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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-76955
PROSPECTUS
- ----------
3,900,000 SHARES
(NFRONT LOGO)
COMMON STOCK
This is an initial public offering of common stock by nFront, Inc. Of the
3,900,000 shares of common stock being sold in this offering, 3,500,000 shares
are being sold by nFront and 400,000 shares are being sold by selling
shareholders. nFront will not receive any of the proceeds from the sale of
shares by the selling shareholders.
-------------------------
The shares of common stock have been approved for quotation on the Nasdaq
National Market under the symbol NFNT.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Initial public offering price............................ $10.00 $39,000,000
Underwriting discounts and commissions................... $ 0.70 $ 2,730,000
Proceeds to nFront, before expenses...................... $ 9.30 $32,550,000
Proceeds to the selling shareholders..................... $ 9.30 $ 3,720,000
</TABLE>
The selling shareholders have granted the underwriters an option for a
period of 30 days to purchase up to 585,000 additional shares of common stock.
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HAMBRECHT & QUIST
J.C. BRADFORD&CO.
RAYMOND JAMES & ASSOCIATES, INC.
SOUNDVIEW TECHNOLOGY GROUP
JUNE 29, 1999
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[ARTWORK DEPICTED IN PROSPECTUS]
1. Inside front page includes the following text:
"Defining the Future of Internet Banking"
"nFront is a provider of Internet banking solutions
to financial institutions."
"nFront's Internet banking services enable banks to provide consumers
and businesses with an "Internet branch" for banking from the
convenience of their own homes and offices, 24 hours a day, 7
days a week."
"nFront ... where banking meets the world."
[nFront logo]
2. Inside front page gate-fold portrays the following:
Title bar at the top of the page states: "Defining the Future..."
Followed by the nFront logo.
Upper left side of the page: Text stating "Defining the Moment" over
the following text: "nFront enables banks to offer an "Internet bank
branch" to customers. Our services include custom web site design and
hosting, online bill pay services, cash management for businesses and
account origination services."
At the bottom left side of the page under the heading "Internet Banking
Powered by nFront" is the text "nFront serves as a single-source
solution for enabling Internet banking transactions."
Below this text is a graphic reflecting a box labeled "Consumer" from
which the following four items emanate: "Account Origination," "Online
Banking," "Bill Payment" and "Brokerage Research." Lines for the four
items move through the nFront logo to a graphic representing a
financial institution.
In the upper portion of the center of the page is
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a screen shot of a web site developed by nFront for one of its client
banks. Under the screen shot is the following text: "Custom Web Site
Design strengthens bank branding, while on line banking offers improved
services through an innovative delivery channel."
To the right of the screen shot are three other screen shots
accompanied by the following text: "Electronic Bill Payment allows
customers to initiate one-time and recurring payments to user defined
payees, with the ability to generate reports based on payment
criteria." "Cash Management provides small business owners with
specialized services needed to manage their commercial accounts, from
disbursing funds to initiating electronic tax payments." "Account
Origination allows existing and prospective customers to apply for a
range of custom bank products, including deposit and savings accounts,
loans, and lines of credit."
In the bottom center portion of the page, the following text appears:
"nFront is building a nationwide network of banks that offer Internet
banking services - currently more than 120 banks coast to coast." Under
this text appears a graphic of a map of the United States with the
nFront logo superimposed over Atlanta, Georgia and colored lines
arching to various cities throughout the United States.
On the right side of the page at the top appears the text: "Defining
the Destination." Below this text is a graphic representing a circle
with the nFront logo superimposed in the middle and three circles
around the periphery identified as "Financial Institution," "Consumer"
and "Business." Below the graphic appears the following text: "The
Future of eCommerce." Under that text is the following:
"The nFront solution enables our client banks to serve as financial
destinations for their customers, positioning the banks, we believe, to
play a critical role in the rapidly developing world of electronic
commerce."
3. Inside back page portrays the following:
Graphics portray the back of a person seated in front of a computer
screen with graphics to the left and right of screen shots from web
sites developed by nFront for its client banks.
Title bar at the top of the page states: "Where Banking Meets the
World."
Below the title bar are the words: "BANKING.COM"
Centered at the bottom of the page is the nFront logo.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 25
Selected Financial Data..................................... 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Business.................................................... 41
Management.................................................. 56
Certain Transactions........................................ 63
Principal and Selling Shareholders.......................... 64
Description of Capital Stock................................ 66
Shares Eligible for Future Sale............................. 69
Underwriting................................................ 71
Legal Matters............................................... 73
Experts..................................................... 74
Additional Information...................................... 74
Index to Financial Statements............................... F-1
</TABLE>
nFront, nHome and nBusiness are service marks of nFront. We have applied
for federal registration of "nFront," "nHome" and "nBusiness." This prospectus
also refers to other trademarks and trade names of nFront and other companies.
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements,
before making an investment decision.
NFRONT
nFront provides a comprehensive, outsourced solution that enables small to
mid-sized banks to offer their retail and commercial customers banking and
financial services through the Internet. A comprehensive outsourced solution
means that we handle all aspects of our client banks' Internet banking
operations, including the design, implementation and management of their
"Internet branches." Our solution enables our client banks to establish Internet
branches designed to increase customer retention, acquire new customers,
decrease costs, increase fee income and expand the financial products and
services offered to their customers. By creating Internet branches for our
client banks, we enable banks to become the destination on the Web for bank
customers who are increasingly using the Web for their financial management
needs.
Our nHome product provides Internet banking and financial services to a
bank's retail customers, and our nBusiness product provides Internet banking and
financial services to a bank's commercial customers. Through our outsourcing
model, our client banks purchase our products as services, paying us on a
monthly basis depending on the level of usage by their customers. Our Internet
banking data center provides the necessary communications, transaction
processing and data storage services to operate the nFront system. Our
outsourced solution tends to have significantly lower up front costs, lower
overhead for the bank, shorter lead times on initial implementation and
upgrades, better access to qualified personnel and higher quality service and
support than the bank would experience on an in-house basis.
We market our solution to small to mid-sized banks in the United States,
typically with assets of less than $10 billion, through our direct sales force
and through our strategic marketing alliances with other providers of banking
services. We currently generate revenue by charging client banks an
implementation fee for designing their Internet branch web sites and integrating
our system with the banks' core computer systems. We also receive recurring
monthly fees based primarily on the number of bank customers using our products,
as well as other transaction-based fees. As of March 31, 1999, we had 122 client
banks, of which 83 had completed implementation and were operating an Internet
branch. We have more than tripled our base of client banks over the past nine
months, from 40 as of June 30, 1998 to 122 as of March 31, 1999.
nFront was incorporated in Georgia in 1996. Our principal executive office
is located at 520 Guthridge Court, NW, Suite 100, Norcross, Georgia 30092. Our
telephone number is (770) 209-4460. Our web sites are located at www.banking.com
and www.nfront.com. Information contained on our web sites does not constitute a
part of this prospectus.
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THE OFFERING
<TABLE>
<S> <C>
Common stock offered by nFront..................... 3,500,000 shares
Common stock offered by selling shareholders....... 400,000 shares
Common stock to be outstanding after the
offering......................................... 14,196,152 shares
Use of proceeds.................................... Repayment of debt; expansion of our
business, including sales and
marketing expenditures, product
development and potential future
acquisitions; and for general
corporate purposes, including working
capital.
Nasdaq National Market
symbol........................................... NFNT
</TABLE>
Unless otherwise noted, all information in this prospectus, including share
and per share information, gives effect to a 50-for-1 common stock split in
January 1998, a 3-for-1 common stock split in September 1998, and a 2.65-for-1
common stock split in May 1999; assumes the conversion of all outstanding shares
of redeemable convertible preferred stock into 2,034,285 shares of common stock
immediately prior to completion of this offering; and assumes no exercise of the
underwriters' over-allotment option.
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SUMMARY FINANCIAL DATA
This table summarizes our financial data for the periods indicated. The
unaudited pro forma net loss per share reflects the conversion of our redeemable
convertible preferred stock into common stock. Our balance sheet data is
presented:
- on an actual basis;
- on an unaudited pro forma basis to reflect conversion of our redeemable
convertible preferred stock into common stock; and
- on an unaudited pro forma as adjusted basis to reflect conversion of our
redeemable convertible preferred stock into common stock and our receipt
of the net proceeds from the sale of 3,500,000 shares of common stock
offered by nFront in this offering.
<TABLE>
<CAPTION>
PERIOD NINE MONTHS
FROM JUNE 17, FISCAL ENDED MARCH 31,
1996 (INCEPTION) TO YEAR ENDED -------------------------
JUNE 30, 1997 JUNE 30, 1998 1998 1999
------------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Implementation fees............ $ 358,245 $ 722,859 $ 581,375 $ 1,728,179
Monthly service fees........... 34,263 185,283 102,929 892,816
Other.......................... 458,643 174,287 149,406 214,095
---------- ---------- ---------- -----------
Total revenues............ 851,151 1,082,429 833,710 2,835,090
Operating income (loss).......... 70,993 (573,529) 9,105 (1,853,508)
Net income (loss)................ 48,740 (522,996) 9,107 (1,808,147)
Accretion on redeemable
convertible preferred stock.... -- (35,733) -- (204,661)
---------- ---------- ---------- -----------
Net income (loss) attributable to
common stock................... $ 48,740 $ (558,729) $ 9,107 $(2,012,808)
========== ========== ========== ===========
Net income (loss) per common
share -- basic and diluted..... $ 0.01 $ (0.07) $ 0.00 $ (0.24)
Weighted average shares
outstanding -- basic and
diluted........................ 5,079,167 8,033,223 8,000,090 8,498,844
========== ========== ========== ===========
Unaudited pro forma net loss per
share -- basic and diluted..... $ (0.07) $ (0.19)
========== ===========
Unaudited pro forma weighted
average shares outstanding --
basic and diluted.............. 8,300,746 10,533,129
========== ===========
OPERATING DATA (AT END OF PERIOD):
Total client banks under
contract....................... 6 40 24 122
Total client banks implemented... 2 20 14 83
Total customers at client banks
using our solution............. * 5,220 3,149 19,648
</TABLE>
* Information not available because prior to fiscal year ended June 30, 1998,
nFront did not bill client banks on the basis of the total customers at client
banks using the nFront solution.
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<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 1,530,458 $1,530,458 $32,416,510
Working capital................................... 561,185 561,185 31,749,030
Total assets...................................... 3,802,645 3,802,645 34,688,697
Long-term debt, net of current portion............ 427,540 427,540 --
Redeemable convertible preferred stock............ 2,580,222 -- --
Total stockholders' equity (deficit).............. (1,572,199) 1,008,023 32,623,408
</TABLE>
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RISK FACTORS
You should consider carefully the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.
WE HAVE A LIMITED OPERATING HISTORY AND WE CANNOT GUARANTEE WE WILL BECOME
PROFITABLE
We were incorporated in June 1996. Because we have a limited operating
history, an investor in our common stock must consider the risks and
difficulties frequently encountered by early stage companies in new and rapidly
evolving markets, including the Internet banking and electronic commerce
markets. These risks include our ability to:
- successfully expand our sales and marketing efforts;
- maintain our current, and develop new, strategic marketing relationships;
- promote acceptance of our Internet banking services by customers of our
client banks;
- respond effectively to competitive pressures;
- continue to develop and upgrade our technology; and
- attract, retain and motivate qualified personnel.
We cannot guarantee that we will succeed in achieving these goals, and
there can be no assurance we will ever achieve or sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our limited operating history.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE LOSSES IN THE FUTURE
We incurred net losses of approximately $532,000 for the quarter ended June
30, 1998; $394,000 for the quarter ended September 30, 1998; $249,000 for the
quarter ended December 31, 1998; and $1.2 million for the quarter ended March
31, 1999. At March 31, 1999, we had an accumulated deficit of approximately $2.3
million. We expect to incur significant operating losses on a quarterly basis in
the future.
We will need to generate significant revenues to achieve and maintain
profitability, and we cannot assure you that we will be able to do so. Even if
we do achieve profitability, we cannot assure you that we can sustain or
increase profitability on a quarterly or an annual basis in the future. If our
revenues grow more slowly than we anticipate or if our operating expenses exceed
our expectations, our financial performance will likely be adversely affected.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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OUR FINANCIAL RESULTS COULD FLUCTUATE AND MAY ADVERSELY AFFECT OUR STOCK PRICE
Our financial results have varied on a quarterly basis and could fluctuate
substantially in the future, adversely affecting our stock price. We believe
that quarter-to-quarter comparisons of our financial results are not necessarily
meaningful, and you should not rely on them as an indication of future
performance. These fluctuations may be caused by several factors, many of which
are beyond our control, including pricing competition and pricing pressures for
our products and services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
IF OUR REVENUES DO NOT MEET OUR EXPECTATIONS, OUR FINANCIAL RESULTS WILL SUFFER
BECAUSE OUR EXPENSES WILL INCREASE FOR THE REMAINDER OF THE CALENDAR YEAR
We plan to significantly increase our sales and marketing, research and
development and general and administrative expenses throughout the remainder of
calendar year 1999. Our expenses are partially based on our expectations
regarding future revenues, and are largely fixed in nature, particularly in the
short term. As a result, if our revenues in a period do not meet our
expectations, our financial results will likely suffer.
OUR SUCCESS DEPENDS UPON THE DEMAND FOR OUR PRODUCTS AND SERVICES IN THE BANKING
INDUSTRY
We expect to derive substantially all of our revenues from products and
services provided to banks, the banks' customers and other participants in the
financial services industry. Accordingly, our future success depends
significantly upon the continued demand for our products and services within
this industry. We believe that important factors in our growth will be the
willingness of the banking industry to pursue technological innovation and
customer demand and acceptance of this innovation. If the rate of adoption by
banks of products like ours were too slow, we could experience reduced demand
for our products and services. In addition, changes in economic conditions and
unforeseen events, including recession, inflation or other adverse occurrences,
may result in a significant decline in the utilization of bank services or
demand for our products and services. Any event that results in decreased
consumer or corporate use of bank services, or increased pressures on banks
toward the in-house development of Internet banking systems, could have a
material adverse effect on our business, financial condition and results of
operations.
THE EXPANDED USE OF THE INTERNET FOR PROVIDING BANKING AND OTHER FINANCIAL
PRODUCTS AND SERVICES IS UNCERTAIN AND MAY AFFECT OUR CUSTOMER BASE AND REVENUE
GROWTH
The market for Internet-based financial services only recently has begun to
develop, and the market demand for our products and services is uncertain.
Critical issues concerning commercial use of the Internet for financial
services, including security, reliability, ease and cost of access and quality
of service, are evolving and may impact the growth of Internet use. We cannot
predict the size of the market for Internet-based financial services or the rate
at which that market will grow. If the market for Internet-based financial
services fails to grow, grows more slowly than anticipated, or becomes saturated
with competitors, our business, financial condition and results of operations
likely would be materially adversely affected. Furthermore,
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telephone and personal computer banking systems have been marketed in the past
and have not enjoyed widespread consumer adoption. Accordingly, there can be no
assurance that there will be widespread consumer acceptance of advanced Internet
banking systems, including ours.
We rely on the Internet to provide access to our banking services. Our
business would be adversely affected if Internet use does not continue to grow
or grows more slowly than expected. Internet usage may be inhibited for a number
of reasons, including inadequate network infrastructure, security concerns,
inconsistent quality of service, and unavailability of cost effective,
high-speed access to the Internet. The occurrence of any of these factors could
inhibit the acceptance and adoption of Internet banking.
DECLINE IN DEMAND FOR NHOME OR NBUSINESS COULD AFFECT OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
To date, more than 91% of our revenue has been attributable to fees
generated from our nHome product. Fees generated from the sale of nHome and
related services and from the sale of our nBusiness product, which became
generally available in March 1999, are expected to account for most of our total
revenue for the foreseeable future. As a result, a decline in demand for, or
failure to achieve broad market acceptance of, nHome or nBusiness would have a
material adverse effect on our business, financial condition and results of
operations. There can be no assurance that we will continue to be successful in
marketing nHome, nBusiness or any new or enhanced products and services.
WE MAY EXPERIENCE DELAYS IN DEVELOPING ENHANCEMENTS OF EXISTING PRODUCTS AND
DEVELOPING NEW PRODUCTS; THESE DELAYS MAY AFFECT OUR COMPETITIVENESS
Our future success will depend on our ability to develop, test, sell and
support enhancements of our nHome and nBusiness products and new products on a
timely basis in response to changing bank and bank customer needs, competition,
technological developments and emerging industry standards. The electronic
banking and financial services industry is characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
product and service introductions. These developments could limit the
marketability of our products and services and could render our products and
services obsolete. There can be no assurance that we can successfully identify
new product opportunities and develop and bring new products and services to
market in a timely manner given the rapid evolution of the electronic banking
industry. Our failure to successfully adapt our products and services to this
rapidly changing market could adversely affect our business.
OUR SALES CYCLE VARIES AND MAY CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE
The purchase decision relating to our products is typically made by senior
management of our prospective client banks. Due in part to the nature of our
applications and the associated hardware, software and consulting expenditures,
potential client banks tend to be cautious in making purchase decisions. The
purchase of our products involves a commitment of resources and recurring
expense and the attendant delays frequently associated with approving capital
expenditures
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and reviewing new technologies that affect key operations. Our client banks'
decision-making processes require us to provide a significant level of education
to prospective customers regarding the use and benefits of our products. We may
expend substantial funds and management resources during the sales cycle and
fail to make the sale. Accordingly, our results of operations for a particular
period may be adversely affected if the sales forecasted for a particular period
are delayed or do not otherwise occur.
The time between the date of initial contact with a potential client bank
and the execution of a contract with the bank typically ranges from six weeks
for smaller agreements to three months or longer for larger agreements. The
sales cycle is subject to significant risks and delays over which we have little
or no control, including:
- the banks' budgetary constraints;
- the banks' internal acceptance reviews;
- the success and continued support through the sales efforts of companies
with which we have strategic alliances; and
- the possibility of cancellation or delay of projects by banks.
IMPLEMENTATION OF OUR SOLUTION AT NEW CLIENT BANKS MAY TAKE LONGER THAN WE
ANTICIPATE AND COULD ADVERSELY AFFECT OUR OPERATING RESULTS
During the course of an initial bank implementation, we must integrate our
Internet banking software with the bank's core banking software. This involves
installation of an interface to permit communication between our products and
the banks' core banking software. While we have managed integration with over 28
different core banking systems, we may, from time to time, experience some
delays in the integration process, particularly if we do not already have an
established interface for that core banking software. Our implementation period
typically ranges from 35 to 170 days and currently averages approximately three
months. With systems for which we do not have an available interface, we must
develop customized software programs that enable our Internet banking software
and the bank's core banking software to communicate. A longer integration period
will increase the cost of the implementation, delay the recognition of revenues
associated with the implementation and result in a loss of service-related
customer usage fees. Changes to existing core banking software systems and
custom implementations for larger client banks could also cause integration
delays in future implementations that could have a material adverse effect on
our operating results for subsequent periods.
WE RELY ON OUR STRATEGIC MARKETING ALLIANCES TO GENERATE CUSTOMERS AND REVENUE
We expect that revenues generated from the sale of our products and
services based on leads generated through our strategic marketing alliances will
continue to account for a significant portion of our revenues for the
foreseeable future. In particular, we expect that a limited number of our
strategic marketing relationships, such as those with BISYS and BancTec, which
are core bank processing service providers, will account for a substantial
portion of our client bank leads and, therefore, revenues over time. Client
banks sold and billed through the BISYS
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strategic marketing alliance represented 26% of our revenue for the nine months
ended March 31, 1999. Our agreement with BancTec is relatively new and has not
yet generated material revenues. Our strategic marketing agreements are
typically five year agreements pursuant to which the strategic alliance
companies have agreed to use commercially reasonable efforts to market the
nFront products and services and not to market any other Internet banking
product to their customers. We pay each company with which we have a strategic
marketing alliance a commission, typically between 10% and 40%, based on the
revenues generated by our client banks that are also clients of the companies
with which we have strategic marketing alliances.
Our strategic marketing alliances are in an early stage of development. If
we lose one or more of our major strategic marketing relationships, we may be
unable in a timely manner, or at all, to replace the strategic marketing
relationships with other relationships that have comparable customer bases and
user demographics.
OUR BUSINESS COULD SUFFER IF CLIENT BANKS TERMINATE THEIR CONTRACTS WITH US AS A
RESULT OF ACQUISITIONS OF THE BANKS OR FOR OTHER REASONS
Although we have included financial penalties in most of our contracts with
our client banks for early termination without cause, these financial penalties
would be insufficient to replace the monthly service fee revenues that we would
receive if the bank had continued as a customer. As a result of the mergers and
acquisitions occurring in the banking industry today, there is a potential risk
of some of our existing client banks terminating their agreements with us. An
existing client bank may be acquired by or merged with another bank that
utilizes a different Internet banking system or does not desire to continue the
relationship with us for some other reason, which could result in the new entity
terminating the relationship with us. Many of the larger money center banks that
are involved in consolidating the banking industry do not use nFront's
solutions. Our business, financial condition and results of operations could
suffer if client banks terminate their relationships with us.
A SIGNIFICANT PORTION OF OUR RECURRING REVENUE IS BASED ON A SMALL NUMBER OF
CLIENT BANKS, AND THE LOSS OF A NUMBER OF THESE CLIENT BANKS COULD ADVERSELY
AFFECT OUR BUSINESS
We have, to date, depended on a limited number of client banks for a
significant part of our recurring revenues. For the nine month period ended
March 31, 1999, BancorpSouth accounted for 27% of monthly service fee revenues,
and our five largest client banks accounted for 53% of our monthly service fee
revenues. The loss of a number of our client banks may adversely affect our
business, financial condition and results of operations.
We anticipate that our results of operations in the near future will
continue to depend to a significant extent upon revenues from a small number of
client banks. In addition, we anticipate that these client banks will continue
to vary over time so that the achievement of our long-term goals will require us
to obtain additional client banks on an ongoing basis. Our failure to enter into
a sufficient number of contracts during a particular period could have a
material adverse effect on our business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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WE ARE CURRENTLY EXPERIENCING A PERIOD OF SIGNIFICANT GROWTH THAT IS PLACING A
STRAIN ON OUR RESOURCES
We have experienced significant growth in our operations since the fiscal
year ended June 30, 1998 and anticipate that additional expansion may be
required in order to continue our growth. Any expansion of our business would
place additional demands on our management, operational capacity and financial
resources. Our failure to manage growth effectively could have a material
adverse effect on our business, financial condition and results of operations.
We anticipate that we will need to recruit qualified personnel in all areas of
our operations, including management, sales, marketing, implementation and
software development, to effectively manage and control additional growth. There
can be no assurance that we will be effective in attracting and retaining
additional qualified personnel, expanding our operational capacity or otherwise
managing growth.
We have increased our number of employees from 30 at June 30, 1998 to 71 at
March 31, 1999. This expansion has placed, and is expected to continue to place,
a significant strain on our management, operational and financial resources.
Since June 1998, we have added a number of key managerial, technical and
operations personnel, including our President and Chief Operating Officer, Chief
Financial Officer, Senior Vice President of Sales and Vice President of
Marketing, and we expect to add additional key personnel in the near future.
Since December 1, 1998, we have added 12 new sales representatives, bringing the
total to 14 at March 31, 1999.
To manage the expected growth of our operations and personnel, we must
continue improving or replacing existing operational, accounting and information
systems, procedures and controls. Further, we must manage effectively our
marketing relationships as well as our relationships with Internet content
providers, affiliates and other third parties necessary to our business.
OUR BUSINESS IS DEPENDENT ON OUR CHIEF EXECUTIVE OFFICER AND OTHER KEY EXECUTIVE
PERSONNEL
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, particularly Brady L.
