in the professional
services organization, as well as improved billing rate realization.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 65% from $2.8
million in the three months ended June 30, 1998 to $4.6 million in the three
months ended June 30, 1999. Sales and marketing expenses as a percentage of
total net revenue increased from 59% in the three months ended June 30, 1998 to
61% in the three months ended June 30, 1999. Sales and marketing expenses
increased in absolute dollars primarily due to increased personnel-related
costs, which represented 88% of the increase. Sales and marketing expenses as a
percentage of total net revenue increased as a result of 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 174%
from $972,000 in the three months ended June 30, 1998 to $2.7 million in the
three months ended June 30, 1999. Research and development expenses as a
percentage of total net revenue increased from 21% in the three months ended
June 30, 1998 to 36% in the three months ended June 30, 1999. 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 82% of the increase in absolute
dollars.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
127% from $641,000 in the three months ended June 30, 1998 to $1.5 million in
the three months ended June 30, 1999. General and administrative expenses as a
percentage of total net revenue were 14% in the three months ended June 30, 1998
and 20% in the three months ended June 30, 1999. General and administrative
expenses increased in absolute dollars and as a percentage of total net revenue
as a result of increased personnel-related costs resulting from the
27
<PAGE> 27
growth of our finance, human resources and information systems staff,
representing 47% of the increase in absolute dollars, as well as increased
spending for legal and financial advisory services, representing 37% of the
increase.
STOCK COMPENSATION. In connection with the granting of stock options to
our employees, we recorded aggregate unearned compensation totalling $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. We recorded expenses related to stock
compensation of $424,000 in the three months ended June 30, 1998 and $514,000 in
the three months ended June 30, 1999. Stock compensation expenses as a
percentage of total net revenue were 9% in the three months ended June 30, 1998
and 7% in the three months ended June 30, 1999.
AMORTIZATION OF GOODWILL. During the three months ended June 30, 1999, we
recorded $240,000 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 from $35,000 of net interest
expense in the three months ended June 30, 1998 to $71,000 of net interest
income in the three months ended June 30, 1999. The improvement is primarily due
to interest earned on increased cash and equivalents.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999
REVENUE
Total net revenue increased 101% from $5.9 million in fiscal 1997 to $11.9
million in fiscal 1998 and 81% to $21.4 million in fiscal 1999.
LICENSE. License revenue increased 77% from $3.9 million in fiscal 1997 to
$7.0 million in fiscal 1998, and 50% to $10.5 million in fiscal 1999. License
revenue as a percentage of total net revenue was 67% in fiscal 1997, 59% in
fiscal 1998 and 49% in fiscal 1999. The increases in absolute dollars were
primarily due to increased market acceptance of our products, increases in the
average size of transactions, as well as the introduction of versions of our
product that included functionality for Internet and corporate network use.
During fiscal 1999, 78% of our license revenue came from new customer
deployments.
SERVICES. Services revenue increased 149% from $2.0 million in fiscal 1997
to $4.9 million in fiscal 1998 and 123% to $10.9 million in fiscal 1999.
Services revenue at a percentage of total net revenue was 33% in fiscal 1997,
41% in fiscal 1998 and 51% in fiscal 1999. 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 49% from $178,000 in fiscal
1997 to $265,000 in fiscal 1998, and 345% to $1.2 million in fiscal 1999. Cost
of license revenue as a percentage of license revenue was 5% in fiscal 1997, 4%
in fiscal 1998 and 11% in fiscal 1999. The increase in absolute dollars in
fiscal 1998 was primarily due to costs associated with sub-licensing of third-
party software used in our products. 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.
We 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 our existing products and core technology does not vary
with recognized license revenue. As a result, our cost of license revenue may
vary
28
<PAGE> 28
significantly from quarter to quarter in both absolute dollars and as a
percentage of license revenue.
SERVICES. Cost of services revenue increased 47% from $2.1 million in
fiscal 1997 to $3.1 million in fiscal 1998 and 133% to $7.3 million in fiscal
1999. Cost of services revenue as a percentage of services revenue was 108% in
fiscal 1997, 64% in fiscal 1998 and 67% in fiscal 1999. The increase in absolute
dollars was primarily due to increased professional services personnel engaged
in deployment, training and technical support, representing 67% of the increase
in fiscal 1998 and 58% of the increase in fiscal 1999. In 1997, our cost of
services revenue exceeded our services revenue because the actual cost of
providing consulting services exceeded the fixed-price payment received from the
customer. During this period, we provided our 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, we generally do not enter into and do not intend to enter into
fixed-price payment arrangements for our consulting services.
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. Cost of
services revenue as a percentage of services revenue increased in fiscal 1999
due to increased use of contract personnel. We expect cost of services revenue
to increase in the future in absolute dollars as we expand our 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 we provide and the utilization rate of our services personnel.
Additionally, we 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 28% from $6.0
million in fiscal 1997 to $7.6 million in fiscal 1998 and 86% to $14.1 million
in fiscal 1999. Sales and marketing expenses as a percentage of total net
revenue were 101% in fiscal 1997, 64% in fiscal 1998 and 65% in fiscal 1999. The
increases in absolute dollars were primarily due to an increase in sales and
marketing personnel, representing 88% of the increase in fiscal 1998 and 69% of
the increase in fiscal 1999. Sales and marketing expenses decreased as a
percentage of total net revenue in fiscal 1998 primarily due to revenue growth
and increased in fiscal 1999 due to the investments in sales and marketing
described above. We believe sales and marketing expenses will continue to
increase in absolute dollars as we expand our sales and marketing organization,
initiate additional marketing programs, expand our distribution channels and
expand 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 50%
from $2.2 million in fiscal 1997 to $3.3 million in fiscal 1998 and 70% to $5.7
million in fiscal 1999. Research and development expenses as a percentage of
total net revenue were 38% in fiscal 1997, 28% in fiscal 1998 and 27% 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. The increase in fiscal 1999 was due to our addition of engineering and
development personnel, both through new hiring and as a result of our FirstFloor
acquisition. Personnel-related expenses accounted for 96% of the increase in
fiscal 1999. Research and development expenses as a percentage of total net
revenue declined in fiscal 1998 and fiscal 1999 due to the higher rate of
revenue growth during the periods.
We believe that continued investment in research and development is
critical to attaining our strategic objectives, and as a result we expect that
research and
29
<PAGE> 29
development expenses will 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
50% from $1.5 million in fiscal 1997 to $2.2 million in fiscal 1998, and 79% to
$4.0 million in fiscal 1999. General and administrative expenses as a percentage
of total net revenue were 25% in fiscal 1997, 19% in fiscal 1998 and 19% in
fiscal 1999. The increase in general and administrative expenses in absolute
dollars was primarily due to increased personnel to support our expanding
operations. Personnel-related expenses represented 70% of the increase in fiscal
1998 and 43% of the increase in fiscal 1999. General and administrative expenses
also increased in absolute dollars in fiscal 1999 due to the relocation of our
corporate headquarters which resulted in a charge of $660,000 for the minimum
lease payments committed under our previous leased facility and losses on
disposal of certain fixed assets.
We believe that general and administrative expenses will continue to
increase in absolute dollars as we expand our operations and assume the
responsibilities of a public company, and may fluctuate as a percentage of total
net revenue from period to period.
STOCK COMPENSATION. In fiscal 1998 and 1999 we recorded aggregate unearned
compensation totalling $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. We recorded expenses
related to stock compensation of $864,000 during fiscal 1997, $780,000 during
fiscal 1998 and $2.0 million during fiscal 1999.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with our
acquisition of FirstFloor, we 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 our 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
30
<PAGE> 30
considering, 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. We
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 our management's estimate of market size
and growth, expected trends in technology and the expected timing of new product
introductions. We 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 our 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,
our cash flow and other assumptions have not materially changed.
AMORTIZATION OF GOODWILL. During fiscal 1999, we 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 declined from $21,000 of net interest
income in fiscal 1997 to $41,000 of net interest expense in fiscal 1998, and
improved to $23,000 of net interest expense in fiscal 1999, 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
1997, 1998 or 1999 because we incurred net operating losses in each of those
periods.
As of March 31, 1999, we had net operating loss carryforwards for federal
income tax reporting purposes of $12.1 million that expire in various amounts
beginning in fiscal 2011. We 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. We had net deferred tax assets, including our 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 the notes to the consolidated financial statements.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited consolidated statement of
operations data for each of the nine quarters in the period ended June 30, 1999,
as well as that data expressed as a percentage of our total net revenue for the
quarters presented. We have prepared this unaudited consolidated information on
a basis consistent with our audited consolidated financial statements, and in
the opinion of our management, this information reflects all normal recurring
adjustments necessary for a fair presentation of our operating results for the
quarters presented. You should read this information in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus. You should not draw any conclusions about our 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, JUNE 30,
1997 1997 1997 1998 1998 1998 1998 1999 1999
-------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <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 $ 3,457
Services................... 780 1,371 1,150 1,593 1,721 2,628 3,155 3,427 3,976
------- ------- ------- ------- ------- ------- ------- ------- -------
Total net revenue........ 2,065 2,533 3,455 3,806 4,653 5,285 5,715 5,760 7,433
Cost of net revenue:
License.................... 20 53 97 95 101 265 350 463 137
Services................... 815 597 828 875 1,367 1,742 2,036 2,127 2,660
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of net
revenue................ 835 650 925 970 1,468 2,007 2,386 2,590 2,797
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 1,230 1,883 2,530 2,836 3,185 3,278 3,329 3,170 4,636
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........ 1,768 1,962 1,824 2,039 2,758 3,066 3,699 4,615 4,558
Research and development... 670 776 934 962 972 1,232 1,684 1,789 2,666
General and
administrative........... 542 610 573 497 641 1,459 934 954 1,452
Stock compensation......... 11 160 252 357 424 469 582 532 514
Acquired in-process
research and
development.............. -- -- -- -- -- 1,840 -- -- --
Amortization of goodwill... -- -- -- -- -- 78 234 238 240
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 2,991 3,508 3,583 3,855 4,795 8,144 7,133 8,128 9,430
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations......... (1,761) (1,625) (1,053) (1,019) (1,610) (4,866) (3,804) (4,958) (4,794)
Interest and other income,
net........................ (36) (6) 7 (6) (35) (46) 54 4 71
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss..................... $(1,797) $(1,631) $(1,046) $(1,025) $(1,645) $(4,912) $(3,750) $(4,954) $(4,723)
======= ======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL NET
REVENUE:
Net revenue:
License.................... 62% 46% 67% 58% 63% 50% 45% 41% 47%
Services................... 38 54 33 42 37 50 55 59 53
------- ------- ------- ------- ------- ------- ------- ------- -------
Total net revenue........ 100 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of net revenue:
License.................... 1 2 3 2 2 5 6 8 2
Services................... 39 24 24 23 30 33 36 37 36
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of net
revenue................ 40 26 27 25 32 38 42 45 38
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 60 74 73 75 68 62 58 55 62
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........ 86 77 53 55 59 58 65 80 61
Research and development... 32 31 27 25 21 23 29 31 36
General and
administrative........... 26 24 16 13 14 28 17 17 20
Stock compensation......... 1 6 7 9 9 9 10 9 7
Acquired in-process
research and
development.............. -- -- -- -- -- 35 -- -- --
Amortization of goodwill... -- -- -- -- -- 1 4 4 3
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 145 138 103 102 103 154 125 141 127
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations......... (85) (64) (30) (27) (35) (92) (67) (86) (65)
Interest and other income,
net........................ (2) -- -- -- -- (1) 1 -- 1
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss..................... (87)% (64)% (30)% (27)% (35)% (93)% (66)% (86)% (64)%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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FACTORS AFFECTING QUARTERLY RESULTS
Total net revenue has increased during each of the nine quarters ended
June 30, 1999 due to an increase in the number of our customers, an increase in
the average transaction size and an increase in follow-on orders from existing
customers. We experience 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 five
quarters ended June 30, 1999 primarily as a result of several large
implementation projects during those periods.
