<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 2000
REGISTRATION NO. 333-34976
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WEBSIDESTORY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7389 33-0727173
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
10182 TELESIS COURT, 6TH FLOOR
SAN DIEGO, CA 92121
(858) 546-0040
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
TERANCE A. KINNINGER
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
WEBSIDESTORY, INC.
10182 TELESIS COURT, 6TH FLOOR
SAN DIEGO, CA 92121
(858) 546-0040
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
CAMERON JAY RAINS, ESQ. BRUCE R. HALLETT, ESQ.
JEFFREY T. BAGLIO, ESQ. SCOTT R. SANTAGATA, ESQ.
JOHN J. GILLULY III, ESQ. KANDY L. WILLIAMS, ESQ.
DECEMBER GREENE, ESQ. AMY J. HANSEN, ESQ.
GRAY CARY WARE & FREIDENRICH LLP BROBECK, PHLEGER & HARRISON LLP
4365 EXECUTIVE DRIVE, SUITE 1600 38 TECHNOLOGY
SAN DIEGO, CA 92121-2189 IRVINE, CA 92618
(858) 677-1400 (949) 790-6300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE(3)
------------------------------------------------------------------------------------------------------
Common Stock ($0.001 par value)...................... $57,500,000 $15,180
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares that the Underwriters will have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
(3) Represents amount paid on initial filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 18, 2000
PROSPECTUS
5,000,000 SHARES
[WEBSIDESTORY LOGO]
COMMON STOCK
--------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are
offering 5,000,000 shares. No public market currently exists for our common
stock.
We propose to list the shares on the Nasdaq National Market under the
symbol "WSSI." We expect the public offering price to be between $7.00 and $9.00
per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to WebSideStory, Inc............................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 750,000
additional shares of common stock at the public offering price less the
underwriting discount to cover over-allotments, if any.
We expect to use $16.75 million of our net proceeds for the mandatory
redemption of all outstanding shares of our redeemable preferred stock which are
held by entities affiliated with TA Associates, Inc. and Summit Partners, LLC
and become due and payable upon the closing of our initial public offering.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers expects to deliver the shares on or about ,
2000.
--------------------------------------------------------------------------------
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
WILLIAM BLAIR & COMPANY
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL
SERVICES CORPORATION
, 2000
<PAGE> 3
GATEFOLD:
On the left, multiple images of web pages and people, with lines connecting
them to a centrally placed WebSideStory logo.
On the right, a screenshot of the HitBox Enterprise reporting interface.
The heading reads, "WebSideStory, the Pulse of the Internet:"
The subheadings read, "collects and analyzes more than 4.5 billion web page
views per month," and "provides Internet intelligence to more than 150,000 web
sites."
<PAGE> 4
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Special Note Regarding Forward-Looking Statements........... 19
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 22
Dilution.................................................... 23
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 40
Management.................................................. 55
Certain Transactions........................................ 64
Principal Stockholders...................................... 67
Description of Capital Stock................................ 69
Shares Eligible for Future Sale............................. 71
Underwriting................................................ 73
Legal Matters............................................... 75
Experts..................................................... 76
Where You Can Find More Information......................... 76
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------------
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE 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 UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information in this prospectus, including the section entitled "Risk Factors,"
regarding our company and the common stock being sold in this offering.
WEBSIDESTORY, INC.
WebSideStory provides detailed, real-time Internet web site user behavior
information and analysis. We offer subscriptions to information services such as
HitBox Enterprise, HitBox Pro, HitBox Wireless and HitBox that allow businesses
to outsource the collecting, processing and real-time reporting of users'
interaction with their web pages. With the information we provide, businesses
can observe how Internet users interact with a web site, click from page to
page, or buy products or services and use this information to improve
advertising strategies, site content, site structure and product or service
offerings. We provide this valuable business information and analysis without
customers having to buy, install, run or maintain any software. Our customers
can quickly implement our information services. Our services can be used by
large and small web sites and are currently used to monitor over 150,000 web
sites and 4.5 billion page views per month. Our customers include both large
businesses and emerging Internet companies.
We provide our customers with Internet user behavior measurement and
analysis services in the form of detailed statistical reports. Our reports
include information on numbers of users, times and durations of visits, patterns
of movement within a site, visitors' Internet service providers, operating
systems, search engines, time zones and web browser software, sources of
visitors, and visitors' interest profiles. We can provide this intelligence to
companies using virtually any choice of computer system and software, to serve
either wireline or wireless browsers. Our services are designed to enable
businesses to develop clear insights and make informed decisions based upon
accurate and timely information. They are easy to use and can be adapted to the
rapidly changing configurations of our customers' web sites.
As businesses develop more comprehensive online capabilities to address
large and growing markets such as eCommerce, they require more sophisticated
means of analyzing customer behavior. Growth of the Internet creates both
opportunities and challenges for these businesses. Millions of users continue to
access the Internet through desktop computers and, increasingly, mobile and
wireless devices such as Palm VII Connected Organizers and web-enabled phones.
The ability to capitalize on the eCommerce market opportunity depends, in part,
on businesses' abilities to analyze and respond to the electronic records of
millions of online customer interactions with a web site.
We introduced our basic HitBox Internet user behavior information and
analysis service in the fourth quarter of 1996. We initially sold our services
in exchange for links on customers' web pages. These links bring Internet users
to our web sites, from where we derive revenue through the sale of
advertisements. Advertising sales constituted 90.1%, 83.3%, 88.8% and 74.1% of
total revenue in 1997, 1998, 1999 and the six months ended June 30, 2000,
respectively.
In the third quarter of 1999, we began selling subscriptions to our
Internet behavior information and analysis services for a fee. As a result, our
revenue mix began changing to include subscription-based information services.
We have a limited operating history selling fee-based subscription information
services. In 1999 and the first six months of 2000, subscription revenue
constituted 0.8% and 20.5% of total revenue, respectively. In 1997 and 1998, we
realized operating income of $500,000 and $1.5 million, respectively. We
incurred operating losses in 1999 and the first six months of 2000 of $1.9
million and $5.7 million, respectively, which included stock-based compensation
of $2.0 million and $3.5 million in 1999 and the first six months of 2000,
respectively. We anticipate incurring losses in the future as we attempt to grow
our new subscription business.
We intend to enhance our competitive position by providing to our customers
more statistics and more analysis of information. We operate in highly
competitive markets. As new devices, operating systems and browsers emerge, we
plan to continue to provide our customers with relevant Internet user
intelligence. We plan to capitalize on our technology that allows our customers
to measure user behavior on the wireless
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<PAGE> 6
Internet. By executing these strategies, we intend to pursue our objective to
become one of the leading sources of Internet business intelligence in the
evolving online economy.
CORPORATE INFORMATION
We were formed as a California corporation in September 1996, and we intend
to reincorporate in Delaware prior to the completion of this offering.
Our principal executive offices are located at 10182 Telesis Court, 6th
Floor, San Diego, California 92121, and our telephone number at that address is
(858) 546-0040. Our principal web site is located at www.websidestory.com.
Information contained in our web sites is not part of this prospectus.
THE OFFERING
Common stock offered by
WebSideStory........................ 5,000,000 shares
Common stock to be outstanding after
the offering........................ 29,466,325 shares
Use of proceeds..................... $16.75 million of the proceeds will be
used to redeem all outstanding shares
of our redeemable preferred stock
currently held by entities affiliated
with TA Associates, Inc. and Summit
Partners, LLC. Kurt R. Jaggers and
Walter G. Kortschak, two of our
directors, are affiliated with TA
Associates, Inc. and Summit Partners,
LLC, respectively. The remaining
proceeds will be used to fund purchases
of equipment, to pay down our line of
credit, to pay a note in favor of a
former stockholder and for working
capital and general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.............................. WSSI
This preliminary prospectus is subject to completion prior to this
offering. Among other things, this preliminary prospectus describes our company
as we currently expect it to exist at the time of this offering. Except as
otherwise indicated, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- has been adjusted to give effect to a 1-for-6 reverse split of our common
stock that will be completed prior to this offering;
- assumes that we have reincorporated in the State of Delaware;
- assumes all outstanding convertible redeemable preferred stock has been
converted into 7,889,066 shares of common stock;
- assumes that upon the closing of this offering all outstanding shares of
redeemable preferred stock have been redeemed; and
- assumes an initial public offering price of $8.00 per share.
In addition to the 29,466,325 shares of common stock outstanding after this
offering, as of the completion of this offering and based on the number of
shares issued and options granted as of July 31,
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<PAGE> 7
2000, we expect to have additional shares of common stock available for issuance
under the following plans and arrangements:
- 2,642,655 shares issuable under our stock option plans, consisting of:
- 2,048,361 shares underlying options outstanding at a weighted average
exercise price of $1.70 per share; and
- 594,294 shares available for future issuance;
- 738,179 shares underlying an option granted to a key executive at an
exercise price of $0.04 per share;
- 500,000 shares available for issuance under our 2000 Employee Stock
Purchase Plan; and
- 13,333 shares issuable upon exercise of a warrant held by Imperial Bank.
WebSideStory(R), HitBox(R), StatMarket(R) and Yep.com(R) are our U.S.
registered service marks. Our "W" logo is also a service mark. We have applied
to register The Pulse of the Internet, Traffic and Yep as our service marks.
This prospectus also contains trademarks and trade names of other companies. All
trademarks and trade names appearing in this prospectus are the property of
their respective holders.