"Tripp" Rackley III, our founder and Chief Executive Officer. The loss of the
services of Mr. Rackley or other key employees would likely have a significant
adverse effect on our business. We only have employment agreements with our
Chief Executive Officer and our President. We maintain "key person" life
insurance in the amount of $2,000,000 on our Chief Executive Officer, but this
amount likely would be inadequate to compensate us for the loss of his services.
WE HAVE EXPERIENCED DIFFICULTY IN HIRING AND RETAINING PERSONNEL
There is significant competition for qualified employees among Internet
companies today. As a result of our rapid growth and expansion, we have in the
past experienced, and we expect to continue to experience difficulty in hiring
and retaining highly skilled employees with appropriate qualifications. We have
been required to hire a significant number of new employees in a short period of
time. We may be unable to retain our skilled employees or attract, assimilate or
retain other highly qualified employees in the future. Our operating results may
be
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adversely affected if we experience increased expenses related to attracting and
retaining qualified employees. If we do not succeed in attracting new personnel
or retaining and motivating our current personnel, our business will be
adversely affected.
NETWORK SECURITY PROBLEMS COULD CAUSE US TO LOSE CUSTOMERS
Even though we have implemented security measures, our networks may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Someone who is able to circumvent security measures could
misappropriate our proprietary information or cause interruptions in our
Internet operations. Internet and on-line service providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. Unknown security risks may result in liability to us
and also may deter banks from purchasing our products, and deter banks'
customers from using our products. We may need to expend significant capital or
other resources protecting against the threat of security breaches or
alleviating problems caused by breaches. Although we intend to continue to
implement state of the art security measures, persons may be able to circumvent
the measures that we implement in the future. Eliminating computer viruses and
alleviating other security problems may result in interruptions, delays or
cessation of service to users accessing web sites that deliver our services, any
of which could harm our business.
INTERNET SECURITY CONCERNS COULD HINDER THE GROWTH OF INTERNET BANKING AND OTHER
ELECTRONIC COMMERCE SERVICES
Users of Internet banking and other electronic commerce services are highly
concerned about the security of transmissions over public networks. Concerns
over security and the privacy of users may inhibit the growth of the Internet
and other on-line services generally, and the Web in particular, especially as a
means of conducting commercial transactions. Any well-publicized compromise of
security could deter people from using the Internet or using it to conduct
transactions that involve transmitting confidential information. We may incur
significant costs to protect against the threat of security breaches or to
alleviate problems caused by those breaches. We rely on standard Internet
security systems, all of which are licensed from third parties, to provide the
security and authentication necessary to effect secure transmission of data.
However, we cannot guarantee that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise or breach of our security measures.
WE COULD BE LIABLE FOR MISAPPROPRIATION OF OUR USERS' PERSONAL INFORMATION
Unauthorized users could possibly circumvent the measures we take to
protect client bank data. To the extent that our activities involve the storage
and transmission of proprietary information, security breaches could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Any compromise of our security could harm our business. In addition, the Federal
Trade Commission and state agencies have been investigating various Internet
companies regarding their use of personal information. We could incur additional
expenses if
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<PAGE> 16
new regulations regarding the use of personal information are introduced or if
our privacy practices are investigated.
WE ARE DEPENDENT ON OUR INTERNET BANKING DATA CENTER, AND IT COULD SUFFER
TECHNICAL PROBLEMS AND SERVICE INTERRUPTIONS
All of our communications and network equipment is located at our corporate
headquarters in Norcross, Georgia. Any system failure at this location could
lead to interruptions, delays or cessations in providing our Internet banking
services to our client banks, which could have a material adverse effect on our
business, financial condition and results of operations. Our operations are
dependent upon our ability to protect systems against damage from fires,
hurricanes, earthquakes, power losses, telecommunications failures, break-ins,
computer viruses, hacker attacks and other events beyond our control. We have
contracted to establish a redundant Internet banking data center, but that data
center is not scheduled to be on-line until July 31, 1999. We cannot assure that
this data center will operate as anticipated. In the event of a disaster that
impacts our Internet banking data center, and depending on the nature of the
disaster, it may take several days for an off-site computer system to become
operational for all of our client banks, and use of an alternative off-site
computer would result in substantial additional cost to us. In the event of an
extended outage, we could potentially lose many of our client banks, which may
have a material adverse effect on our business, financial condition and results
of operations. Although we maintain business interruption insurance, it may not
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems.
OUR SUCCESS DEPENDS UPON THE PROPER OPERATION OF INTERNALLY-DEVELOPED SOFTWARE
AND SYSTEMS AS WELL AS THIRD-PARTY PRODUCTS
We have developed custom software for our systems. This software may
contain undetected errors, defects or bugs. Although we have not suffered
significant harm from any errors or defects to date, we may discover significant
errors or defects in the future that we may or may not be able to correct. We
must expand and upgrade our technology, transaction-processing systems and
network infrastructure if the volume of traffic and transactions on our system
increases substantially. We could experience periodic temporary capacity
constraints, which may cause unanticipated system disruptions, slower response
times and lower levels of customer service. We may be unable to accurately
project the rate or timing of increases, if any, in the use of our services or
expand and upgrade our systems and infrastructure to accommodate these increases
in a timely manner. Any inability to do so could harm our business. Our
agreements with our client banks typically contain provisions designed to limit
our exposure to potential product liability claims. It is possible, however,
that the limitation of liability provisions contained in our agreements may not
be effective under the laws of all jurisdictions. Although we have not
experienced any product liability claims to date, the sale and support of our
products may entail the risk of these claims. A product liability claim brought
against us could have a material adverse effect on our business, financial
condition and results of operations.
Our products involve integration with the core processing systems of our
client banks as well as the systems of the company that provides bill payment
processing services to us. We have an agreement through which another company
provides to us processing services for the electronic bill payment features of
our nHome and nBusiness products. The agreement was originally with Moneyline
Express/Travelers
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<PAGE> 17
Express. In January 1999, M&I Data Services assumed the agreement and is
performing these services. The agreement provides for fees to be paid to M&I
based on banks implementing bill payment services and the number of bill payment
and electronic funds transfer transactions per month, as well as the allocation
of credit risks between the parties on potential insufficient funds or returned
items. The agreement is a non-exclusive, three year agreement which began in
July 1997. The agreement will automatically renew for one-year renewal terms
unless terminated by either party prior to renewal. Under the agreement, we
cooperate with M&I to develop interfaces between the nFront products and the M&I
bill payment processing systems. While we believe that there are alternative
sources available for these services, at this time M&I is the only bill payment
processor used by us. A loss of their services could disrupt, for an indefinite
period, the bill payment services we provide to our client banks. If the core
processing or bill payment processing systems with which we are integrated
should become unavailable for any reason, fail under operation with our products
or fail to be supported by their respective vendors, it would be necessary for
us to redesign our products and/or obtain alternative vendors. There can be no
assurance that these changes could be accomplished in a cost-effective or timely
manner. We also could experience difficulties integrating our products with
other hardware and software. Furthermore, should new releases of products and
systems occur before we develop products compatible with these new releases, any
resulting decline in demand for our products could have a material adverse
effect on our business, financial condition and results of operations.
WE RELY ON THE INTERNET REMAINING A VIABLE COMMERCIAL MEDIUM
Our success depends, in large part, on other companies maintaining the
Internet infrastructure. In particular, we rely on other companies to maintain a
reliable network that provides adequate speed, data capacity and security and to
develop products that enable reliable Internet access and services. If the
Internet continues to experience significant growth in the number of users,
frequency of use and amount of data transmitted, the Internet infrastructure may
be unable to support the demands placed on it, and the Internet's performance or
reliability may suffer as a result of this continued growth. In addition, the
Internet could lose its viability as a commercial medium due to delays in the
development or adoption of new standards and protocols to process increased
levels of Internet activity. Any degradation of Internet performance or
reliability could cause users to reduce their Internet usage. If other companies
do not develop the infrastructure or complementary products and services
necessary to establish and maintain the Internet as a viable commercial medium,
our business, financial condition and results of operations could be materially
adversely affected.
OUR BUSINESS IS HIGHLY COMPETITIVE
The market for Internet banking services and financial software
applications is highly competitive, and we expect that competition will
intensify in the future. In addition we could experience competition from our
client banks and potential client banks. From time to time, these potential
client banks develop, implement and maintain their own services and applications
for revenue enhancements, cost reductions and/or enhanced customer services,
rather than purchasing services and related products from third parties. There
can be no assurance that these client banks or other potential client banks will
perceive sufficient value in our products
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<PAGE> 18
and services to justify investing in them. In addition, client banks or
potential client banks could enter into strategic relationships with one or more
of our competitors to develop, market and sell competing services or products.
We compete with a variety of third parties, including Digital Insight,
Edify, FundsXpress, Q-UP, First Data Direct Banking and Security First
Technologies, that employ many different approaches to providing Internet
banking services. We believe that nFront's ability to compete successfully
depends upon a number of factors, including:
- our market presence within our target market;
- the capacity, reliability and security of our network infrastructure;
- the comprehensiveness and ease of use of our products;
- our pricing policies and the pricing policies of our competitors and
suppliers;
- the timing of introductions of new products and services by us and our
competitors; and
- our ability to support evolving industry standards.
We expect competition in our markets to increase significantly as new
companies enter our market and current competitors expand their product lines
and services. These new competitors may include non-bank financial institutions,
such as brokerage firms and on-line service providers such as E*Trade, Intuit,
Charles Schwab, Quicken.com and Yahoo! Finance, all of which could be dominant
competitors given their current position in the online financial services
industry, broad name recognition and substantial online customer bases. Many of
our current and potential competitors are likely to enjoy substantial
competitive advantages, including:
- greater financial, technical and marketing resources can be devoted to
the development, promotion and sale of their services;
- longer operating histories;
- greater name recognition;
- client banks with larger customer bases; and
- larger base of client banks.
Any pricing pressures, reduced margins or loss of market share resulting
from our failure to compete effectively would materially adversely affect our
business, financial condition and operating results.
INFRINGEMENT OF OUR PROPRIETARY TECHNOLOGY COULD HARM OUR BUSINESS
We rely on a combination of copyright, trademark and trade secret laws and
contractual provisions to establish and protect our proprietary rights. We have
applied for the federal registration of service marks for "nFront," "nHome" and
"nBusiness." We have also registered the domain names "banking.com" and
"nFront.com."
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<PAGE> 19
There can be no assurance that the steps we have taken to protect our
proprietary rights will be adequate, that we will be able to secure trademark or
service mark registrations for our marks in the United States or in foreign
countries or that third parties will not infringe upon or misappropriate our
copyrights, trademarks, service marks, domain names and similar proprietary
rights. In addition, effective copyright and trademark protection may be
unenforceable or limited in foreign countries, and the global nature of the
Internet makes it impossible to control the ultimate destination of our
services. It is possible that our competitors may independently develop
technologies that are substantially equivalent or superior to our technology.
Also, our competitors or others may adopt product or service names similar to
ours, thereby impeding our ability to build brand identity and possibly leading
to customer confusion. Moreover, because domain names derive value from the
individual's ability to remember these names, we cannot guarantee that our
domain names will not lose their value if, for example, users begin to rely on
mechanisms other than domain names to access on-line resources. Our inability to
protect our marks adequately could have a material adverse effect on the
acceptance of the nFront brand and on our business, financial condition and
operating results.
LITIGATION MAY BE REQUIRED TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
In the future, litigation may be necessary to enforce and protect our trade
secrets, copyrights and other intellectual property rights. Litigation would
divert management resources, be expensive and may not effectively protect our
intellectual property.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION
We may be subject to litigation for claims of infringement of the rights of
others or to determine the scope and validity of the intellectual property
rights of others. If other parties file applications for marks used or
registered by us, we may have to oppose those applications and participate in
administrative proceedings to determine priority of rights to the mark, which
could result in substantial costs to us due to the diversion of management's
attention and the expense of this litigation, even if the eventual outcome is
favorable to us.
Adverse determinations in litigation could result in the loss of
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties or prevent us from selling our services. There can
be no assurance that we will be able to obtain these licenses on commercially
reasonable terms, if at all. Any of these results could have a material adverse
effect on the acceptance of the nFront brand and on our business, financial
condition and operating results.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO
DOING BUSINESS ON THE INTERNET
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues including user privacy, pricing, and
the characteristics and quality of products and services. For example, the
Telecommunications Act sought to prohibit transmitting various types of
information
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<PAGE> 20
and content over the Internet. Several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet service
providers and on-line service providers in a manner similar to long distance
telephone carriers and to impose access fees on those companies. This could
increase the cost of transmitting data over the Internet. Moreover, it may take
years to determine the extent to which existing laws relating to issues such as
property ownership, libel and personal privacy issues apply to the Internet. Any
new laws or regulations relating to the Internet or the manner in which existing
laws are applied to the Internet could adversely affect our business.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION RELATING TO BANKING AND OUR
CLIENT BANKS MAY BECOME SUBJECT TO MORE STRINGENT ELECTRONIC BANKING
REGULATIONS, WHICH COULD AFFECT OUR GROWTH-RATE
Our primary customers are banks. The banking industry, including electronic
banking, is regulated heavily, and we expect that this regulation will affect
the relative demand for our products and services. In addition, through their
ability to regulate our bank customers' system requirements, bank regulators can
effectively regulate the required security systems, communication technologies
and other features of our products and services.
There can be no assurance that federal, state or foreign governmental
authorities will not adopt new regulations addressing electronic banking or
banking operations generally that could require us to modify our current or
future products and services. The adoption of laws or regulations affecting our
business or our client banks' business could reduce our growth rate or could
otherwise have a material adverse effect on our business, financial condition
and operating results.
THE INTERNET PRODUCTS AND SERVICES THAT WE AND OUR CLIENT BANKS PROVIDE COULD BE
SUBJECT TO SALES OR OTHER TAXES WHICH COULD AFFECT DEMAND FOR OUR PRODUCTS
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals at the federal, state and local level and
foreign governments would, if enacted, impose taxes on the sale of goods and
services and other Internet activities. A recently enacted law places a
temporary moratorium on some forms of taxation on Internet commerce. We cannot
predict the effect of current attempts to tax or regulate commerce over the
Internet. Any legislation that substantially impairs the growth of electronic
commerce could have a material adverse effect on our business, financial
condition and operating results.
TO EXECUTE OUR STRATEGY WE MAY REQUIRE ADDITIONAL FUNDING THAT MAY NOT BE
AVAILABLE ON FAVORABLE TERMS OR AT ALL
Although we believe that our existing capital resources and available
financing will be adequate to fund our operations for at least the next 18
months, these sources may be inadequate. We have not sustained positive earnings
or cash flow and we are required to incur significant expenses to be
competitive. Consequently, we may require additional funds during or after this
period to successfully execute our strategy. Additional financing may not be
available on favorable terms or at all. If we cannot raise adequate funds to
satisfy our capital requirements, we may have to limit
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<PAGE> 21
our operations significantly. Our future capital requirements depend upon many
factors, including, but not limited to:
- the rate at which we expand our sales and marketing operations;
- the extent to which we expand our products and services;
- the extent to which we develop and upgrade our technology and data
network infrastructure;
- the occurrence, timing, size and success of acquisitions; and
- the response of competitors to our service offerings.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
We cannot predict the extent to which investor interest in nFront will lead
to the development of a trading market for our common stock or how liquid that
market might become. The initial public offering price for our common stock was
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. Our common stock price could be subject to wide fluctuations in
response to several factors which are discussed elsewhere in "Risk Factors."
In addition, the market for Internet and technology companies has
experienced extreme price and volume volatility that have often been unrelated
or disproportionate to the operating performance of those companies. These broad
market and industry factors may materially and adversely affect our stock price,
regardless of our operating performance. The trading prices of the stocks of
many Internet and technology companies are at or near historical highs and
reflect relative valuation levels substantially above historical levels. These
trading prices and relative valuation levels may not be sustained.
OUR MANAGEMENT AND AFFILIATES CONTROL MORE THAN 60% OF OUR STOCK; NO CORPORATE
ACTIONS REQUIRING SHAREHOLDER APPROVAL CAN BE TAKEN WITHOUT THE APPROVAL OF THIS
GROUP
Following this offering, our officers, directors and affiliated persons
will beneficially own approximately 69.9% of our common stock (65.8% if the
underwriters exercise their over-allotment option in full). Brady L. "Tripp"
Rackley III, our Chief Executive Officer, will beneficially own approximately
22.3% of our common stock (20.9% if the underwriters exercise their
over-allotment option in full) following this offering. As a result, our
officers, directors and affiliated persons will effectively be able to:
- elect, or defeat the election of, our directors;
- amend or prevent amendment of our Articles of Incorporation or Bylaws;
- effect or prevent a merger, sale of assets or other corporate
transaction; and
- control the outcome of any other matter submitted to the shareholders for
vote.
Our public shareholders, for so long as they hold less than 50% of our
common stock, will be unable to control the outcome of these transactions.
Management's stock ownership may discourage a potential acquirer from offering
to purchase or otherwise attempting to obtain control of nFront, which in turn
could reduce our
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<PAGE> 22
stock price or prevent our shareholders from realizing a premium over our stock
price.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of our
common stock. After this offering, 14,196,152 shares of our common stock will be
outstanding. All of the shares sold in this offering will be freely tradable
unless held by affiliates of nFront or by persons subject to other contractual
or legal restrictions on resale. The remaining shares of common stock
outstanding after this offering will be restricted as a result of securities
laws or lock-up agreements signed by the holder and will be available for sale
in the public market as follows:
- no restricted shares will be eligible for sale as of the date of this
prospectus;
- approximately 386,425 restricted shares will be eligible for sale 180
days after the date of this prospectus upon the expiration of lock-up
agreements with the underwriters; and
- approximately 9,909,727 restricted shares will become eligible for sale
thereafter at various times upon the expiration of their respective
holding periods and if otherwise in accordance with the provisions of
Rule 144.
Hambrecht & Quist LLC may, in its sole discretion and at any time without
prior notice, release all or any portion of the common stock subject to lock-up
agreements. See "Shares Eligible for Future Sale" for a more detailed
discussion.
YEAR 2000 COMPLIANCE ISSUES COULD ADVERSELY IMPACT OUR BUSINESS
We are in the process of assessing and remediating any Year 2000 issues
associated with our computer systems and software and other property and
equipment. Despite our testing and remediation efforts, our systems and those of
third parties, including client banks, core processors, other technology
companies, utilities, affiliates, and end users may contain errors or faults
with respect to the Year 2000. Our efforts to address this issue are described
in more detail in "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of Year 2000 Computer Issues." We also face
risks relating to the potential Year 2000 noncompliance of our client banks and
other institutions that support the banks, such as the FedWire system governing
electronic fund transfers and the Federal Reserve system itself. Furthermore, if
a client bank is unable to achieve Year 2000 readiness, the regulators could
suspend that bank's operations, adversely affecting the volume of new bank
customers and transactions generated for us by that bank. Additionally, an
extended disruption in availability of electricity to our facilities resulting
from Year 2000 problems with utility service providers could adversely affect
our business, results of operations and financial condition. Known or unknown
errors or defects that affect the operation of our software and systems and
those of third parties, including content providers, advertisers, affiliates,
and end users could result in delay or loss of revenue, interruption of
services, cancellation of client bank contracts, diversion of development
resources, damage to our reputation, increased service and warranty costs, and
litigation costs, any of which could harm our business.
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WE COULD BE LIABLE FOR INFORMATION RETRIEVED FROM OUR WEB SITES
We may be subject to third party claims for defamation, negligence,
copyright or trademark infringement or other theories based on the nature and
content of information supplied on our web sites by us or third parties,
including our content providers or users. These types of claims have been
brought, sometimes successfully, against on-line services in the past. We could
be subject to liability with respect to content that may be accessible on web
sites maintained on our system. Even if these claims do not result in liability
to us, we could incur significant costs in investigating and defending against
these claims and in implementing measures to reduce our exposure to this
liability. Our insurance may not cover potential claims of this type or may not
be adequate to cover all costs incurred in defense of potential claims or to
indemnify us for all liability that we may incur.
OUR MANAGEMENT HAS BROAD DISCRETION AS TO USE OF PROCEEDS FROM THIS OFFERING
WHICH WE MAY NOT USE EFFECTIVELY
Our management will have broad discretion in how we use the net proceeds of
this offering. We currently expect to use the net proceeds from this offering
for repayment of debt; expansion of our business, including sales, marketing and
product development expenditures; potential future acquisitions; and general
corporate purposes, including working capital. Investors will be relying on the
judgment of our management regarding the application of the proceeds from this
offering.
POTENTIAL ACQUISITIONS INVOLVE RISKS
Though we have not yet entered into negotiations on any potential
acquisitions and do not have any short-term plans to do so, we intend to
continuously evaluate our position within our industry, and we may acquire
complementary technologies or businesses in the future. Due to consolidation
trends within the online services industry, failure to adopt and successfully
implement a long-term acquisition strategy could damage our competitive
position. Future acquisitions may involve large one-time write-offs and
amortization expenses related to goodwill and other intangible assets. Any of
these factors could adversely affect our results of operations or stock price.
Acquisitions involve numerous risks, including:
- difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company with our
operations;
- diverting our management's attention from other business concerns;
- impairing relationships with our employees, affiliates, strategic
marketing alliances and content providers;
- being unable to maintain uniform standards, controls, procedures and
policies;
- entering markets in which we have no direct prior experience; and
- losing key employees of the acquired company.
Some or all of these risks could result in a material adverse effect on our
business, financial condition and results of operations. In addition, we cannot
assure you that we will be able to identify suitable acquisition candidates that
are available for sale at reasonable prices. We may elect to finance future
acquisitions using some or all of the proceeds of this offering. We may also
elect to finance future acquisitions with debt financing, which would increase
our debt service requirements, or through the issuance of additional common or
preferred stock, which could result in dilution to our shareholders. There can
be no assurance that
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we will be able to arrange adequate financing for any acquisitions on acceptable
terms.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE DILUTION
The initial public offering price is substantially higher than the pro
forma net tangible book value per share of our outstanding common stock
immediately after the offering. Accordingly, purchasers of common stock in this
offering will experience immediate and substantial dilution of approximately
$7.70 in pro forma net tangible book value per share, or approximately 77% of
the offering price of $10.00 per share. In contrast, existing shareholders paid
an average price of $0.31 per share. Investors will incur additional dilution
upon the exercise of outstanding stock options and warrants.
OUR ARTICLES OF INCORPORATION AND BYLAWS, AS WELL AS GEORGIA LAW, MAY PREVENT OR
DELAY A FUTURE TAKEOVER
Our Second Amended and Restated Articles of Incorporation, as amended,
Bylaws, other agreements and Georgia law could make it more difficult for a
third party to acquire us, even if a change in control would be beneficial to
our shareholders. For example, our Second Amended and Restated Articles of
Incorporation and Bylaws provide, among other things, that:
- the Board of Directors, without shareholder approval, has the authority
to issue preferred stock with rights superior to the rights of the
holders of common stock;
- shareholders must comply with advance notice provisions contained in our
Bylaws to make proposals at shareholder meetings and nominate candidates
for election to our Board of Directors;
- the Board of Directors is classified and directors have staggered terms;
and
- the shareholders may call a special meeting only upon request of 35% of
votes entitled to be cast on an issue.
Georgia law also contains "business combination" and "fair price" provisions
that may have the effect of delaying, deterring or preventing a change in
control of nFront. See "Description of Capital Stock - Antitakeover Provisions
of Our Second Amended and Restated Articles of Incorporation, Bylaws and Georgia
Law."
FORWARD-LOOKING STATEMENTS
There are statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and elsewhere in this
prospectus that are "forward-looking statements." These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations and intentions and other statements contained in the
prospectus that are not historical facts. When used in this prospectus, the
words "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements, including our plans, objectives, expectations and
intentions and other factors discussed under "Risk Factors."