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 our 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. 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 our domestic sales force, as
well as the establishment of our 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 our sales force. Research and
development expenses increased significantly in the four quarters ended June 30,
1999 due to an increase in product development personnel added in conjunction
with our 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 our 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.
Our quarterly operating results have varied significantly in the past and
we expect that they will vary significantly from quarter to quarter in the
future. These variations are caused by a number of factors, including the length
of our sales cycle, demand for and market acceptance of our products and
services, the timing of orders and deployment of our products and services, the
impact of our revenue recognition policies, changes in technology and changes
caused by the rapidly evolving electronic commerce market and the impact of year
2000 investments by us and our customers.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not necessarily
meaningful and are not a good predictor of our future performance. Our operating
results may be below the expectations of public market analysts and investors in
future quarters, which could cause volatility in the price of our stock.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and met our capital
expenditure requirements primarily through the sale of
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private equity securities, and to a lesser
extent, notes payable and capital equipment leases. As of June 30, 1999, we had
$10.5 million of cash and cash equivalents, compared with $15.4 million as of
March 31, 1999. Cash used in operating activities was $4.3 million for fiscal
1997, $3.3 million for fiscal 1998 and $7.4 million for fiscal 1999, and was
$298,000 in the quarter ended June 30, 1998 and $3.4 million in the quarter
ended June 30, 1999. Cash used in operations resulted primarily from net losses
and increases in our accounts receivable, offset in part by the growth in
accrued liabilities, deferred revenue, and non-cash expenses including
depreciation and stock compensation.
Net cash used in investing activities of $930,000 for fiscal 1997, $1.4
million for fiscal 1998, $1.8 million for fiscal 1999, $271,000 for the quarter
ended June 30, 1998 and $1.3 million for the quarter ended June 30, 1999,
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 $5.4 million for fiscal 1997,
$5.3 million for fiscal 1998, $22.1 million for fiscal 1999, $319,000 for the
quarter ended June 30, 1998 and used cash of $187,000 in the quarter ended June
30, 1999. Financing activities were primarily the sale of our common and
preferred stock. We have also used debt and leases to partially finance our
operations and capital purchases. At June 30, 1999 we also had $1.2 million in
current and noncurrent debt as well as $372,000 in current and noncurrent 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, we 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 we
expect to complete in October 1999. The loan bears interest at the bank's prime
rate plus 0.5% per year, and interest is repayable only during the draw period,
with principal amortizing over the subsequent 36 months. The bank advanced us
$1.0 million under this commitment on September 30, 1999. We issued warrants to
the bank to purchase 5,263 shares of common stock at $9.50 per share in
connection with this commitment.
Our borrowings under the variable rate installment notes and the new
commitment for an equipment line of credit require us to comply with quarterly
and monthly financial tests, including minimum operating results, and liquidity,
leverage and debt service ratios. As of March 31, 1999 and through August 31,
1999, we were not in compliance with the minimum operating results covenant and
other monthly financial tests. We obtained a waiver from the lender for the
periods in which we were not in compliance. The total amount outstanding under
these variable rate installment notes as of June 30, 1999 was approximately
$818,000.
At March 31, 1999, we also had noncancelable operating leases for office
space and equipment of approximately $1.6 million which are payable through
fiscal 2004.
Although we have no material long-term commitments for capital
expenditures, we anticipate a substantial increase in our capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. We intend to fund the intended increase in
expenses and capital expenditures through the proceeds of this offering,
together with existing cash and cash equivalents, and believe that these funds
will be sufficient to meet our working capital needs for at least the next 12
months. However, we may need to raise additional funds in order to support more
rapid expansion of our sales force, develop new or enhanced products or
services,
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respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If we seek to raise
additional funds, we may not be able to obtain funds on terms which are
favorable or otherwise acceptable to us. If we raise additional funds through
the issuance of equity securities, the percentage ownership of our stockholders
would be reduced. Furthermore, these securities may have rights, preferences or
privileges senior to our common stock.
RECENTLY ISSUED 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 will become effective during the year ending March 31, 2000.
SOP No. 98-1 provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of these costs. We do not expect the adoption of SOP No.
98-1 to have a material effect on our 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". 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 our results of operations, financial position or cash flows.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products in North
America, and to a lesser extent in Europe and Asia. As a result, our 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 our revenue is currently denominated in U.S. dollars, a strengthening of
the dollar could make our products less competitive in foreign markets. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, particularly since the majority of our investments are in short-term
instruments. Due to the short-term nature of our investments, we do not believe
that we have a material risk exposure. Because some of our debt arrangements are
based on variable rates of interest, our interest expense is sensitive to
changes in the general level of U.S. interest rates. Since these obligations
represent a small percentage of our total capitalization, we believe 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 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. We are subject to potential year 2000
problems affecting our products, our internal systems and the systems of our
suppliers and customers, any of which could harm our business.
We believe that all current versions of our products are year 2000
compliant, so long as they are configured and used in accordance with our
specifications, and provided that the underlying operating systems and any other
software used with our products are also year 2000 compliant. However, since our
products are integrated with our customers' systems, the failure of our
customers' systems to be year 2000 compliant could impede the success of our
applications in their systems. Accordingly, known or unknown defects or errors
that affect the operation of our software, including any defects or errors in
systems that include our products, could result in delay or loss of revenue,
diversion of development resources, damage to our reputation, or increased
service or warranty costs, any of which could harm our business.
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We have initiated an assessment of our internal systems and are not
currently aware of any material operational issues or costs associated with
preparing our internal systems for the year 2000. However, we may experience
material unanticipated problems and costs caused by undetected errors or defects
in the technology used in our internal systems.
In conjunction with our year 2000 assessment, we have begun to contact our
major suppliers to determine whether their operations and the products and
services they provide are year 2000 compliant. Where practicable, we will
attempt to mitigate our risks with respect to the failure of suppliers to be
year 2000 compliant. However, these failures remain a possibility and could harm
our business.
We are in the process of developing a contingency plan to address
situations that may result if our products, our internal systems, or the systems
of our suppliers or customers are not year 2000 compliant.
We have funded our year 2000 plan from available cash and have not
separately accounted for these costs. To date, these costs have not been
material and are not expected to be material. However, we may experience
unanticipated problems and costs with year 2000 compliance that could harm our
business.
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<PAGE> 36
BUSINESS
We provide electronic commerce software and services focused on the
purchasing customer, to companies worldwide in the telecommunications, financial
services, retail, computer hardware and manufacturing industries. Our 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.
Our electronic commerce software is broadly applicable to a wide range of
industries and markets, products and services. Our 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 our 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 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
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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.
We believe 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 our software, companies can create a web-based guided
selling experience that can be customized based upon the needs of the customer.
Our 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 our software to research, evaluate, weigh trade-offs on price,
performance and other attributes, configure in real-time and buy complex goods
and services.
Our solutions provide the following advantages:
HIGHLY STRATEGIC. Our 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, our 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, we believe
our software can provide a significant return on investment and generally is
viewed by our customers as a means of achieving strategic and competitive
advantage.
CUSTOMER-DRIVEN. Unlike traditional enterprise applications, our software
is designed specifically for interacting directly with customers, resellers and
other partners. Our "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, our
agent technology delivers personalized information during the purchase process,
enabling companies 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.
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INTEGRATED. By combining advanced configuration, information delivery,
content management and personalization functionality, we offer 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, our software enables customers to develop
highly intuitive, interactive, graphical and content-rich electronic commerce
sites. We also provide professional consulting and implementation services,
complemented by our relationships with third-party implementation partners, to
provide a tailored solution for each company's needs.
SCALABLE AND FLEXIBLE. Our 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 our 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.
STRATEGY
Our objective is to be the leading provider of electronic commerce
software to customers worldwide. The key elements of our strategy include:
INCREASE THE BREADTH AND DEPTH OF OUR ELECTRONIC COMMERCE SOLUTIONS. Our
strategy is to provide software that enhances customer interaction by adding new
features to our Calico eSales Suite and by adding new products that provide
marketing and post-sales service functionality. We plan to accomplish this
through internal product development, licensing and acquisitions of third-party
technology and partnering. Our acquisition of FirstFloor provided agent
technology which enables targeted, personalized information delivery, a key
element in our Calico eSales solution. The introduction of personalized products
which provide marketing functionality will enable our customers to tailor
Internet sites to help build relationships with their most important customers.
In addition, we intend to facilitate integration of our products with a broad
range of enterprise and Internet software applications through the development
of additional tools for integration of our software with other computer
applications and additional application programming interfaces.
ALIGN WITH ELECTRONIC COMMERCE LEADERS AND EXPAND IN OTHER TARGETED
VERTICAL MARKETS. Our electronic commerce software is broadly applicable to a
range of industries and markets. To date, our customers have been concentrated
in two major industry groups -- computer hardware and network and
telecommunications equipment. Our strategy has been to pursue relationships with
leading participants in key industries who have adopted aggressive electronic
business strategies. In addition, we plan to continue to expand in additional
industries where electronic commerce software is highly strategic and promote
significant competitive advantage, including manufacturing, retail,
telecommunications services, and financial services.