3
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following financial information should be read together with the
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus. For more information regarding the calculation of the number of
shares used in per share computations, see Note 2 to the consolidated financial
statements included elsewhere in this prospectus. Unaudited pro forma net loss
per share attributable to common stockholders reflects the redemption of our
redeemable preferred stock and the conversion of our convertible redeemable
preferred stock into common stock as of the dates of issuance, June 18, 1999 and
June 30, 2000.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue:
Information services -- advertising
sales................................. $ 1,460 $ 4,587 $ 8,521 $ 4,314 $ 5,130
Information services -- subscriptions... -- -- 74 -- 1,422
Technology services..................... 160 918 1,005 451 371
----------- ----------- ----------- ----------- -----------
Total revenue............................. $ 1,620 $ 5,505 $ 9,600 $ 4,765 $ 6,923
Stock-based compensation*................. -- -- 1,998 -- 3,515
Total operating expenses.................. 1,122 4,039 11,523 3,972 12,666
Income (loss) from operations............. 498 1,466 (1,923) 793 (5,743)
Net income (loss)......................... 304 837 (1,185) 617 (6,059)
Net income (loss) attributable to common
stockholders............................ 304 837 (16,644) 589 (9,229)
Net income (loss) per share attributable
to common stockholders:
Basic................................... $ 0.01 $ 0.05 $ (1.07) $ 0.04 $ (0.60)
=========== =========== =========== =========== ===========
Diluted................................. $ 0.01 $ 0.04 $ (1.07) $ 0.03 $ (0.60)
=========== =========== =========== =========== ===========
Shares used in computing net income (loss)
per share attributable to common
stockholders:
Basic................................... 30,303,030 18,011,623 15,595,899 16,524,175 15,271,693
=========== =========== =========== =========== ===========
Diluted................................. 30,303,030 18,760,557 15,595,899 17,890,255 15,271,693
=========== =========== =========== =========== ===========
Unaudited pro forma net loss per share
attributable to common stockholders,
basic and diluted....................... -- -- $ (0.79) -- $ (0.36)
=========== ===========
Shares used in computing unaudited pro
forma net loss per share attributable to
common stockholders, basic and
diluted................................. -- -- 20,420,966 -- 24,217,269
=========== ===========
Constructive cash dividend per share**.... -- -- $ 9.59 $ 9.59 --
=========== ===========
---------------
* Stock-based compensation:
Sales and marketing................. $ -- $ -- $ 44 $ -- $ 400
Technology development and
operations....................... -- -- 34 -- 321
General and administrative.......... -- -- 1,920 -- 2,794
----------- ----------- ----------- ----------- -----------
$ -- $ -- $ 1,998 $ -- $ 3,515
=========== =========== =========== =========== ===========
</TABLE>
** This relates to a constructive cash dividend of $20.0 million that resulted
from the repurchase of our common stock in conjunction with the preferred
stock transaction in June 1999 (See Note 5 to the consolidated financial
statements included elsewhere in this prospectus).
The decrease in basic and diluted shares used in computing net income per
share attributable to common stockholders from 1997 to 1998 is due primarily to
the repurchase of stock from one of our founding stockholders during 1998 (see
Note 3 to the consolidated financial statements included elsewhere in this
4
<PAGE> 9
prospectus). The decrease in basic and diluted shares used in computing net
income (loss) per share attributable to common stockholders from 1998 to 1999 is
due primarily to our repurchase of common stock in conjunction with the
preferred stock transaction in June 1999 (see Note 5 to the consolidated
financial statements included elsewhere in this prospectus) and the exclusion of
loss year antidilutive potential common shares in the calculation for 1999.
Operating expenses increased significantly from 1997 through 1999 and for
the six months ended June 30, 2000 as we increased our sales and marketing
efforts, technology development and operations efforts, infrastructure costs,
and general and administrative costs. In 1999 and the six months ended June 30,
2000, we also incurred approximately $2.0 million and $3.5 million,
respectively, in stock-based compensation related to stock options granted to
our employees. Refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more detailed explanations of the
increases in operating expenses.
The following table provides a summary of our consolidated balance sheet as
of June 30, 2000. The pro forma column reflects: (a) the automatic conversion of
all outstanding shares of our convertible redeemable preferred stock into
7,889,066 shares of common stock at the closing of this offering and (b) the
automatic redemption of our redeemable preferred stock in the amount of $16.75
million at the closing of this offering, which is reflected as a current
obligation to redeem the redeemable preferred stock. The pro forma as adjusted
column reflects: (a) payment of the obligation to redeem the redeemable
preferred stock in the amount of $16.75 million, (b) the repayment of a note
payable by us to a former stockholder in the amount of $182,000 plus the related
unamortized discount of $18,000, (c) the sale of 5,000,000 shares of our common
stock in this offering at an assumed initial public offering price of $8.00 per
share, after deducting the underwriting discounts and commissions and estimated
offering expenses, and (d) the receipt and application of the net proceeds from
this offering. See "Use of Proceeds" for a discussion about how we intend to use
the proceeds from this offering.
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................................... $ 4,431 $ 4,431 $22,231
Working capital (deficit)................................... 5,217 (11,533) 23,086
Total assets................................................ 11,733 11,733 29,533
Note payable to former stockholder (current and long-term
portion).................................................. 182 182 --
Capital lease obligations (long-term portion)............... 22 22 22
Redeemable preferred stock.................................. 32,411 -- --
Total stockholders' equity (deficit)*....................... (24,746) (9,085) 25,647
</TABLE>
------------
* Stockholders' deficit is due primarily to our repurchase of common stock of
$5.0 million and a constructive cash dividend of $20.0 million issued to our
founders and a key executive in conjunction with the preferred stock
transaction in June 1999, resulting in an increase to stockholders' deficit
of $25.0 million.
5
<PAGE> 10
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before you decide to invest in our common stock. If any of
the negative events referred to below occurs, our business, financial condition
and results of operations could suffer. In any such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
This prospectus includes statistical and empirical data regarding the
Internet. The data is taken or derived directly from information published by
several sources, including International Data Corporation and Forrester
Research. We have not independently verified the data and we caution you to read
the data in connection with the rest of the disclosure in this document,
particularly this "Risk Factors" section.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED HISTORY OF SELLING OUR INTERNET USER BEHAVIOR INFORMATION AND
ANALYSIS ON A FEE-BASED SUBSCRIPTION BASIS, WHICH MAKES IT DIFFICULT TO EVALUATE
OUR CURRENT BUSINESS PERFORMANCE AND FUTURE PROSPECTS.
We were formed in September 1996. Until August 1999, we provided our basic
HitBox Internet user behavior information and analysis service solely in
exchange for links to our web sites on which we sold advertising. However, we
recently began selling our fee-based subscription services, HitBox Enterprise,
HitBox Wireless, HitBox Pro and StatMarket. We must sell increasing amounts of
these services in the future to grow our business. There is a significant number
of risks and uncertainties inherent in our business especially in light of our
limited relevant operating history and our limited experience selling
subscriptions to our Internet user behavior information and analysis services
for a fee. These risks and uncertainties are particularly significant for
companies such as ours that are in rapidly evolving markets for Internet
products and services.
In particular, our limited operating history and limited experience selling
our fee-based services results in the following material risks:
- If we do not market our services to online businesses and thereby
increase our ability to collect data regarding Internet users in the
aggregate, our revenue may not grow and our operating results may suffer.
- If we do not maintain current and attract new advertiser relationships,
our revenue may not grow and our operating results may suffer.
- If we do not continue to develop and upgrade our services to keep pace
with the growth of the Internet and changes in its technology and
regulatory environment, we may not be able to service our customers or
compete effectively.
- If we do not manage the internal growth of our business, our operating
expenses may increase and our growth may be limited.
- If we do not develop new relationships with resellers and companies that
will co-market products and services with us, our revenue may not grow
and our operating results may suffer.
If online businesses are not willing to subscribe to our services for a
fee, then our revenue will not grow and our operating results will suffer. As a
result, our stock price may decline.
WE EXPECT THAT OPERATING EXPENSES WILL INCREASE SIGNIFICANTLY AND THAT WE WILL
INCUR LOSSES IN THE FUTURE.
Although we have had profitable operations in the past, we incurred a net
loss of approximately $1.2 million in 1999 and $6.1 million for the first six
months of 2000. Prior to the third quarter of 1999, we operated profitably when
we provided our information services solely in exchange for advertising space.
We became unprofitable in the third quarter of 1999 as a result of our new focus
on providing information services in exchange for subscription fees and as a
result of stock-based compensation expense. To pursue our
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<PAGE> 11
current business strategy, we expect our operating expenses will continue to
increase significantly over the next twelve months, perhaps doubling or more
during such period as compared to the prior twelve-month period. This increase
in operating expenses may render us unable to generate sufficient revenues to be
profitable in the future.
Over the next twelve months we expect to increase the number of our sales
and marketing management employees, including adding sales personnel in
international markets. We also plan to open new distribution channels with other
companies to resell and co-market our services, as well as increase our
marketing and promotional activities. As a result, we anticipate that our sales
and marketing expenses will represent the majority of the anticipated operating
expense increase over the next twelve months and could increase three times or
more compared to the prior twelve months' expenses.
We also expect to expand our efforts to enhance our existing services and
develop new services. As a result, we anticipate that over the next twelve
months our technology development and operations expenses could increase two
times or more over the previous twelve months' expenses.
In addition, we have recently expanded our management team and expect to
expand it further as well as build infrastructure to support our growth. As a
result we anticipate that general and administrative expenses will increase over
the next twelve months compared to the prior twelve months; however, we expect
the increase to be at a rate less than that anticipated for other operating
expenses.
Unprofitable operations may have an adverse effect on the price of our
common stock and consequently your investment in us. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
more detailed discussion of our operating expenses.
BECAUSE OUR FEE-BASED SERVICES AND OUR WEB PROPERTIES ARE RELATIVELY NEW, IT IS
UNCERTAIN THAT THEY WILL ACHIEVE WIDESPREAD CUSTOMER ACCEPTANCE.
We introduced HitBox Pro in August 1999 and HitBox Enterprise in October
1999. In addition, we began to offer StatMarket as a subscription service in
December 1999. As a result, we have realized only limited revenue from sales of
these services of approximately $74,000 and $1.4 million in 1999 and the first
six months of 2000, respectively. We cannot assure you that these new
subscription services will achieve customer acceptance or that we will be able
to continue to generate or to grow revenue from sales of these services. We also
have a limited history of operating our web properties HitBox.com and Yep.com,
and it is uncertain whether our customers and Internet users will continue to
use them. If businesses are not willing to pay the fees for our subscription
services, or if our web properties do not achieve market acceptance, our
business will be harmed.