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USE OF PROCEEDS
The net proceeds to nFront from the sale of the 3,500,000 shares of common
stock offered by us in this offering, after deducting offering expenses of
approximately $935,000 and the underwriting discounts and commissions, will be
approximately $31.6 million. We will not receive any of the proceeds from the
sale of shares by the selling shareholders. The principal purposes of this
offering are to obtain additional capital, to create a public market for our
common stock, to facilitate future access by us to public equity markets and to
provide increased visibility and credibility in a marketplace where many of our
current and potential competitors are or will be publicly-held companies. We
expect to use the net proceeds from the offering to repay the debt described
below, to expand our sales and marketing expenditures, to continue our product
development, and for general corporate purposes. We expect to use approximately
$887,500 of the net proceeds to repay loans outstanding to NationsBank, N.A. The
term loan portion of the NationsBank loans (of which approximately $575,000 is
outstanding), which was used to repay our obligations to Silicon Valley Bank,
bears interest at the prime rate plus 1% and matures on August 15, 2001. The
line of credit portion of the loans (of which approximately $312,500 is
outstanding) bears interest at Libor plus 1.75% and is due upon completion of
this offering. We used the proceeds derived from both the NationsBank line of
credit and from the original Silicon Valley loan for general working capital. We
may borrow additional amounts under the line of credit prior to the consummation
of the offering to fund our current working capital needs. The proceeds of the
offering will be used to repay any additional debt we incur prior to completion
of the offering to fund our current working capital needs. As of the date of
this prospectus, we cannot specify with certainty all of the particular uses for
the remaining net proceeds we will have upon completion of the offering.
Accordingly, our management will have broad discretion in the application of the
net proceeds.
We may, when the opportunity arises, use an unspecified portion of the net
proceeds to acquire or invest in complementary businesses, products and
technologies. From time to time, in the ordinary course of business, we expect
to evaluate potential acquisitions of businesses, products or technologies.
However, we have no present understandings, commitments or agreements with
respect to any material acquisition or investment.
Pending use of the net proceeds for the above purposes, we intend to invest
these funds in short-term, interest-bearing, investment-grade securities and use
these funds for general corporate purposes.
DIVIDEND POLICY
nFront has never declared or paid any cash dividends on its capital stock.
We currently intend to retain any future earnings and do not anticipate paying
any cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999. Our
capitalization is presented:
- on an actual basis;
- on an unaudited pro forma basis to reflect conversion of our redeemable
convertible preferred stock into common stock; and
- on an unaudited pro forma as adjusted basis to reflect conversion of our
redeemable convertible preferred stock into common stock and our receipt
of the net proceeds from the sale of 3,500,000 shares of common stock
offered by nFront in this offering.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Long term debt, net of current portion........ $ 427,540 $ 427,540 $ --
Redeemable convertible preferred stock, no par
value; 10,000,000 shares authorized; 255,885
shares issued and outstanding at March 31,
1999; no pro forma and pro forma as adjusted
shares issued or outstanding................ 2,580,222 -- --
Stockholders' equity (deficit):
Common stock, no par value; 70,000,000
shares authorized; 8,661,867 shares
issued and outstanding at March 31, 1999;
10,696,152 pro forma and 14,196,152 pro
forma as adjusted shares issued and
outstanding.............................. 710,981 3,291,203 34,906,588
Subscription receivable..................... (777) (777) (777)
Accumulated deficit......................... (2,282,403) (2,282,403) (2,282,403)
----------- ----------- -----------
Total stockholders' equity (deficit)........ (1,572,199) 1,008,023 32,623,408
----------- ----------- -----------
Total capitalization..................... $ 1,435,563 $ 1,435,563 $32,623,408
=========== =========== ===========
</TABLE>
Upon the closing of the offering, our authorized capital will consist of
70,000,000 shares of common stock and 10,000,000 shares of preferred stock. Upon
the closing of this offering, all of our outstanding preferred stock will
convert into shares of common stock and none of our preferred stock will be
issued or outstanding. We expect there to be 14,196,152 shares of common stock
outstanding after the offering, which includes the pro forma adjustments
described above. The outstanding shares as of March 31, 1999 exclude 959,782
shares of common stock issuable upon the exercise of outstanding stock options
at a weighted average exercise price of $1.26, 50,000 shares of common stock
issuable upon the exercise of outstanding warrants at an exercise price equal to
the initial public offering price, approximately 62,000 shares of common stock
issuable upon the exercise of options granted since March 31, 1999 or to be
granted upon completion of this offering under our stock incentive plan and
approximately 42,850 shares of common stock issuable upon the exercise of
options to be granted upon completion of this offering under our employee stock
purchase plan.
Read the capitalization table together with the sections of this prospectus
entitled "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes included in this prospectus.
24
<PAGE> 27
DILUTION
As of March 31, 1999, nFront had a pro forma net tangible book value of
approximately $1.0 million, or $0.09 per share of common stock. Pro forma net
tangible book value per share represents the amount of total tangible assets of
nFront reduced by its total liabilities, divided by the number of shares of
common stock outstanding after giving effect to the conversion of all
outstanding shares of preferred stock into shares of common stock upon
completion of this offering. After giving effect to the receipt by nFront of the
net proceeds from the sale of the 3,500,000 shares of common stock offered by
nFront hereby, the pro forma as adjusted net tangible book value of nFront as of
March 31, 1999 would have been approximately $32.6 million, or $2.30 per share.
This represents an immediate increase in pro forma net tangible book value of
$2.21 per share to existing shareholders and an immediate dilution of $7.70 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $10.00
Pro forma net tangible book value per share as of March
31, 1999............................................... $0.09
Increase per share attributable to new investors.......... 2.21
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.30
------
Dilution per share to new investors......................... $ 7.70
======
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 1999
the differences between existing shareholders and new investors with respect to
the number of shares of common stock purchased from nFront, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders......... 10,696,152 75.3% $ 3,290,426 8.5% $ 0.31
New investors.......... 3,500,000 24.7 35,000,000 91.5 10.00
---------- ----- ----------- -----
Total................ 14,196,152 100.0% $38,290,426 100.0%
========== ===== =========== =====
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
stock options or warrants after March 31, 1999. As of March 31, 1999, options to
purchase 959,782 shares of common stock were outstanding, with a weighted
average exercise price of $1.26 per share. In conjunction with an agreement
under which nFront has the right, through the completion of this offering, to
issue up to $5.0 million in subordinated debentures, nFront agreed to issue to
Noro-Moseley Partners IV, L.P. a warrant to purchase shares of common stock, the
number of shares and exercise price of which were determined by reference to the
price per share in this offering. Based on the price per share in this offering,
the warrant entitles Noro-Moseley to purchase 50,000 shares of common stock at
$10.00 per share. Additionally, if CNL Financial Corporation, one of our
strategic marketing alliances, consummates sales to between 51 and 75 or more
client banks prior to January 1, 2000, we will be obligated to issue options to
purchase up to 114,988 shares of common stock at an exercise price of $1.63 per
share. To the extent that the outstanding options or warrants to purchase common
stock, or any options or
25
<PAGE> 28
warrants issued in the future, are exercised, there will be further dilution to
new investors.
Sales by the selling shareholders in this offering will reduce the number
of shares of common stock held by existing shareholders to 10,296,152, or
approximately 72.5% (approximately 68.4%, if the underwriters' over-allotment
option is exercised in full) of the total number of shares of common stock
outstanding upon the closing of this offering and will increase the number of
shares held by new public investors to 3,900,000, or approximately 27.5%
(4,485,000 shares, or approximately 31.6%, if the underwriters' over-allotment
option is exercised in full) of the total number of shares of common stock
outstanding after this offering. See "Principal and Selling Shareholders."
26
<PAGE> 29
SELECTED FINANCIAL DATA
The following table sets forth our selected financial data and other
operating information. We derived the selected financial data from our financial
statements and related notes included in another part of this prospectus. You
should read the selected financial data together with our financial statements
and related notes and the section of the prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Ernst
& Young LLP, independent auditors, audited our financial statements for the
period from June 17, 1996 (inception) to June 30, 1997, the fiscal year ended
June 30, 1998 and the nine months ended March 31, 1999. The statement of
operations and per share data for the nine months ended March 31, 1998 were
derived from unaudited financial statements which, in the opinion of management,
include all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of results of operations. You should not rely on interim
results as being indicative of results we expect for the full year.
Additionally, historical results are not necessarily indicative of results to be
expected in the future. See Notes 1 and 11 of Notes to Financial Statements for
an explanation of the determination of the shares used in computing basic and
diluted net income (loss) per common share and unaudited pro forma net loss per
share.
<TABLE>
<CAPTION>
PERIOD FROM FISCAL YEAR NINE MONTHS
JUNE 17, 1996 ENDED ENDED MARCH 31,
(INCEPTION) TO JUNE 30, -----------------------
JUNE 30, 1997 1998 1998 1999
-------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Implementation fees.............................. $ 358,245 $ 722,859 $ 581,375 $ 1,728,179
Monthly service fees............................. 34,263 185,283 102,929 892,816
Other............................................ 458,643 174,287 149,406 214,095
--------- ----------- --------- -----------
Total revenues................................. 851,151 1,082,429 833,710 2,835,090
Operating expenses:
Cost of implementation........................... 246,544 346,054 132,750 697,541
Cost of Internet banking data center............. 61,681 96,732 65,098 213,950
Selling and marketing............................ 194,450 568,928 189,265 1,462,943
Product development.............................. 106,429 170,419 109,164 785,790
General and administrative....................... 157,274 440,099 305,188 1,445,481
Depreciation..................................... 13,780 33,726 23,140 82,893
--------- ----------- --------- -----------
Total operating expenses....................... 780,158 1,655,958 824,605 4,688,598
Operating income (loss)............................ 70,993 (573,529) 9,105 (1,853,508)
Other (income) expense:
Interest income.................................. (3,672) (26,692) (3,916) (63,436)
Interest expense................................. -- 2,084 1,914 18,075
--------- ----------- --------- -----------
Income (loss) before income taxes.................. 74,665 (548,921) 11,107 (1,808,147)
Income tax expense (benefit)....................... 25,925 (25,925) 2,000 --
--------- ----------- --------- -----------
Net income (loss).................................. 48,740 (522,996) 9,107 (1,808,147)
Accretion on redeemable convertible preferred
stock............................................ -- (35,733) -- (204,661)
--------- ----------- --------- -----------
Net income (loss) attributable to common stock..... $ 48,740 $ (558,729) $ 9,107 $(2,012,808)
========= =========== ========= ===========
Net income (loss) per common share -- basic and
diluted.......................................... $ 0.01 $ (0.07) $ 0.00 $ (0.24)
========= =========== ========= ===========
Weighted average shares outstanding -- basic and
diluted.......................................... 5,079,167 8,033,223 8,000,090 8,498,844
========= =========== ========= ===========
Unaudited pro forma net loss per share -- basic and
diluted.......................................... $ (0.07) $ (0.19)
=========== ===========
Unaudited pro forma weighted average shares
outstanding -- basic and diluted................. 8,300,746 10,533,129
=========== ===========
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
PERIOD FROM FISCAL YEAR NINE MONTHS
JUNE 17, 1996 ENDED ENDED MARCH 31,
(INCEPTION) TO JUNE 30, -----------------------
JUNE 30, 1997 1998 1998 1999
-------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
OPERATING DATA (AT END OF PERIOD):
Total client banks under contract.................. 6 40 24 122
Total client banks implemented..................... 2 20 14 83
Total customers at client banks using our
solution......................................... * 5,220 3,149 19,648
</TABLE>
- ---------------
* Information not available because prior to fiscal year ended June 30, 1998,
nFront did not bill client banks on the basis of the total customers at client
banks using the nFront solution.
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------- AS OF MARCH 31,
1997 1998 1999
--------- ---------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 243,525 $2,521,384 $ 1,530,458
Working capital (deficiency).............................. (71,787) 1,957,205 561,185
Total assets.............................................. 402,345 2,998,128 3,802,645
Long-term debt, net of current portion.................... -- -- 427,540
Redeemable convertible preferred stock.................... -- 2,375,561 2,580,222
Total stockholders' equity (deficit)...................... 49,240 (209,391) (1,572,199)
</TABLE>
28
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
anticipated in these forward-looking statements as a result of factors
including, but not limited to, those under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
nFront provides a comprehensive, outsourced solution that enables small to
mid-sized banks to offer their retail and commercial customers banking and
financial services through the Internet. nFront's products and services provide
bank-branded Internet applications to these banks, enabling the banks to offer
products, services and transactions over the Internet in a secure environment.
We were founded and incorporated in June 1996. From June 1996 through May 1997,
our principal activities consisted of developing our nHome product, recruiting
employees and raising capital. Our revenue during this period was generated
primarily through software licensing fees from our nHome product. In June 1997,
in response to the significant demand from small to mid-sized banks, we opened
our Internet banking data center and began focusing on providing our client
banks with a comprehensive outsourced Internet banking solution. In March 1999,
we released our nBusiness product, which is designed to meet the specific needs
of a bank's commercial customers. Our nHome product has been responsible for
generating most of our revenue to date.
We derive revenue from multi-year service contracts under which our client
banks pay us the following fees:
- an up-front implementation fee for developing each client bank's uniquely
branded web site;
- recurring fees based primarily on the number of customers of our client
banks that use our products;
- transaction-based fees; and
- fees for materials and services provided to client banks to support their
customer marketing efforts and to train their staff on how best to manage
customers on the Internet branch.
The implementation fee, which is billable to the client bank when the
contract is executed, is recognized as revenue over the implementation period,
which currently averages approximately three months. We record the unrecognized
portion of billable implementation fees as deferred revenue. Revenue from
monthly user fees and transaction fees are recognized monthly based on the
number of users with accounts on the bank's Internet branch at the end of the
month and the transactions occurring during the month. The service contracts
with the banks are typically five year exclusive agreements. The revenue from
marketing and training support materials and services is recognized at the time
the materials are delivered or the services are provided.
29
<PAGE> 32
We compensate both our sales representatives and companies with which we
have strategic marketing alliances with commissions. Sales representatives'
commissions are determined using a fixed commission schedule, which is based on
the total asset size of the applicable client bank sold. Commissions on sales
guaranteed from companies with which we have strategic marketing alliances are
paid in accordance with the contractually agreed upon commission schedules in
the respective contracts. These commissions, typically between 10% and 40%, vary
by relationship and are generally expressed as a percentage of the up-front
implementation fee and the monthly recurring fees.
Our strategic marketing agreements stipulate that either nFront or the
company with which we have a strategic marketing alliance is responsible for
billing a client bank. In the event that nFront is responsible for billing the
client bank, we recognize the gross amount of revenue and the sales commission
to the company with which we have a strategic marketing alliance as a selling
and marketing expense. In the event that the company with which we have a
strategic marketing alliance is responsible for billing the client bank, that
company remits an agreed upon amount to us. Accordingly, we recognize the
related revenue collected and no sales commission expense is incurred.
To date, the majority of our resources have been directed to creating our
nHome and nBusiness Internet banking products, building our Internet banking
data center, forming exclusive strategic marketing alliances, marketing our
products and building our sales and marketing team. As we have migrated from a
licensing fee structure to a structure based on recurring revenue generation, we
have incurred significant operating losses since September 30, 1997. Our
strategy is to rapidly expand our base of client banks, assist these banks in
promoting the use of the nFront system by their customers and increase the
retail and commercial banking communities' awareness and acceptance of the
nFront solution. We anticipate that our operating expenses will increase
substantially in future quarters as we increase our sales force, significantly
increase our marketing and branding efforts, continue to develop new
distribution channels, fund greater levels of product development and expand our
support staff and facilities to facilitate our anticipated growth. Accordingly,
we expect to incur additional losses in future quarters.
30
<PAGE> 33
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
JUNE 17, 1996 FISCAL ENDED MARCH 31,
(INCEPTION) TO YEAR ENDED ----------------------
JUNE 30, 1997 JUNE 30, 1998 1998 1999
-------------- -------------- -------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Implementation fees.......... $358,245 $ 722,859 $581,375 $ 1,728,179
Monthly service fees......... 34,263 185,283 102,929 892,816
Other........................ 458,643 174,287 149,406 214,095
-------- ---------- -------- -----------
Total revenues............ 851,151 1,082,429 833,710 2,835,090
Operating expenses:
Cost of implementation....... 246,544 346,054 132,750 697,541
Cost of Internet banking data
center.................... 61,681 96,732 65,098 213,950
Selling and marketing........ 194,450 568,928 189,265 1,462,943
Product development.......... 106,429 170,419 109,164 785,790
General and administrative... 157,274 440,099 305,188 1,445,481
Depreciation................. 13,780 33,726 23,140 82,893
-------- ---------- -------- -----------
Total operating
expenses................ 780,158 1,655,958 824,605 4,688,598
Operating income (loss)........ 70,993 (573,529) 9,105 (1,853,508)
Other (income) expense:
Interest income.............. (3,672) (26,692) (3,916) (63,436)
Interest expense............. -- 2,084 1,914 18,075
-------- ---------- -------- -----------
Income (loss) before income
taxes........................ 74,665 (548,921) 11,107 (1,808,147)
Income tax expense (benefit)... 25,925 (25,925) 2,000 --
-------- ---------- -------- -----------
Net income (loss).............. $ 48,740 $ (522,996) $ 9,107 $(1,808,147)
======== ========== ======== ===========
</TABLE>
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
Revenues
Implementation Fees. Implementation fees represent fees generated from
developing the client banks' uniquely branded web sites. Implementation fees
increased from $581,000 during the 1998 period to $1.7 million in the 1999
period. This increase was attributable to an increase in the number of new banks
purchasing the nFront solution, from 19 banks purchasing our solution during the
1998 period to 83 banks during the 1999 period. The increase in banks purchasing
our Internet banking solution reflects increased client bank acceptance of
Internet banking as well as continued development of our products and services
and an increase in our sales force from one individual at March 31, 1998 to a
team of 14 sales representatives at March 31, 1999. We added 12 new sales
representatives since December 1, 1998. Additionally, we introduced our
nBusiness product in March 1999.
Monthly Service Fees. Monthly service fees consist of the monthly fees
charged to our client banks based primarily on the number of bank customers with
accounts on the system and the volume of transactions such as bill payment, fund
transfers and check imaging. These fees increased from $103,000 in the 1998
period to
31
<PAGE> 34
$893,000 in the 1999 period. This increase is attributable to the increase in
customers at our client banks utilizing the nFront system from approximately
3,000 at March 31, 1998 to approximately 19,500 at March 31, 1999.
Other. Other revenue consists of the fees charged to our client banks for
materials and services to support marketing and training efforts as well as
other non-recurring fees, including fees for custom web site development. These
revenues increased from $149,000 in the 1998 period to $214,000 in the 1999
period primarily because of increased sales of our marketing materials.
Expenses
Cost of Implementation. Cost of implementation consists primarily of
salaries and wages and facilities costs directly attributable to the
implementation process. Cost of implementation increased from $133,000 in the
1998 period to $698,000 in the 1999 period. This increase reflects the
significant growth in personnel required to accommodate the increase in new
banks purchasing our solution.
Cost of Internet Banking Data Center. Cost of Internet banking data center
consists primarily of salaries and wages and communications costs required to
operate the Internet banking data center. These costs increased from $65,000 in
the 1998 period to $214,000 in the 1999 period to support the significant growth
in the number of client banks and those banks' customers utilizing the nFront
system.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries and wages, sales commissions, advertising, travel, public relations and
marketing materials and tradeshow costs. Sales and marketing expenses increased
from $189,000 in the 1998 period to $1.5 million in the 1999 period. The
increase reflects the expansion of our sales force and a substantial increase in
sales commissions paid to our sales representatives and companies with which we
have strategic marketing alliances due to our increased sales. We believe that
these expenses will increase significantly in the future as we continue to
expand our sales force and increase our marketing and advertising efforts.
Product Development. Product development expenses consist primarily of
salaries and wages costs. Product development expenses increased from $109,000
in the 1998 period to $786,000 in the 1999 period. This increase reflects the
increase in technical personnel to support the continued development of our
nHome product and the development of our new nBusiness product, which was
released in March 1999.
General and Administrative. General and administrative expenses consist
primarily of salaries and wages and other related costs for operations and
executive employees, professional fees and facilities-related expenses. General
and administrative expenses increased from $305,000 in the 1998 period to $1.4
million in the 1999 period. This increase is attributable to an increase in
personnel and facilities expenses necessary to support our expanded operations.
Depreciation. Depreciation expense increased from $23,000 in the 1998
period to $83,000 in the 1999 period primarily as a result of depreciation of
new computer equipment associated with the growth of the Internet banking data
center as well as depreciation of our enhanced administrative systems. During
the 1999 period, we added new sales automation, customer support and accounting
systems.
32
<PAGE> 35
Interest Income. Interest income increased from $4,000 in the 1998 period
to $63,000 in the 1999 period as a result of interest earned on cash balances
during the period. We raised approximately $2.8 million in proceeds from private
equity offerings from May 1998 to September 1998.
Interest Expense. Interest expense increased from $2,000 in the 1998
period to $18,000 in the 1999 period as a result of borrowings under our line of
credit facility with Silicon Valley Bank. This line of credit was executed in
August 1998. Outstanding borrowings under the facility totaled $729,000 as of
March 31, 1999.
Income Taxes. As of March 31, 1999, we had approximately $2.0 million of
federal net operating loss carryforwards, which begin expiring in 2013.
Utilization of these net operating loss carryforwards could become subject to
annual limitation due to "change of ownership" provisions of the Internal
Revenue Code and similar state provisions. For financial reporting purposes, a
valuation allowance has been recognized to reduce net deferred tax assets to
zero due to uncertainties with respect to nFront's ability to realize the
benefit of deferred income tax assets.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Revenues
Implementation Fees. Implementation fees increased from $358,000 in fiscal
1997 to $723,000 in fiscal 1998. This increase was attributable to the fact that
only six new client banks purchased the nFront solution during fiscal 1997 while
35 banks purchased the nFront solution during fiscal 1998. This increase was
partially offset during fiscal 1998 by the modification of our pricing structure
to lower the up-front charges to the client bank and establish recurring monthly
service fees as well as other transaction-based fees.
Monthly Service Fees. Monthly service fees increased from $34,000 in
fiscal 1997 to $185,000 in fiscal 1998 as a result of the increase in the number
of client bank customers using nFront's products.
Other. Other revenue decreased from $459,000 in fiscal 1997 to $174,000 in
fiscal 1998. This decrease is primarily attributable to one-time revenue
generated from a customized project performed for one client bank in fiscal
1997.
Expenses
Cost of Implementation. Cost of implementation increased from $247,000 in
fiscal 1997 to $346,000 in fiscal 1998. This increase is attributable to the
increase in client banks sold from six in fiscal 1997 to 34 in fiscal 1998.
Cost of Internet Banking Data Center. Cost of Internet banking data center
increased from $62,000 in fiscal 1997 to $97,000 in 1998. These costs increased
to support the significant growth in the number of client banks and these banks'
customers utilizing the nFront system.
Selling and Marketing. Selling and marketing expenses increased from
$194,000 in fiscal 1997 to $569,000 in fiscal 1998. This increase was due
primarily to a substantial increase in sales commissions due to our increased
sales.
33
<PAGE> 36
Product Development. Product development expenses increased from $106,000
in fiscal 1997 to $170,000 in fiscal 1998. This increase reflects the increase
in technical personnel to support the continued development of our nHome
product.
General and Administrative. General and administrative expenses increased
from $157,000 in fiscal 1997 to $440,000 in fiscal 1998. This increase is
attributable to an increase in personnel and facilities expenses necessary to
support our expanded operations.