ENHANCE SALES AND IMPLEMENTATION SERVICES THROUGH INCREASED ALLIANCES. Our
strategy is to increase our revenue base by complementing our 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 our customers with
access to additional design, modeling and
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implementation resources. In addition, our
goal is to form additional marketing and distribution alliances with electronic
commerce software vendors and resellers to broaden distribution or provide
complementary functionality to our applications. We also intend to provide
company-wide integration of our 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. Our 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 our Calico eSales Quote product is described in extensible markup
language, or XML, enabling dynamic and intelligent exchange among electronic
commerce applications. Our strategy is to continue to develop leading
technologies in order to deliver more advanced functionality in our software to
our customers.
IDENTIFY AND CAPITALIZE ON NEW ELECTRONIC COMMERCE-BASED BUSINESSES. Our
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, we believe
we can further capitalize on the growth of electronic commerce and remain at the
forefront of electronic commerce trends and technology.
PRODUCTS AND SERVICES
We have developed a suite of applications, integration tools and services
for building electronic commerce solutions.
In a typical interaction with the Calico eSales Suite, a user at a retail
kiosk or other mode of interaction views pages on a vendor's web site that
describe a complex product or service the user wishes to purchase. The web
server supporting the web site connects to the various Calico eSales Suite
modules through industry-standard protocols, such as JHTML, ASP and JSP. The
Calico Enterprise Connectors or other published Java application programming
interfaces then integrate the Calico eSales Suite modules with the vendor's
order entry or other computer systems, enabling user interaction by providing
data flow to the Calico eSales Suite modules and the web site.
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[CALICO eSALES ARCHITECTURE CHART]
THE CALICO ESALES SUITE
The Calico eSales Suite is an integrated family of interactive user-guided
software products that provide our customers with the ability to create aspects
of person-to-person selling in an on-line environment. Companies can use our
suite of products to support multiple sales channels, including direct sales,
in-store, resellers, value added resellers, telesales and sales over the
Internet. Our 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 our 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 our "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
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multi-user setting. A single 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 the same model,
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thereby accommodating increased traffic while continuing to provide rapid
response time.
CUSTOMER CASE STUDIES
The following case studies are representative of our customers and how
they use the Calico eSales Suite.
DELL COMPUTER CORPORATION
Dell has licensed Calico software for their enterprise configuration
solution on a worldwide basis. Dell internal telesales staff in Europe and the
U.S. are currently using the Calico eSales Configurator to create an accurate
order for Dell's large server and storage product line.
Calico's "user guiding behavior" technology helps the Dell salespeople
correctly configure these large servers by combining the hardware and software
components based on the varying customer requirements as to performance,
redundancy, and other state-of-the-art features offered in the Dell server line.
The result is an accurate order custom tailored to each individual customer
situation.
NORTEL NETWORKS
Communication networking leader Nortel Networks has implemented our Calico
eSales Suite to enable its customers to buy Nortel Networks Carrier Solutions
products interactively via the Internet.
Using the Calico eSales Suite, Nortel Networks Carrier customers have
access to up-to-date and customizable product and pricing information for
optical and access product portfolios, enabling them to make informed purchasing
decisions. The Calico eSales Suite guides Nortel customers through the
purchasing process, reducing the time it takes to configure and place orders for
optical and access networking products and enhancing order accuracy.
Nortel believes our interactive, customer-focused guided selling approach
will enhance sales and customer satisfaction. Nortel Networks is also working
with us to deploy and integrate our eSales Suite as a part of its future
electronic business initiatives.
INTERNATIONAL GAME TECHNOLOGY
IGT designs, develops and manufactures slot, video and progressive gaming
devices and software systems. To meet the increasing demand for its products and
better serve its customers and prospects, IGT needed a sales force automation
solution that would enable its direct sales force to pursue new sales
opportunities and configure products at the point of sale. The solution required
functionality to deliver information about IGT's extensive and complex product
line, as well as state-by-state gaming requirements, from within a single
computer system. The Calico eSales Configurator, together with a sales
automation application provided by Clarify, Inc., created a seamless interface
between IGT's mobile sales organization and networked users and its back-end
enterprise resource planning system. This integrated software solution provided
IGT's sales representatives with the ability to match those customer needs with
the appropriate IGT product configuration.
EDU.COM
edu.com is a national marketing and distribution channel that focuses
exclusively on the purchasing needs of college students. edu.com brokers
programs with vendors to deliver favorable pricing on significant purchases.
Through edu.com, students receive "student-only" prices on a variety of branded
products and services including computers, software, textbooks, and health &
beauty care products, as well as banking, phone and travel services.
edu.com utilizes navigators based on the Calico eSales Configurator to
help students make educated purchasing decisions. The navigators prompt students
with questions specific to the category of products they are shopping for, then
offer a list of choices that meet their criteria. Students unfamiliar with the
product they are buying can use the navigators to easily identify appropriate
selections. Informed shoppers can use the navigators to locate products quickly
and easily.
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PROFESSIONAL SERVICES
We offer 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. Our staff of professionals and consultants who
define the implementation specifications for installing our software work with
customers to capture and model the business logic and policies that reflect
marketing and selling practices. Our professional services consultants also help
with the integration of our applications into other company-wide computer
software systems. Our professional services team and our 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.
We use our 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 our
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 our 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 our engagement.
MAINTENANCE AND CUSTOMER SERVICE
We offer 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. Our help desk is staffed with technical support engineers experienced
in a variety of programming languages. For our customers, including those using
in-house modeling resources, our remote consulting staff provides ongoing
consulting, limited continuing education and customer-specific model support.
Our implementation support is targeted at customers who have completed their
modeling and require assistance in implementing a client/server or Internet
server deployment. We also help troubleshoot problems with network bandwidth,
network access and configurations as they pertain to our products.
SALES AND MARKETING
We market and sell our products primarily through our direct sales force
located at our headquarters in San Jose, and our regional sales and service
offices in Atlanta, Boston, Chicago, England, Germany and Sweden. As of June 30,
1999, our total sales and marketing organization consisted of 67 employees. We
intend to increase our domestic and international direct sales organizations, in
part by increasing our direct sales force in Australia, the Benelux, Singapore
and Japan during fiscal 2000. We are also complementing our direct sales force
through additional distribution channels, including systems integrators and
value added resellers, both domestically and internationally. For example, we
have entered into an agreement with an entity to provide sales distribution and
services in Japan.
We have multi-disciplined sales teams that consist of sales, technical and
support professionals. Our senior management also takes an active role in our
sales efforts. We often develop a pilot or custom demonstration which we or our
partners can then use to design a model for a full scale implementation. Our
sales efforts are typically directed to senior executives at our customers'
organizations, including the chief executive officer, the chief information
officer and the vice presidents of sales and marketing.
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To support our direct sales efforts and to actively promote our Calico
eSales brand, we conduct comprehensive marketing programs and market research,
including public relations, print advertisements, online advertisements, trade
shows, speaking engagements and ongoing customer communications.
STRATEGIC ALLIANCES
We are 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 us to
provide our customers with access to additional resources to design, install and
customize our solutions. As of June 30, 1999, these alliances were in their
early phase of development and we had not yet generated significant revenue from
these alliances.
As part of this strategy, we have formed marketing and distribution
alliances with electronic commerce software vendors. For example, we have
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. We have also recently entered into a joint
marketing agreement with Vignette to share sales and marketing leads, provide
complementary training of each other's sales teams and develop joint marketing
materials. Vignette is a provider of Internet relationship management software
products and services. In addition, we have a cooperative marketing agreement
with IBM. These relationships enable us to broaden distribution of our products
and provide complementary functionality to our applications.
Under these joint marketing arrangements, each party agrees to provide
each other with reasonable marketing and sales assistance. Our marketing and
distribution alliances are not exclusive and some of our partners provide
similar services to other companies.
We also intend to expand the professional services offered to our
customers by enhancing existing relationships with systems integrators and
professional services organizations. We have entered into a joint marketing
agreement with Andersen Consulting to form a global alliance. Under this
alliance, Andersen Consulting acquires rights to market integration services
related to our software, and we have agreed to promote Andersen Consulting as
the preferred integrator of our 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.
We hope to work together with Andersen Consulting to stimulate interest
for our products and services under this marketing alliance. As part of this
alliance, we have agreed to engage Andersen Consulting to provide a minimum of
$1.0 million of consulting services over the next 18 months, including creation
of prototypes, external presentations, development of training materials,
product testing and other activities supporting our product releases.
In addition, Andersen Consulting has agreed to purchase 307,200 shares of
common stock at $13.02 per share in a private placement to close concurrently
with this offering.
We are 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, we have entered into a joint
marketing agreement with USWeb/CKS, an Internet professional services firm,
where
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USWeb/CKS may provide its Internet integration expertise in our customer
deployments.
We also participate in the Oracle Partner Program, which assists us in
marketing the Calico eSales suite of products to Oracle customers. Since our
products are built to be database independent, they can be easily integrated
with Oracle's products.
We are a Microsoft Certified Solution Provider and a member of the
Microsoft Developer Network, providing us with co-marketing and advertising
opportunities.
SIGNIFICANT CUSTOMERS
We have provided electronic commerce software primarily to customers
concentrated in two major industry groups -- computer hardware and network and
telecommunications equipment. We are 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 our total net
revenue. In fiscal 1998, Micron Electronics accounted for more than 10% of our
total net revenue. In fiscal 1997, Amdahl, Lanier and US Robotics (subsequently
acquired by 3Com) each accounted for more than 10% of our total net revenue. A
substantial portion of our 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 we
have generated revenue of in excess of $100,000 in either the year ended March
31, 1999 or the quarter ended June 30, 1999:
<TABLE>
<S> <C>
Best Buy Qwest
Cabletron Siemens
Cisco Starhub
Dell Sunrise Medical
Gateway Telia
Merrill Lynch Telxon
Motorola US West
MTD Products Zurn Industries
Nortel Networks
</TABLE>
These customers accounted for 87% of our total net revenue for fiscal 1999
and 82% of our total net revenue for the three months ended June 30, 1999.
TECHNOLOGY
Our software architecture provides the platform for our electronic
commerce software. Our 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. We intend to develop user interface
components to allow our customers to use either a Unix-based or Windows NT-
based Web server. If we are unable to promptly or successfully develop the Unix
version, the scalability of our Calico eSales Configurator may be adversely
impacted for certain customer applications due to the scalability limitations of
Windows NT.