THE SUCCESS OF OUR BUSINESS WILL ALSO BE AFFECTED BY OUR ABILITY TO CONTINUE TO
GENERATE ADVERTISING SALES REVENUE DERIVED FROM OUR SERVICES.
Historically, advertising sales revenue has been the majority of our total
revenue, and we expect it to be a significant portion of revenue in the future.
Our advertising sales revenue as a percentage of total revenue in 1997, 1998,
1999 and the first six months of 2000 was 90.1%, 83.3%, 88.8% and 74.1%,
respectively. Advertising sales are derived from contracts which range in
duration from one to three months. The market for Internet advertising is new
and rapidly evolving, and there is significant uncertainty about the demand for
and market acceptance of Internet advertising. In addition, the number of web
sites that offer advertising opportunities continues to increase thereby
increasing the competition for available advertising revenue. We cannot assure
you that the market for Internet advertising will continue to expand, that it
will become sustainable or that we will be able to provide an attractive forum
for advertisers. Also, prior to the year 2000 we earned the majority of our
advertising revenue from sales of advertising to web sites that contained adult-
oriented content. In the year ended December 31, 1999 and the six months ended
June 30, 2000, we derived approximately 74% and 39%, respectively of our total
advertising sales revenue from these advertisers. In the first quarter of 2000,
we adopted a policy to eliminate all advertising sold to these web sites, and as
of May 31, 2000, we had eliminated all such advertising. As a result, if we are
to maintain or increase revenue from advertising, we must secure additional
advertising customers to offset the loss of revenue from these
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advertisers. If we are unable to sell our advertising inventory on favorable
terms, or in sufficient amounts, then our revenue may not grow and may even
decline. If we are unable to continue to generate significant advertising
revenue, our business and results of operations will be adversely affected.
OUR SUBSCRIPTION SERVICES REQUIRE RENEWALS, AND WE CANNOT PREDICT WHAT THE
RENEWAL RATES WILL BE.
Businesses subscribe to our HitBox Enterprise, HitBox Pro and StatMarket
services. HitBox Enterprise subscriptions provide for an initial thirty-day
cancellation period and are generally for a one-year term, after which time they
automatically renew for successive monthly periods unless terminated by either
party. HitBox Pro subscriptions are monthly subscriptions paid in advance and
cancelable anytime. StatMarket subscriptions are generally three-month to
one-year subscriptions paid in advance. As of June 30, 2000, the average time
remaining under our subscription services agreements was approximately eight
months. Businesses are under no obligation to renew these subscriptions after
they expire. Because these services are new, we are unable to predict renewal
rates. Our renewal rates may also decline as a result of a consolidation in our
customer base or if a significant number of our customers cease operations. If
our renewal rates are low or decline for any reason, recurring revenue from our
fee-based subscription services will be adversely affected.
IF DEMAND FOR INTERNET USER MEASUREMENT AND ANALYSIS SERVICES DOES NOT EXPAND,
WE MAY NOT SELL OUR SERVICES OR GROW OUR BUSINESS.
The market for Internet user measurement and analysis services is new and
rapidly evolving. In particular, the market for outsourced information services
such as ours is relatively new. We will not be able to sell our services or grow
our business if the market for Internet user measurement and analysis services
does not grow or if outsourced services are not widely adopted.
THE FINANCIAL CONDITION OF WEB-BASED BUSINESSES MAY REDUCE THEIR SPENDING ON OUR
INFORMATION SERVICES AND INTERNET ADVERTISING.
Many of our customers and potential customers are consumer-oriented,
web-based businesses that rely on investments of equity capital to finance
operating expenses. Recent public market conditions have made it difficult for
many consumer-oriented, Internet businesses to raise equity capital. Adverse
capital market conditions may reduce their ability or willingness to pay for our
information services and Internet advertising in general. Any such reduction
would correspondingly decrease our market for both our subscription fee services
and the advertising we sell on our web sites.
OUR FAILURE TO EXPAND OUR SALES OPERATIONS AND DISTRIBUTION CHANNELS MAY LIMIT
OUR GROWTH.
We may be unable to expand our sales operations or establish the
distribution channel relationships necessary for us to grow our business. In
order to increase our market share and revenue, we will need to expand our
direct sales operations and develop indirect sales and distribution channels
through resellers and customer referrals. We have less than a year of experience
in direct sales and are in the process of expanding our direct sales force. We
had, as of July 31, 2000, approximately 26 sales personnel dedicated to selling
the HitBox services. Our new sales employees will require training and time to
achieve full productivity. We seek to hire sales people with experience in
selling technical products or services, but we may not be able to hire enough
qualified individuals when needed, or at all. We currently do not have indirect
sales and distribution channels, and we may not be able to establish the
relationships with distributors, vendors, marketers or resellers necessary to
develop successful indirect sales and distribution channels. While to date we
have spent an immaterial amount developing indirect sales and distribution
channels, we intend to spend significant amounts of time and money attempting to
develop those relationships in the future. We intend to hire additional
dedicated personnel to pursue these business relationships and to pay referral
fees, percentages of sales and discounts to our standard pricing in connection
with establishing the indirect sales and distribution channels. If we are unable
to grow our sales operations or develop successful indirect sales and
distribution channels, our revenue could decline and our stock price could
suffer.
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WE OPERATE IN HIGHLY COMPETITIVE MARKETS, WHICH COULD MAKE IT DIFFICULT FOR US
TO ACQUIRE AND RETAIN CUSTOMERS.
The market for Internet user measurement and analysis services is highly
competitive. Our competitors vary in size and in the type of products and
services they offer. Some of our main competitors include Accrue Software, Inc.,
Engage Technologies, Inc., NetGenesis Corp. and WebTrends Corporation. In
addition, we also compete indirectly with providers of overall Internet audience
ratings, such as MediaMetrix, Inc. and NetRatings, Inc. Many of our competitors
have:
- longer operating histories;
- larger sales operations and customer bases;
- greater brand recognition;
- more agreements for the resale or promotion of their products and
services; and
- significantly greater financial, marketing, technical and other resources
than we do.
We currently compete in several areas such as:
- price;
- ease of use;
- product performance;
- service; and
- speed of implementation.
We expect competition in the market for Internet user measurement and
analysis services to intensify because our business does not require large
capital investments initially and an industry standard has not been established.
Some of our existing and future competitors may be able to:
- devote greater resources to sales efforts and marketing and promotional
campaigns;
- charge less for their products and services; or
- devote substantially more resources to technology and systems
development.
Furthermore, our competitors who sell software enable their customers to
measure certain types of data and statistics that we do not measure, such as
hits, which are the files that comprise a web page and certain file downloads,
such as video files. We expect that our competitors will add more features to
their products that we will not add to our services. Some businesses may require
data or statistics that our competitors provide and we do not provide and may,
therefore, select the products of our competitors. If we are not able to compete
successfully against our current and future competitors, it will be difficult to
acquire and retain customers. In addition, we may experience limited revenue
growth, reduced operating margins, loss of market share and diminished value in
our services.
IF A COMPETING INTERNET USER MEASUREMENT AND ANALYSIS SERVICE IS ADOPTED AS THE
INDUSTRY STANDARD, WE MAY LOSE EXISTING CUSTOMERS OR ENCOUNTER DIFFICULTIES IN
ATTRACTING NEW CUSTOMERS.
To date, no Internet user measurement and analysis service has been adopted
as the industry standard for measuring Internet user behavior and preferences.
However, if one of our current or future competitors is successful in
establishing its products and services as the industry standard, it will be
difficult for us to retain current customers or attract additional customers for
our services. As a result, our revenue could decline.
SEASONAL AND OTHER FLUCTUATIONS IN OUR OPERATING RESULTS MAY MAKE IT DIFFICULT
TO PREDICT OUR FUTURE PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET
PRICE OF OUR COMMON STOCK.
Our subscription services and advertising revenues are based on business
buying patterns and on Internet usage of web sites that we serve. We have
offered our fee-based services for only a limited period and are not certain
what effect seasonality will have on our business. If businesses slow purchases
of our services, such as HitBox Enterprise or advertising sales, or if Internet
usage declines, we may experience seasonality in our
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business. Businesses buying and Internet usage generally decline during the
summer months. In addition to seasonal fluctuations, we may experience
significant fluctuations in our operating results if Internet usage remains flat
or declines for other reasons such as security concerns, limited bandwidth, and
increased regulation. These factors all tend to make the timing and amount of
revenue unpredictable and may lead to greater period-to-period fluctuations in
revenue than we have experienced historically.
As a result of the factors described above, we believe that our quarterly
revenue and results of operations are likely to vary significantly in the future
and that period-to-period comparisons of our operating results may not be
meaningful. You should not rely on the results of one quarter as an indication
of future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."
ANY DISRUPTION OF OUR NETWORK COULD AFFECT OUR ABILITY TO OPERATE OUR SERVICES,
WEB PROPERTIES AND THE WEB SITES OF OUR HOSTING CUSTOMERS.
Our network is susceptible to outages due to fire, floods, power loss,
telecommunications failures, break-ins and similar events. In addition, our
network infrastructure is located in Southern California, an area susceptible to
earthquakes. We do not have multiple site back-up for our services in the event
of any such occurrence. Despite our implementation of network security measures,
our servers are vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering with our computer systems. We do not
carry sufficient business interruption insurance to compensate us for the
intangible losses that may occur as a result of any of these events. Any such
event could have a material adverse effect on our business, operating results
and financial condition.
We depend on access to the Internet through the following four large
Internet service providers, or ISPs, in order to operate our business:
- Level (3) Communications;
- Digex Business Internet;
- Sprint Communications; and
- Verio, Inc.
We may in the future use additional or different ISPs. If we lose the
services of one or more of our ISPs for any reason, we could experience
disruption in our service offerings, network availability and web hosting
services. In addition, the loss of one of our ISPs as the result of
consolidation in the ISP industry could delay or prevent us from retaining the
services of a replacement ISP and increase the potential for disruption of our
business. This disruption to our business could damage our reputation and result
in a decrease in our revenue from the loss of current or potential customers. In
1998, we experienced a disruption of service from an ISP that affected the
quality of our service to our customers for approximately one day.