Depreciation. Depreciation expense increased from $14,000 in fiscal 1997
to $34,000 in fiscal 1998 primarily as a result of depreciation of new computer
equipment associated with the growth of the Internet banking data center.
Interest Income. Interest income increased from $4,000 in fiscal 1997 to
$27,000 in fiscal 1998 as a result of interest earned on cash balances during
the period. This increase is due primarily to interest earned on the investment
pending use of the private equity offering proceeds received during fiscal 1998.
34
<PAGE> 37
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly financial information for
each of the seven quarters during the fiscal year ended June 30, 1998 and the
nine months ended March 31, 1999. In the opinion of management, this information
has been prepared on the same basis as the audited financial statements and
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the unaudited quarterly results included in this
prospectus. We expect to continue to experience fluctuations in our quarterly
operating results. Our quarterly results have in the past been subject to
fluctuations and, therefore, the operating results for any quarter or quarters
are not necessarily indicative of results for any future period. The quarterly
results should be read in conjunction with our financial statements and related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1998 1998 1998 1998 1999
------------- ------------ --------- --------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Implementation fees...... $ 217,313 $ 134,500 $ 229,562 $ 141,484 $ 481,677 $ 730,171 $ 516,331
Monthly service fees..... 28,517 28,603 45,809 82,354 132,706 363,243 396,867
Other.................... 39,982 98,325 11,099 24,881 12,014 105,559 96,522
--------- --------- --------- --------- ---------- ---------- -----------
Total revenues......... 285,812 261,428 286,470 248,719 626,397 1,198,973 1,009,720
Operating expenses:
Cost of implementation... 31,414 50,635 50,701 213,304 211,823 219,186 266,532
Cost of Internet banking
data center............ 29,587 14,256 21,255 31,634 47,085 94,826 72,039
Selling and marketing.... 29,481 52,191 107,593 379,663 260,471 428,366 774,106
Product development...... 32,786 41,267 35,111 61,255 146,881 226,610 412,299
General and
administrative......... 82,350 92,242 130,596 134,911 363,640 464,646 617,195
Depreciation............. 6,642 7,886 8,612 10,586 16,048 25,977 40,868
--------- --------- --------- --------- ---------- ---------- -----------
Total operating
expenses............. 212,260 258,477 353,868 831,353 1,045,948 1,459,611 2,183,039
Operating income (loss)... 73,552 2,951 (67,398) (582,634) (419,551) (260,638) (1,173,319)
Other (income) expense:
Interest income.......... (1,220) (985) (1,711) (22,776) (26,186) (20,126) (17,124)
Interest expense......... -- 665 1,249 170 518 8,233 9,324
--------- --------- --------- --------- ---------- ---------- -----------
Income (loss) before
income taxes........... 74,772 3,271 (66,936) (560,028) (393,883) (248,745) (1,165,519)
Income tax expense
(benefit).............. 13,459 589 (12,048) (27,925) -- -- --
--------- --------- --------- --------- ---------- ---------- -----------
Net income (loss)......... $ 61,313 $ 2,682 $ (54,888) $(532,103) $ (393,883) $ (248,745) $(1,165,519)
========= ========= ========= ========= ========== ========== ===========
</TABLE>
The fluctuation in implementation fee revenue in the quarters ended
September 30, 1997, December 31, 1997 and March 31, 1998 reflects the
unpredictability of client bank sales in the early stages of our business. The
decrease in implementation fee revenue and the corresponding increase in other
fees during the quarter ended June 30, 1998 reflects our significant decrease in
the standard up-front implementation fee resulting from our migration from a
licensing fee structure to a structure based on recurring revenue generation.
The decrease in implementation fee revenue during the quarter ended March 31,
1999 reflects a decrease in the number of new banks purchasing nFront products
and services in December 1998 and January 1999 as compared to the previous
quarter and the resulting reduction in revenue recognized over the three month
implementation
35
<PAGE> 38
periods. The relatively slower growth in monthly service fees during the same
quarter also reflects a decrease in the number of new banks purchasing nFront
products and services in December 1998 and January 1999. Our sales have
historically decreased in December. Additionally, our focus on building the
sales team contributed to slower sales in January 1999.
The increase in cost of implementation during the quarter ended June 30,
1998 reflects an increase in one-time set up costs to establish our bill payment
interfaces. The increase in selling and marketing expenses during this quarter
reflects a one-time contractually agreed upon fee paid to a client bank.
Our revenues and operating results are likely to vary significantly from
quarter to quarter in the future due to a number of factors, many of which are
outside of our control. These factors include: our ability to sell our products
and services to banks; our client banks' abilities to convert their customers to
Internet banking; services or products introduced by us or by our competitors;
the timing and uncertainty of sales cycles; seasonal declines in sales, which
typically occur in the fourth calendar quarter; the level of Internet usage; our
ability to attract, integrate and retain qualified personnel; our ability to
successfully integrate operations and technologies from acquisitions or other
business combinations; technical difficulties or system downtime affecting the
Internet generally or the operation of our client banks' web sites; and general
economic conditions, as well as economic conditions specific to the banking and
financial services industries.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have raised approximately $4.0 million of capital,
consisting of $2.3 million of redeemable convertible preferred stock, $950,000
of common stock and $750,000 of debt. Through March 31, 1999, we have invested
$900,000 in capital expenditures. Beyond our capital expenditures, the funds we
have raised have been applied to support our working capital needs. Our working
capital needs have expanded significantly as our client bank base has grown to
122 banks as of March 31, 1999.
On June 17, 1999, we entered into a loan agreement with NationsBank, N.A.,
whereby NationsBank agreed to loan us up to $5.0 million. The Loan includes a
$4.4 million revolving line of credit and a $575,000 term loan. We used
approximately $575,000 of the proceeds from the term loan toward repayment of
the debt outstanding with Silicon Valley Bank and borrowed an additional
$312,500 for working capital and to pay closing costs. The term loan is to be
repaid in equal monthly installments of principal, plus accrued interest,
through August 15, 2001. The line of credit terminates and must be repaid upon
the first to occur of (a) December 31, 1999, (b) the closing of this offering or
(c) the 25th business day following demand by NationsBank if this offering has
not closed by September 15, 1999. We are repaying both the term loan and the
line of credit from the proceeds of this offering. At March 31, 1999, we had
cash of $1.5 million.
In April 1999, we entered into a debenture purchase agreement with Noro-
Moseley Partners IV, L.P. Under this agreement, Noro-Moseley agreed to purchase
up to $5.0 million of senior subordinated debentures upon request by us. No
debentures have been issued under this agreement. The obligation of Noro-Moseley
to purchase debentures under the agreement expires upon the completion of this
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offering. In exchange for its commitment under the agreement, we agreed to issue
to Noro-Moseley a three-year warrant to purchase shares of common stock, the
number of shares and exercise price of which were determined by reference to the
price per share in this offering. Based on the price per share in this offering,
the warrant entitles Noro-Moseley to purchase 50,000 shares of common stock at
$10.00 per share. One of our directors, Mr. Charles D. Moseley, Jr., is a member
of MKFJ-IV, LLC, the general partner of Noro-Moseley.
We may borrow additional amounts under the line of credit prior to the
consummation of the offering to fund our current working capital needs. The
proceeds of the offering will be used to repay any additional debt we incur
prior to completion of the offering to fund our current working capital needs.
In the next twelve months we expect to invest approximately $4.5 million in
capital expenditures. We believe that our existing capital resources, together
with the estimated net proceeds from this offering, will be sufficient to fund
our operations for at least the next 18 months. If we expand more rapidly than
currently anticipated, if our working capital needs exceed our current
expectations or if we make acquisitions, we may need to raise additional capital
from equity or debt sources. We cannot be sure that we will be able to obtain
the additional financing necessary to satisfy these expanded cash requirements
or to implement an expanded growth strategy on acceptable terms or at all. If we
cannot obtain this financing on terms acceptable to us, we may be forced to
curtail some planned business expansion and may be unable to fund our ongoing
operations.
During the nine month period ended March 31, 1999, we used net cash of $1.7
million for operating activities, as compared to $236,000 for the nine month
period ended March 31, 1998. Operating activities for the nine month period
ended March 31, 1999 consisted primarily of a $1.8 million net loss. Cash used
in operating activities in fiscal 1998 included a net loss of $523,000 and an
increase in accounts receivable of $175,000 partially offset by an increase in
deferred revenue of $522,000. Cash provided by operating activities in fiscal
1997 included net income of $49,000 and an increase in accrued liabilities of
$214,000.
Cash used in investing activities was $716,000 for the nine month period
ended March 31, 1999, as compared to $66,000 for the same period ended March 31,
1998. Investing activities for the 1999 period consisted of capital expenditures
totaling $716,000. These capital expenditures were related primarily to the
expansion of the Internet banking data center as well as the additional
furniture and equipment needed to accommodate our growth. Cash used in investing
activities in fiscal 1998 consisted of capital expenditures of $120,000 related
primarily to equipment purchases for the Internet banking data center. Cash used
in investing activities in fiscal 1997 consisted of capital expenditures of
$47,000 related primarily to purchases of office equipment.
Cash provided by financing activities was $1.4 million for the nine months
ended March 31, 1999, as compared to $300,000 for the 1998 period. Financing
activities included net proceeds from our bank credit facility of $729,000 and
$650,000 from the sale of our common stock. Cash provided by financing
activities in fiscal 1998 included proceeds of $2.3 million from the sale of our
preferred stock and $300,000 from the sale of our common stock. Cash provided by
financing activities in fiscal 1997 consisted of $500 from the sale of our
common stock.
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RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1998, we adopted Statement of Financial Accounting
Standard No. 130, Reporting for Comprehensive Income, or FAS 130. FAS 130
requires disclosures of components of non-stockholder changes in equity in
interim periods and additional disclosures of components of non-stockholder
changes in equity on an annual basis. Adoption of FAS 130 had no impact on our
results of operations or financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, Disclosures about Segments of an
Enterprise and Related Information, or FAS 131. We adopted FAS 131 effective
July 1, 1998. The adoption of this standard did not have a material effect on
our financial statement disclosures.
In March 1998, the AICPA issued Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, or SOP
98-1. We will adopt SOP 98-1 effective July 1, 1999. We have not completed our
evaluation of the impact of adopting SOP 98-1 but do not expect its adoption to
have a material effect on our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
nFront's interest income and expense is sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates
affect the interest on nFront's cash equivalents earned as well as the interest
incurred on nFront's long-term debt, respectively. Based on our cash equivalents
balance and level of debt at March 31, 1999, nFront's exposure to interest rate
risk is not material.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year without specifying the century.
As a result, date-sensitive software may recognize a date of "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of nFront's operations, including a
temporary inability to process transactions, send invoices or engage in other
business activities, and, as a result, the operations of the banks and end users
that we serve. Year 2000 issues impact nFront both on an external basis in
connection with the products and services we offer to banks and end users, as
well as on an internal basis as to our own operations and systems. We also face
risks relating to the potential year 2000 non-compliance with institutions that
provide services to us, merchants processing electronic transfer of funds, the
FedWire system governing electronic funds transfers and the Federal Reserve
system itself. We believe that based on our assessments to date, material year
2000 issues that we have identified that are within our control can be
corrected. The failure of nFront or third party hardware or software that is
used by nFront or in conjunction with our products to be year 2000 compliant
could have a material adverse effect on nFront's financial position and results
of operations.
Year 2000 Project Team. We have assembled a year 2000 project team,
composed of nFront employees from our senior management, product management,
development, Internet banking data center, support, implementation, accounting
and
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facilities management working groups. Our year 2000 project team has identified
software, equipment and systems that are material to our business, and we have
reviewed and tested our nFront products, as well as the software, equipment and
systems supplied to us by third party vendors, to determine their ability to
correctly process date changes from 1999 through 2000. The goals of the project
team are to minimize any year 2000-related impact to our bank customers and
their customers; maintain year 2000 readiness as a top business priority; and
work closely with our internal and external business associates to achieve year
2000 readiness. Management believes the costs related to year 2000 compliance
have not and will not have a material effect on nFront's financial condition,
results of operations and cash flows.
nFront Products. We designed our products to be year 2000 compliant. Year
2000 remediation efforts to nFront's products were minor due to nFront's
awareness of year 2000 issues when our products were updated in early 1998.
nFront products require users to enter a four-digit date code for each date, and
each product process stores and displays dates only in a four-digit year format.
We tested our products in test environments intended to emulate a year 2000
environment. Testing was performed on the century date change as well as other
critical date rollovers such as leap year using significant dates both before
and after January 1, 2000. No significant problems were detected as a result of
this testing.
Year 2000 External Efforts and Issues. We have substantially completed the
replacement, modification or retirement of hardware or software components for
nFront products and services that were identified by the year 2000 project team
to be vital to our core business processes and at risk for year 2000 failures.
In addition, we have requested that our customers, vendors, and other business
associates participate in our readiness efforts and update us on their year 2000
progress. Many of our computer systems and business operations are provided
and/or maintained by outside suppliers. nFront's key vendors and suppliers,
including core processors with which our systems interface, have been asked to
demonstrate sufficient year 2000 readiness. Where feasible, we have tested
vendor supplied products that are critical to our operations.
Year 2000 Internal Efforts and Issues. Our year 2000 project team has
completed corporate-wide inventory of nFront's internal application and system
software and of our computers and other equipment, such as our building security
systems, fire alarm systems and heating and air conditioning equipment, to
determine if this equipment uses embedded computer chips that may be date
sensitive. Based on this analysis, nFront has upgraded hardware and software
deemed vital to our on-going business by the year 2000 project team to versions
or releases identified by their vendors as year 2000 ready or compliant;
implemented computer code changes for non-critical issues not affecting year
2000 compliance; and substantially completed remediation of identified year 2000
issues in "mission critical" systems, or systems that are vital to the
successful continuance of core business activities.
Most Likely Worst Case Scenarios of Year 2000 Problems. nFront expects to
identify and resolve all year 2000 problems that could materially adversely
affect its business, financial condition or operating results. However, we
believe that it is not possible to determine with complete certainty that all
year 2000 problems affecting us have been identified or corrected. In addition,
we cannot accurately predict how many failures related to the year 2000 problem
will occur or the severity, duration or
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financial consequences of these failures. As a result, we expect that the
following worst case scenarios could occur:
- a significant number of operational inconveniences and inefficiencies for
nFront, our services and our clients that may divert our time and
attention and financial and human resources from our ordinary business
activities; and
- a number of serious system failures that may require significant efforts
by us to prevent or alleviate material business disruptions.
Contingency and Business Continuity Planning. Our year 2000 project team
has designed a corporate business continuity plan specific to year 2000 issues
to address potential disruptions to business identified by the year 2000 project
team that may impact our customers and other business associates. In addition,
we have developed consolidated readiness plans and schedules for business areas
to enable us to react to such identified potential events that could impact
normal business routines. Depending on the systems affected, these plans could
include (a) replacement of affected equipment; (b) use of backup equipment or
facilities; (c) increased work hours for our personnel to correct any year 2000
problems which arise; and (d) other similar approaches. If we are required to
implement any of these contingency plans or are unable to implement any of these
plans effectively, they could have a material adverse effect on our business,
financial condition or operating results.
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BUSINESS
The following Business section contains forward-looking statements relating
to future events or the future financial performance of nFront, which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of other factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
nFront provides products and services designed to enable small to mid-sized
banks to provide Internet banking and other financial services to their retail
and commercial customers. Through our outsourcing model, our client banks
purchase our products as services, paying us on a monthly basis depending on the
level of usage by their customers. Our solution enables our client banks to
utilize the Internet to retain current customers, acquire new customers, offer
additional products and services, decrease costs and increase fee income. By
enabling banks to offer comprehensive Internet banking services, as well as
additional financial products and services, the nFront solution enables our
client banks to create a bank-branded web site that becomes a financial
destination for the client bank's customers.
Our solution consists of our Internet banking products, our Internet
banking data center which facilitates use of the products, implementation and
web site design services and marketing support services. Our nHome product
provides Internet banking services targeted at meeting the banking needs of a
bank's retail customers. Our nBusiness product provides banking services
specifically designed to meet the needs of the bank's commercial customers.
Through our Internet banking data center, we provide the necessary
communications, transaction processing and data storage services to operate the
system. We work closely with each of our client banks to design the appearance
of their Internet branches, implement and integrate our system with the banks'
existing computer systems and train the banks' employees to market our products.
As of March 31, 1999 we had 122 client banks.
INDUSTRY BACKGROUND
Growth of the Internet and Electronic Commerce
The Internet has emerged as a significant global communications medium
enabling millions of people to share information and conduct business
electronically. International Data Corporation estimates that the number of Web
users world-wide will grow from approximately 97 million in 1998 to
approximately 320 million by 2002. This growth is being driven by a number of
factors, including an expanding base of personal computers in the home and
workplace; improvements in network infrastructure; easier, faster and cheaper
access to the Internet and commercial on-line services; advances in network and
communication security; increased general awareness of the Internet among
consumer and business users; and the introduction of alternative
Internet-enabled devices, such as televisions and handheld devices.
As access to the Internet expands, businesses are increasingly using the
Web as an effective means of retaining customers, acquiring new customers,
selling additional products and services to their existing customer base and
reducing costs.
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The ease of use, functionality and accessibility of the Internet have made it an
increasingly attractive commercial medium by providing features that
historically had been unavailable through traditional channels of customer
contact. For example, the Internet provides users with convenient access to
large amounts of dynamic data to support their financial management, investment
management and purchasing decisions. Through the Internet, businesses are able
to communicate effectively with customers by providing access to information,
including frequent updates of new products and services, content, pricing and
visual presentations. Additionally, businesses can utilize customer-specific
data obtained through the customer's interaction with the business' web site to
market services and products targeted at the particular customer. International
Data Corporation estimates that goods and services purchased over the Internet
in the U.S. will increase from approximately $26 billion in 1998 to over $269
billion in 2002.
In addition to its use as a general commercial medium, the Internet has
rapidly emerged as a means of providing financial products and services. Many
companies increasingly are offering a variety of financial products and
services, including credit cards, brokerage services, insurance products and
commercial and retail banking services, via the Internet. For example, according
to International Data Corporation, the number of on-line brokerage accounts in
the United States is expected to grow from 3.5 million at the end of 1997 to 24
million at the end of 2002.
Emergence of Internet Banking
Banks have historically used technology to create alternative distribution
channels for their services in order to reduce their customers' dependence on
traditional physical branch locations. Examples include automated teller
machines or ATMs, telephone banking and electronic banking. The primary benefits
sought by banks in their attempts to reduce customers' reliance on traditional
branches were, among others, to reduce costs, increase the breadth and
availability of services and differentiate themselves from their competitors.
Although banks have been successful in directing customers to alternative
distribution channels, these alternatives have historically provided customers
with only limited access to the services available at a traditional branch
location. In seeking cost effective, convenient alternative distribution
channels that will provide customers a full array of services, banks have
recently focused on electronic banking alternatives, such as PC banking and
Internet banking.
Banks originally offered electronic banking by distributing their
proprietary PC-based software to their customers or by developing links between
the bank's computers and PC-based personal finance manager software packages
such as Intuit's Quicken(R) or Microsoft's Money. PC banking provides access to
the customer's accounts and the ability to execute banking transactions.
However, limitations of PC banking include:
- customers can only access their bank accounts and related information
from the particular PC on which the PC banking software has been
installed;
- it can be expensive for the bank to provide and support PC banking
because of the significant costs to develop, purchase and maintain the
software and hardware necessary to integrate with the bank's core
operating system and to support the locally-installed copies of software
on the customers' PCs; and
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- PC banking does not enhance the bank's ability to identify and exploit
opportunities to sell other products and services to the customer.
Consequently, only a relatively small number of banks have offered a PC
banking solution.
The proliferation of the Internet has enabled the development and
implementation of Internet banking systems that overcome many of the limitations
of PC banking. Unlike PC banking, Internet banking only requires that a customer
have a secure Web browser for access to the Internet and the bank. Internet
banking does not require the user to have any other specific software and does
not restrict the customer to a particular PC. Instead, customers may access
their bank information through the Internet using any Web-enabled device to
review account activity, transfer funds, pay bills or transact other business.
Account information is stored on a secure server at all times, protected by
technology designed specifically to safeguard this information. According to
Forrester Research, the number of households banking on-line in the United
States is projected to grow from 2.4 million in 1997 to more than 18 million by
2002.
According to the Office of the Comptroller of the Currency, as of June 30,
1998, there were 374 banks offering transactional Internet banking web sites in
the United States. With the rapid growth of the Internet banking market, many
banks are compelled to offer Internet banking as part of their overall services
in order to remain competitive and continue to retain and attract customers.
Challenges to Implementing Internet Banking Systems
Many banks choose between using in-house resources or licensed technology
to implement an Internet banking system. Common challenges for banks trying to
implement Internet banking systems using internally-developed or licensed
technology include:
- substantial initial investments in hardware, software and communications
equipment required to implement these systems and maintain security and
redundancy;
- difficulty in identifying, attracting and retaining qualified personnel
to implement and manage the system;
- limited access to technical resources to integrate an Internet banking
system into the bank's core computer systems, monitor the system for
security and regulatory compliance and train and support the bank's
customers on the use of the system; and
- competitive risks associated with possible delays in implementing,
supporting or upgrading an Internet banking solution in-house.
These challenges are particularly difficult for most small to mid-sized
banks due to their limited capital and internal technical resources. Many larger
national or "super-regional" banks offer some form of Internet banking currently
and bank customers are increasingly demanding these services. Small to mid-sized
banks are being pressured to provide competitive solutions.
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Many banks, particularly small to mid-sized banks, are seeking to outsource
their Internet banking services as a more cost-effective, efficient means of
providing these services to their customers. An outsourced Internet banking
solution can provide to the small to mid-sized bank the resources necessary to
create an Internet banking service competitive with the services offered by the
large banks.
nFront's Market Opportunity
We believe that a significant opportunity exists to provide small to
mid-sized banks with a comprehensive, outsourced solution that enables these
banks to offer Internet banking services to their customers. As of September 30,
1998, there were more than 10,000 banks, savings and loans and thrifts in the
United States and all but 81 of those had assets below $10 billion.
Approximately 175 million, or approximately 52%, of the deposit accounts with
balances less than $100,000 were held by banks in that small to mid-sized bank
segment. Many consumers and small businesses continue to be attracted by the
customer orientation and local community presence offered by small to mid-sized
banks and are beginning to demand the convenience of Internet banking.
Internet banking also permits banks to more easily expand the financial
products and services offered to their customers to include brokerage services,
credit cards, bill presentment, bill payment, insurance, tax return preparation,
full on-line account origination and retail Web-based purchasing.
NFRONT'S SOLUTION
We provide a comprehensive, outsourced solution that enables small to mid-
sized banks to offer their customers complete branch banking services through
the Internet. Our solution consists of our Internet banking products, our
Internet banking data center which facilitates the use of these products,
implementation and web site design services and marketing and support services.
Our nHome product provides Internet banking services targeted at meeting the
needs of a bank's retail customers. Our nBusiness product provides banking
services specifically designed to meet the needs of the bank's commercial
customers. The nFront Internet banking data center provides the web server
computers, communications, data storage, retrieval and security, as well as
support personnel necessary to operate an Internet branch for each bank, that is
integrated with the bank's existing computer systems. Our solution enables banks
to utilize the Internet to compete more effectively in their markets, retain
current customers, acquire new customers, offer additional products and
services, decrease costs and increase fee income.
By creating Internet branches for our client banks, we enable banks to
become the destination on the Web for bank customers who are increasingly using
the Web to research, evaluate and, if desired, purchase a broad array of
financial products and services. Because of the integral role of bank accounts
in all types of financial transactions and the importance of expanded access to
the information relating to those accounts, we believe that banks are
particularly well suited to provide this financial destination on the Web for
their customers. Our products and services enable our client banks' customers to
access their personal account information, perform a variety of financial
transactions and conduct investment research on the banks' web site. We plan to
expand our products and services to enable client banks
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to offer investment portfolio management, insurance and related sales to
strengthen their position as the financial destination on the Web for their
customers.