The elements of our technology consist of the following:
USER-GUIDED BEHAVIOR TECHNOLOGY
We have developed proprietary "user-guided behavior" technology that is
based upon expert systems that provide the ability to match user requirements
with specific product and service offerings from companies, subject to a number
of constraints. The user-guided behavior technology offers the following
benefits:
- - Our 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
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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 our 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. Our
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
Our 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.
Our architecture is designed to comply with widely accepted commercial
software industry standards for building large-scale Internet applications. In
addition to XML, we use other widely accepted standards in developing our
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 our support of open standards.
RESEARCH AND DEVELOPMENT
Our future success will depend in part upon our ability to enhance the
Calico eSales Suite of products, develop new products and capitalize on our
technological leadership to provide electronic commerce software to a global
customer base. Our immediate focus is to extend the existing company-wide
business application integration capabilities of our product suite to Oracle
Order Entry and SAP Order Entry. In addition, we are seeking to broaden our
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, we work with several
industry standards organizations such as the World
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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 we are actively promoting the use of XML technology for data
representation and computer-to-computer exchange of information.
Our research and development expenses were $2.2 million for fiscal 1997,
$3.3 million for fiscal 1998, $5.7 million for fiscal 1999, $972,000 for the
three months ended June 30, 1998 and $2.7 million for the three months ended
June 30, 1999. We expect to continue to invest significantly in research and
development in the future. We have experienced technical personnel in the areas
of agent-based technology, artificial intelligence, expert systems, user
interface design, enterprise and middleware software development.
PROPRIETARY RIGHTS
Our success and ability to compete are substantially dependent on our
internally developed technology and software applications. We have 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 our user-guided product configuration technology.
In addition, we have filed patent applications in three foreign jurisdictions.
While we rely on patent, trademark, copyright and trade secret laws and
restrictions in the United States and other jurisdictions, together with
contractual restrictions, to protect our proprietary rights, patent, trademark,
copyright and trade secret protection may not be available in every country in
which we distribute our products.
We also typically enter into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
our customers, suppliers and strategic partners in order to limit access to and
distribution and disclosure of our proprietary information. However, despite our
efforts to protect our proprietary rights, unauthorized parties could copy or
otherwise obtain and use our products or technology or develop products with the
same functionality as our products. Policing unauthorized use is difficult, and
the steps we have taken may not prevent misappropriation of our technology. In
addition, the laws of some foreign countries provide less protection of
proprietary rights than do the laws of the United States, and we expect that it
will become more difficult to monitor the use of our products if we increase our
international presence.
We utilize technology provided by BEA Systems, Inc. for our application
servers, from Verity, Inc. for our 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, our products could be delayed until equivalent
software could be developed or licensed and integrated into our products.
However, we do not believe that our 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. We expect 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 our competitors may
have filed or intend to file patent applications covering aspects of their
technology that they claim our technology infringes. Our competitors may make a
claim of infringement against us with respect to our products and technology.
These claims could result in litigation subjecting us to significant liability
for damages, or in invalidation of our 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 us to enter into royalty
or licensing agreements in order to be able to sell our products. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, or at all.
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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.
We believe that our ability to compete depends on many factors, both
within and beyond our control, including:
- - the performance, functionality, scalability and flexibility of our software
solutions;
- - the timing and market acceptance of new products and product enhancements to
the Calico eSales Suite of products;
- - the effectiveness of our sales and marketing efforts; and
- - the quality and performance of our professional services.
Although we believe that we currently compete favorably as to each of
these factors, we expect competition to persist and intensify. Our primary
competition currently comes from companies developing solutions in-house and
from a large number of emerging companies focused on electronic commerce. We
also compete with vendors of enterprise class application software, including
BroadVision, Siebel Systems, Oracle, SAP, Baan and Microsoft. Within our Calico
eSales Configurator product line, our competitors include Trilogy, pcOrder.com,
Selectica and FirePond.
Many of our competitors and potential competitors have a number of
significant advantages over us, including:
- - a longer operating history;
- - preferred vendor status with our 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.
We also expect that competition will increase as a result of software
industry consolidation. For example, a number of enterprise software companies
have announced acquisitions of point solution providers to expand their product
lines. Our competitors may also bundle their products in a manner that may
discourage users from purchasing our 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
We are currently involved in litigation with a former employee arising out
of the alleged sexual harassment and wrongful termination of the employee. We
have 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 us
and one of our former employees as defendants. The case is currently in the
early stages of pre-trial discovery. The lawsuit seeks unspecified monetary
amounts for lost wages and benefits, emotional and physical distress and
punitive damages.
We believe that we have meritorious defenses against the alleged claims,
and intend to defend ourselves vigorously. However, due to the nature of
litigation and the fact that discovery is still in its early stages, we 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. We may also
incur substantial legal fees in this matter. After consideration of the nature
of the claims and facts relating to the litigation, we believe that the
resolution of this matter will not harm our business. However, the results of
these proceedings, including any potential settlement, are uncertain and there
can be no assurance that they will not harm our business.
EMPLOYEES
As of June 30, 1999, we had 210 employees. Of that total, 65 were
primarily
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engaged in product development, engineering or systems engineering, 67 were
engaged in sales and marketing, 54 were engaged in professional services and 24
in operational, financial and administrative functions.
None of our employees is represented by a labor union, and we have never
experienced a work stoppage. Our relations with our employees are good.
FACILITIES
Our headquarters are located in approximately 58,000 square feet in San
Jose, California, occupied under an office lease expiring in September 2004. We
also lease 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. We have
additional leased space in San Jose and Mountain View, California, some of which
we have sublet to unrelated third parties.
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MANAGEMENT
OFFICERS AND DIRECTORS
Our 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).............. 50 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................... 47 Vice President and Managing Director, Eurasia
Steve P. Leahy....................... 40 Vice President, Americas
Alan W. MacMurray.................... 42 Vice President, Professional Services
Joseph A. Moran...................... 42 Vice President, Finance
Amanda A. North...................... 43 Vice President, New Ventures
Barton P. O'Brien.................... 43 Vice President, Strategic Sales
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.................. 55 Director
William D. Unger..................... 49 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 our 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 our Executive Vice President and Chief
Operating Officer since May 1999, and from February 1998 to May 1999, Mr.
Barrett served as our 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,
which was subsequently acquired by IBM, from July 1994 to March 1996. From March
1992 to July 1994, Mr. Barrett served concurrently as General Manager,
Government Sales and Marketing and Senior Director Strategic Sales and
Operations at Lotus, and from June 1984 to March 1992, Mr. Barrett held various
senior management positions in sales, marketing and services at Lotus. Mr.
Barrett
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<PAGE> 51
holds a B.S. degree in Marketing Management from the University of Rhode Island.
MATTHEW S. DIMARIA has served as our 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 our 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 our 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 our 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 our 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 our 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 our 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.
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<PAGE> 52
Mr. Leahy holds a B.A. degree in History from Bowdoin College.
ALAN W. MACMURRAY has served as our 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.
JOSEPH A. MORAN has served as our Vice President, Finance since June 1997,
and as Chief Financial Officer from June 1997 to June 1999. From 1991 to 1997,
Mr. Moran held various positions at Sybase, including Vice President, Finance,
Enterprise Business Group from June 1996 to June 1997, and Director of Finance
from January 1993 to June 1996. Mr. Moran holds a B.S. degree in Economics from
the University of California at Berkeley and an M.B.A. degree in Finance and
International Business from the University of Chicago. Mr. Moran has resigned
his employment with Calico effective December 15, 1999.
AMANDA A. NORTH has served as our Vice President, New Ventures since
September 1998. From November 1997 to September 1998, Ms. North served as
Calico's Vice President, Corporate Marketing. From October 1993 to November
1997, Ms. North held various positions at Studio Archetype, a developer of
complex and high visibility web sites. Ms. North was President of Studio
Archetype from October 1996 to October 1997. Ms. North holds B.A. degrees in
Economics and Politics from Princeton University and an M.B.A. degree from
Stanford University.
BARTON P. O'BRIEN has served as our Vice President, Strategic Sales, since
he co-founded Calico in January 1994. Prior to joining Calico, Mr. O'Brien held
sales positions at RSA Data Security, a developer of encryption and
authentication technology. Mr. O'Brien holds a B.S. degree in Business
Administration from the University of Florida and an M.S. degree in Industrial
Administration from Carnegie-Mellon Graduate School of Industrial
Administration.
MICHAEL M. OUYE has served as our 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 our 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
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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 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
Upon completion of the offering, the terms of the board of directors will
be 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 our control. Our board of directors consists of five members. Our
bylaws provide that the authorized number of directors may be changed by
resolution of the board of directors.
We have agreed to appoint a representative of Andersen Consulting to our
board of directors upon the closing of the sale of common stock to Andersen
Consulting in the private placement concurrently with this offering. 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 our directors, officers or key
executives.
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BOARD COMMITTEES
The board of directors has established an audit committee and a
compensation committee.
The audit committee reviews and monitors our corporate financial reporting
and our external audits, including, among other things, our control functions,
the results and scope of the annual audit and other services provided by our
independent accountants and our compliance with legal matters that have a
significant impact on our financial reports. The audit committee also consults
with management and our independent accountants prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with our independent accountants. The current members of the audit
committee are Messrs. Lacroute and Unger.
The compensation committee reviews and makes recommendations to the board
of directors regarding our compensation policies and all forms of compensation
to be provided to our executive officers and directors, including among other
things, annual salaries and bonuses and stock option and other incentive
compensation arrangements. The current members of the compensation committee are
Messrs. Lacroute and Unger. Prior to the creation of our compensation committee
in February 1999, all compensation decisions were made by our full board.
Neither Mr. Naumann nor Mr. Paseman participated in discussions by our board of
directors with respect to his compensation.