A RAPID EXPANSION OF OUR NETWORK AND SYSTEMS COULD CAUSE US TO LOSE INTERNET
USER BEHAVIOR MEASUREMENT INFORMATION OR CAUSE OUR NETWORK OR SYSTEMS TO FAIL.
We intend to significantly expand our network to improve capacity and
performance. We are using approximately 55% of our current bandwidth. We expect
to rent space for some servers with ISPs and to relocate our own data center. We
also intend to implement new commercial databases to help store and manage our
information. If we experience disruptions in our network as a result of these
efforts or if these efforts are unsuccessful, then our ability to provide our
services and generate revenue will be harmed.
In the future, we may need to expand our network and systems at a more
rapid pace than we have historically. We may suddenly require additional
bandwidth for which we have not adequately planned. We may secure an extremely
large customer with an extraordinary number of page views that would require
significant system resources. We may gain new accounts at such a rapid rate that
our systems are unable to process the information. In the event that one or more
of these factors occurs, our network or systems may not be capable of meeting
the demand for increased capacity. We may lose valuable Internet user data or
our
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network may temporarily shutdown if we fail to expand our network to meet future
growth. Any lapse in our ability to collect Internet user information will
decrease the value of our existing data as well as prevent us from providing the
complete data requested by our customers. Any disruption in our network
processing or loss of Internet user data may damage our reputation and result in
the loss of customers.
WE MAY BE LIABLE TO OUR CUSTOMERS AND MAY LOSE CUSTOMERS IF WE SUPPLY INACCURATE
INTERNET USER INFORMATION OR IF OUR ABILITY TO SUPPLY ACCURATE INTERNET USER
INFORMATION IS INTERRUPTED.
The information in our databases may contain inaccuracies that our
customers regard as significant. Our ability to collect and report data may be
interrupted by a number of factors, including our inability to access the
Internet or the failure of our network or software systems. Hackers, or
individuals who attempt to breach our network security, could, if successful,
misappropriate proprietary information or cause interruptions in our services.
If we experience any breaches of our network security or sabotage, we might be
required to expend significant capital and resources to protect against, or to
alleviate, problems. We may not be able to remedy any problems caused by hackers
or saboteurs in a timely manner, if at all. In addition, computer viruses may
harm our systems, and the transmission of computer viruses could expose us to
litigation or to a material risk of loss. Any irregularities or inaccuracies in
the data we supply that our customers regard as significant, or any interruption
in our ability to supply that data, may reduce our operating income or require
us to spend substantial amounts to defend lawsuits and pay any resulting damage
awards as well as divert management's attention from the operation of our
business. We do not independently verify the information contained in our
databases that is provided by Internet users. We may be liable to our customers
for loss of business, loss of future revenue, breach of contract or even for the
loss of goodwill to their business. In addition to potential liability, our
supplying of inaccurate information or the interruption of our ability to supply
that information could hurt our public image and result in the loss of both
existing and potential customers.
WE COULD BE HELD LIABLE TO THIRD PARTIES OR GOVERNMENTAL AGENCIES OR LOSE
CUSTOMERS AND OUR BUSINESS MAY BE HARMED BASED ON THE CONTENT THAT IS ON OUR WEB
PROPERTIES OR ON WEB SITES TO WHICH WE LINK OR THAT WE HOST.
We could be held liable to third parties as a contributor or a publisher if
the content on our web properties or web sites to which we link or that we host
violates others' copyright, trademark or other intellectual property rights or
is deemed or perceived to be defamatory. Our web properties also include content
that third parties provide to us that we do not monitor or control. We may not
discover or be able to change in a timely manner any content on our web
properties that may cause third parties or governmental agencies to bring legal
actions against us or that would cause customers to stop visiting our web sites.
Any liability, or even threatened liability, stemming from these possibilities,
could damage our public image, cause us to incur legal costs and divert
management's attention from our operations, which could in turn adversely affect
our business and the value of our stock.
We may lose customers or receive negative publicity as a result of negative
reaction to content on our web sites or web sites to which we link or that we
host. Historically, we have not pre-screened our HitBox customers based on the
content available on the customers' sites. Our web sites contain links to sites
with racial, political, religious and adult-oriented content or that offer
unlicensed music or software. In the past, we have received correspondence from
Internet users who state that they will not visit our web sites based upon some
of the content on sites to which we link. In particular, Internet users have
objected to the fact that our web sites link to sites with racial, political,
religious and adult-oriented content or that offer unlicensed music or software.
We currently do not pre-screen the content of sites to which we link or that we
host, and we currently do not intend to do so in the future. If we receive
negative publicity, businesses and Internet users may decide not to visit our
web sites or use our services, which will harm our business and could cause our
stock price to decline.
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IF THE INFORMATION THAT WE COLLECT AND USE WITHOUT CONSENT WERE DEEMED
PERSONALLY IDENTIFYING, OUR ABILITY TO COLLECT AND REPORT THIS INFORMATION WOULD
BE LIMITED.
Both existing and proposed laws regulate and restrict the collection and
use of information over the Internet that is considered personally identifying.
These laws are changing and vary among domestic and foreign jurisdictions, but
certain information such as names, addresses, telephone numbers, credit card
numbers and email addresses are widely considered personally identifying. We do
not believe that the Internet user information that we currently collect and use
without the user's consent, such as page views, operating systems, browser
versions and ISPs, is personally identifying. However, the scope of information
collected over the Internet that is considered personally identifying may become
more expansive and it is possible that current and future legislation may apply
to the information that we collect. Third parties or governmental agencies may
charge us with violations of current or future laws regarding the collection of
information, exposing us to litigation and potential liability. In the event
that the information that we collect and use is considered to be personally
identifying, our ability to collect and use this information will be restricted
and we will have to change our methods. Any restriction or change to our
information collection methods would cause us to spend substantial money and
time to make such changes and could decrease the amount and value of the
information that we collect.
INCREASED REGULATION OR LAWS OF ONLINE PROFILING MAY LIMIT OUR ABILITY TO
COLLECT AND USE INTERNET USER INFORMATION AND RESULT IN A DECREASE IN THE VALUE
OF OUR SERVICES.
Many foreign and domestic governmental authorities have created laws and
regulations that affect our ability to collect and use Internet usage data. If
these or other authorities enact regulations and laws that place new limitations
on how we use the Internet usage data that we collect, the amount and value of
the information that we collect would decrease, our business operations would be
negatively affected and the value of your investment would decline. Domestic and
foreign governments are considering restricting the collection and use of
Internet usage data. Some privacy advocates argue that even anonymous data,
individually or when aggregated, may reveal too much information about Internet
users.
If governmental authorities were to follow privacy advocates'
recommendations and enact laws that limit our online profiling practices, we
would likely have to obtain the express consent, or "opt-in," of an Internet
user before we could collect, share, or use any of that user's information. It
might also not be possible to comply with all foreign governmental restrictions
simultaneously. Any change to an opt-in system of profiling would damage our
ability to aggregate and utilize the information we currently collect from
Internet users and would reduce the amount and value of the information that we
provide to customers. A reduction in the value of our information might cause
some existing customers to discontinue their use of our services or discourage
potential customers from subscribing to our services, which would reduce our
revenue. We would also need to expend considerable effort and resources, both
human and financial, to develop new information collection procedures to comply
with an opt-in requirement. Even if we succeeded in developing new procedures,
we might be unable to convince Internet users to agree to our collection and use
of their information. This would negatively impact our revenue, growth and
potential for expanding our business and could cause our stock price to decline.
LIMITATIONS ON THE USE OF COOKIES TO COLLECT INFORMATION MAY REDUCE OUR ABILITY
TO DEVELOP ONLINE PROFILES AND AGGREGATE INTERNET USER INFORMATION.
Our technology currently uses "cookies," or small files of information
placed on a user's computer, to collect information about an Internet user's
visits to the web sites of our customers. This collection of behavioral
information can be accomplished without the user's knowledge or consent. Most
currently available Internet browsers allow users to modify their browser
settings to prevent cookies from being stored on their computer without their
knowledge. Recently, Microsoft announced that the next release of its Internet
browser will warn Internet users whenever they receive cookies that do not come
from the web sites being visited, such as our cookies as we currently serve
them. Users can also delete cookies from their computer at any time, and
widely-available software allows Internet users to sweep all cookies from their
computers. We are not aware of any reliable method to ascertain whether Internet
users are deleting their cookie files. If a
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large number of Internet users refuse, disable or delete their cookie files, the
number of profiles to which we have access would decrease, the collection of our
statistics based on cookies would be impaired and the value of our services
based on those profiles and statistics would decrease.
Some privacy advocates and governmental officials have suggested
restricting or eliminating the use of cookies without the Internet user's
consent. If we were required to obtain consent before delivering a cookie or if
the use or effectiveness of cookies is limited, we would be required to switch
to alternative technologies to collect user profile information. Alternative
technologies may be unavailable or substantially less effective than cookies.
Creating replacement technology for cookies could require us to expend
significant time and resources. We may be unable to complete this alternative
technology development in time to avoid negative consequences to our business,
and the replacement methods we develop may not be commercially feasible. In the
context of our existing technology, the replacement of cookies might also reduce
our existing customer base by requiring current customers to take specific
action to accommodate new technology.
In addition, privacy concerns may cause some Internet users to be less
likely to visit web sites that subscribe to our services and deliver our
cookies. If enough Internet users choose not to visit sites in which we have
embedded our technology and from which we collect information, our ability to
collect information and provide our services effectively would be adversely
affected. This would, in turn, reduce the value of our services and inhibit the
growth of our business.
WE MAY BE THE TARGET OF LEGAL ACTION BASED ON THE WAY WE COLLECT AND USE
INTERNET USER INFORMATION.