The key differentiators of our products and services are:
Outsourced Solution. Our outsourced solution has been designed to have
significantly lower up-front costs, lower overhead, shorter lead times on
initial implementation and upgrades and better access to qualified personnel
than the bank would experience on an in-house basis. Finally, by aggregating the
customer bases and assets of our client banks, our outsourced solution enables
us to take advantage of economies of scale and increased buying power in
negotiating agreements with third parties to offer additional products and
services to our client banks' customers, resulting in improved economic
arrangements than would otherwise be the case. By outsourcing the system design,
implementation, operation and support, the bank is free to focus on its core
competency, serving its banking customers, rather than managing the growing
complexities of Internet technology.
Fat Server Architecture. Our products are based on a system architecture
that is commonly referred to as a "fat server" design. A "server" is the
computer or collection of computers that store information and handle many of
the more complex data processing functions. A "fat server" refers to a server
that has been configured to handle significant volumes of data storage and
retrieval, as well as complex data processing functions. With "fat server"
architecture, the system utilizes a relational database located on the nFront
system server to receive and store customer data from a bank's core computer
system. This data storage architecture allows the nFront system to store and
organize the client bank customer's account data locally, without a continuous,
direct connection between the customer and the bank's core system. On the other
hand, a "thin server" refers to a server which acts more as a conduit for
information which is processed either by other servers or by the PCs accessing
this server. With the "thin server" model, which connects the customer directly
to the bank's core system, the information available to the customer is limited
to data currently accessible on the bank's core system.
Fat server architecture provides the following functional advantages over
thin server architecture:
- Access to historical financial information. Information stored on the
fat server allows a customer to generate consolidated reports on
financial transactions spanning an extended period of time. nFront's fat
server system currently stores up to two years of customer data, whereas
thin server systems typically provide access to 60 to 90 days of
financial data. We believe access to more historical account data
promotes increased customer loyalty for a bank.
- Analysis of customer information. A fat server solution enhances the
bank's ability to extract and analyze relevant customer account
information and more efficiently cross-sell products.
- Effective consolidation of financial services. The fat server can more
effectively consolidate the customer's financial data from disparate host
systems in one place. These host systems include banking, brokerage and
insurance financial data.
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Ease of Integration through Relationships with Core Processors. We have
interfaces with 28 different core processing systems used by banks, enabling us
to offer faster, more cost-effective integration of our Internet banking
products with a bank's existing core processing system. Core processors provide
the software and services required by banks to process their transactions.
Microsoft NT-Based. The nFront solution is designed to take advantage of
the Microsoft NT application environment. In 1997 we received the Microsoft
Corporation "Best Industry Solution for Internet Banking" award. The nFront
solution utilizes the Microsoft BackOffice suite, which provides an integrated,
scalable system foundation, allowing nFront to focus on product development
instead of third-party application selection and integration. The integrated
suite of NT server applications enables nFront to efficiently add new bank
clients and their customers without interrupting service to our existing
customers.
STRATEGY
Our objective is to be the leading provider of Internet banking products
and services to the small to mid-sized bank market and to create Web-based
financial destinations for the millions of banking customers in that market. To
achieve our objective, we intend to:
Capitalize on Exclusive, Strategic Marketing Alliances to Expand Base of
Client Banks. Primarily through our strategic marketing alliances with bank
core processors and other related service providers, we plan to increase the
number of banks offering the nFront products and services to their customers. We
have formed exclusive, five year relationships with many of the key core
processors and other providers of supporting technology to our target banking
market segment. We recently expanded our national sales force to pursue
additional sales opportunities through our strategic marketing relationships.
Assist Client Banks in Converting their Customers to the nFront System. A
portion of our service fees are based on the conversion of our client banks'
customers to our system, as well as the number of their customers using our
system each month. We offer to client banks our marketing program and other
support services to promote conversion of their customers to our system. We are
currently expanding our marketing team to achieve this objective.
Build Awareness of nFront's Brands. As our client banks develop their
positions as comprehensive financial destinations on the Web, we are positioning
the "nFront" brand to create broad market recognition of nFront as the leading
provider of solutions enabling banks to offer Internet banking, financial
services and financial destination sites. The nFront logo appears on our client
banks' Internet branches, further promoting the nFront name. In addition, we
plan to use our www.banking.com web site and increased advertising to promote
awareness of our products and services.
Generate Incremental Revenue by Offering Additional Financial Products and
Services through the nFront System. We intend to generate incremental revenue
for ourselves and our client banks by providing additional products and services
to the client banks' customers through the nFront system. These additional
services may include, among others, insurance, brokerage and bill presentment
services. In
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addition to providing incremental revenue, these products and services should
enhance the client banks' positions as financial destinations on the Web and
improve customer retention for the banks.
Continue to Enhance Our Products and Services. We believe our system
architecture serves as the foundation for our future position as a leader in the
Internet banking market for small to mid-sized banks. We have made and intend to
continue to make substantial investments to improve our core technologies to
enhance the functionality and performance of our products and services.
PRODUCTS AND SERVICES
nFront offers products and services designed to enable banks to offer
complete branch banking services over the Internet to retail and commercial
customers. Our nHome product provides Internet banking services to a bank's
retail customers. Our nBusiness product provides these services to a bank's
commercial customers. We work closely with each of our client banks to design
the appearance of their Internet branches to achieve each bank's particular
branding objectives. The nFront Internet banking data center provides the
computers that operate as the web servers for the system, the communications
equipment, the data storage, retrieval and security software and hardware, as
well as the support personnel, necessary to operate each client bank's Internet
branch and connect each Internet branch to the bank's existing computer systems.
Through our outsourcing model, our client banks purchase our products as
services, paying us on a monthly basis depending on the level of usage by their
customers. Pricing for our nHome and nBusiness products include an up-front
implementation fee payable upon execution of the contract, recurring monthly
fees, transaction fees and fees for additional marketing and support services.
Products
nHome. The nHome product provides a bank's retail customers a wide array
of branch banking services over the Internet. nHome was initially released in
November 1996. As of March 31, 1999, there were 122 agreements with banks to
provide the nHome product to their customers. With the nHome product, a bank's
retail customers can:
- open new accounts;
- access account summaries and histories;
- download account information to personal finance software, such as
Intuit's Quicken or Microsoft's Money;
- receive electronic images of cleared checks;
- transfer funds;
- pay bills;
- manage pending transactions;
- generate custom reports;
- define event notifications;
- receive on-line customer support; and
- view a fully functional Internet banking demonstration.
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nHome also includes components used by the client bank to support the
Internet branch. These administrative components include the ability for the
client banks' customers and potential customers to submit account applications
in a secure environment. Also, the client bank can automatically generate email
responses to customer applications, update product interest rates and terms and
receive customer-specific marketing and data analysis.
nBusiness. The nBusiness product provides to a bank's small business
customers comprehensive commercial banking services over the Internet. nBusiness
was initially released in March 1999 and as of March 31, 1999, there were 37
agreements with banks to provide the nBusiness product to their customers. The
product has been designed to enable the bank to generate additional fee revenue
by offering its commercial customers a broader array of commercial cash
management services than they currently offer. The nBusiness product provides
the bank the same administrative and support functions available in the nHome
product. With the nBusiness product, a bank's commercial customer receives the
functionality of the nHome product, plus, the customer can:
- debit customer accounts;
- issue stop payment orders;
- pay employees;
- create multiple user security profiles;
- issue wire transfers;
- facilitate direct deposit; and
- initiate electronic tax payments.
Services
We provide the implementation services necessary to install our products,
"brand" the bank's Internet branch and integrate the nFront products into the
bank's core processing system. For a typical nHome installation, the
implementation period currently averages approximately three months.
Additionally, we provide the following marketing and support services to our
client banks:
Client Bank Marketing Program. Our client bank marketing program offers
banks marketing campaigns aimed at converting existing bank customers to the
nFront system and acquiring new customers. The program consists of several
separate pre-designed segments from which the bank can choose. Each segment is
complete with "camera ready" collateral marketing material as well as media
campaign strategies. We may print and produce the materials at an additional
cost or the bank may choose a local vendor to print and produce the materials.
Employee Education Program. The Employee Education Program is a training
program designed to help client banks train their employees on the benefits of
the nFront system and Internet banking. nFront typically conducts training at
the client bank. Training covers topics such as connecting to and navigating the
Web, Internet banking, Internet security, email and related topics. nFront can
employ a "train-the-trainer" approach or train the client's front line staff.
The program includes leaders' guides and participants' kits.
Marketing Consulting Services. We also offer customized consulting
services for those banks with specific marketing and training needs. These
services include competitive analyses, performance reporting, product
recommendations and service
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and support recommendations. Consulting projects are priced on a time and
materials basis.
INTERNET BANKING DATA CENTER
All of our client bank Internet branches are hosted and processed in our
Internet banking data center. The data center contains the computers that
operate as the web servers for the system, the communications equipment, the
data storage, retrieval and security software and hardware, as well as the
support personnel, necessary to operate each client bank's Internet branch and
connect each Internet branch to the client bank's existing computer systems. The
data center communicates with a client bank by transferring the data directly
from the client bank's core system to our servers in the data center utilizing
direct data connections and a workstation running at the client bank.
Our data center provides a controlled access environment that includes a
high capacity battery backup system. The battery backup system provides
continuous power to all production systems including servers, monitors,
telecommunications equipment, and employee workstations. In addition, a diesel
power generator provides backup power to our entire facility in the event of an
extended power outage. We have recently entered into an agreement with Exodus
Communications that provides us with a redundant data center, which will allow
us to continue to provide service in the event of a catastrophic loss of our
primary data center. We expect this redundant data center to be operational by
the quarter ending September 30, 1999.
STRATEGIC MARKETING ALLIANCES
When evaluating Internet banking solutions, banks usually focus on the ease
of interface between their existing core banking software and the Internet
banking software. Core banking software is the central software within a bank
that processes information concerning banking transactions such as deposits and
withdrawals. The link between the core banking software and the Internet banking
software allows for the transfer of transactional data between both software
systems. We have formed strategic marketing alliances with vendors of core
banking software and outsourced data processing services who market our products
exclusively to their customer base. These relationships are typically for a five
year period, and we pay commissions to the companies with which we have
strategic marketing alliances. These commissions typically range from 10% to 40%
of the implementation fees and portions of the monthly service fees charged by
nFront, though one agreement provides for a commission of 50% on the
implementation fees. Generally we do not pay commissions on transactional fees
such as bill payment or funds transfers. In addition, we have developed
interfaces to the software systems of each of the companies with which we have
strategic marketing alliances. Our alliances with core processors include BISYS,
BancTec, Sparak and First Commerce Technologies.
BISYS. We have a five-year marketing agreement with BISYS which began in
April 1998, with automatic renewals for successive five-year terms unless
terminated by either party prior to renewal. BISYS, which provides transaction
processing and other administrative and computer processing services to banks
and financial institutions, offers our products to its customer base. Subject to
some restrictions,
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BISYS agrees to use its best efforts not to distribute other Internet banking
solutions. BISYS is entitled to retain a portion of the fees collected on
implementation and monthly service on the nFront System.
BancTec USA, Inc. We have two five-year marketing agreements with BancTec
which began in January 1999 and March 1999, respectively, with automatic
renewals for successive five-year terms unless terminated by either party prior
to renewal. BancTec, which provides transaction processing and other
administrative and computer services to banks and financial institutions, offers
our products to its customers and to its potential bank customers. Subject to
some restrictions, BancTec has agreed that nFront will be its premier provider
of Internet banking solutions to its customers. We pay to BancTec commissions on
the implementation fees and monthly service fees we receive from their
customers.
Sparak. We have a five-year marketing agreement with Sparak which began in
July 1997, with automatic renewals for successive five-year terms unless
terminated by either party prior to renewal. Sparak, which provides transaction
processing and other administrative and computer processing services to banks
and financial institutions, offers our nHome system to its customer base and to
potential bank customers. Sparak has exclusive rights to market nHome to its
customer base and nonexclusive rights with respect to potential bank customers.
We pay to Sparak commissions on the implementation fees and monthly service fees
we receive from their customers.
First Commerce Technologies. We have a five-year marketing agreement with
First Commerce Technologies which began in July 1997, with automatic renewals
for successive five-year terms unless terminated by either party prior to
renewal. First Commerce Technologies, which provides transaction processing and
other administrative and computer processing services to banks and financial
institutions, offers our products to its customers and its potential bank
customers. Subject to some restrictions, First Commerce Technologies agrees to
use its best efforts not to distribute other Internet banking solutions. We pay
to First Commerce Technologies commissions on the implementation fees and
monthly service fees we receive from their customers.
We also have exclusive marketing alliances with other banking technology
providers such as BISYS Document Solutions, a bank check imaging company, and
Southern Data Systems, a bank platform automation company.
SALES
nFront utilizes a direct sales force that works closely with the national
sales forces of each of the companies with which we have strategic marketing
alliances to capitalize on their existing relationships within the banking
community to promote nFront's products and services. Many of nFront's sales
representatives are teamed with and assigned a strategic marketing relationship
customer base on which to focus. The strategic marketing alliance sales
representatives identify banks that are interested in purchasing an Internet
banking solution, qualify the customer and then pass the qualified lead to the
nFront sales person. The nFront sales person manages the sales effort, provides
a demonstration of the products and negotiates and closes the sale. The nFront
sales representative continues to leverage the relationship throughout the sales
process and continues to work jointly with the strategic
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marketing alliance sales representative. We compensate both our sales
representatives and companies with which we have strategic marketing alliances
with commissions.
In addition to sales representatives focused on the strategic marketing
alliances, nFront also has sales representatives that focus exclusively on
specific geographic territories as well as a sales representative that contacts
nFront client banks to explore sales of additional and complementary nFront
products and services. Since December 1, 1998, we have added 12 new sales
representatives, to bring the total to 14 at March 31, 1999.
The typical sales cycle for nFront products is approximately 90 days. We
have recently implemented a sales force automation and customer relationship
management software system that will allow our sales force to view the complete
customer prospect listing, track progress in the sales cycle and report to
management sales progress, thereby facilitating a complete customer contact
program.
MARKETING
We have achieved our historical growth with minimal marketing expenditures.
We have utilized or intend to utilize the following programs and promotional
activities to enhance our sales efforts:
Advertising. We employ joint marketing efforts through our strategic
marketing alliances nationwide, and we advertise in financial publications,
trade magazines and financial industry directories. In addition, the nFront logo
appears on our client banks' Internet branches further promoting the nFront
name.
Public Relations. We proactively pursue public relations opportunities to
build brand awareness for nFront and its products. We target traditional print,
syndicated news services and industry events with our public relations programs.
We participate actively in industry trade shows, both on our own and jointly
with companies with which we have strategic marketing alliances. To date,
participation in industry trade shows has been our primary means of marketing.
Direct Mail. We use direct mail to deliver our message to the key decision
makers at all targeted banks in the United States. Direct mail campaigns will
often be co-branded with the companies with which we have strategic marketing
alliances.
Telemarketing. To support our direct mail campaigns and advertising, we
utilize telemarketing to target decision makers at community banks. We also use
telemarketing to pre-qualify Internet banking leads as well as to sell
additional products and services to existing nFront clients.
PRODUCT DEVELOPMENT
Our product development efforts focus on enhancing current product
functionality and adding new products to the nFront product line. We will
continue to develop real time interfaces, check imaging, bill payment and bill
presentment interfaces to the systems of companies with which we have strategic
marketing alliances. New functionality planned for nHome includes on-line
brokerage, deposit imaging, statement imaging, bill presentment and credit
scoring. New functionality
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planned for nBusiness includes Internet payroll, managerial graphing capability,
electronic data interchange functionality and other business applications.
Our product development strategy includes clear definition and separation
of responsibilities. We approach each development effort using the same
fundamental set of guidelines and standards. The development process also allows
for feedback from nFront's client banks and from internal resources as defined
milestones are reached. nFront uses the rapid application development, or RAD,
technique in order to manage product development cycles to attempt to keep pace
with rapid changes in technology.
CLIENT BANKS
Our target market is the approximately 10,000 small to mid-sized banks in
the United States. As of March 31, 1999, we had 122 client banks, of which 83
had completed implementation and were operating an Internet branch. The average
asset size of our client banks as of that date was $490 million.
For the nine months ended March 31, 1999, no individual client bank
accounted for 10% of our total revenues, although client banks sold and billed
through the BISYS strategic marketing alliance represented 26% of our revenue
for that period. One client bank, First Commerce Bank, accounted for 14% of our
total revenues in the fiscal year ended June 30, 1998 and for 57% of our total
revenues in the fiscal year ended June 30, 1997.
COMPETITION
The Internet technology, financial services and secure network
communication industries all represent dynamic and competitive markets. We
continue to expect competition to intensify in the future, especially with
respect to Internet financial service products. Because of the diverse and
changing competitive marketplace in the financial services industry and for
Internet related products and services, there can be no assurance that we have
identified or considered all possible present and future competitors or that the
discussion set forth below represents a complete coverage of competition.
We believe that we face two basic levels of competition in our market. The
first is competition from companies offering competitive Internet banking
solutions to banks. The second is competition which our client banks face in
providing Internet-based financial products and services to their customer base.
We believe that the principal competitive factors in our market are
industry trust, technical capabilities, operating effectiveness, cost and
scalability, customer service, security, speed to market, and capital. Many of
our competitors have the financial, technical and marketing resources, plus
established industry relationships, to better compete based on these factors.
Competitive pressures we face may have a material adverse effect on our
business, financial condition or operating results.
The market for on-line banking and financial software and services is
competitive, rapidly evolving and subject to technological change. With the
continued development of the Internet as an alternative means of delivering
financial services, we expect competition to intensify. Principal competitors
currently include software companies that provide comprehensive in-house
software and Internet
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integration tools for on-line banking and brokerage solutions and outsourcing
companies that provide similar product functionality to different target
markets.
With respect to solution providers in competition with us, while we believe
no other company delivers comprehensive, outsourced Internet products and
services to banks in our target market, there are a number of companies that
have similar products and services such as Digital Insight, Edify, FundsXpress,
Q-UP, First Data Direct Banking and Security First Technologies. However, many
of our current and potential competitors have longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources.
We also believe that the competitive forces facing us include the various
competitive alternative approaches for Internet banking solutions, such as thin
servers; fat clients (personal financial management software) and in-house
development. Each of these alternatives competes with our fat server, outsourced
solution.
In providing Internet banking solutions to their customers, our client
banks face competition not only from other banks, but also from non-bank
financial institutions, such as brokerage firms and on-line service providers
such as E*TRADE, Intuit's Quicken.com and Yahoo! Finance.
GOVERNMENT REGULATION
We are not licensed by the Office of the Comptroller of the Currency, the
Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of
Thrift Supervision, the National Credit Union Association or other Federal or
state agencies that regulate or monitor banks or other types of providers of
financial electronic commerce services. Federal, state or foreign agencies may
attempt to regulate our activities. Congress could enact legislation that would
require us to comply with data, record keeping, processing and other
requirements. We may be subject to additional regulation as the market for our
business continues to evolve. For example, Regulation E, which is promulgated by
the Federal Reserve Board, governs electronic fund transfers made by regulated
financial institutions and providers of access devices and electronic fund
transfer services, including many aspects of our services. Under Regulation E,
our client banks are required, among other things, to provide disclosure to
retail customers, to comply with notification periods regarding changes in the
terms of service provided and to follow specified procedures for dispute
resolutions. The Federal Reserve Board may adopt new rules and regulations for
electronic funds transfers that could lead to increased operating costs and
could also reduce the convenience and functionality of our services, possibly
resulting in reduced market acceptance. Because of the growth in the electronic
commerce market, Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market, and Federal or
state authorities could enact laws, rules or regulations affecting our business
operations. We also may be subject to Federal, state and foreign money
transmitter laws, encryption and security export laws and regulations and state
and foreign sales and use tax laws. If enacted or deemed applicable to us, these
laws, rules or regulations could be imposed on our activities or our business
thereby rendering our business or operations more costly, burdensome, less
efficient or
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impossible, any of which could have a material adverse effect on our business,
financial condition and operating results.
The market we currently target, the financial services industry, is subject
to extensive and complex Federal and state regulation. Our current and
prospective clients, which consist primarily of commercial banks and thrifts,
operate in markets that are subject to extensive and complex Federal and state
regulations and oversight. While we are not directly subject to these
regulations, our services and related products must be designed to work within
the extensive and evolving regulatory constraints in which our clients operate.
These constraints include Federal and state truth-in-lending disclosure rules,
state usury laws, the Equal Credit Opportunity Act, the Electronic Funds
Transfer Act, the Fair Credit Reporting Act, Bank Secrecy Act and the Community
Reinvestment Act. Because many of these regulations were promulgated before the
development of our solution, the application of these regulations to our
solution must be determined on a case by case basis. We do not make
representations to client banks regarding the applicable regulatory
requirements, but instead rely on each bank making its own assessment of the
applicable regulatory provisions in deciding whether to become a client bank.
Furthermore, some consumer groups have expressed concern regarding the privacy,
security and interchange pricing of financial electronic commerce services. It
is possible that one or more states or the federal government may adopt laws or
regulations applicable to the delivery of financial electronic commerce services
in order to address these or other privacy concerns. It is not possible to
predict the impact that any of these regulations could have on our business.
We currently offer services on the Internet. Due to the increasing
popularity of the Internet, it is possible that laws and regulations may be
enacted with respect to the Internet, covering issues such as user privacy,
pricing, content, characteristics and quality of services and products. The
adoption of any of these laws or regulations may limit the growth of the
Internet, which could affect our ability to utilize the Internet to deliver
banking and other financial electronic commerce services.
INTELLECTUAL PROPERTY
Our success will be heavily dependent upon proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. These laws, procedures and contracts provide only limited
protection. We have applied for the federal registration of service marks for
"nFront," "nHome" and "nBusiness." We have also registered the domain names
"banking.com" and "nFront.com." Despite the precautions that we take, it may be
possible for unauthorized third parties to copy aspects of our current or future
products or to obtain and use information that we regard as proprietary. The
means we employ to protect our proprietary rights may not be adequate.
Additionally, our competitors may independently develop similar or superior
technology. Policing unauthorized use of software is difficult and some foreign
laws do not protect nFront's proprietary rights to the same extent as United
States laws. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Litigation could
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result in substantial costs and diversion of our resources and could materially
adversely affect our business, operating results, and financial condition.
EMPLOYEES
As of March 31, 1999, we had 71 employees. We have never had a work
stoppage and none of our employees are represented under collective bargaining
agreements. We consider our employee relations to be good.
FACILITIES
Our Internet banking data center and administrative, sales, marketing and
development facilities are located in approximately 13,800 square feet of office
space in Norcross, Georgia. This facility is leased to us through August 1,
2003. In addition, we lease approximately 1,000 square feet in a facility in
Bogart, Georgia, which serves as a location for many of our graphic designers.
We are in the process of expanding our Norcross offices to a total of
approximately 20,000 square feet.
LEGAL PROCEEDINGS
nFront is not a party to any material legal proceeding.