DIRECTOR COMPENSATION
Our 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 our 1997 Stock Option Plan and employee-directors will be able
to participate in our 1999 Employee Stock Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
No member of our 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 our board of directors or compensation
committee. During fiscal 1999, all compensation decisions were made by our full
board. In August, 1999, we issued 198,752 shares of our Series D preferred stock
to entities affiliated with Mr. Unger in connection with our acquisition of
FirstFloor, and in September 1999 we issued 329,090 shares of our Series E
preferred stock to entities affiliated with Mr. Lacroute and 548,488 shares of
our Series E preferred stock to entities affiliated with Mr. Unger in connection
with our Series E preferred stock financing.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to our chief
executive officer and each of our other executive officers whose total salary
and bonus exceeded $100,000 for the fiscal year ended March 31, 1999:
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION(S) SALARY BONUS OPTIONS
------------------------------ -------- -------- ------------
<S> <C> <C> <C>
Alan P. Naumann........................................... $175,000 $ 37,148 300,000
President and Chief Executive Officer
David E. Barrett.......................................... 175,000 179,018 --
Executive Vice President and Chief Operating Officer
Matthew S. DiMaria........................................ 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 our chief executive officer and
each of our other executive officers who earned in excess of $100,000.
All of these options were granted under our 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 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 our 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 our 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 our 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 our prediction of our
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 TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED PRICE APPRECIATION
UNDERLYING TO EMPLOYEES FOR OPTION TERM
OPTIONS DURING EXERCISE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL 1999 PER 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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AGGREGATE OPTION EXERCISES AND OPTION VALUES
The following table presents for our chief executive officer and each of
our 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 our 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 our favor that entitles us
to repurchase unvested shares at their original exercise price on termination of
the employee's services with us. 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 UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT MARCH 31, 1999 OPTIONS AT 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
our 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
our control. Mr. Barrett's options will accelerate from 70% to full
acceleration, depending on the date of the change in our 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 our control, Mr. Barrett is terminated without cause or
resigns for good reason.
BENEFIT PLANS
1995 STOCK OPTION PLAN
Our 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 our 1997 stock option plan. The 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.
1997 STOCK OPTION PLAN
Our 1997 stock option plan was adopted by the board of directors in June
1997 and by the 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,
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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 our 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 3,867,926 shares as
of June 30, 1999. As of June 30, 1999, 7,343,624 shares had been issued upon the
exercise of options under our 1995 and 1997 stock option plans, options to
purchase a total of 5,278,237 shares at a weighted average exercise price of
$6.41 per share were outstanding under these plans, and 2,848,107 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 our 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 our
executive officers provide for acceleration upon a change in our control.
FIRSTFLOOR OPTIONS
In connection with the acquisition of FirstFloor, we assumed the options
granted under the FirstFloor 1993 stock option plan and converted the options
into options to purchase 47,203 shares of our Series D preferred stock. At June
30, 1999, options to purchase 31,463 shares of Series D preferred stock were
outstanding at a weighted average exercise price of $2.68 per share. We do not
intend to grant further options to purchase our Series D preferred stock.
401(k) PLAN
In 1995, we adopted a tax-qualified employee savings and retirement plan
which covers our 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 us to make matching contributions to the
401(k) plan. To date we have 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 us or our employees to the
401(k) plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the
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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, the board of directors adopted the 1999 employee stock
purchase plan, subject to stockholder approval. We have 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 will
become effective as of the effective date of this offering and will be
administered by the board of directors or by a committee appointed by the board
of directors. Employees are eligible to participate if they are customarily
employed by us 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
our 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.
Unless the board of directors or a committee of the board of directors
determines otherwise, the first offering period starts on the effective date of
this offering and will run for approximately 24 months and will be divided into
four consecutive purchase periods of approximately six months. The first
offering period and the first purchase period commence on the date of this
prospectus. 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. The 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 our control, our 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.
LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation and bylaws that limit or
eliminate the personal liability of our 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 us or our
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 us or our stockholders;
- - acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
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- - unlawful stock repurchases, redemptions or other distributions or unlawful
payments of dividends; or
- - any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation and bylaws also allow us to indemnify our
officers, directors and other agents to the fullest extent permitted by Delaware
law. We intend to enter into separate indemnity agreements with each of our
officers and directors which gives these officers and directors additional
indemnification. The indemnity agreements may require us, among other things,
to:
- - indemnify our officers and directors against liabilities that may arise by
reason of their status or service as directors or officers;
- - advance expenses as incurred to our 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.
We also intend to purchase an insurance policy covering our directors and
officers for claims they may otherwise be required to pay or for which we may be
required to indemnify them.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification is sought. We
are not aware of any threatened litigation or proceeding which may result in a
claim for indemnification.
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TRANSACTIONS WITH RELATED PARTIES AND INSIDERS
We have raised capital primarily through the sale of our stock. On May 26,
1995 and May 31, 1995, we sold 6,000,000 shares of Series A preferred stock at a
price of $0.67 per share. On June 7, 1996, we 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, we 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 we 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 our 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.
The following holders of more than 5% of our 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.
Entities affiliated with Kleiner Perkins Caufield & Byers are together
considered a 5% stockholder of ours. 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 ours. 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 ours.
In connection with our 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 our 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 us.
At the time of our acquisition of FirstFloor, Mayfield Fund held
approximately 22.5% of our 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 our acquisition of FirstFloor, David J. Cardinal, our
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.
Our preferred stockholders, our 5% stock holders and our 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. See
"Description of Capital Stock -- Registration Rights" on page 66 for further
discussion of these registration rights.
On July 18, 1997, we loaned $240,000 to Alan P. Naumann, our Chief
Executive Officer,
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<PAGE> 61
in connection with his purchase of
1,200,000 shares of our 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, we loaned $520,000 to Mr. Naumann, in
connection with the purchase of 300,000 shares of our 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, we loaned $343,750 to David E. Barrett, our Executive
Vice President and Chief Operating Officer, in connection with his purchase of
412,500 shares of our common stock for $0.83 per share upon exercise of stock
options. The notes accrue interest at the rate of 5.59% per year 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, we loaned $141,750 to Matthew DiMaria, our Vice
President, Marketing, in connection with his purchase of 202,500 shares of our
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, we granted options to purchase 150,000 shares of
common stock to Joseph Costello, one of our directors, at an exercise price of
$12.00 per share.
On September 3, 1999, we entered into an agreement with Dell U.S.A. L.P.
to sell to Dell 1,536,000 shares of common stock at $13.02 per share in a
private placement to close concurrently with this public offering.
On September 29, 1999, we entered into an agreement with Andersen
Consulting to sell to Andersen Consulting 307,200 shares of common stock at
$13.02 per share, in a private placement to close concurrently with this public
offering.
Although these shares are not being underwritten, Dell and Andersen
Consulting will be granted registration rights to include their shares in any
future registered offerings filed by us.
We intend to enter into indemnity agreements with each of our directors
and officers. These indemnity agreements will require us 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.
We believe that all transactions with our officers, directors, principal
stockholders and other affiliates described above were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
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<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common
stock as of June 30, 1999, by:
- - each person who is known by us to beneficially own more than 5% of our
common stock;
- - our chief executive officer, each of the executive officers named in the
summary compensation table and each of our directors; and
- - all of our 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, we believe 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 ownership on the table is based on 27,120,127 shares
outstanding as of June 30, 1999 and 32,963,327 shares outstanding immediately
following the completion of this offering, assuming the underwriters'
over-allotment option is not exercised, the conversion of all shares of
preferred stock into common stock, and the sale of an aggregate of 1,843,200
shares of common stock to Dell and Andersen Consulting. Of the total shares
outstanding, 2,302,561 shares are subject to our 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 June 30, 1999 are deemed to be
outstanding for the purpose of computing 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 SHARES
OUTSTANDING
NUMBER OF SHARES ---------------------------------
BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------ --------------- --------------
<S> <C> <C> <C>
Mayfield Fund(1)........................ 5,732,974 21.1% 17.4%
2800 Sand Hill Road,
Menlo Park, California 94025
Kleiner Perkins Caufield & Byers(2)..... 5,349,922 19.7 16.2
2750 Sand Hill Road,
Menlo Park, California 94025
Integral Capital Partners(3)............ 1,817,182 6.7 5.5
2750 Sand Hill Road,
Menlo Park, California 94025
Alan P. Naumann(4)...................... 1,500,000 5.5 4.6
David E. Barrett(5)..................... 412,500 1.5 1.3
Matthew S. DiMaria(6)................... 202,500 * *
William G. Paseman...................... 3,750,000 13.8 11.4
Bernard J. Lacroute(2).................. 5,349,922 19.7 16.2
2750 Sand Hill Road,
Menlo Park, California 94025
William D. Unger(7)..................... 5,583,782 20.6 16.9
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 63.5 51.6
</TABLE>
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<PAGE> 63
- ---------------
(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 our 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) Mr. Lacroute is a partner of Kleiner Perkins Caufield & Byers. The shares
listed represent 4,047,724 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 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.
(4) Includes 837,500 shares subject to repurchase by Calico in the event Mr.
Naumann ceases to be an employee of Calico prior to full vesting of the
shares. The right of repurchase lapses at the rate of 31,250 shares per
month until July 18, 2001, after which date the right to repurchase lapses
at the rate of 6,249 shares per month.
(5) Includes 275,000 shares subject to repurchase by Calico in the event Mr.
Barrett ceases to be an employee of Calico prior to full vesting of the
shares. The right of repurchase lapses at the rate of 8,594 shares per
month.
(6) Includes 135,000 shares subject to repurchase by Calico in the event Mr.
DiMaria ceases to be an employee of Calico prior to full vesting of the
shares. The right of repurchase lapses at the rate of 4,220 shares per
month.
(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 1,247,500 shares subject to repurchase by Calico upon cessation of
employment prior to full vesting of the shares, and options to purchase
412,500 shares that are immediately exercisable.
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<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
As of June 30, 1999, there were 27,120,127 shares outstanding held by 239
shareholders of record. Upon completion of this offering, our authorized capital
stock will consist 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. The
following description of our capital stock gives effect to the amendments to the
certificate of incorporation to be filed upon completion of this offering. Our
certificate of incorporation and bylaws, to be effective after the closing of
this offering, provide further information about our capital stock.
COMMON STOCK
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of our 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 our liquidation, dissolution or winding up, share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
preferred stock.
Because our 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. Each outstanding share of common stock is, and all shares of common
stock to be outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon completion of this offering, all outstanding shares of preferred
stock will be converted on a one-to-one basis into shares of common stock.
However, following this conversion, under our certificate of incorporation, the
board of directors will have 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 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 our board of directors
and making it more difficult for a third party to acquire, or discourage a third
party from acquiring, a majority of our outstanding voting stock. Furthermore,
the preferred stock may have other rights, including economic rights, senior to
the common stock. We have no current plans to issue any shares of preferred
stock.