We collect, use and distribute information derived from the activities of
Internet users. Recently, some companies have been the subject of class action
lawsuits and governmental investigations based on their collection, use and
distribution of Internet user information without the consent of the Internet
users. For example, the Federal Trade Commission, or FTC, regularly investigates
companies' compliance with their own stated privacy policies. These
investigations have covered, for example, such activities as the sale of
personally identifiable information to third parties, the delivery of personally
identifiable information relating to anonymous chat rooms and message board
participants and the proposed merger of online anonymous profile information
with personally identifiable information obtained from offline sources. While we
are not aware of any FTC investigation regarding any practices we currently
employ, in the future, the FTC may investigate the practices we employ. In
addition, some local government agencies and privacy advocates have alleged that
delivery of cookies without consent is improper and should be illegal and object
to the use of unseen code on web pages used to gather data about Internet users.
Such government agencies and privacy advocates could bring a similar complaint
against us in connection with our use of cookies or other data collection
methods. Governmental entities and private persons or entities, may assert that
our methods of collecting, using and distributing Internet user information are
illegal or improper. Any such legal action, even if unsuccessful, may distract
our management's attention, divert our resources, negatively affect our public
image and harm our business.
WIDESPREAD ACCEPTANCE OF OUR SERVICES DEPENDS IN LARGE PART ON INCREASING MARKET
AWARENESS OF OUR BRANDS AMONG INTERNET BUSINESSES.
We believe that maintaining and strengthening the WebSideStory brand and
the other brands that we use, such as HitBox, Yep and StatMarket, are important
to our business and important elements in attracting new customers. Our ability
to successfully promote and position our brands will depend largely on the
effectiveness of our marketing efforts and our ability to develop reliable and
useful services at competitive prices. We anticipate that our sales and
marketing expenses, which include marketing and promotional expenses, will
represent the majority of the anticipated operating expense increase over the
next twelve months and could increase perhaps three times or more compared to
the prior twelve months' expenses. Due in part to the emerging nature of the
market for Internet user measurement and analysis services and the substantial
resources available to many of our competitors, we may have only a short time in
which we have an opportunity to achieve and maintain a significant market share.
Furthermore, the importance of brand recognition will increase as competition in
the market for our services increases. If we are unsuccessful in maintaining and
strengthening our brands, we may have difficulty attracting new customers.
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OUR FUTURE SUCCESS DEPENDS ON THE GROWTH OF THE INTERNET.
Our business is entirely dependent on the use and growth of the Internet.
If the Internet is not widely accepted as a medium for commerce and
communication in the future, our business will be adversely affected.
Even if the use of the Internet grows, the Internet infrastructure may not
be able to support the demands placed on it by this growth. Factors affecting
the ability of the Internet to support these demands include:
- security concerns of Internet users;
- inadequate network infrastructure;
- inconsistent quality of service; and
- lack of availability of cost-effective, high-speed Internet service.
As a result, the performance and reliability of the Internet may decline.
Web sites and proprietary online services have experienced interruptions in
their service as a result of outages, sabotage and other delays occurring
throughout their infrastructure. If these outages, sabotage or other delays
frequently occur in the future, Internet usage as a medium for communication and
commerce could grow more slowly or decline. In 1998, we experienced a disruption
of service from an ISP that affected the quality of service to our customers for
approximately one day. Customers were unable to access the reports we generate
about Internet user behavior particular to their web sites for that length of
time. Therefore, if the use of the Internet as a medium for communication or
commerce does not grow because of these types of interruptions, then the demand
for our services will most likely decrease and our operating results will
suffer.
OUR BUSINESS MAY NOT BE SUCCESSFUL IF WE LOSE THE SERVICES OF OUR EXISTING KEY
EMPLOYEES.
We expect that the services of the following key employees will be
important to our future operations:
- John J. Hentrich, President and Chief Executive Officer;
- Blaise P. Barrelet, Chairman and Chief Internet Architect;
- Terance A. Kinninger, Senior Vice President and Chief Financial Officer;
- Meyar Sheik, Senior Vice President and Chief Marketing Officer;
- Thomas H. Stigler, Senior Vice President, Enterprise Sales and Business
Development; and
- Randall K. Broberg, General Counsel and Chief Privacy Officer.
Any of our key personnel may terminate his employment relationship with our
company on short notice. We do not maintain any "key person" life insurance
policies. If we are unable to maintain an effective executive team, we may not
be able to achieve our short or long-term objectives or create or maintain
stockholder value.
OUR MANAGEMENT TEAM IS NEW AND MAY EXPERIENCE PROBLEMS WORKING TOGETHER.
Our management team has been working together only for a short while and
may not be able to work together effectively. Many members of our management
team have had only limited experience managing a rapidly growing company, on
either a public or private basis. John J. Hentrich, our President and Chief
Executive Officer, joined us in November 1999 and has not served in such
capacity in a public company prior to joining us. In addition, Thomas H.
Stigler, our Senior Vice President, Enterprise Sales and Business Development,
joined us in February 2000. Terance A. Kinninger, our Senior Vice President and
Chief Financial Officer, Meyar Sheik, our Senior Vice President and Chief
Marketing Officer, and Randall K. Broberg, our General Counsel and Chief Privacy
Officer, joined us in April 2000. If our management team is unable to work
together effectively, our business and results of operations may decline.
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WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE THE GROWTH OF OUR BUSINESS.
To date, we have experienced rapid growth. In the beginning of 1999, we had
approximately 30 employees. As of July 31, 2000, we had approximately 142
employees. Many of these employees, including some of our executive officers,
have very limited experience with our company and understanding of our systems
and controls. Many of our financial, operational and managerial systems and
controls were designed for a small business and will therefore need to be
adapted or replaced as we continue to expand our operations. We believe that we
will need to continue to grow in the future in order to be competitive in our
market. We will need to attract and hire additional sales, technical and
management personnel in an intensely competitive hiring environment. At the same
time, we will need to upgrade and expand our financial, operational and
managerial systems and controls. If we fail to manage our growth effectively,
our expenses could increase and our management's time and attention could be
diverted. If we do not succeed in these efforts, we will be unable to
effectively grow and manage our business, and our financial results could be
negatively affected.
THE COMPETITION FOR SKILLED PERSONNEL IS INTENSE AND IF WE FAIL TO ATTRACT,
INTEGRATE AND RETAIN SKILLED PERSONNEL OUR BUSINESS WILL BE ADVERSELY AFFECTED.
Our future success depends on our ability to hire and retain highly skilled
personnel. We anticipate that our total number of employees may double over the
next twelve months. In particular, we will need to recruit into our sales and
marketing and technology development organizations, both domestically and
internationally. Competition for these and other candidates is intense and
turnover in technology companies is high. We cannot assure you that we will be
able to successfully attract, integrate or retain sufficiently qualified
personnel. Our inability to retain and attract the necessary personnel could
adversely affect our business.
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE CONTROL OVER
OUR AFFAIRS.
Our executive officers and directors and entities affiliated with them
will, in the aggregate, beneficially own approximately 82.9% of our common stock
following this offering. As a group they will be able to control our business.
In particular, following the completion of this offering, Blaise P. Barrelet,
our Chairman and Chief Internet Architect and Agnes L. Barrelet, one of our Vice
Presidents and the spouse of Mr. Barrelet, together will own approximately 49.3%
of our outstanding common stock. These stockholders will have the ability to
exert substantial influence over all matters requiring approval by our
stockholders. For example, Mr. and Mrs. Barrelet, together with a key executive,
personally sold shares of common stock to TA Associates, Inc. and Summit
Partners, LLC in the financing transaction in June 1999, for which we recognized
a constructive cash dividend of $20.0 million. See "Certain Transactions." Other
stockholder matters include the election and removal of directors and any
merger, consolidation or sale of all or substantially all of our assets. In
addition, they may dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control or impeding a merger or consolidation, takeover
or other business combination.
THE SUCCESS OF OUR BUSINESS DEPENDS IN LARGE PART ON OUR ABILITY TO PROTECT AND
ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS EFFECTIVELY.
We regard the protection of our inventions, copyrights, service marks,
trademarks and trade secrets as important to our future success. We rely on a
combination of patent, copyright, service mark, trademark, and trade secret laws
and contractual restrictions to establish and protect our proprietary rights. We
endeavor to enter into agreements with our employees and contractors and
agreements with parties with whom we do business in order to limit access to and
disclosure of our proprietary information. Despite our efforts, we may be
unsuccessful in these endeavors. Moreover, others may independently develop
technologies that are competitive, or even infringing. The enforcement of our
intellectual property rights also depends on our legal actions against such
infringers being successful, but we cannot be sure such actions will be
successful, even when our rights have been infringed. For example, in November
1999, we filed a lawsuit in the United States District Court for the Southern
District of California against WebTrends Corporation, alleging that their
introduction of their WebTrends Live service constituted copyright infringement,
trade dress infringement and
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unfair competition. WebTrends responded with a counterclaim of infringement. In
November 1999, the court granted a temporary restraining order that resulted in
WebTrends withdrawing the WebTrends Live service from the Internet. The parties
reached a settlement and in January 2000 the case was dismissed.
We have six patent applications pending, two of which were filed
provisionally, in the United States covering our methods of gathering and
tracking Internet user behavior information. We have also registered "HitBox" as
a service mark in the United States, Japan and the European Union. We have also
registered copyrights for all of our web sites: WebSideStory.com, HitBox.com,
Yep.com and StatMarket.com. We cannot assure you that patent or service mark
registrations will issue with respect to pending or future applications or that
any issued patents or registered service marks will be enforceable. Because of
the global nature of the Internet, our web sites can be viewed worldwide but we
do not have intellectual property protection in every jurisdiction. Further,
effective patent, trademark, service mark, copyright and trade secret protection
may not be available in every country in which our services are available over
the Internet. In addition, the legal standards relating to the validity,
enforceability and scope of protection of intellectual property rights in
Internet-related industries are uncertain and still evolving.
We regard our database of aggregate Internet usage data as proprietary.
However, the only protections we have from others accessing and using the data
that we collect are our network security features, our confidentiality
agreements with our employees, customers and vendors and trade secret laws. If
our information can be accessed by third parties or is wrongfully provided to
third parties, it would decrease the value of that information which would have
a material adverse effect on our business.