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MANAGEMENT
The following table sets forth information about the executive officers and
directors of nFront:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ------------------------------------
<S> <C> <C>
Brady L. "Tripp" Rackley III........ 28 Chairman of the Board of Directors
and Chief Executive Officer
Robert L. Campbell.................. 48 President, Chief Operating Officer
and Director
Jeffrey W. Hodges................... 33 Chief Financial Officer and
Secretary
Brady L. Rackley.................... 55 Director
Thomas E. Greene III................ 52 Director
Charles D. Moseley, Jr.............. 56 Director (1)(2)
William H. Scott III................ 51 Director (1)
James A. Verbrugge.................. 58 Director (2)
Vincent R. Brennan.................. 36 Senior Vice President -- Sales
Steven S. Neel...................... 29 Senior Vice President -- Operations
W. Derek Porter..................... 27 Vice President -- Research and
Development
Adam M. Naide....................... 32 Vice President -- Marketing
Alan W. Powell...................... 29 Vice President -- Sales
</TABLE>
- -------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Brady L. "Tripp" Rackley III, founder of nFront, has served as Chairman of
the Board and Chief Executive Officer of nFront since its inception in 1996.
Prior to forming nFront, Mr. Rackley served as Chief Operating Officer of
LeapFrog Technologies, Inc., a software development company, from October 1995
until February 1996, and as Vice President -- Development of Systeme Corp., a
software development company, from December 1992 until September 1995. Mr.
Rackley received an Industrial Engineering degree from the Georgia Institute of
Technology and has post-graduate studies in business and human computer
interface from the University of Central Florida. Mr. Rackley is also a member
of the board of the Alexander-Tharpe Foundation, Inc. Mr. Rackley is the son of
Brady L. Rackley.
Robert L. Campbell has served as President and Chief Operating Officer of
nFront since July 1998 and as a Director since September 1998. Prior to joining
nFront, Mr. Campbell worked as an independent consultant for Campbell and
Associates from January to July 1998. Mr. Campbell served as President of
Insight Management, a professional services business, from January 1997 until
November 1997. Mr. Campbell served as President and Chief Executive Officer of
Servantis Systems, Inc., a banking and electronic commerce software and services
firm from July 1993 until the company's acquisition by CheckFree Corp. in March
1996. Mr. Campbell received a Bachelor of Science Degree and a Masters of
Business Administration from the University of Tennessee.
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Jeffrey W. Hodges has served as Chief Financial Officer of nFront since
November 1998 and was elected Secretary in April 1999. Prior to joining nFront,
Mr. Hodges served as Vice President -- Controller of Powertel, Inc., a public
wireless telecommunications provider, from June 1995 until November 1998. From
December 1988 until June 1995, Mr. Hodges served as an auditor at Arthur
Andersen, LLP, an independent accounting firm, serving most recently as Audit
Manager from 1992 to 1995. Mr. Hodges is a graduate of Auburn University with a
degree in accounting and is a Certified Public Accountant.
Brady L. Rackley has served as a Director of nFront since its inception in
1996 and served as Secretary from inception to April 1999. From 1990 until 1995,
Mr. Rackley was the President and Chief Executive Officer of Systeme Corp., a
software development company. Mr. Rackley also has served as the Chairman of the
Board, President and Chief Executive Officer of LeapFrog Technologies, Inc., a
software development Company, since October 1995. Mr. Rackley is the father of
Brady L. "Tripp" Rackley III.
Thomas E. Greene III has served as a Director of nFront since May 1998. Mr.
Greene has served as Chairman of Liberty Street Capital Corporation, an
investment banking company, since May 1995. Prior to joining Liberty Street
Capital Corporation, Mr. Greene served as Vice President of Municipal Finance of
Goldman Sachs & Co. from May 1993 until May 1995.
Charles D. Moseley, Jr. has served as a Director of nFront since May 1998
and as a member of the Audit and Compensation Committees of the Board of
Directors of nFront since November 1998. Mr. Moseley is a member of MKFJ-IV,
LLC, which is the general partner of Noro-Moseley Partners IV, L.P., a venture
capital firm. Mr. Moseley founded Noro-Moseley Partners in 1983, and he is a
director of several private companies. Mr. Moseley received a Bachelor of
Industrial Engineering degree from the Georgia Institute of Technology and a
Masters of Business Administration from Harvard University.
William H. Scott III has served as a Director and a member of the
Compensation Committee of nFront since November 1998. Mr. Scott has served as
the President of ITC Holding Co., a telecommunications service provider, since
December 1991, and has been a director of ITC Holding Co. since May 1989. Mr.
Scott is also an officer and director of several ITC Holding Co. subsidiaries.
In addition, Mr. Scott serves on the Board of Directors of Mindspring
Enterprises, Inc., an Internet service provider; Innotrac Corporation, a
customized, technology-based marketing support services company; ITC Deltacom,
Inc., a full-service telecommunications provider; and Knology Holdings, Inc., a
broadband telecommunications service provider, formerly known as CyberNet
Holdings, Inc. Mr. Scott received a Bachelor of Arts degree from Presbyterian
College and a Masters degree in Business Administration from the University of
Georgia.
James A. Verbrugge has served as a Director and a member of the Audit
Committee of nFront since May 1998. Dr. Verbrugge has served as Professor of
Finance at the University of Georgia since 1968 and currently serves as Chairman
of the University's Department of Banking and Finance. Dr. Verbrugge is also a
member of the Board of Directors of Proactive Technologies Inc., an airport
hospitality services and real estate holding company. Dr. Verbrugge received a
Ph.D. in Economics from the University of Kentucky.
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Vincent R. Brennan has served as Senior Vice President -- Sales of nFront
since March 1998 and is responsible for growing and managing nFront's sales,
marketing and business development units. From September 1998 until March 1999,
Mr. Brennan served as Senior Vice President -- Sales and Marketing of nFront.
Prior to joining nFront, Mr. Brennan was employed by John H. Harland Co. from
June 1986 until September 1998, serving as Senior Vice President -- Sales,
managing the financial markets division from December 1995 until September 1998
and as Vice President from April 1993 until December 1995. Mr. Brennan received
a Bachelor's degree in Business Administration from the University of
Connecticut.
Steven S. Neel has served as Senior Vice President -- Operations of nFront
since July 1996 and is responsible for enhancing customer satisfaction by
implementing and supporting the nFront products and services. Prior to joining
nFront, Mr. Neel served as Vice President -- Implementations of LeapFrog
Technologies, Inc., a software development company, from October 1995 until July
1996. Prior to joining LeapFrog Technologies, Inc., Mr. Neel was a partner from
April 1993 until October 1995 in an Atlanta-based consulting firm where he
obtained experience in the financial services industry. Mr. Neel received a
Bachelor's degree in Management from the Georgia Institute of Technology.
W. Derek Porter has served as Vice President -- Research and Development of
nFront since its inception in 1996 and is responsible for product development
and data center operations. Prior to joining nFront, Mr. Porter worked for
LeapFrog Technologies, Inc., a software development company, as Internet Product
Manager and Director of Product Strategy. Prior to entering the banking software
industry, Mr. Porter worked with IBM Corporation in various technical roles
ranging from technical product support to LAN Applications Specialist. Mr.
Porter received a Bachelor's degree in Management from the Georgia Institute of
Technology.
Adam M. Naide has served as Vice President -- Marketing of nFront since
April 1999 and is responsible for all consumer marketing and product marketing
functions. Prior to joining nFront, Mr. Naide spent ten years in
marketing-management related positions including Director of Marketing with
Primestar Inc., a satellite communications company, from April 1998 until March
1999, Director of Marketing with Cox Communications, a media conglomerate, from
October 1994 until March 1998, and Account Executive with InterServ Services
Corp., a marketing services company, from December 1993 until June 1994. Mr.
Naide consulted independently from July 1994 until September 1994. Mr. Naide
received a Bachelor's degree in Business Administration from Emory University
and a Masters of Business Administration from the University of Georgia.
Alan W. Powell has served as Vice President -- Sales of nFront since August
1997 and is responsible for both partner and non-partner sales and managing and
training the sales department. From May 1997 until August 1997, Mr. Powell was
an Account Executive with nFront. From August 1995 until joining nFront, Mr.
Powell served as a Regional Sales Engineer with Renishaw, Inc., an aerospace
products manufacturer. Prior to joining Renishaw, Mr. Powell worked as an
account engineer with both Sorel Equipment Co. from February 1995 until August
1995 and James Industrial from February 1993 until February 1995. Mr. Powell
received a Bachelor's degree in Industrial Engineering from the Georgia
Institute of Technology.
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TERMS OF DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. The Board currently consists of three
Class I directors (Messrs. Brady L. "Tripp" Rackley III, Campbell and Greene),
two Class II directors (Messrs. Verbrugge and Brady L. Rackley) and two Class
III directors (Messrs. Moseley and Scott). At each annual meeting of
shareholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring. The terms
of the initial Class I directors, Class II directors and Class III directors
will expire upon the election and qualification of successor directors at the
1999, 2000 and 2001 annual meetings of shareholders, respectively. The executive
officers serve at the pleasure of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The members of the Audit Committee are Charles D. Moseley, Jr. and James A.
Verbrugge. The Audit Committee reviews the scope and timing of our audit
services and any other services our independent auditors are asked to perform,
the auditor's report on our financial statements following completion of their
audit and their policies and procedures with respect to internal accounting and
financial control. In addition, the Audit Committee makes annual recommendations
to the Board of Directors for the appointment of independent auditors for the
following year.
The members of the Compensation Committee are Charles D. Moseley, Jr. and
William H. Scott III. The Compensation Committee reviews and evaluates the
compensation and benefits of all our officers, reviews general policy matters
relating to compensation and benefits of employees of nFront and makes
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also administers our stock option plans.
COMPENSATION OF DIRECTORS
Neither employee nor non-employee directors receive cash compensation for
services performed in their capacity as directors. We reimburse each director
for reasonable out-of-pocket expenses incurred in attending meetings of the
Board of Directors and any of its committees. In addition, directors who are not
nFront employees are eligible to receive options under the nFront Director Stock
Option Plan. Under this plan, eligible directors may receive an option to
purchase 2,500 shares of nFront common stock upon becoming a director and 1,000
additional shares each subsequent year immediately following the annual meeting
of shareholders. At the first annual meeting of shareholders after the effective
date of this offering, nFront intends to grant options pursuant to the Director
Stock Option Plan to purchase 1,000 shares of nFront common stock to each of our
non-employee directors who are either re-elected at that meeting or whose terms
continue beyond the meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no Compensation Committee interlocks.
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the total
compensation paid or accrued by us in 1998 for our Chief Executive Officer, our
only executive officer whose total annual salary and bonuses determined at June
30, 1998 exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------- OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Brady L. "Tripp" Rackley III............ 1998 $134,668 $ 0 $25,402(1)
Chairman of the Board and Chief
Executive Officer
</TABLE>
- -------------------------
(1) Includes $13,785 in personal automobile expenses and $10,000 in country club
dues.
STOCK OPTION AND OTHER COMPENSATION PLANS
nFront, Inc. Stock Incentive Plan. Our Stock Incentive Plan became
effective on September 9, 1998. The aggregate number of shares of nFront common
stock reserved for issuance under the Stock Incentive Plan is 2,188,900 shares.
The number of shares of common stock available for issuance under the Stock
Incentive Plan shall automatically increase on the last trading day of the last
month of each of nFront's fiscal years, beginning with the fiscal year ending
June 30, 2000 and continuing through the fiscal year ending June 30, 2004, by a
number of shares equal to one and one-quarter percent (1.25%) of the total
number of shares of common stock outstanding on the last trading day of the
month preceding the final month of each such fiscal year, but in no event shall
any such annual increase exceed 1,000,000 shares (as adjusted under the terms of
the plan). The purpose of the Stock Incentive Plan is to provide incentives for
key employees, officers, consultants and directors to promote the success of
nFront, thereby benefiting shareholders and aligning the economic interests of
the participants with those of the shareholders. Awards granted under the Stock
Incentive Plan may be either restricted stock or options intended to qualify as
"incentive stock options" or nonqualified stock options.
As of March 31, 1999, options to purchase 959,782 shares of common stock
were outstanding under the Stock Incentive Plan at a weighted average exercise
price of $1.26 per share. No shares of common stock had been issued upon
exercise of options granted under the Stock Incentive Plan.
Incentive Compensation Plan. We adopted a cash incentive compensation plan
for our 1999 fiscal year. The plan is administered by the Compensation Committee
of the Board of Directors, which determines eligible participants, performance
goals, measurement criteria, performance ratings and amount and timing of
payments. Awards under the plan are determined annually on the basis of our
performance over the year in relation to pre-determined financial and operating
goals. All awards are paid in full, in cash, following the year of performance.
Awards are granted under the plan at the sole discretion of the Compensation
Committee.
nFront, Inc. Employee Stock Purchase Plan. In June 1999, our shareholders
approved the nFront, Inc. Employee Stock Purchase Plan which is intended to
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<PAGE> 63
qualify under Section 423 of the Internal Revenue Code. The stock purchase plan
will be effective upon completion of this offering. The stock purchase plan
allows employees to purchase common stock through payroll deductions for 85% of
the fair market value of the common stock. Participation in the stock purchase
plan is voluntary. Employees may become participants in the stock purchase plan
by authorizing payroll deductions of one to ten percent of their base pay for
each payroll period. At the end of each six-month purchase period, each
participant in the stock purchase plan will receive an amount of our common
stock equal to the sum of that participant's payroll deductions during the
period multiplied by 85% of the lower of the fair market value of our common
stock at the beginning of the period, or the fair market value of our common
stock at the end of the period. No employee may participate in the stock
purchase plan if such employee owns or would own 5% or more of the voting power
of all classes of our stock. There are currently 100,000 shares of common stock
reserved for issuance under the stock purchase plan. The number of shares of
common stock available for issuance under the stock purchase plan shall
automatically increase on the last trading day of the last month of each of
nFront's fiscal years, beginning with the fiscal year ending June 30, 2000 and
continuing through the fiscal year ending June 30, 2004, by a number of shares
equal to one-quarter percent (0.25%) of the total number of shares of common
stock outstanding on the last trading day of the month preceding the final month
of each such fiscal year, but in no event shall any such annual increase exceed
1,000,000 shares (as adjusted under the terms of the plan). We are permitted
under the stock purchase plan to purchase shares of common stock on the open
market for the purpose of reselling the shares to participants in the stock
purchase plan. No shares will be sold by us to participants in the stock
purchase plan until after completion of this offering.
nFront Director Stock Option Plan. The nFront Director Stock Option Plan
became effective in April 1999. The aggregate number of shares of nFront common
stock reserved for issuance under the Director Stock Option Plan is 200,000
shares. At the first annual meeting of shareholders after the effective date of
this offering, nFront intends to grant options pursuant to the Director Stock
Option Plan to purchase shares of nFront common stock to each of our
non-employee directors who are either re-elected at such meeting or whose terms
continue beyond the meeting.
EMPLOYMENT AGREEMENTS
Brady L. "Tripp" Rackley III and Robert L. Campbell have entered into
employment agreements and non-disclosure, non-solicitation and non-competition
agreements with nFront. Under the employment agreements, Mr. Rackley is entitled
to receive an annual base salary of $175,000 and Mr. Campbell is entitled to an
annual base salary of $135,000. Both are entitled to bonuses as determined by
the Board of Directors. In addition, both are eligible to participate in
nFront's Stock Incentive Plan. Under the terms of the non-disclosure,
non-solicitation and non-competition agreements, Messrs. Rackley and Campbell
have assigned to nFront all of their copyrights, trade secrets and patent rights
that relate to the business of nFront. Additionally, they have agreed not to
compete with nFront during the term of their employment and for one year
afterward. They have also agreed not to solicit customers and employees of
nFront for a period of one year following termination of their employment with
nFront. If nFront terminates their employment when they had not violated any
specific provision of the agreement or they terminate their
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<PAGE> 64
employment for reasons that are deemed to be proper under the agreements, they
will be entitled to receive severance payments equal to the amount of their
then-current base salary and benefits for a twelve month period following
termination.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Second Amended and Restated Articles of Incorporation provide that the
liability of our directors for monetary damages shall be eliminated to the
fullest extent permissible under Georgia law and that we may indemnify our
officers, employees and agents to the fullest extent permitted under Georgia
law.
Our Bylaws provide that we must indemnify our directors against all
liabilities to the fullest extent permitted under Georgia law and that we must
advance all reasonable expenses incurred in a proceeding where the director was
either a party or a witness because he or she was a director.
We have entered into agreements that require us to indemnify our directors
and our officers to the full extent permitted under Georgia law. In addition, we
have agreed to defend, hold harmless and indemnify our directors and our
officers against any obligation to pay a judgment, penalty, fine, expenses and
settlement amounts in connection with any action, suit or proceeding brought by
reason of the fact that he or she is a director or officer, as the case may be,
of nFront or is serving, at the request of nFront, as a director, officer,
employee, agent or consultant of another entity. No indemnification will be
provided for any misappropriation of any nFront business opportunity, any act or
omission involving intentional misconduct or a knowing violation of law, any
transaction from which an improper personal benefit was received and other types
of liability under Georgia law. Further, nFront will pay expenses incurred by
directors and officers in defending any covered action, suit or proceeding in
advance of the final disposition of such action, suit or proceeding. We believe
that these agreements, as well as the provisions contained in our articles and
bylaws described above, are necessary to attract and retain qualified persons as
directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors of nFront pursuant to the provisions of our
charter documents, Georgia law or the agreements described above, nFront has
been advised that in the opinion of the Securities and Exchange Commission, this
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
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<PAGE> 65
CERTAIN TRANSACTIONS
RELATED PARTY TRANSACTIONS
In January 1997, LeapFrog Technologies, Inc., a Georgia corporation of
which Brady L. Rackley is Chairman of the Board, exchanged office furniture
having a fair market value of $83,986 for programming services furnished by
nFront having the same value. In October 1997, we loaned Mr. Rackley $20,000,
and he repaid $20,875 in February 1998, constituting payment in full. The loan
was unsecured and had an interest rate of 10.5% per year. In addition, nFront
has retained Mr. Rackley to provide marketing and sales consulting services to
nFront for $70,000 per year. Mr. Rackley is a Director and principal shareholder
of nFront.
During the period from October 1997 through January 1998, we borrowed a
total of $90,000 from Brady L. "Tripp" Rackley III, our Chief Executive Officer.
The loans were unsecured, had an interest rate of 10.5% per year and were repaid
in February 1998.
In May 1998, we issued to Noro-Moseley Partners IV, L.P. 255,885 shares of
redeemable convertible preferred stock at a per share price of $9.77. These
shares will be automatically converted into 2,034,285 shares of common stock
upon the completion of this offering. One of our directors, Mr. Charles D.
Moseley, Jr., is a member of MKFJ-IV, LLC, the general partner of Noro-Moseley.
In May 1998, we paid a $125,000 fee to Liberty Street Capital, an
investment banking company controlled by Mr. Thomas E. Greene III, one of our
directors. The fee was payment for services provided by Liberty Street Capital
to us in connection with the investment in nFront by Noro-Moseley.
In April 1999, we entered into a debenture purchase agreement with Noro-
Moseley Partners IV, L.P. Under this agreement, Noro-Moseley agreed to purchase
up to $5.0 million of senior subordinated debentures upon request by us. No
debentures have been issued under this agreement. The obligation of Noro-Moseley
to purchase debentures under the agreement expires upon the completion of this
offering. In exchange for its commitment under the agreement, we agreed to issue
to Noro-Moseley a three-year warrant to purchase a number of shares of common
stock equal to $500,000 divided by the initial public offering price of our
common stock and exerciseable at that price. Based on the price per share in
this offering, the warrant entitles Noro-Moseley to purchase 50,000 shares of
common stock at $10.00 per share.
Our Chief Executive Officer, Mr. Rackley, and our President, Mr. Campbell,
have employment agreements described in "Management -- Employment Agreements."
Our Board of Directors has adopted a resolution whereby all future
transactions with related parties, including any loans from us to our officers,
directors, principal shareholders or affiliates, must be approved by a majority
of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors or a majority of the
disinterested shareholders and must be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
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<PAGE> 66
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of the date of this prospectus and as adjusted
to reflect the sale of the common stock being offered hereby with respect to:
- each of our directors;
- each of the selling shareholders;
- each shareholder known by us to be the beneficial owner of more than 5%
of the outstanding shares of common stock; and
- all of our executive officer and directors as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING NUMBER OF AFTER THE OFFERING
-------------------------- SHARES BEING -------------------------
NAME OF BENEFICIAL OWNER(1) SHARES PERCENTAGE(2) OFFERED SHARES PERCENTAGE(2)
- --------------------------- ---------- ------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Brady L. "Tripp" Rackley
III.................... 3,295,513 30.8% 133,624 3,161,889 22.3%
Brady L. Rackley(3)...... 3,173,449 29.7% 128,675 3,044,774 21.5%
Noro-Moseley Partners IV,
L.P.(4)................ 2,531,822 23.6% 100,631 2,431,191 17.1%
W. Derek Porter.......... 596,250 5.6% 24,176 572,074 4.0%
William H. Scott III..... 203,432 1.9% 203,432 1.4%
James A. Verbrugge....... 119,250 1.1% 119,250 *
Thomas E. Greene III..... 119,250 1.1% 4,835 114,415 *
Steven S. Neel........... 198,750 1.9% 8,059 190,691 1.3%
Robert L. Campbell....... 81,368 * 81,368 *
Charles D. Moseley,
Jr.(5)................. 2,531,822 23.6% (5) 2,431,191 17.1%
All directors and executive
officers as a group (13
persons)............... 10,359,727 96.4% 9,959,727 69.9%
</TABLE>
- ---------------
* Less than 1% of the outstanding common stock.
(1) Except as set forth herein, the business address of the named beneficial
owner is c/o nFront, Inc., 520 Guthridge Court, NW, Suite 100, Norcross,
Georgia 30092.
(2) For purposes of calculating the percentage beneficially owned, the number of
shares of common stock deemed outstanding prior to and after the offering
consists of: (i) 8,661,867 shares outstanding as of March 31, 1999, plus
(ii) 2,034,285 shares issued upon automatic conversion of the redeemable
convertible preferred stock as a result of this offering. No person in the
above table holds options that may be exercised within 60 days following the
date of this prospectus. The number of shares of common stock deemed
outstanding after this offering includes an additional 3,500,000 shares that
are being offered for sale by nFront in this offering. Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission that deem shares to be beneficially owned by any person or group
who has or shares voting and investment power with respect to these shares.
(3) Includes 66,250 shares beneficially owned by Mr. Rackley's wife, Katharine
S. Rackley, 728,750 shares beneficially owned by The Katharine Rackley
Grantor
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<PAGE> 67
Retained Annuity Trust and 728,750 shares beneficially owned by The Brady
Rackley Grantor Retained Annuity Trust. Mr. Rackley disclaims beneficial
ownership of shares held by Ms. Rackley.
(4) Includes 2,034,285 shares of common stock issued upon automatic conversion
of all shares of preferred stock and 50,000 shares of common stock issuable
upon exercise of a warrant issued to Noro-Mosley Partners pursuant to the
Debenture Purchase Agreement described in "Certain Transactions." The
address of Noro-Moseley Partners IV, L.P. is 9 North Parkway Square, 4200
Northside Parkway, Atlanta, Georgia 30327.
(5) Consists of the 2,531,821 shares beneficially owned by Noro-Moseley Partners
IV, L.P. Mr. Moseley is a member of MKFJ-IV, LLC, which is the general
partner of Noro-Moseley Partners IV, L.P. Mr. Moseley disclaims beneficial
ownership of the shares owned by Noro-Moseley Partners IV, L.P. Mr.
Moseley's address is 9 North Parkway Square, 4200 Northside Parkway,
Atlanta, Georgia 30327.