WARRANTS
As of September 30, 1999, we had issued warrants to purchase a total of
138,872 shares of common stock on an as-converted basis. Warrants to purchase
42,000 shares of common stock at $0.67 per share will expire in November 2002.
Warrants to purchase 34,999 shares of common stock at $1.60 per share will
expire in November 2004 and warrants to purchase 56,250 shares of common stock
at $1.60 per share will expire in June 2007. On September 25, 1999, we issued
warrants to purchase 5,263 shares of common stock at $9.50 per share in
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<PAGE> 65
connection with a proposed bank financing.
The warrants expire on September 25, 2002.
REGISTRATION RIGHTS
Following this offering, under the terms of an amended investor rights
agreement, the holders of approximately 20,599,535 shares of our common stock,
including shares issuable upon conversion of preferred stock and warrants and
options to purchase preferred stock, will have rights to require us to register
those shares under the Securities Act. Subject to limitations in this investor
rights agreement, the holders of at least 30% of these shares may require, on
two occasions, that we use our best efforts to register these shares for public
resale. If we register any common stock for our 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. The holders of these shares may also require us to register all or a
portion of their registrable securities on Form S-3 when we are 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. We will pay all fees, costs
and expenses of these registrations, other than underwriting discounts and
commissions.
Included within the shares subject to registration rights that entitle the
holders to include their shares in future registration statements filed by us
are an aggregate of 1,843,200 shares of common stock to be sold to Dell U.S.A.
L.P. and Andersen Consulting in two private placements to close concurrently
with this offering.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make it more difficult for a third party to acquire us by means of a
tender offer, proxy contest, or otherwise, and could make the removal of
incumbent officers and directors more difficult. These provisions could
discourage coercive takeover practices and takeover bids and encourage persons
seeking to acquire control of us to negotiate first with us.
We will be subject to Section 203 of the Delaware General Corporation Law,
which generally prohibits a publicly held Delaware corporation from engaging in
any 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.
Section 203 defines a business combination 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
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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.
In general, Section 203 defines an interested stockholder as an entity or
person who, together with affiliates and associates, owns 15% or more of the
corporation's outstanding voting stock.
Upon filing after the closing of this offering, our certificate of
incorporation will provide that our board of directors will be divided into
three classes of directors serving staggered three-year terms. As a result, only
one of the three classes of our board of directors will be elected each year.
The classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of us
and may maintain the incumbency of our board of directors, as the classification
of the board generally increases the difficulty of replacing a majority of the
directors. Our directors will be removable only for cause upon the affirmative
vote of the holders of at least a majority of the voting power of all
outstanding shares of voting stock, voting as a single class. Our board of
directors has the exclusive right to set the authorized number of directors and
to fill vacancies on our board of directors. Our certificate of incorporation
requires that any action required or permitted to be taken by stockholders must
be effected at a duly called annual or special meeting of the stockholders and
may not be effected by a consent in writing. In addition, special meetings of
the stockholders may be called only by our board of directors, the Chairman of
our board of directors, or our chief executive officer or by the holders of not
less than ten percent of all of the shares entitled to vote at the meeting.
Advance notice must be given by stockholders of any stockholder proposals or
director nominations or other business to be brought by stockholders at
stockholders' meetings. Our certificate of incorporation authorizes undesignated
preferred stock, which makes it possible for the board of directors to issue
preferred stock with voting or other rights or preferences that could discourage
potential acquisition proposals and could delay or prevent a change in our
control or management. These provisions may be amended only by the affirmative
vote of at least two-thirds of all the outstanding voting stock. These
provisions may have the effect of deferring hostile takeovers or delaying
changes in our control or management.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is BankBoston, N.A.,
whose address is 150 Royall Street, Canton, Massachusetts 02021 and whose
telephone number is (781) 575-2200.
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<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there was no public market for our common stock.
Future sales of substantial amounts of common stock in the public market,
including shares issued upon exercise of outstanding options or warrants, could
adversely affect the market price of our common stock.
Upon completion of this offering, we will have 32,963,327 shares of common
stock outstanding, assuming no exercise of options after June 30, 1999. Of these
shares, 4,000,000 of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except for
any shares purchased by affiliates of Calico as that term is defined in Rule 144
under the Securities Act. Shares purchased by affiliates may generally only be
sold pursuant to an effective registration statement under the Securities Act or
in compliance with the limitations of Rule 144 as described below.
We issued and sold the remaining 28,963,327 shares of common stock held by
existing stockholders in reliance on exemptions from the registration
requirements of the Securities Act and are "restricted securities" as that term
is defined in Rule 144 under the Securities Act. All of these restricted
securities will be subject to lock-up agreements generally providing that the
stockholder will not offer, sell, or otherwise dispose of any of the shares of
common stock owned by them, for a period of 150 days after the date of this
offering, with 70% of the shares remaining subject to the lock-up agreement for
180 days, without the prior written consent of Goldman, Sachs & Co. Following
the expiration of the lock-up period, 25,106,427 restricted shares will be
available for sale in the public market, all of which are subject to limitations
under Rule 144, except for 1,087,477 shares eligible for sale under Rule 144(k)
and 5,324,703 shares eligible for sale under Rule 701, subject in some cases to
repurchase rights in favor of Calico.
Immediately after the completion of this offering, we intend to file a
registration statement on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our 1997
Stock Option Plan and our 1999 employee stock purchase plan. Based upon the
number of shares subject to outstanding options as of June 30, 1999 and
currently reserved for issuance under our stock option plans, this registration
statement would cover approximately 8,891,305 shares. Shares registered under
the registration statement will generally be available for sale in the open
market immediately after the 180 day lock-up agreements expire.
Also beginning six months after the date of this offering, holders of
22,135,535 shares of our common stock, including shares issuable upon conversion
of preferred stock and warrants and of options to purchase preferred stock will
be entitled to certain rights with respect to registration of these shares for
sale in the public market. See "Description of Capital Stock -- Registration
Rights". Registration of these shares under the Securities Act would result in
these shares becoming freely tradable without restriction under the Securities
Act immediately upon effectiveness of the registration.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year, including a person who may be deemed an
affiliate, is entitled to sell in "brokers' transactions" or to market makers,
within any three-month period, a number of shares that does not exceed the
greater of:
- - 1% of the number of shares of common stock then outstanding, which will
equal approximately 329,633 shares immediately after this offering; or
- - the average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
Sales under Rule 144 are also subject to restrictions relating to the
manner of sale,
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notice and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been an affiliate of
Calico at any time during the 90 days preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, "144(k) shares" may be sold immediately upon the completion of this
offering.
RULE 701
In general, under Rule 701 as currently in effect, any of our employees,
directors, officers, consultants or advisors who purchase shares from us in
connection with a compensatory stock or option plan or other written agreement
before the effective date of this offering is entitled to sell the shares 90
days after the effective date of this offering in reliance on Rule 144 without
having to comply with the holding period and notice requirements of Rule 144
and, in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.
The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, along with
the shares acquired upon exercise of the options, including exercises after the
date of this prospectus. Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this prospectus, may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its one year
minimum holding period requirements.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Calico by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. As of June
30, 1999, an investment partnership of Gray Cary Ware & Freidenrich owned an
aggregate of 5,485 shares of our Series E preferred stock, which was purchased
on September 4, 1998 for $4.558 per share. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
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 FirstFloor Software, Inc. at December 31, 1996
and 1997, and for each of the two years in the period ended December 31, 1997,
appearing in 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.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This 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 offered in this offering, please read the registration statement
and the exhibits and schedules that we have 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 SEC in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048, 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 SEC. The SEC maintains a world wide web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the site is
http://www.sec.gov.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, and will file periodic reports, proxy statements and other information
with the SEC. These periodic reports, proxy statements and other information
will be available for inspection and copying at the regional offices, public
reference facilities and web site of the SEC referred to above.
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CALICO COMMERCE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CALICO COMMERCE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Operations........................ F-4
Consolidated Statement of Stockholders' Deficit............. F-5
Consolidated Statement of Cash Flows........................ F-6
Notes to Consolidated Financial Statements.................. F-7
PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
Overview.................................................... F-30
Pro Forma Combined Consolidated Statement of Operations..... F-31
Notes to Pro Forma Combined Consolidated Financial
Information............................................... F-32
FIRSTFLOOR SOFTWARE, INC.
Report of Independent Auditors.............................. F-33
Balance Sheets.............................................. F-34
Statements of Operations.................................... F-35
Statements of Shareholders' Equity (Net Capital
Deficiency)............................................... F-36
Statements of Cash Flows.................................... F-37
Notes to Financial Statements............................... F-39
</TABLE>
F-1
<PAGE> 71
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.