IF A THIRD PARTY ASSERTS THAT WE ARE INFRINGING ITS INTELLECTUAL PROPERTY,
WHETHER SUCCESSFUL OR NOT, THEN OUR BUSINESS MAY BE HARMED.
Third parties may assert patent and other intellectual property
infringement claims against us in the form of lawsuits, letters or other forms
of communication. If a third party successfully asserts a claim that we are
infringing their proprietary rights, royalty or licensing agreements might not
be available on terms we find acceptable or at all. As currently pending patent
applications are not publicly available, we cannot anticipate all such claims or
know with certainty whether our technology infringes the intellectual property
rights of third parties. We expect that the number of infringement claims in our
market will increase as the number of services and competitors in our industry
grows. These claims, whether meritorious or not, could:
- be time-consuming;
- result in costly litigation; or
- require us to enter into royalty or licensing agreements.
As a result, any third-party intellectual property claims against us could
adversely affect our business, increase our expenses, and divert our
management's attention. Even if we have not infringed any such rights, we cannot
be sure our legal defenses will be successful. If we are successful defending
against such claims, our legal defense could require significant financial
resources and management time.
BECAUSE WE CONDUCT OPERATIONS IN EUROPE AND BECAUSE OUR BUSINESS STRATEGY
INCLUDES EXPANDING OUR INTERNATIONAL OPERATIONS, OUR BUSINESS IS SUSCEPTIBLE TO
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We recently incorporated subsidiaries in France and the Netherlands, and
our business strategy includes expanding our international operations. We have
not determined with certainty what geographic areas we intend to further expand
into, and we have very limited prior experience operating in foreign
jurisdictions. Conducting international operations subjects us to new risks that
we previously have not generally faced in the United States. These include:
- currency exchange rate fluctuations;
- unexpected changes in foreign regulatory requirements;
- maintaining and servicing computer hardware in distant locations;
- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
16
<PAGE> 21
- difficulties in managing and staffing international operations;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- the burdens of complying with a wide variety of foreign laws; and
- varied protection for intellectual property rights in some countries.
The occurrence of any one of these risks could negatively affect our
international business and, consequently, our results of operations generally.
In addition, the Internet may not be used as widely in international markets in
which we expand our international operations and, as a result, we may not be
successful in offering our services there.
WE MAY EXPAND BY ACQUISITIONS, INVESTMENTS IN OTHER COMPANIES OR THROUGH
BUSINESS RELATIONSHIPS THAT MAY DIVERT OUR MANAGEMENT'S ATTENTION AND CONSUME
RESOURCES THAT ARE NECESSARY TO SUSTAIN OUR BUSINESS.
If appropriate opportunities present themselves, we may acquire other
complementary businesses, technologies, services or products. We also may enter
into relationships with other businesses or make investments in other companies
if we believe they are in our best interests. Such relationships may involve
preferred or exclusive licenses, channels of distribution or pricing. We may
make investments in companies whose technology complements our own or who our
management otherwise determines are in our best interests. We currently have no
agreements or commitments relating to any acquisition investment or
relationship. We cannot assure you that we would be able to complete future
acquisitions successfully or to integrate acquired businesses, technologies,
services or products into our current operations. An acquisition, investment or
relationship may result in unforeseen operating difficulties and expenditures.
It may also require significant management attention that would otherwise be
available for ongoing development of our business. Moreover, we cannot assure
you that the anticipated benefits of any acquisition, investment or relationship
would be realized. In connection with one or more of those transactions, we may:
- issue additional equity securities that would dilute stockholders;
- incur debt on terms unfavorable to us or that we are unable to repay;
- incur contingent liabilities;
- integrate additional employees; and
- incur amortization expenses related to goodwill and other intangible
assets.
These actions could have an adverse effect on our stock price and
consequently your investment in our common stock.
MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF PROCEEDS FROM THIS OFFERING.
We may apply the proceeds of this offering to uses that do not improve our
results of operations. Our management will have broad discretion with respect to
the use of most of the proceeds from this offering. You will be relying on the
judgment of our management concerning these uses. The failure of our management
to apply these funds effectively could result in unfavorable returns and
uncertainty about our prospects, each of which could cause the price of our
common stock to decline. See "Use of Proceeds."
RISKS RELATED TO THIS OFFERING
THERE MAY BE VOLATILITY IN OUR STOCK PRICE AND ANY PROLONGED DECLINE COULD LIMIT
THE LIQUIDITY IN OUR COMMON STOCK AND OUR ABILITY TO GROW AND OPERATE OUR
BUSINESS.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest will lead to the
development of an active and liquid trading market. The lack of an active and
liquid trading market in our common stock could result in the loss of market
makers, the loss of media attention and the loss of or failure to obtain analyst
coverage. In addition, we are proposing to list our common stock on the Nasdaq
National Market System, or NMS. There are continuing eligibility
17
<PAGE> 22
requirements of companies listed on the NMS. If we are not able to continue to
satisfy the eligibility requirements of the NMS, then our stock may be delisted.
This could result in a lower price of our common stock and may limit the ability
of our stockholders to sell our stock.
The initial public offering price of our common stock may not be indicative
of the market price that will prevail in the trading market. A prolonged decline
in the market price of our common stock may limit our ability to raise equity
capital on terms favorable to us and our stockholders, if at all. As a result,
we may not be able to grow our business and, if we are not profitable, then we
may not have adequate resources to fund operations.
If our stock price drops below $5.00 per share, then the disclosure and
suitability obligations for broker-dealers on the marketability of our common
stock may be affected. This could adversely affect the activity in and liquidity
of the trading market of our common stock.
THERE MAY BE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR STOCK AS A RESULT OF
SHARES BEING AVAILABLE FOR SALE IN THE FUTURE.
Sales of a substantial amount of common stock in the public market, or the
perception that these sales may occur, could adversely affect the market price
of our common stock prevailing from time to time. This could also impair our
ability to raise additional capital through the sale of our equity securities.
After this offering, we will have 29,466,325 shares of common stock outstanding,
or 30,216,325 shares if the underwriters' over-allotment option is exercised in
full. Of these shares, the shares sold in this offering will be freely tradable,
except for shares purchased by an affiliate of ours, which will be subject to
the limitations of Rule 144 under the Securities Act. The remaining 24,466,325
shares are "restricted shares," and will become eligible for sale in the public
market at various times after 180 days after the date of this prospectus,
subject to the limitations and other conditions of Rule 144 under the Securities
Act. All of our current stockholders have entered into lock-up agreements with
representatives of the underwriters. These lock-up agreements restrict the sale
of shares by our current stockholders for a period of 180 days following the
offering. The underwriters may waive the lock-up restrictions prior to the end
of the 180-day period at their discretion, but we do not know what conditions
would cause the underwriters to waive the lock-up restrictions, and we have no
reason to believe they will do so. If the underwriters waive the lock-up
restrictions prior to the end of the 180-day period, then our current
stockholders may be able to sell shares subject to Rule 144 of the Securities
Act.
In addition, after this offering, the holders of 7,902,399 shares of common
stock will have registration rights and, subject to market conditions, may
require us to register all or a part of these shares. If our stockholders
attempt to sell a significant number of shares of our common stock, then the
price of our common stock may decline. See "Shares Eligible for Future Sale."
THE TANGIBLE BOOK VALUE OF THE COMMON STOCK WILL BE SUBSTANTIALLY LOWER THAN THE
OFFERING PRICE.
The initial public offering price will be substantially higher than the pro
forma tangible book value per share of our outstanding common stock. If you
purchase our common stock in this offering, the shares you buy will experience
an immediate and substantial dilution in tangible book value per share. The
shares of common stock owned by the existing stockholders will receive a
material increase in the pro forma tangible book value per share. The dilution
to investors in this offering will be approximately $6.56 per share. As a
result, if we were to distribute our tangible assets to our stockholders
immediately following this offering, purchasers of shares of common stock in
this offering would receive less than the amount paid for such shares. See
"Dilution."
EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT OUR ACQUISITION BY A THIRD
PARTY.
We have adopted many anti-takeover provisions in our certificate of
incorporation and by-laws. We believe the material provisions are:
- the provision for blank check preferred stock;
- the elimination of cumulative voting;
18
<PAGE> 23
- the limitation that directors can only be removed for cause;
- the requirement that vacancies on the board created by anything other
than stockholder removal can be filled only by vote of the remaining
directors;
- the establishment of a limited period during which stockholders may make
proposals for stockholder meetings; and
- the provision for a classified board.
Some of these provisions and Delaware law could, together or separately:
- discourage potential acquisitions proposals;
- delay or prevent a change in control; and
- limit the price that investors might be willing to pay in the future for
shares of our common stock.
We are subject to Section 203 of the Delaware General Corporation Law,
which generally prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested" stockholder for a period of
three years following the date on which the stockholder became an "interested"
stockholder. See "Description of Capital Stock."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve many risks
and uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology including "could," "may," "will," "should," "except,"
"plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue," the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially from
any forward-looking statement. We cannot guarantee future results, levels of
activity, performance or achievements.
19
<PAGE> 24
USE OF PROCEEDS
We estimate that our net proceeds from the offering will be approximately
$34.8 million ($40.3 million if the underwriters' option to purchase additional
shares is exercised in full) based upon an assumed initial public offering price
of $8.00 per share, after deducting the underwriting discounts and commissions
and estimated offering expenses.
We expect to use $16.75 million of our net proceeds for the mandatory
redemption of all outstanding shares of our redeemable preferred stock which
become due and payable upon the closing of our initial public offering. All
outstanding shares of our redeemable preferred stock are held by entities
affiliated with TA Associates, Inc. and Summit Partners, LLC. Kurt R. Jaggers
and Walter G. Kortschak, two of our directors, are affiliated with TA
Associates, Inc. and Summit Partners, LLC, respectively.
We presently intend to use the remaining net proceeds of this offering as
follows:
- an estimated $3.0 to $5.0 million will be used to fund purchases of
computer equipment, office equipment and furniture.
- an estimated $3.3 million will be used to repay amounts outstanding under
our line of credit and subordinated loan.