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<PAGE> 68
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of nFront consists of 70,000,000 shares of
common stock, no par value per share, and 10,000,000 shares of preferred stock,
no par value per share. The following summary is a description of the material
terms of our capital stock and is subject to, and qualified in its entirety by
reference to, the provisions of nFront's Second Amended and Restated Articles of
Incorporation, which is included as an exhibit to the Registration Statement of
which this prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of March 31, 1999, there were 8,661,867 shares of nFront common stock
outstanding held of record by 13 shareholders. There will be 14,196,152 shares
of common stock outstanding (assuming no exercise of outstanding options or
warrants after March 31, 1999) after giving effect to the sale of common stock
offered to the public in this offering and conversion of the redeemable
convertible preferred stock. The holders of common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
shareholders. There are no cumulative voting rights. Subject to preferences that
may be applicable to any outstanding shares of preferred stock, the holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available for the
payment of dividends. In the event of a liquidation, dissolution or winding up
of nFront, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
Upon completion of the offering, all outstanding shares of redeemable
convertible preferred stock will be converted into an aggregate of 2,034,285
shares of common stock. Pursuant to nFront's Second Amended and Restated
Articles of Incorporation, the Board of Directors has the authority, without
further action by the shareholders, to issue up to 10,000,000 shares of
preferred stock in one or more series and to fix the designations, powers,
preferences, privileges and relative, participating, optional or special rights
and the qualifications, limitations or restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the common
stock.
The Board of Directors, without shareholder approval, can issue preferred
stock with voting, conversion or other rights that could adversely affect the
voting power and other rights of the holders of common stock. Preferred stock
could thus be issued quickly with terms calculated to delay or prevent a change
of control of
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<PAGE> 69
nFront or make removal of management more difficult. Additionally, the issuance
of preferred stock may have the effect of decreasing the market price of the
common stock and may adversely affect the voting and other rights of the holders
of common stock. The Company has no plans to issue any preferred stock.
WARRANTS
nFront has issued to Noro-Moseley Partners IV, L.P. a warrant to purchase
50,000 shares of common stock. This warrant, which expires on June 28, 2002, has
an exercise price of $10.00 per share. The warrant was issued in connection with
the debenture purchase agreement by Noro-Moseley described in "Certain
Transactions" above.
ANTITAKEOVER PROVISIONS OF OUR SECOND AMENDED AND RESTATED ARTICLES OF
INCORPORATION, BYLAWS AND GEORGIA LAW
Preferred Stock. As noted above, nFront's Board of Directors, without
shareholder approval, has the authority under nFront's Second Amended and
Restated Articles of Incorporation to issue preferred stock with rights superior
to the rights of the holders of common stock. As a result, preferred stock could
be issued quickly and easily, could adversely affect the rights of holders of
common stock and could be issued with terms calculated to delay or prevent a
change of control of nFront or make removal of management more difficult.
Shareholder Meetings. Under nFront's Bylaws, the shareholders may call a
special meeting only upon the request of holders of at least 35% of votes
entitled to be cast on each issue proposed to be considered at the special
meeting. Additionally, the Board of Directors, the Chairman of the Board, the
Chief Executive Officer or the President of nFront may call special meetings of
shareholders.
Requirements for Advance Notification of Shareholder Proposals and Director
Nominations. nFront's Bylaws establish advance notice procedures with respect to
shareholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the Board of
Directors or a committee thereof.
Classified Board and Removal of Directors. nFront's Second Amended and
Restated Articles of Incorporation provide for a seven member board of directors
to be elected, initially, to staggered one, two and three year terms and,
thereafter, for successive three year terms. Also, the directors may only be
removed from office for cause by the majority vote of the shareholders at a
meeting for which notice of the removal action has been properly given.
Georgia Business Combination Statute. nFront has elected in its Bylaws to
be subject to provisions of Georgia law prohibiting various business
combinations involving shareholders that have an economic interest in the
transaction for a period of five years after the shareholder becomes an
interested shareholder of nFront. A "business combination" includes, among other
things, a merger or consolidation involving nFront and the interested
shareholder and the sale of 10% or more of nFront's assets. In general, the
Georgia Business Combination Statute defines an "interested shareholder" as any
entity or person beneficially owning 15% or more of
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<PAGE> 70
the outstanding voting stock of nFront and any entity or person affiliated with
or controlling or controlled by such entity or person.
Georgia Fair Price Statute. The Company has elected in its Bylaws to be
subject to the "Fair Price" provisions under Georgia law. These provisions
require that a "business combination" with an "interested shareholder" must be
approved by directors of nFront who will continue to be directors following the
business combination and shareholders other than the interested shareholders.
The Fair Price provisions do not restrict a business combination if the cash,
stock or other property received by nFront's shareholders meet various fair
value criteria described in the statute.
These charter provisions and provisions of Georgia law may have the effect
of delaying, deterring or preventing a change of control of nFront.
REGISTRATION RIGHTS
Pursuant to a Shareholder Agreement with nFront, dated as of May 13, 1998,
and the Stock Purchase Warrant between nFront and Noro-Moseley, investors
holding an aggregate of 2,084,285 shares of common stock (including 2,034,285
shares issued upon conversion of the Redeemable Convertible Preferred Stock and
50,000 shares issuable upon exercise of the Warrant to be issued to
Noro-Moseley) are entitled to specified rights with respect to the registration
of these shares under the Securities Act. At any time, following a public
offering of nFront's common stock, any such investor may request that nFront
file a registration statement that covers the sale of at least 40% of the shares
of common stock held by the investor. An investor may require that nFront
register its common stock for resale only one time, other than as described
below. In addition, if nFront proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security holders, the investors are entitled to notice of the registration and
to include shares of common stock in the registration at nFront's expense. All
of these registration rights are subject to conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in the registration.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
NASDAQ NATIONAL MARKET LISTING
nFront's common stock is approved for listing on the Nasdaq National Market
under the symbol NFNT.
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<PAGE> 71
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for nFront's common
stock, and there can be no assurance that a significant public market for the
common stock will be developed or be sustained after this offering. Sales of
substantial amounts of common stock in the public market after this offering, or
the possibility of these sales occurring, could adversely affect prevailing
market prices for the common stock or the future ability of nFront to raise
capital through an offering of equity securities.
After this offering, nFront will have outstanding an aggregate of
14,196,152 shares of common stock. Of these shares, the 3,900,000 shares offered
hereby will be freely tradeable in the public market without restriction under
the Securities Act, unless these shares are held by "affiliates" of nFront, as
that term is defined in Rule 144 under the Securities Act or by persons subject
to other contractual or legal restrictions on resale. The remaining 10,296,152
shares of common stock outstanding upon completion of this offering will be
"restricted securities," as that term is defined in Rule 144 under the
Securities Act. The restricted securities were issued and sold by nFront in
private transactions in reliance upon exemptions from registration under the
Securities Act. Restricted securities may be sold in the public market only if
they are registered or if they qualify for an exemption from registration, such
as Rules 144 or 701 under the Securities Act, which are summarized below.
All of the executive officers, directors, shareholders and employees of
nFront, who collectively hold an aggregate of 10,296,152 restricted shares of
nFront, have entered into "lock-up" agreements with Hambrecht & Quist LLC in
which they have agreed not to offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any of these shares for a period of 180 days
from the date of this prospectus. Hambrecht & Quist LLC may, in its sole
discretion and at any time without prior notice, release all or any portion of
the common stock subject to these lock-up agreements. Hambrecht & Quist LLC
currently has no plans to release any portion of the securities subject to these
lock-up agreements. When determining whether or not to release shares from the
lock-up agreements, Hambrecht & Quist LLC will consider, among other factors,
market conditions at the time, the number of shares proposed to be released or
for which the release is being requested and a shareholder's reasons for
requesting the release. We have also entered into an agreement with Hambrecht &
Quist LLC that nFront will not offer, sell or otherwise dispose of common stock
for a period of 180 days from the date of this prospectus.
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701 will be as follows:
- no restricted shares will be eligible for sale as of the date of this
prospectus;
- approximately 386,425 restricted shares will be eligible for sale 180
days after the date of this prospectus upon the expiration of lock-up
agreements with the underwriters; and
- approximately 9,909,727 restricted shares will become eligible for sale
thereafter at various times upon the expiration of their respective
holding periods and otherwise if in accordance with the provisions of
Rule 144.
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<PAGE> 72
Following the expiration of the lock-up periods and subject to applicable
vesting periods, shares issued upon exercise of options granted by nFront prior
to the date of this prospectus will also be available for sale in the public
market pursuant to Rule 701 under the Securities Act. Rule 701 permits resales
of these shares in reliance upon Rule 144 but without compliance with its
restrictions, including the holding period requirement, imposed under Rule 144.
In general, under Rule 144 as in effect at the closing of this offering,
beginning 90 days after the date of this prospectus, a person (or persons whose
shares of nFront are aggregated) who has beneficially owned restricted shares
for at least one year (including the holding period of any prior owner who is
not an affiliate of nFront) would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of common stock (approximately 141,962 shares
immediately after this offering) or (ii) the average weekly trading volume of
the common stock during the four calendar weeks preceding the filing of a Form
144 with respect to the sale. Sales under Rule 144 are also subject to manner of
sale and notice requirements and to the availability of current public
information about nFront. Under Rule 144(k), a person who is not deemed to have
been an affiliate of nFront 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
(including the holding period of any prior owner who is not an affiliate of
nFront) is entitled to sell the shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
nFront intends to file after the effective date of this offering a
registration statement on Form S-8 to register approximately 2,488,900 shares of
common stock issuable upon the exercise of outstanding stock options or reserved
for issuance under the nFront Stock Incentive Plan, the nFront Director Stock
Option Plan and the nFront Employee Stock Purchase Plan. This registration
statement will become effective automatically upon filing. Shares issued under
the foregoing plans, after the filing of a registration statement on Form S-8,
may be sold in the open market, subject, in the case of option holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lock-up
agreements and vesting restrictions imposed by nFront.
Following this offering, the holders of an aggregate of 2,034,285 shares of
outstanding common stock and up to 50,000 shares of common stock issuable upon
exercise of warrants will have rights to require nFront to register their shares
for future sale pursuant to a Shareholder Agreement. See "Description of Capital
Stock -- Registration Rights."
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<PAGE> 73
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, for whom Hambrecht & Quist LLC, J.C. Bradford & Co.,
Raymond James & Associates, Inc. and SoundView Technology Group, Inc. are acting
as representatives, have severally agreed to purchase from nFront and the
selling shareholders the following respective number of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Hambrecht & Quist LLC............................... 1,272,000
J.C. Bradford & Co.................................. 636,000
Raymond James & Associates, Inc..................... 636,000
SoundView Technology Group, Inc..................... 636,000
BancBoston Robertson Stephens Inc................... 80,000
Deutsche Bank Securities Inc........................ 80,000
Prudential Securities Incorporated.................. 80,000
Salomon Smith Barney Inc............................ 80,000
Charles Schwab & Co., Inc........................... 80,000
Advest, Inc......................................... 40,000
SunTrust Equitable Securities Corporation........... 40,000
First Albany Corporation............................ 40,000
First Union Capital Markets Corp.................... 40,000
Pacific Crest Securities Inc........................ 40,000
The Robinson-Humphrey Company, LLC.................. 40,000
Sandler, O'Neill & Partners, L.P.................... 40,000
Wachovia Securities, Inc............................ 40,000
---------
Total............................................. 3,900,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to conditions precedent, including the absence of any
material adverse change in nFront's business and the receipt of certificates,
opinions and letters from nFront, its counsel and independent auditors. The
underwriters' have committed to purchase all shares of common stock offered
hereby if any of the shares are purchased.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us and the selling
shareholders in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of common stock.
71
<PAGE> 74
<TABLE>
<CAPTION>
PAID BY SELLING
PAID BY US SHAREHOLDERS
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share...................... $ 0.70 $ 0.70 $ 0.70 $ 0.70
Total.......................... $2,380,000 $2,380,000 $280,000 $689,500
</TABLE>
We will pay the offering expenses of approximately $935,000.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to dealers at that price less a concession not in excess of
$0.40 per share. The underwriters may allow and these dealers may reallow a
concession not in excess of $0.10 per share to other dealers. After the initial
public offering of the shares, the offering price and other selling terms may be
changed by the underwriters. The representatives have informed nFront that the
underwriters do not intend to confirm discretionary sales of the shares of
common stock offered by this prospectus.
The selling shareholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to 585,000 additional shares of common stock at the initial public offering
price, less the underwriting discount, set forth on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered by us. The selling shareholders will be obligated, pursuant to the
option, to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of common stock.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
nFront has agreed to indemnify the underwriters against various
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of those
liabilities.
nFront, the selling shareholders, and other shareholders of nFront,
including executive officers and directors, who will own in the aggregate
10,296,152 shares of common stock after the offering, have agreed that they will
not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into shares
of common stock owned by them during the 180-day period following the date of
this prospectus. nFront has agreed that it will not, without the prior written
consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180 days following the date of this prospectus, except that nFront may issue
shares upon the exercise of options
72
<PAGE> 75
granted prior to the date hereof and may grant additional options under its
stock option plans, provided that, without the prior written consent of
Hambrecht & Quist LLC, these additional options shall not be exercisable during
this period. Sales of these shares in the future could adversely affect the
market price of the common stock.
There are persons participating in this offering that may over-allot or
effect transactions that stabilize, maintain or otherwise affect the market
price of the common stock at levels above those that might otherwise prevail in
the open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting syndicate
or the effecting of any purchase to reduce a short position created in
connection with the offering. A penalty bid means an arrangement that permits
the underwriters to reclaim a selling concession from a syndicate member in
connection with this offering when shares of common stock sold by the syndicate
member are purchased in syndicate covering transactions. These transactions may
be effected on the Nasdaq National Market, in the over-the-counter market, or
otherwise. This stabilizing, if commenced, may be discontinued at any time.
Prior to the offering, there has been no public market for the common
stock. The initial public offering price for the common stock was determined by
negotiations among nFront and the underwriters. Among the factors considered in
determining the initial public offering price were prevailing market and
economic conditions, revenues and results of operations of nFront, market
valuations of other companies engaged in activities similar to nFront's
activities, estimates of the business potential and prospects of nFront, the
present state of nFront's business operations, nFront's management and other
factors deemed relevant.
At the request of nFront, the underwriters have reserved for sale, at the
initial public offering price, not more than five percent of the shares of
common stock offered hereby (not including shares subject to the underwriters'
over-allotment option) for designated individuals, including officers and
directors of nFront, who may express an interest in purchasing shares in this
offering. Any such persons may, as a condition to purchasing these reserved
shares, be required to agree not to offer, sell or otherwise dispose of any such
reserved shares for a period of 180 days following the date of this prospectus
without the prior written consent of Hambrecht & Quist. The number of shares of
common stock available for sale to the general public will be reduced to the
extent that these persons purchase these reserved shares. Any reserved shares
that are not so purchased will be offered by the underwriters to the general
public on the same basis as other shares offered hereby.
LEGAL MATTERS
The validity of the shares offered hereby will be passed on for nFront by
Morris, Manning & Martin, L.L.P., Atlanta, Georgia. Employees of Morris, Manning
& Martin, L.L.P. are purchasing 4,250 shares of common stock in the offering at
the initial public offering price. The validity of the shares offered hereby
73
<PAGE> 76
by nFront will be passed upon for the underwriters by King & Spalding, Atlanta,
Georgia.
EXPERTS
The financial statements of nFront as of and for the period from June 17,
1996 (inception) to June 30, 1997, as of and for the fiscal year ended June 30,
1998, and as of and for the nine months ended March 31, 1999, 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
herein, and are included in reliance upon this report given the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered hereby. This prospectus is only a part of the
registration statement and does not contain all of the information included in
the registration statement. Further information with respect to nFront and the
common stock offered hereby can be found in the registration statement.
Statements made in this prospectus as to the contents of any contract, agreement
or other document are not necessarily complete. Documents filed as an exhibit to
the registration statement, and all descriptions in this prospectus are
qualified in all respects by reference to the registration statement. The
registration statement and the exhibits and schedules thereto may be inspected
without charge at the public reference room maintained by the Commission in Room
1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Seven World Trade Center, Room 1400, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the public reference section of the Commission at 450 Fifth Street, N. W.,
Washington, D.C. 20549, Room 1024, at prescribed rates. The public may obtain
information on the operation of the Commission's public reference room by
calling the Commission at 1-800-SEC-0330. In addition, nFront is required to
file electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The Commission maintains an Internet site at http://www.sec.gov, which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. Information concerning
nFront is also available for inspection at the offices of the Nasdaq National
Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the Commission. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the Commission's public reference rooms and the Commission's web
site, which is described above.
74
<PAGE> 77
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Auditors.............................. F-2
Balance Sheets as of June 30, 1997 and 1998 and March 31,
1999 and Pro Forma March 31, 1999 (unaudited)............. F-3
Statements of Operations for the Period from June 17, 1996
(inception) through June 30, 1997, the Fiscal Year Ended
June 30, 1998, and the Nine Months Ended March 31, 1998
(unaudited) and 1999...................................... F-4
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the Period from June
17, 1996 (inception) through June 30, 1997, Fiscal Year
Ended June 30, 1998, and Nine Months Ended March 31,
1999...................................................... F-5
Statements of Cash Flows for the Period from June 17, 1996
(inception) through June 30, 1997, the Fiscal Year Ended
June 30, 1998, and the Nine Months Ended March 31, 1998
(unaudited) and 1999...................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
nFront, Inc.
We have audited the accompanying balance sheets of nFront, Inc. (the
"Company") as of June 30, 1997 and 1998 and March 31, 1999 and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for the period from June 17, 1996
(inception) through June 30, 1997, the fiscal year ended June 30, 1998 and the
nine months ended March 31, 1999. 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 nFront, Inc. at June 30,
1997 and 1998 and March 31, 1999 and the results of its operations and its cash
flows, for the period from June 17, 1996 (inception) through June 30, 1997, the
fiscal year ended June 30, 1998, and the nine months ended March 31, 1999 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
April 22, 1999, except for Note 12, as to
which the date is June 17, 1999
F-2
<PAGE> 79
NFRONT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1997 1998 1999 1999
-------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $243,525 $2,521,384 $1,530,458
Accounts receivable........................... 37,793 116,919 530,035
Unbilled accounts receivable.................. -- 96,199 781,501
Prepaid expenses and other assets............. -- 2,811 34,423
Refundable income taxes....................... -- 51,850 51,850
-------- ---------- ----------
Total current assets................... 281,318 2,789,163 2,928,267
Property and equipment:
Leasehold improvements........................ -- -- 31,742
Software...................................... -- -- 178,505
Furniture and fixtures........................ 106,352 197,541 216,006
Equipment..................................... 25,050 54,199 541,589
-------- ---------- ----------
131,402 251,740 967,842
Less accumulated depreciation................. (13,780) (47,506) (130,399)
-------- ---------- ----------
117,622 204,234 837,443
Other assets.................................... 3,405 4,731 36,935
-------- ---------- ----------
Total assets........................... $402,345 $2,998,128 $3,802,645
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............. $ -- $ -- $ 301,793
Accounts payable.............................. 6,791 86,446 211,305
Accrued liabilities........................... 213,900 191,195 773,763
Deferred revenue.............................. 32,404 554,317 1,080,221
Account payable to related party.............. 74,085 -- --
Income taxes payable.......................... 25,925 -- --
-------- ---------- ----------
Total current liabilities.............. 353,105 831,958 2,367,082
Long-term debt, net of current portion.......... -- -- 427,540
Redeemable convertible preferred stock, no par
value; 10,000,000 shares authorized; issuable
in series:
Series A -- 255,885 shares authorized, issued
and outstanding at June 30, 1998 and March
31, 1999; liquidation preference of
$2,782,873 at March 31, 1999; no pro forma
shares issued or outstanding................ -- 2,375,561 2,580,222 $ --
Stockholders' equity (deficit):
Common stock, no par value; 70,000,000 shares
authorized; 7,950,000, 8,132,993 and
8,661,867 shares issued and outstanding at
June 30, 1997 and 1998 and March 31, 1999,
respectively; 10,696,152 pro forma shares
issued and outstanding...................... 1,375 265,642 710,981 3,291,203
Subscription receivable....................... (875) (777) (777) (777)
Retained earnings (deficit)................... 48,740 (474,256) (2,282,403) (2,282,403)
-------- ---------- ---------- -----------
Total stockholders' equity (deficit)... 49,240 (209,391) (1,572,199) 1,008,023
-------- ---------- ---------- -----------
Total liabilities and stockholders'
equity (deficit)..................... $402,345 $2,998,128 $3,802,645 $ 3,802,645
======== ========== ========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 80
NFRONT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 17, 1996 FISCAL NINE MONTHS ENDED
(INCEPTION) YEAR ENDED MARCH 31,
THROUGH JUNE 30, -------------------------
JUNE 30, 1997 1998 1998 1999
------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Implementation fees.......... $ 358,245 $ 722,859 $ 581,375 $ 1,728,179
Monthly service fees......... 34,263 185,283 102,929 892,816
Other........................ 458,643 174,287 149,406 214,095
---------- ----------- ---------- -----------
Total revenues............... 851,151 1,082,429 833,710 2,835,090
Operating expenses:
Cost of implementation....... 246,544 346,054 132,750 697,541
Cost of Internet banking data
center.................... 61,681 96,732 65,098 213,950
Selling and marketing........ 194,450 568,928 189,265 1,462,943
Product development.......... 106,429 170,419 109,164 785,790
General and administrative... 157,274 440,099 305,188 1,445,481
Depreciation................. 13,780 33,726 23,140 82,893
---------- ----------- ---------- -----------
Total operating expenses....... 780,158 1,655,958 824,605 4,688,598
---------- ----------- ---------- -----------
Operating income (loss)........ 70,993 (573,529) 9,105 (1,853,508)
Other (income) expense:
Interest income.............. (3,672) (26,692) (3,916) (63,436)
Interest expense............. -- 2,084 1,914 18,075
---------- ----------- ---------- -----------
(3,672) (24,608) (2,002) (45,361)
---------- ----------- ---------- -----------
Income (loss) before income
taxes........................ 74,665 (548,921) 11,107 (1,808,147)
Income tax expense (benefit)... 25,925 (25,925) 2,000 --
---------- ----------- ---------- -----------
Net income (loss).............. 48,740 (522,996) 9,107 (1,808,147)
Accretion on redeemable
convertible preferred
stock........................ -- (35,733) -- (204,661)
---------- ----------- ---------- -----------
Net income (loss) attributable
to common stock.............. $ 48,740 $ (558,729) $ 9,107 $(2,012,808)
========== =========== ========== ===========
Net income (loss) per common
share -- basic and diluted... $ 0.01 $ (0.07) $ 0.00 $ (0.24)
========== =========== ========== ===========
Weighted average shares
outstanding -- basic and
diluted...................... 5,079,167 8,033,223 8,000,090 8,498,844
========== =========== ========== ===========
Unaudited pro forma net loss
per share -- basic and
diluted...................... $ (0.07) $ (0.19)
=========== ===========
Unaudited pro forma weighted
average shares outstanding --
basic and diluted............ 8,300,746 10,533,129
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 81
NFRONT, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM JUNE 17, 1996 (INCEPTION) THROUGH JUNE 30, 1997,
FISCAL YEAR ENDED JUNE 30, 1998 AND NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK RETAINED STOCKHOLDERS'
---------------------- --------------------- SUBSCRIPTION EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT RECEIVABLE (DEFICIT) (DEFICIT)
--------- ---------- --------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 17,
1996 (inception)... -- $ -- -- $ -- $ -- $ -- $ --
Proceeds from
issuance of
common stock..... -- -- 7,950,000 1,375 (1,375) -- --
Payment of stock
subscription
receivable....... -- -- -- -- 500 -- 500
Net income........... -- -- -- -- -- 48,740 48,740
--------- ---------- --------- --------- ------- ----------- -----------
Balance at June 30,
1997............... -- -- 7,950,000 1,375 (875) 48,740 49,240
Proceeds from
issuance of
common stock..... -- -- 182,993 300,000 -- -- 300,000
Proceeds from the
issuance of
redeemable
convertible
preferred stock,
net of issuance
costs of
$160,172......... 255,885 2,339,828 -- -- -- -- --
Accretion on
redeemable
convertible
preferred
stock............ -- 35,733 -- (35,733) -- -- (35,733)
Payment of stock
subscription
receivable....... -- -- -- -- 98 -- 98
Net loss........... -- -- -- -- -- (522,996) (522,996)
--------- ---------- --------- --------- ------- ----------- -----------
Balance at June 30,
1998............... 255,885 2,375,561 8,132,993 265,642 (777) (474,256) (209,391)
Proceeds from
issuance of
common stock..... -- -- 528,874 650,000 -- -- 650,000
Accretion on
redeemable
convertible
preferred
stock............ -- 204,661 -- (204,661) -- -- (204,661)
Net loss............. -- -- -- -- -- (1,808,147) (1,808,147)
--------- ---------- --------- --------- ------- ----------- -----------
Balance at March 31,
1999............... 255,885 $2,580,222 8,661,867 $ 710,981 $ (777) $(2,282,403) $(1,572,199)
========= ========== ========= ========= ======= =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 82
NFRONT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 17, 1996 NINE MONTHS ENDED
(INCEPTION) FISCAL MARCH 31,
THROUGH YEAR ENDED -------------------------
JUNE 30, 1997 JUNE 30, 1998 1998 1999
------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 48,740 $ (522,996) $ 9,107 $(1,808,147)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation........................ 13,780 33,726 23,140 82,893
Changes in operating assets and
liabilities:
Accounts receivable............... (37,793) (175,325) (30,948) (1,098,418)
Prepaid expenses and other
assets.......................... (3,405) (4,137) (7,113) (63,816)
Income taxes...................... 25,925 (51,850) (11,591) --
Accounts payable.................. (3,110) (20,355) (21,065) 124,859
Accrued liabilities............... 213,900 (22,705) (204,162) 582,568
Deferred revenue.................. 32,404 521,913 6,929 525,904
-------- ---------- --------- -----------
Net cash provided by (used in)
operating activities................ 290,441 (241,729) (235,703) (1,654,157)
INVESTING ACTIVITIES
Purchase of property and equipment.... (47,416) (120,338) (66,074) (716,102)
-------- ---------- --------- -----------
Net cash used in investing
activities.......................... (47,416) (120,338) (66,074) (716,102)
FINANCING ACTIVITIES
Proceeds from stockholder loan........ -- 90,000 -- --
Repayment of stockholder loan......... -- (90,000) -- --
Proceeds from bank credit facility.... -- -- -- 750,000
Repayment of bank credit facility..... -- -- -- (20,667)
Proceeds from issuance of preferred
stock............................... -- 2,339,828 -- --
Proceeds from issuance of common
stock............................... 500 300,098 300,098 650,000
-------- ---------- --------- -----------
Net cash provided by financing
activities.......................... 500 2,639,926 300,098 1,379,333
-------- ---------- --------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 243,525 2,277,859 (1,679) (990,926)
Cash and cash equivalents at the
beginning of the period............. -- 243,525 243,525 2,521,384
-------- ---------- --------- -----------
Cash and cash equivalents at the end
of the period....................... $243,525 $2,521,384 $ 241,846 $ 1,530,458
======== ========== ========= ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITY
Assets acquired in exchange for
programming services................ $ 83,986 $ -- $ -- $ --
======== ========== ========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest................ $ -- $ -- $ -- $ 19,164
======== ========== ========= ===========
Cash paid for income taxes............ $ -- $ 51,850 $ -- $ --
======== ========== ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 83
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
nFront, Inc. (the "Company") was incorporated on June 17, 1996 (date of
inception). As the Company had minimal activity between the date of inception
and June 30, 1996, the statements of operations, stockholders' equity and cash
flows for the period ended June 30, 1997 include the period June 17, 1996 to
June 30, 1996. The Company's normal operating cycle is twelve months.