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
July 13, 1999, except for Note 12,
which is as of September 30, 1999
F-2
<PAGE> 72
CALICO COMMERCE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
MARCH 31, EQUITY AT
------------------- JUNE 30, JUNE 30,
1998 1999 1999 1999
-------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 2,514 $ 15,441 $ 10,528
Accounts receivable, net.................... 2,952 7,443 7,358
Other current assets........................ 379 1,417 1,883
-------- -------- --------
Total current assets..................... 5,845 24,301 19,769
Property and equipment, net................... 1,847 2,532 3,387
Intangible and other assets, net.............. -- 4,535 4,067
-------- -------- --------
$ 7,692 $ 31,368 $ 27,223
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................ $ 1,197 $ 1,728 $ 2,183
Accrued liabilities......................... 1,813 5,448 5,729
Deferred revenue............................ 2,361 6,054 5,652
Current portion of notes payable............ 330 628 682
Current portion of capital lease
obligations.............................. 100 256 247
-------- -------- --------
Total current liabilities................ 5,801 14,114 14,493
Notes payable, non-current.................... 644 700 497
Capital lease obligations, non-current........ 170 177 125
Other liabilities............................. -- 622 539
-------- -------- --------
6,615 15,613 15,654
-------- -------- --------
Mandatorily Redeemable Convertible Preferred
Stock (Note 6).............................. 14,505 32,535 32,541 $ --
-------- -------- --------
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
11,493 (unaudited) shares issued and
outstanding; 150,000 shares authorized;
27,120 shares issued and outstanding, pro
forma (unaudited)........................ 9 11 11 27
Additional paid-in capital.................. 3,658 17,877 17,894 50,419
Notes receivable from stockholders.......... (712) (2,211) (2,211) (2,211)
Unearned compensation....................... (1,966) (2,779) (2,265) (2,265)
Accumulated deficit......................... (14,417) (29,678) (34,401) (34,401)
-------- -------- -------- --------
Total stockholders' equity (deficit)..... (13,428) (16,780) (20,972) $ 11,569
======== ======== ======== ========
$ 7,692 $ 31,368 $ 27,223
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 73
CALICO COMMERCE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
License.......................... $ 3,940 $ 6,965 $ 10,482 $ 2,932 $ 3,457
Services......................... 1,963 4,894 10,931 1,721 3,976
------- ------- -------- ------- --------
Total net revenue............. 5,903 11,859 21,413 4,653 7,433
------- ------- -------- ------- --------
Cost of net revenue:
License.......................... 178 265 1,179 101 137
Services......................... 2,122 3,115 7,272 1,367 2,660
------- ------- -------- ------- --------
Total cost of net revenue..... 2,300 3,380 8,451 1,468 2,797
------- ------- -------- ------- --------
Gross profit....................... 3,603 8,479 12,962 3,185 4,636
------- ------- -------- ------- --------
Operating expenses:
Sales and marketing.............. 5,950 7,593 14,138 2,758 4,558
Research and development......... 2,224 3,342 5,677 972 2,666
General and administrative....... 1,486 2,222 3,988 641 1,452
Stock compensation (Notes 8 and
9)............................ 864 780 2,007 424 514
Acquired in-process research and
development (Note 2).......... -- -- 1,840 -- --
Amortization of goodwill (Note
2)............................ -- -- 550 -- 240
------- ------- -------- ------- --------
Total operating expenses...... 10,524 13,937 28,200 4,795 9,430
------- ------- -------- ------- --------
Loss from operations............... (6,921) (5,458) (15,238) (1,610) (4,794)
Interest expense................... (40) (154) (314) (66) (50)
Interest income and other.......... 61 113 291 31 121
------- ------- -------- ------- --------
Net loss........................... $(6,900) $(5,499) $(15,261) $(1,645) $ (4,723)
======= ======= ======== ======= ========
Net loss per share:
Basic and diluted................ $ (2.12) $ (1.08) $ (2.27) $ (0.27) $ (0.59)
======= ======= ======== ======= ========
Weighted average shares.......... 3,248 5,079 6,710 6,040 7,961
======= ======= ======== ======= ========
Pro forma net loss per share:
Basic and diluted................ $ (0.74) $ (0.20)
======== ========
Weighted average shares.......... 20,689 23,588
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 74
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)................ 59 -- 17 -- -- -- 17
Repurchase of Common Stock
(unaudited)................ (2) -- -- -- -- -- --
Amortization of unearned
compensation (unaudited)... -- -- -- -- 514 -- 514
Net loss (unaudited)......... -- -- -- -- -- (4,723) (4,723)
------ ---- ------- ------- ------- -------- --------
Balance at June 30, 1999
(unaudited)................ 11,493 $ 11 $17,894 $(2,211) $(2,265) $(34,401) $(20,972)
====== ==== ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 75
CALICO COMMERCE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 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) $(1,645) $ (4,723)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts......................... 200 200 200 74 157
Provision for sales returns............................. 500 200 330 50 153
Depreciation, amortization and other.................... 350 664 2,641 249 869
Stock compensation and other............................ 899 780 2,189 424 514
Loss on disposal of assets.............................. -- -- 260 -- 36
Acquired in-process research and development............ -- -- 1,840 -- --
Changes in assets and liabilities, net of acquisition:
Accounts receivable................................... (1,214) (2,248) (4,904) (879) (225)
Other current assets.................................. (9) (103) (1,072) 46 (466)
Accounts payable...................................... 496 406 531 602 455
Accrued liabilities................................... 422 1,202 2,662 (363) 281
Deferred revenue...................................... 915 1,062 3,130 1,144 (402)
Other liabilities..................................... -- -- 91 -- (44)
------- ------- -------- ------- --------
Net cash used in operating activities............... (4,341) (3,336) (7,363) (298) (3,395)
------- ------- -------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (930) (1,403) (1,829) (271) (1,331)
------- ------- -------- ------- --------
Net cash used in investing activities............... (930) (1,403) (1,829) (271) (1,331)
------- ------- -------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock.................... 23 133 10,153 80 17
Common stock repurchases.................................. -- -- (502) -- --
Proceeds from repayments of stockholder loans............. -- 12 69 -- --
Net proceeds from issuance of preferred stock............. 4,769 4,952 12,217 -- 6
Proceeds from issuance of notes payable................... 702 443 763 345 --
Repayments of notes payable............................... (27) (144) (409) (82) (149)
Principal payments under capital lease obligations........ (55) (64) (172) (24) (61)
------- ------- -------- ------- --------
Net cash provided by financing activities........... 5,412 5,332 22,119 319 (187)
------- ------- -------- ------- --------
Net increase in cash and cash equivalents................... 141 593 12,927 (250) (4,913)
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 $ 2,264 $ 10,528
======= ======= ======== ======= ========
Supplemental cash flow disclosures:
Cash paid for interest.................................... $ 40 $ 154 $ 192 $ 51 $ 47
======= ======= ======== ======= ========
Non cash transactions:
Issuance of Common Stock for notes receivable............. $ 166 $ 574 $ 1,660 $ 1,143 $ --
======= ======= ======== ======= ========
Cancellation of notes receivable related to forfeited
unvested restricted Common Stock........................ $ -- $ 16 $ 92 $ -- $ --
======= ======= ======== ======= ========
Equipment acquired through capital lease obligations...... $ 287 $ -- $ 136 $ -- $ --
======= ======= ======== ======= ========
Issuance of Series B Mandatorily Redeemable Convertible
Preferred Stock warrants................................ $ 25 $ 53 $ -- $ -- $ --
======= ======= ======== ======= ========
</TABLE>
Acquired net assets associated with FirstFloor acquisition includes:
<TABLE>
<S> <C> <C> <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 accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 76
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 June 30, 1999, the
consolidated statements of operations and cash flows for the three months ended
June 30, 1999 and 1998 and the consolidated statements of stockholders' deficit
for the three months ended June 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-7
<PAGE> 77
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>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------ --------------
CUSTOMER 1997 1998 1999 1998 1999
-------- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A..................................... 22% --% --% --% --%
B..................................... 19 -- -- -- --
C..................................... 12 -- -- -- --
D..................................... -- 11 -- -- --
E..................................... -- -- 22 16 --
F..................................... -- -- 13 -- --
G..................................... -- -- -- 32 --
H..................................... -- -- -- -- 29
I..................................... -- -- -- -- 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 June 30, 1999
(unaudited) three customers represented 37%, 13% and 12%, respectively, of gross
accounts receivable.
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.
F-8
<PAGE> 78
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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".
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.
F-9
<PAGE> 79
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-10
<PAGE> 80
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-11
<PAGE> 81
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>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------- -----------------
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.................................. $(6,900) $(5,499) $(15,261) $(1,645) $(4,723)
======= ======= ======== ======= =======
Denominator:
Weighted average shares................... 5,755 8,136 10,327 10,068 10,416
Weighted average unvested shares of Common
Stock subject to repurchase............ (2,507) (3,057) (3,617) (4,028) (2,455)
------- ------- -------- ------- -------
Denominator for basic and diluted
calculation............................ 3,248 5,079 6,710 6,040 7,961
======= ======= ======== ======= =======
Net loss per share:
Basic and diluted......................... $ (2.12) $ (1.08) $ (2.27) $ (0.27) $ (0.59)
======= ======= ======== ======= =======
</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>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 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 -- 1,256
Series E Preferred Stock................. -- -- 1,530 -- 2,688
Preferred Stock warrants................. 49 124 133 133 133
Preferred Stock options.................. -- -- 24 -- 32
Unvested shares of Common Stock subject
to repurchase......................... 2,507 3,057 3,617 4,028 2,455
Common Stock options..................... 2,037 1,646 2,245 1,762 4,021
------ ------ ------ ------ ------
13,533 15,868 19,998 17,606 22,268
====== ====== ====== ====== ======
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended March 31, 1999 and the three
months ended June 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 3,027, weighted average repurchasable shares
at March 31, 1999 and June 30, 1999, respectively) and Series E
F-12
<PAGE> 82
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 15,627,000 increase for the three
months ended June 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.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of the initial public offering of the Company's
Common Stock, the outstanding shares of Series A, Series B, Series C, Series D
and Series E Mandatorily Redeemable Convertible Preferred Stock will
automatically convert into 5,999,998, 3,600,000, 2,083,331, 1,256,019 and
2,687,580 shares, respectively, of Common Stock. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro forma
consolidated balance sheet at June 30, 1999.
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.
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,
F-13
<PAGE> 83
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-14
<PAGE> 84
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-15
<PAGE> 85
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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>
F-16
<PAGE> 86
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable................................... $2,518 $ 8,561
Unbilled receivables.................................. 1,714 571
Allowance for doubtful accounts....................... (580) (659)
Allowance for sales returns........................... (700) (1,030)
------ -------
$2,952 $ 7,443
====== =======
</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, respectively.
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment and software....................... $2,534 $ 3,878
Furniture, fixtures and leasehold improvements........ 291 1,223
------ -------
2,825 5,101
Less: Accumulated depreciation and amortization....... (978) (2,569)
------ -------
$1,847 $ 2,532
====== =======
</TABLE>
Property and equipment includes $395,000 and $700,000 of computer and office
equipment under capital leases at March 31, 1998 and 1999, respectively.