- an estimated $200,000 (including unamortized discount of $18,000) will be
used to repay amounts owing to a former stockholder.
- the remainder of the net proceeds of an estimated $9.5 to $11.5 million
will be used to fund operating losses, working capital needs and general
corporate purposes.
As of the date of this prospectus, we have not allocated any specific
amount of the proceeds for the purposes listed above. The amounts we actually
expend for these purposes may vary significantly and will depend on a number of
factors including the growth of our revenue, the type of efforts we make to
refine our core technology and enhance our services, competitive developments,
and the other factors described under "Risk Factors." Therefore, we cannot
specify with certainty the amounts that may be allocated to the particular uses
of the net proceeds of this offering and the amounts we actually spend could be
outside of the ranges set forth above.
Our management will retain broad discretion in the allocation of the net
proceeds of this offering. A portion of the net proceeds may also be used to
acquire or invest in complementary businesses, technologies, product lines or
products. However, we have no current agreements or commitments with respect to
any such acquisition or investment. Pending such uses, the net proceeds of this
offering will be invested in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
In June 1999, new investors purchased 2,088,154 shares of common stock from
our two founders and a key executive for an aggregate purchase price of $25.0
million or $11.97 per share. At the same time, the investors purchased 100
shares of redeemable preferred stock and 15,034,712 shares of convertible
redeemable preferred stock from us for aggregate consideration of 1) $5.0
million and 2) the contribution of the shares of common stock purchased from our
founders and key executive. The fair value of the common stock purchased from
our founders and key executive was $5.0 million or $2.38 per share, resulting in
an excess of consideration paid to our founders and key executive over the fair
value of the common stock purchased of $9.59 per share or a total of $20.0
million. Because the common stock was purchased on a pro rata basis from our
founders and key executive, the excess of the purchase price of the common stock
over its fair value of $20.0 million has been recorded as a constructive cash
dividend to our founders and key executive.
In December 1999, our board of directors approved a change in the rate at
which the convertible redeemable preferred stock is convertible into common
stock from one-to-0.1667 to one-to-0.4699. This change was made for no
additional cash consideration, as business factors that were present at the time
of the
20
<PAGE> 25
original investment were identified shortly after consummation of the
transaction and reflected in the adjusted conversion rate. The change has been
accounted for as a dividend to the holders of preferred stock of $15.0 million,
calculated as the product resulting from the increased number of shares of
common stock into which the shares of convertible redeemable preferred stock are
convertible multiplied by the fair value of our common stock on the date of the
change of $3.29 per share.
We currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. In addition, covenants in our financing
arrangements currently prohibit us from declaring or paying cash dividends
without our lender's prior consent. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business condition and other factors that our board of
directors may deem relevant.
21
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. The
pro forma column reflects: (a) the automatic conversion of all outstanding
shares of our convertible redeemable preferred stock into 7,889,066 shares of
common stock at the closing of this offering and (b) the automatic redemption of
our redeemable preferred stock in the amount of $16.75 million at the closing of
this offering, which is reflected as a current obligation to redeem the
redeemable preferred stock. The pro forma as adjusted column reflects: (a)
payment of the obligation to redeem the redeemable preferred stock in the amount
of $16.75 million, (b) the repayment of a note payable by us to a former
stockholder in the amount of $182,000 plus the related unamortized discount of
$18,000, (c) an increase in the authorized number of shares of common stock and
preferred stock and the sale of 5,000,000 shares of our common stock in this
offering at an assumed initial public offering price of $8.00 per share, after
deducting the underwriting discounts and commissions and estimated offering
expenses, and (d) the receipt and application of the net proceeds from this
offering.
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Obligation to redeem the redeemable preferred stock....... $ -- $ 16,750 $ --
Note payable to former stockholder (current and long-term
portion)................................................ 182 182 --
Capital lease obligations (long-term portion)............. 22 22 22
Redeemable preferred stock, no par value; 111.66667 shares
designated, issued and outstanding, actual and pro
forma; no shares authorized, issued or outstanding, pro
forma as adjusted....................................... 9,480 -- --
Convertible redeemable preferred stock, no par value;
16,788,746 shares designated, issued and outstanding,
actual; no shares authorized, issued or outstanding, pro
forma and pro forma as adjusted......................... 22,931 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; no shares authorized,
issued or outstanding, actual and pro forma;
10,000,000 shares authorized and no shares issued or
outstanding, pro forma as adjusted................... -- -- --
Common stock, $0.001 par value; 60,000,000 shares
authorized and 16,577,259 shares issued and
outstanding, actual; 60,000,000 shares authorized and
24,466,325 shares issued and outstanding, pro forma;
and 60,000,000 shares authorized and 29,466,325
shares issued and outstanding, pro forma as
adjusted............................................. 5 13 18
Additional paid-in capital.............................. 18,188 33,841 68,586
Unearned stock-based compensation....................... (11,378) (11,378) (11,378)
Accumulated deficit..................................... (31,561) (31,561) (31,579)
-------- -------- --------
Total stockholders' equity (deficit)............ (24,746) (9,085) 25,647
-------- -------- --------
Total capitalization............................ $ 7,869 $ 7,869 $ 25,669
======== ======== ========
</TABLE>
In addition to the 29,466,325 shares of common stock outstanding after this
offering, as of the closing of this offering and based on the number of shares
issued and options granted as of July 31, 2000, we expect to have additional
shares of common stock available for issuance under the following plans and
arrangements:
- 2,642,655 shares issuable under our stock option plans, consisting of:
- 2,048,361 shares underlying options outstanding at a weighted average
exercise price of $1.70 per share; and
- 594,294 shares available for future issuance;
- 738,179 shares underlying an option granted to a key executive at an
exercise price of $0.04 per share;
- 500,000 shares available for issuance under our 2000 Employee Stock
Purchase Plan; and
- 13,333 shares issuable upon exercise of a warrant held by Imperial Bank.
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes included elsewhere
in this prospectus.
22
<PAGE> 27
DILUTION
As of June 30, 2000, our pro forma net tangible book value was
approximately $7.6 million, or approximately $0.31 per share of common stock.
Pro forma net tangible book value per share represents the amount of our total
tangible assets less our total liabilities divided by the total number of shares
of common stock outstanding, after giving effect to the conversion of all
outstanding shares of our convertible redeemable preferred stock.
After giving effect to our sale of common stock in this offering at an
assumed initial public offering price of $8.00 per share, and our receipt of the
estimated net proceeds from the sale, our pro forma net tangible book value as
of June 30, 2000 would have been approximately $42.4 million, or $1.44 per
share. This represents an immediate increase in net tangible book value of $1.13
per share to existing stockholders and an immediate dilution of $6.56 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $8.00
Pro forma net tangible book value per share before the
offering............................................... $0.31
Increase per share attributable to new investors.......... 1.13
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.44
-----
Dilution per share to new investors......................... $6.56
=====
</TABLE>
The following table summarizes, as of June 30, 2000, on the pro forma basis
described above the differences between existing stockholders and the new
investors with respect to the number of shares of common stock purchased from
us, the total consideration paid and the average price per share paid before
deducting the underwriting discounts and commissions and our estimated offering
expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 24,466,325 83.0% $24,495,000 38.0% $1.00
New investors......................... 5,000,000 17.0 40,000,000 62.0 8.00
---------- ----- ----------- -----
Total............................... 29,466,325 100.0% $64,495,000 100.0%
========== ===== =========== =====
</TABLE>
As of July 31, 2000, there were options outstanding to purchase a total of
2,786,540 shares of our common stock at a weighted average exercise price of
$1.70 and warrants outstanding to purchase a total of 837,554 shares of our
common stock. Of the warrants to purchase 837,554 shares of common stock,
warrants to purchase 824,221 shares terminate in the event of our initial public
offering, the sale of all or substantially all of our assets for at least $150
million or the sale of greater than 50.0% of our voting stock for at least $150
million prior to April 2001. To the extent any of these options or warrants are
exercised, there will be further dilution to new investors.
23
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The selected consolidated statement of operations
data for the years ended December 31, 1997, 1998 and 1999 and the selected
consolidated balance sheet data as of December 31, 1998 and 1999 are derived
from our consolidated financial statements and the related notes included
elsewhere in this prospectus. The selected consolidated statement of operations
data for the period from September 16, 1996 (inception) to December 31, 1996 and
the selected consolidated balance sheet data as of December 31, 1996 and 1997
are derived from our consolidated financial statements and the related notes
which are not included in this prospectus. The selected consolidated statement
of operations data for the six months ended June 30, 1999 and 2000 and the
selected consolidated balance sheet data as of June 30, 2000 are unaudited, have
been prepared on the same basis as the audited financial statements and, in our
opinion, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial information in accordance
with generally accepted accounting principles.