DESCRIPTION OF BUSINESS
The Company provides full-service Internet banking solutions to small to
mid-sized banks. The solutions provided by the Company include development and
implementation services, web site design, maintenance and hosting, customer
service training and support, and marketing consulting.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and such differences may be
material to the financial statements.
CASH AND CASH EQUIVALENTS
The Company considers unrestricted, highly liquid investments with initial
maturities of less than three months to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of assets ranging from
three to seven years. Repairs and maintenance are charged to expense as
incurred.
UNBILLED ACCOUNTS RECEIVABLE
The Company bills on the first of each month for the previous month's
activity. Unbilled accounts receivable is comprised of these amounts.
PRODUCT DEVELOPMENT COSTS
Statement of Financial Accounting Standards ("SFAS") 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
F-7
<PAGE> 84
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between completion
of a working model and the point at which the product is ready for general
release have been insignificant.
REVENUE RECOGNITION
The Company earns revenue from implementation fees, monthly user and
transaction fees and marketing and training support materials and services.
The non-refundable implementation fee, which is billable to the client bank
when the contract is executed, is recognized as revenue ratably over the
implementation period, which currently averages approximately three months. The
Company's implementation costs are generally incurred ratably over the
implementation period. The Company records the unrecognized portion of billable
implementation fees as deferred revenue. Revenue from monthly user fees and
transaction fees are recognized monthly based on the number of users with
accounts on the bank's Internet branch at the end of the month and the
transactions occurring during the month. The service contracts with the banks
are typically five year exclusive agreements. The revenue from marketing and
training support materials and services is recognized at the time the materials
are delivered or the services are provided.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." SOP
97-2 was effective July 1, 1998 and generally requires revenue earned on
software arrangements involving multiple elements such as software products,
upgrades, enhancements, post-contract customer support, installation and
training to be allocated to each element based on the relative fair values of
the elements. There was no material change to the Company's accounting for
revenue as a result of the adoption of SOP 97-2.
ADVERTISING
The Company expenses the cost of advertising as incurred. Advertising
expense was $5,116, $59,710 and $215,345 for the period from June 17, 1996
(inception) through June 30, 1997, the fiscal year ended June 30, 1998 and the
nine months ended March 31, 1999, respectively.
STOCK BASED COMPENSATION
SFAS No. 123, Accounting for Stock Based Compensation ("SFAS 123"), sets
forth accounting and reporting standards for stock based employee compensation
plans. As permitted by SFAS 123, the Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations ("APB 25"). Under APB 25, no compensation expense is
recognized for stock options granted to employees at fair market value. To date,
all
F-8
<PAGE> 85
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's stock option grants have been made with an option exercise
price equal to or greater than the fair market value of the underlying common
stock and, accordingly, no compensation expense has been recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The carrying amounts reported in the balance sheet for cash
and cash equivalents and accounts receivable approximate their fair values.
CONCENTRATION OF CREDIT RISK
The Company's revenues are primarily derived from companies located in the
United States. The Company performs periodic credit evaluations of its
customers' financial condition and does not require collateral. The Company
provides for estimated credit losses at the time of sale.
The Company's largest customers comprised the following percentages of
total revenues:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 17, 1996 FISCAL NINE MONTHS
(INCEPTION) THROUGH YEAR ENDED ENDED
JUNE 30, 1997 JUNE 30, 1998 MARCH 31, 1999
------------------- ------------- --------------
<S> <C> <C> <C>
Client bank....................... 57% 14% --
Strategic alliance partner........ -- -- 26%
</TABLE>
Accounts receivable as of June 30, 1997 was substantially from one client
bank. Accounts receivable from three other client banks totaled approximately
$110,000 as of June 30, 1998. Accounts receivable from a strategic alliance
partner totaled approximately $297,000 as of March 31, 1999.
RECLASSIFICATIONS
Certain amounts in the financial statements for the period from June 17,
1996 (inception) through June 30, 1997 and for the fiscal year ended June 30,
1998 have been reclassified to conform to the presentation for the nine months
ended March 31, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting for
Comprehensive Income," ("SFAS 130"). SFAS 130 requires disclosures of components
of non-stockholder changes in equity in interim periods and additional
disclosures of components of non-stockholder changes in equity on an annual
basis. Adoption of SFAS 130 had no impact on the Company's results of operations
or financial position.
F-9
<PAGE> 86
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," ("SFAS
131"). The Company adopted SFAS 131 effective July 1, 1998. The adoption of this
standard did not have a material effect on the Company's financial statement
disclosures.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," ("SOP
98-1.") The Company will adopt SOP 98-1 effective July 1, 1999. The Company has
not completed its evaluation of the impact of adopting SOP 98-1 but does not
expect the adoption to have a material effect on its financial position or
results of operations.
UNAUDITED FINANCIAL STATEMENTS
According to management, the accompanying unaudited financial statements
for the nine months ended March 31, 1998 have been prepared on substantially the
same basis as the audited financial statements and include all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of the financial information set forth therein.
UNAUDITED PRO FORMA INFORMATION
If the offering contemplated by this prospectus is consummated, the Series
A Redeemable Convertible Preferred Stock outstanding as of the closing date will
be converted into shares of the Company's common stock. The pro forma
stockholders' equity as of March 31, 1999 reflects conversion of the outstanding
preferred stock into 2,034,285 shares of common stock. Pro forma net loss per
share is computed as if outstanding preferred stock had been converted into
common stock on the date of issuance.
F-10
<PAGE> 87
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LEASE COMMITMENTS
The Company leases office facilities and certain equipment under separate
operating lease agreements which expire at various dates through 2003. The
Company has the option to renew the office facilities lease for an additional
five years through 2008. Rental expense under these operating leases was
$25,097, $52,361 and $163,019 for the period from June 17, 1996 (inception)
through June 30, 1997, the fiscal year ended June 30, 1998 and the nine months
ended March 31, 1999, respectively. Future commitments under noncancelable
operating leases outstanding as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
PAYMENTS
---------
<S> <C>
2000........................................................ $231,640
2001........................................................ 229,286
2002........................................................ 217,145
2003........................................................ 221,602
2004........................................................ 93,480
Thereafter.................................................. --
--------
$993,153
========
</TABLE>
3. LONG TERM DEBT
In August 1998, the Company entered into a loan agreement with a bank under
which it may borrow up to $750,000. Amounts borrowed under this agreement are
due in thirty monthly installments plus interest at the bank's prime rate plus
1% per annum (8.75% as of March 31, 1999), and are secured by substantially all
of the assets of the Company. As of March 31, 1999, the outstanding borrowings
under this facility were $729,333 which are due as follows:
<TABLE>
<S> <C>
2000........................................................ $301,793
2001........................................................ 301,793
2002........................................................ 125,747
--------
$729,333
========
</TABLE>
4. COMMON STOCK
On January 14, 1998, the Company declared a fifty-for-one stock split of
the Company's common stock. On September 16, 1998, the Company declared a three-
for-one stock split of the Company's common stock. All common stock information
has been retroactively restated to reflect this stock split.
As of March 31, 1999, the Company has reserved 3,163,185 shares of common
stock for future issuance upon the conversion of Series A Redeemable Convertible
Preferred Stock into common stock and upon the exercise of options to purchase
common stock.
F-11
<PAGE> 88
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May, 1998, the Company entered into an agreement to sell 255,885 shares
of Series A Redeemable Convertible Preferred Stock (Series A) for $9.77 per
share. The holders of Series A have the right to convert all or part of the
shares of Series A into common stock initially on a one-for-one basis subject to
certain conversion ratio adjustments should the price of the common stock for
any transaction subsequent to the agreement be lower than $9.77 per share or
automatically if the Company completes an initial public offering at a specified
price per share of common stock which results in aggregate gross proceeds of not
less than $15.0 million. As a result of stock splits subsequent to the issuance
of the Series A, the Series A conversion price has been reduced to $1.23 per
share which results in a conversion ratio of 7.95-for-one. The holders of Series
A vote together with the holders of common stock as a single class on all
actions to be taken by the stockholders of the Company.
At any time after June 1, 2005, any holder of Series A can require the
Company to redeem the outstanding Series A at the redemption price. The
redemption price is equal to the original issuance price of the Series A plus a
10% compound annual rate of return. The carrying amount of Series A is being
increased by periodic accretions so that its carrying amount will equal the
redemption amount at the redemption date.
The agreement provides for preferences upon liquidation. In general, Series
A has a preference at liquidation equal to the greater of the purchase price
plus a 10% compound annual rate of return or the fair value of the Series A. The
remaining assets, if any, would be distributed ratably to the common
stockholders.
In connection with the sale of Series A, the Company paid a fee of $125,000
to an investment banking company controlled by one of the Company's directors.
This fee was recorded as an issuance cost.
6. STOCK INCENTIVE PLAN
In January 1998, the Company's Board of Directors approved a stock
incentive plan whereby 1,128,900 shares of the Company's common stock were
reserved for grants to various personnel of the Company as well as outside
directors. At March 31, 1999, there were 169,117 shares available for grant
under the stock incentive plan. Options granted under the plan generally vest
over a four year period and expire 10 years from the date of grant.
F-12
<PAGE> 89
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock options granted to employees, and related
information for the nine months ended March 31, 1999 follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
--------- --------------
<S> <C> <C>
Outstanding at June 30, 1998........................... -- $ --
Granted.............................................. 962,034 1.23-7.93
Canceled............................................. (2,252) 1.23
-------
Outstanding at March 31, 1999.......................... 959,782 $1.23-7.93
======= ===========
Exercisable at March 31, 1999.......................... -- $ --
======= ===========
</TABLE>
Options outstanding as of March 31, 1999 were comprised of 954,982 options
with an exercise price of $1.23 per share and 4,800 options with an exercise
price of $7.93 per share. The weighted average exercise price per share of
options outstanding as of March 31, 1999 is approximately $1.26. The weighted
average remaining contractual life is 9.5 years.
Pro forma information regarding net income (loss) per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value of these
options was estimated at the date of grant using the Minimum Value option
pricing model with the following weighted-average assumptions for the nine
months ended March 31, 1999: risk-free interest rates of 5.38%; no dividend
yields; and a weighted-average expected life of an option of 5 years.
The Minimum Value option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input 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.
For purposes of pro forma disclosures, the estimated fair value of the
options and warrants granted to employees are amortized to expense over the
vesting period. The weighted average fair value per option granted in the nine
months ended March 31, 1999 was $0.29. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31, 1999
--------------
<S> <C>
SFAS 123 pro forma net loss................................. $(2,049,322)
SFAS 123 pro forma loss per share........................... $ (0.24)
</TABLE>
F-13
<PAGE> 90
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. WARRANTS
During January 1998, the Company entered into a transaction with a reseller
of the Company's services to purchase 182,993 shares of the Company's common
stock at $1.63 per share in cash. In connection with this transaction, the
Company agreed to issue warrants to purchase shares of common stock based on the
number of customer contracts the reseller is able to enter into prior to
September 30, 1998 and January 1, 2000. The reseller did not enter into the
required number of contracts at the September 30, 1998 target date. If the
reseller enters into a certain number of contracts prior to January 1, 2000,
then the reseller will receive up to 114,988 warrants to purchase common stock
at $1.63 per share. Any issued and unexercised warrants will expire on September
30, 2001. The value of the warrants will be determined when it is probable that
the reseller will enter into the target number of contracts.
8. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM NINE
JUNE 17, 1996 MONTHS
(INCEPTION) FISCAL YEAR ENDED
THROUGH ENDED MARCH 31,
JUNE 30, 1997 JUNE 30, 1998 1999
------------- ------------- -----------
<S> <C> <C> <C>
Current
Federal................................. $19,448 $(19,448) $--
State................................... 6,477 (6,477) --
------- -------- ---
$25,925 $(25,925) $--
======= ======== ===
</TABLE>
A reconciliation of the provision for income taxes (benefit) to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
PERIOD FROM NINE
JUNE 17, 1996 MONTHS
(INCEPTION) ENDED
THROUGH YEAR ENDED MARCH 31,
JUNE 30, 1997 JUNE 30, 1998 1999
------------- ------------- -----------
<S> <C> <C> <C>
Tax at statutory rate..................... $18,146 $(208,479) $(687,096)
Permanent differences..................... 7,779 5,089 5,470
Other..................................... -- 8,800 (14,189)
Valuation allowance....................... -- 168,665 695,815
------- --------- ---------
$25,925 $ (25,925) $ --
======= ========= =========
</TABLE>
F-14
<PAGE> 91
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------- MARCH 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss........................... $ -- $ 173,858 $ 780,515
Accrued compensation......................... -- -- 115,349
Other........................................ -- -- 955
--------- --------- ---------
Total deferred tax assets...................... -- 173,858 896,819
Deferred tax liabilities:
Depreciation................................. -- (5,193) (32,339)
--------- --------- ---------
Total deferred tax liabilities................. -- (5,193) (32,339)
--------- --------- ---------
Valuation allowance............................ -- (168,665) (864,480)
--------- --------- ---------
Net deferred taxes............................. $ -- $ -- $ --
========= ========= =========
</TABLE>
For federal income tax purposes at March 31, 1999, the Company has net
operating loss carryforwards of approximately $2.0 million which begin expiring
in 2013. Utilization of the Company's net operating loss carryforwards could
become subject to annual limitation due to the "change of ownership" provisions
of the Internal Revenue Code and similar state provisions. For financial
reporting purposes, a valuation allowance has been recognized to reduce net
deferred tax assets to zero due to uncertainties with respect to the Company's
ability to realize the benefit of deferred income tax assets.
9. 401(K) PLAN
In April, 1998, the Company adopted the nFront, Inc. Retirement Plan (the
"Plan"), which qualifies under Section 401(k) of the Internal Revenue Code.
Employees are eligible to participate in the plan after three months of service.
Participants may contribute a percentage of their base salaries up to the
maximum allowable under Section 401(k). Contributions made to the Plan by the
Company are discretionary. No employer contributions to the Plan have been made
through March 31, 1999.
10. RELATED PARTY TRANSACTIONS
In January 1997, the Company entered into an agreement with a company owned
by certain principal shareholders of the Company whereby the Company would
obtain certain furniture and equipment in exchange for programming services. The
parties valued these assets at $83,986 and the obligation was satisfied upon the
provision of $9,901 and $74,085 of programming services in the period from June
17, 1996 (inception) through June 30, 1997 and year ended June 30, 1998.
F-15
<PAGE> 92
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In October 1997, the Company loaned a stockholder $20,000 which was repaid
in February 1998. The loan was unsecured and bore interest at 10.5% per annum.
During the period from October 1997 through January 1998, the Company
borrowed $90,000 from its Chief Executive Officer. The loans were unsecured and
bore interest at 10.5% per annum, and were repaid in February 1998.
One of the Company's shareholders is a reseller of the Company's services.
During the year ended June 30, 1998 this reseller accounted for $136,872 of the
Company's revenues. There were no revenues from this reseller during the nine
months ended March 31, 1999.
11. NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed in accordance with SFAS 128
which requires disclosure of basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share includes the impact of
potentially dilutive securities. The Company's potentially dilutive securities
were antidilutive and therefore were not included in the computation of weighted
average shares used in computing diluted loss per share. There were no
potentially dilutive securities outstanding during the period from June 17, 1996
(inception) through June 30, 1997 and for the nine months ended March 31, 1998.
The following table sets forth the reconciliation of the numerators of the
basic and diluted income (loss) per share:
<TABLE>
<CAPTION>
PERIOD FROM FISCAL NINE NINE
JUNE 17, 1996 YEAR MONTHS MONTHS
(INCEPTION) ENDED ENDED ENDED
THROUGH JUNE 30, MARCH 31, MARCH 31,
JUNE 30, 1997 1998 1998 1999
------------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss).............. $ 48,740 $ (522,996) $ 9,107 $(1,808,147)
Accretion on redeemable
convertible preferred
stock........................ -- (35,733) -- (204,661)
---------- ---------- ---------- -----------
Net income (loss) attributable
to common stock.............. $ 48,740 $ (558,729) $ 9,107 $(2,012,808)
========== ========== ========== ===========
Net income (loss) per common
share -- basic and diluted... $ 0.01 $ (0.07) $ 0.00 $ (0.24)
========== ========== ========== ===========
Weighted average shares
outstanding -- basic and
diluted...................... 5,079,167 8,033,223 8,000,090 8,498,844
========== ========== ========== ===========
</TABLE>
Potentially dilutive options to purchase 959,782 shares of common stock
with a weighted average exercise price of $1.26 per share outstanding at March
31, 1999 and 2,034,285 common shares issuable upon conversion of the redeemable
convertible
F-16
<PAGE> 93
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock were not included in the computation of diluted loss per share
for the periods outstanding because the Company reported a loss and, therefore,
the effect would be anti-dilutive.
12. SUBSEQUENT EVENTS
On April 21, 1999, the Company's Board of Director's approved the nFront,
Inc. Director Stock Option Plan (the "Director Plan") and has reserved 200,000
shares of common stock for issuance under the Director Plan.
On April 21, 1999, the Company's Board of Directors increased the number of
authorized capital stock from 5,000,000 to 70,000,000 shares of common stock and
from 1,000,000 to 10,000,000 shares of preferred stock, pending stockholder
approval. This increase has been reflected in the financial statements as of
March 31, 1999.
On April 21, 1999, the Company's Board of Directors increased the number of
shares of the Company's common stock reserved for grants under the stock
incentive plan to 2,188,900 shares.
On April 22, 1999, the Company executed a senior subordinated debenture
agreement with a stockholder under which the Company may borrow up to $5.0
million through the earlier of April 22, 2000 or the closing of an underwritten
public offering of the Company's common stock. Unanimous approval of the
Company's Board of Directors is required to borrow in excess of $3 million under
the agreement. Interest on any borrowings under the senior subordinated
debenture accrues at the prime rate plus 3% per annum, payable at maturity. In
consideration of the stockholder's commitment to make the loan, the Company
agreed to issue warrants exercisable for three years for i) common shares equal
to $500,000 divided by the initial public offering price and at a purchase price
per share equal to the initial public offering price per share if the offering
is declared effective prior to September 1, 1999 or ii) 55,671 common shares at
a purchase price of $8.98 per share.
On May 25, 1999, the Company's Board of Directors approved the nFront, Inc.
Employee Stock Purchase Plan which, subject to certain terms and conditions,
will allow employees to purchase common stock through payroll deductions for 85%
of the fair market value of the common stock. Upon adoption, 100,000 shares of
common stock were reserved for issuance under the plan, and the number of shares
available for issuance under the plan shall automatically increase on the last
trading day of each fiscal year, beginning with the fiscal year ending June 30,
2000, by a number of shares equal to one-quarter percent (0.25%) of the total
number of shares of common stock outstanding.
On May 28, 1999, the Company's Board of Directors declared a 2.65-for-1
common stock split. All common stock, option and warrant information, weighted
average shares and earnings per share information has been retroactively
restated to reflect the common stock split.
F-17
<PAGE> 94
NFRONT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On June 17, 1999, the Company entered into a loan agreement which is
comprised of a $4,425,000 revolving line of credit (the "Line"), which bears
interest at Libor plus 1.75% per annum and a $575,000 term loan (the "Loan"),
which bears interest at the Prime Rate plus 1.0% per annum. The Line is due on
the earliest to occur of: (i) December 31, 1999; (ii) the consummation of a
public offering of the Company's common stock; or (iii) 25 days after request
for payment made by the lender. The Loan is due in 26 equal monthly installments
commencing on July 15, 1999. The Line and the Loan are secured by substantially
all of the assets of the Company and the Company used the proceeds of the Loan
to repay long-term debt.
F-18
<PAGE> 95
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,900,000 SHARES
(NFRONT LOGO)
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
J.C. BRADFORD&CO.
RAYMOND JAMES & ASSOCIATES, INC.
SOUNDVIEW TECHNOLOGY GROUP
-----------------------
JUNE 29, 1999
-----------------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until July 24, 1999 (25 days after the date of this offering), all dealers
that buy, sell or trade in our common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This requirement is in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
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