Accumulated depreciation of assets under capital leases totaled $209,000 and
$360,000 at March 31, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1998 1999
------ ---------
<S> <C> <C>
INTANGIBLE AND OTHER ASSETS, NET:
Existing and core technology........................ $ -- $ 1,547
Goodwill............................................ -- 4,329
------ -------
-- 5,876
Less: Accumulated amortization...................... -- (1,341)
------ -------
$ -- $ 4,535
====== =======
ACCRUED LIABILITIES:
Accrued compensation and benefits................... $ 379 $ 1,149
Accrued commissions................................. 540 1,573
Other............................................... 894 2,726
------ -------
$1,813 $ 5,448
====== =======
</TABLE>
F-17
<PAGE> 87
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-18
<PAGE> 88
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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>
F-19
<PAGE> 89
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-20
<PAGE> 90
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-21
<PAGE> 91
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
instrument as additional interest expense. The following table summarizes the
outstanding warrants:
<TABLE>
<CAPTION>
DATE OF EXERCISE ESTIMATED FISCAL YEAR
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 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>
F-22
<PAGE> 92
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-23
<PAGE> 93
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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)................... (1,963) 1,963 9.50
Repurchase of restricted Common Stock
(unaudited)................................. 2 -- 0.12
Options exercised (unaudited)................. -- (59) 0.31
Options canceled (unaudited).................. 107 (107) 3.13
-------- --------
Balance at June 30, 1999 (unaudited).......... 2,848 5,294 6.41
======== ========
</TABLE>
F-24
<PAGE> 94
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 June 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.......................... 351 7.7 $0.35 189 $0.26
1.00 - 2.63......................... 752 8.6 2.31 105 2.02
2.67 - 3.17......................... 660 9.2 3.02 20 2.91
4.50 - 9.50......................... 3,531 9.8 8.52 71 5.32
----- ---
5,294 9.4 6.41 385 1.80
===== ===
</TABLE>
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>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 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% 5.83%
Expected life (in years)...................... 4 4 4 4 4
Weighted average fair value of options
granted.................................... $0.03 $0.11 $1.22 $0.50 $2.89
</TABLE>
F-25
<PAGE> 95
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 three months ended
June 30, 1998 and 1999, respectively, (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------ ----------------------
1997 1998 1999 1998 1999
------- ------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss as reported............. $(6,900) $(5,499) $(15,261) $(1,645) $(4,723)
Pro forma net loss............... (6,914) (5,546) (16,207) (1,714) (5,511)
Net loss per share as reported... (2.12) (1.08) (2.27) (0.27) (0.59)
Pro forma net loss per share..... (2.12) (1.08) (2.41) (0.29) (0.69)
</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.
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
F-26
<PAGE> 96
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-27
<PAGE> 97
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
YEAR ENDED MARCH 31,
----------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
United States.......................................... $5,903 $11,827 $20,108
Other foreign countries................................ -- 32 1,305
------ ------- -------
$5,903 $11,859 $21,413
====== ======= =======
</TABLE>
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
F-28
<PAGE> 98
CALICO COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-29
<PAGE> 99
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-30
<PAGE> 100
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-31
<PAGE> 101
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-32
<PAGE> 102
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-33
<PAGE> 103
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-34
<PAGE> 104
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-35
<PAGE> 105
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-36
<PAGE> 106
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
----------- ----------- ----------- -----------
</TABLE>
F-37
<PAGE> 107
FIRSTFLOOR SOFTWARE, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- --------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
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-38
<PAGE> 108
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-39
<PAGE> 109
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CUSTOMER CONCENTRATION (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-40
<PAGE> 110
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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.
F-41
<PAGE> 111
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Amounts received in advance of satisfying revenue recognition criteria are
classified as deferred revenue in the accompanying balance sheets.
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-42
<PAGE> 112
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. COMMITMENTS (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>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
YEARS ENDING DECEMBER 31,
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-43
<PAGE> 113
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
CONVERTIBLE PREFERRED STOCK (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-44
<PAGE> 114
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
1993 STOCK OPTION/STOCK ISSUANCE PLAN (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>
F-45
<PAGE> 115
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
1993 STOCK OPTION/STOCK ISSUANCE PLAN (CONTINUED)
The weighted average fair value of options granted in 1996 and 1997 was $0.04
and $0.05, respectively.
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
F-46
<PAGE> 116
FIRSTFLOOR SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED)
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 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-47
<PAGE> 117
UNDERWRITING
Calico and the underwriters for the offering named below have entered into
an underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Hambrecht & Quist LLC are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ....................................... 1,285,600
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................................. 1,285,600
Hambrecht & Quist LLC....................................... 642,800
Banc of America Securities LLC.............................. 78,000
BancBoston Robertson Stephens Inc........................... 78,000
Blaylock & Partners, L.P.................................... 40,000
Credit Suisse First Boston Corporation...................... 78,000
Deutsche Bank Securities Inc................................ 78,000
First Albany Corporation.................................... 40,000
First Union Capital Markets Corp............................ 40,000
Edward D. Jones & Co., L.P.................................. 78,000
SG Cowen Securities Corporation............................. 78,000
SoundView Technology Group, Inc............................. 40,000
U.S. Bancorp Piper Jaffray Inc.............................. 40,000
Warburg Dillon Read LLC..................................... 78,000
Wit Capital Corporation..................................... 40,000
---------
Total............................................. 4,000,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in
the table above, the underwriters have an option to purchase up to an additional
600,000 shares from Calico to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Calico. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Calico
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ 0.98 $ 0.98
Total................ $3,920,000 $4,508,000
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $0.54 per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $0.10 per share from the initial
public offering price. If all the shares are not sold at the initial offering
price, the representatives may change the offering price and the other selling
terms.
Calico has agreed with the underwriters not to dispose of or hedge any of
its common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus,
U-1
<PAGE> 118
except with the prior written consent of the
representatives. This agreement does not apply to any existing employee benefit
plans. See "Shares Eligible for Future Sale" for a discussion of restrictions on
transfer of Calico's shares.
Prior to this offering, there has been no public market for the shares.
The initial public offering price has been negotiated between Calico and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Calico's historical performance, estimates of Calico's
business potential and earnings prospects, an assessment of Calico's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "CLIC".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
At our request, the underwriters have reserved up to 350,000 shares of
common stock for sale, at the initial public offering price, to directors,
officers, employees and friends through a directed share program. The number of
shares of common stock available for sale to the general public in the public
offering will be reduced to the extent these persons purchase these reserved
shares.
Calico estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $1.9
million.
Calico has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
In September 1998, an entity affiliated with Merrill Lynch, Pierce, Fenner
& Smith Incorporated purchased 219,394 shares of Calico's preferred stock at a
purchase price of $4.558 per share, for an aggregate amount of approximately
$1.0 million. These shares will convert into 219,394 shares of common stock upon
the completion of this offering.
In September 1998, entities and persons affiliated with Hambrecht & Quist
LLC purchased an aggregate of 219,394 shares of Calico's preferred stock at a
purchase price of $4.558 per share, for an aggregate amount of approximately
$1.0 million. These shares will convert into 219,394 shares of common stock upon
the completion of this offering.
Concurrently with the sale of shares in this offering, Calico will sell
directly to Andersen Consulting $4.0 million worth of common stock in a private
placement, at a price of $13.02 per share, for a total of 307,200 shares of
common stock. This price is less than the price paid by other investors in this
offering. The shares to be sold to
U-2
<PAGE> 119
Andersen Consulting are not part of this underwritten public offering. We have
agreed to appoint a representative of Andersen Consulting to our board of
directors upon the closing of the sale to Andersen Consulting. We have also
recently entered into a joint marketing agreement with Andersen Consulting.
Under this alliance Andersen Consulting acquires rights to market integration
services related to our software, and we have agreed to promote Andersen
Consulting as the preferred integrator of our software. We have also agreed to
engage Andersen Consulting to provide a minimum of $1.0 million of consulting
services over the next 18 months.
In addition, concurrently with the sale of shares in this offering, Calico
will sell directly to Dell U.S.A., L.P., a Texas limited partnership, $20.0
million of common stock in a private placement, at a price of $13.02 per share,
for a total of 1,536,000 shares of common stock. This price is less than the
price paid by investors in this offering. The shares to be sold to Dell are not
part of this underwritten public offering.
U-3
<PAGE> 120
[Art Work Page 1]
Calico enables companies to sell complex products and services over the
Web. Calico's customers include companies that have adopted aggressive
electronic business strategies in a wide range of industries and
markets--telecommunications, financial services, retail, computer hardware, and
manufacturing.
[schematic depicting modes of communication, screen shot of
Calicocommerce.com]
[Calico logo]
[Art Work Page 2]
Calico provides electronic commerce software applications that enable
companies to interactively engage their customers to achieve competitive
advantage.
[Calico logo]
[schematic depicting Customer-focused solutions for Electronic Business]
- Calico eSales InfoGuide delivers targeted marketing information directly
to customers to ADVISE them during the online buying process
- Calico eSales Configurator matches customer requirements with product
attributes to CUSTOMIZE their product selection to meet their needs
[Art Work Page 3]
[continued schematic depicting Customer-focused Solutions for Electronic
Business]
- Calico eSales Quote provides customized sales quotations to customers to
evaluate PRICE and assist in the PURCHASE process
- Calico eSales Loyalty Builder is designed to PERSONALIZE the guided
selling experience and enable companies to build and RETAIN customer
relationships
[Inside Back Cover Art Work]
Calico--Customer-Focused Solutions for Electronic Business
Enables Electronic Business Strategies--
Calico provides large enterprises with electronic commerce software
applications that enable reduced time-to-market for new products and improved
sales effectiveness and order accuracy, in order to achieve strategic and
competitive advantage and enhance return on investment.
Calico eSales Suite: An Internet-Based Guided Selling Solution
Customer Driven--
Companies can create Web sites that guide customers through the entire
buying process, delivering content that is personalized and customized to
generate repeat business.
Integrated
Calico combines advanced configuration, information delivery, content
management, and personalization functionality in an integrated suite of
electronic commerce software.
Deployable Across Multiple Modes of Distribution
Calico eSales Suite connects distributors, resellers, telemarketers, and
direct sales forces to end users, and facilitates connections with existing
computer applications.
[schematic depicting different modes of computer connection, with Calico
logo and address]
For the diagram on page 42:
[Diagram of Calico eSales Interaction with a graphical depiction of the
connection and integration between users, customer web sites and web servers,
the Calico eSales Suite, Calico Enterprise Connectors and other Java application
programming interfaces and the existing order entry and other computer systems]
<PAGE> 121
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 6
Special Note Regarding Forward-Looking
Statements............................. 18
Use of Proceeds.......................... 18
Dividend Policy.......................... 18
Capitalization........................... 19
Dilution................................. 20
Selected Consolidated Financial Data..... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 22
Business................................. 37
Management............................... 51
Transactions with Related Parties and
Insiders............................... 61
Principal Stockholders................... 63
Description of Capital Stock............. 65
Shares Eligible for Future Sale.......... 68
Legal Matters............................ 69
Experts.................................. 69
Where You Can Find More Information...... 70
Index to Financial Statements............ F-1
Underwriting............................. U-1
</TABLE>
-------------------------
Through and including October 31, 1999, (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
4,000,000 Shares
CALICO COMMERCE, INC.
Common Stock
-------------------------
[CALICO LOGO]
-------------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
HAMBRECHT & QUIST
Representatives of the Underwriters
- ----------------------------------------------------------
- ----------------------------------------------------------