<TABLE>
<CAPTION>
SEPTEMBER 16, 1996 SIX MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, JUNE 30,
TO DECEMBER 31, --------------------------------------- -------------------------
1996 1997 1998 1999 1999 2000
------------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue:
Information services -- advertising
sales............................... $ 13 $ 1,460 $ 4,587 $ 8,521 $ 4,314 $ 5,130
Information
services -- subscriptions........... -- -- -- 74 -- 1,422
Technology services................... -- 160 918 1,005 451 371
----------- ----------- ----------- ----------- ----------- -----------
Total revenue....................... 13 1,620 5,505 9,600 4,765 6,923
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of revenue....................... -- -- -- -- -- 255
Sales and marketing................... -- 296 1,103 3,414 1,292 2,600
Technology development and
operations.......................... 9 245 1,423 3,412 1,425 3,427
General and administrative............ 1 581 1,513 2,699 1,255 2,869
Stock-based compensation*............. -- -- -- 1,998 -- 3,515
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............ 10 1,122 4,039 11,523 3,972 12,666
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations........... 3 498 1,466 (1,923) 793 (5,743)
Interest income (expense), net.......... -- 5 (5) 78 1 64
Other income............................ -- -- -- 110 110 83
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision for
(benefit from) income taxes........... 3 503 1,461 (1,735) 904 (5,596)
Provision for (benefit from) income
taxes................................. 2 199 624 (550) 287 463
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)....................... 1 304 837 (1,185) 617 (6,059)
Dividend to preferred stockholders as a
result of change in conversion terms
of convertible redeemable preferred
stock (Note 5)........................ -- -- -- (14,992) -- --
Accretion of discount on redeemable
preferred stock....................... -- -- -- (467) (28) (451)
Accretion related to beneficial
conversion feature embedded in
convertible redeemable preferred
stock................................. -- -- -- -- -- (2,719)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) attributable to common
stockholders.......................... $ 1 $ 304 $ 837 $ (16,644) $ 589 $ (9,229)
=========== =========== =========== =========== =========== ===========
Net income (loss) per share attributable
to common stockholders:
Basic................................. $ 0.00 $ 0.01 $ 0.05 $ (1.07) $ 0.04 $ (0.60)
=========== =========== =========== =========== =========== ===========
Diluted............................... $ 0.00 $ 0.01 $ 0.04 $ (1.07) $ 0.03 $ (0.60)
=========== =========== =========== =========== =========== ===========
Shares used in computing net income
(loss) per share attributable to
common stockholders:
Basic................................. 30,303,030 30,303,030 18,011,623 15,595,899 16,524,175 15,271,693
=========== =========== =========== =========== =========== ===========
Diluted............................... 30,303,030 30,303,030 18,760,557 15,595,899 17,890,255 15,271,693
=========== =========== =========== =========== =========== ===========
</TABLE>
24
<PAGE> 29
<TABLE>
<CAPTION>
SEPTEMBER 16, 1996 SIX MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, JUNE 30,
TO DECEMBER 31, --------------------------------------- -------------------------
1996 1997 1998 1999 1999 2000
------------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Unaudited pro forma net loss per share
attributable to common stockholders,
basic and diluted..................... -- -- -- $ (0.79) -- $ (0.36)
=========== ===========
Shares used in computing unaudited pro
forma net loss per share attributable
to common stockholders, basic and
diluted............................... -- -- -- 20,420,966 -- 24,217,269
=========== ===========
Constructive cash dividend per
share**............................... -- -- -- $ 9.59 $ 9.59 --
=========== ===========
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
*Stock-based compensation:
Sales and marketing..................... $ -- $ -- $ -- $ 44 $ -- $ 400
Technology development and operations... -- -- -- 34 -- 321
General and administrative.............. -- -- -- 1,920 -- 2,794
----------- ----------- ----------- ----------- ----------- -----------
$ -- $ -- $ -- $ 1,998 $ -- $ 3,515
=========== =========== =========== =========== =========== ===========
</TABLE>
**This relates to a constructive cash dividend of $20.0 million that resulted
from the repurchase of our common stock in conjunction with the preferred
stock transaction in June 1999 (see Note 5 to the consolidated financial
statements included elsewhere in this prospectus).
Operating expenses increased significantly from 1997 through 1999 and for
the six months ended June 30, 2000 as we increased our sales and marketing
efforts, technology development and operations efforts, infrastructure costs,
and general and administrative costs. In 1999 and the six months ended June 30,
2000, we also incurred approximately $2.0 million and $3.5 million in
stock-based compensation related to stock options granted to our employees.
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more detailed explanations of the increases in
operating expenses.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------- --------
1996 1997 1998 1999 2000
---- ------ ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.................................. $16 $ 437 $ 330 $ 3,254 $ 4,431
Working capital............................................ 3 (96) (93) 4,209 5,217
Total assets............................................... 19 1,153 2,024 8,798 11,733
Note payable to former stockholder (current and long-term
portion)................................................. -- -- 277 215 182
Capital lease obligations (long-term portion).............. -- -- 70 29 22
Redeemable preferred stock................................. -- -- -- 29,465 32,411
Total stockholders' equity (deficit)....................... 6 310 682 (22,793) (24,746)
</TABLE>
------------
For more information regarding the calculation of the number of shares used
in per share computations, see Note 2 to our consolidated financial statements
included elsewhere in this prospectus. Unaudited pro forma net loss per share
attributable to common stockholders reflects the assumed issuance of common
stock to repay the redeemable preferred stock at an assumed offering price of $8
per share and the conversion of our convertible redeemable preferred stock into
common stock as of the dates of issuance, June 18, 1999 and June 30, 2000.
25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the consolidated financial statements
and the notes thereto included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks described in
"Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We provide detailed, real-time web site user behavior information and
analysis. Our services allow businesses to outsource the collection, processing
and reporting of users' interactions with their web sites. We commenced
operations in September 1996 as a California corporation and intend to
reincorporate in the state of Delaware prior to the closing of this offering.
We introduced our basic HitBox measurement and analysis service in the
fourth quarter of 1996. We initially offered this service in exchange for the
right to display our banner ads on our customers' web sites. Beginning in
January 2000, we began offering banner advertisements of our advertising
customers on our HitBox customers' web sites. When visitors to our HitBox
customers' web sites click on these banner ads, they are directed either to our
HitBox.com and Yep.com web sites or to the web sites of our advertising
customers. To date, in connection with our basic HitBox service, we have
generated advertising sales revenue primarily from the sale of online
advertising on our HitBox.com and Yep.com web sites and, beginning in January
2000, from banner ads from our advertising customers placed on our HitBox
customers' web sites. Advertising sales revenue is recorded as a gross amount
since we act as the principal in our relationship with all advertisers. We sell
our advertising based on the number of clicks a banner ad receives, known as a
cost-per-click-through basis. We also sell advertising based upon the number of
times advertising is viewed, known as a cost per thousand of advertising
impressions viewed. In 1999 and the first six months of 2000, approximately 81%
of our advertising was sold on a cost-per-click-through basis, while 19% was
sold on a cost per thousand impression(s) basis. Prior to 1999, substantially
all of our advertising was sold on a cost-per-click-through basis. Advertising
placed on both our HitBox.com and Yep.com web sites and on our HitBox customers'
web sites is sold under short-term contracts that range in duration from 30 to
90 days.
In 1999, we generated $8.5 million in revenue from advertising sales, which
represented 88.8% of total revenue. In the first six months of 2000, advertising
sales revenue was 74.1% of total revenue. Prior to 2000, we derived the majority
of our advertising revenue from the sale of advertising to web sites with adult-
oriented content. In 1997, 1998 and 1999, revenue from the sale of advertising
to these web sites constituted approximately 100%, 90% and 74% of total
advertising sales revenue, respectively. However, in the first quarter of 2000,
we adopted a policy to eliminate the sale of advertising to such web sites, and
as of May 31, 2000, we eliminated all such advertising sales revenue. For the
six months ended June 30, 2000, such advertising sales revenue constituted
approximately 39% of total advertising sales revenue. We recognize revenue from
advertising contracts ratably over the period in which the ads are displayed on
our web sites or our HitBox customers' web sites, provided that no significant
obligations remain at the end of the contract term. If any significant
obligations remain at the end of the term, we defer recognition of the related
advertising revenue until the obligations are fulfilled. We expect that our
advertising sales revenue will continue to decrease as a percentage of total
revenue but will be a substantial portion of our revenue in the foreseeable
future.
In 1999, we began focusing our efforts on providing information services on
a subscription-fee basis. We introduced HitBox Enterprise and HitBox Pro in the
third quarter of 1999. During 1999 and the first six months of 2000, revenue
from subscriptions represented 0.8% and 20.5% of total revenue, respectively. We
expect that revenue from subscriptions will continue to increase as a percentage
of our total revenue in the foreseeable future.
HitBox Enterprise is our premium measurement and analysis service that
delivers all of our available statistics and reports. We recognize HitBox
Enterprise subscription revenue monthly based on the number of
26
<PAGE> 31
web sites and page views monitored by our service in the preceding month. HitBox
Enterprise subscription fees currently begin at $1,295 per month per customer
and have exceeded $35,000 per month for certain customers. HitBox Enterprise
contracts provide for an initial thirty-day cancellation period and are
generally for a one-year term after which time they automatically renew unless
terminated by either party.
HitBox Pro is our mid-level measurement and analysis service that delivers
basic statistics and reports of Internet user behavior for a monthly fee which
is based on an estimate of the web sites and page views monitored and is
adjusted quarterly to reflect actual traffic. HitBox Pro subscription fees range
from a minimum of $19.95 per month to $3,200 per month for certain customers. We
recognize HitBox Pro subscription revenue ratably over the term of the contract.
Contracts for our HitBox Pro service are generally month-to-month, paid in
advance and cancelable at any time.
Our StatMarket service provides broad Internet trends based on data
aggregated by our HitBox services. We launched StatMarket in August 1999 and
began offering StatMarket services on a subscription fee basis in the fourth
quarter of 1999. Prior to the first quarter of 2000, we did not charge a fee for
this service and did not realize any revenue from StatMarket. StatMarket
subscription fees range from $660 to $3,000 per month. We recognize StatMarket
subscription revenue ratably over the term of the contract, which ranges from
three months to one year in duration and is paid in advance.
We currently earn technology services revenue from hosting third-party web
sites on our network. Contracts for technology services generally have
three-month terms. During 1999 and in the first six months of 2000, revenue from
technology services represented 10.4% and 5.4% of total revenue, respectively.
As we do not intend to focus on hosting services in the future, we expect that
revenue from hosting services will significantly decline.
We intend to focus significant additional sales and marketing resources on
expanding revenue from HitBox Enterprise and our other fee-based information
services, including our recently introduced HitBox Wireless service. We intend
to expand our direct sales and marketing organizations both domestically and
internationally as well as develop new indirect sales and distribution channels
for our services. In 2000, we formed subsidiaries in France and the Netherlands
to market our services in Europe. As a result of these activities, we expect
that our future operating expenses will increase significantly.
We were profitable on an annual basis from inception through 1998. In the
year ended December 31, 1999 and the six months ended June 30, 2000, we incurred
net losses of approximately $1.2 million and $6.1 million, respectively,
primarily as a result of stock-based compensation of approximately $2.0 million
and $3.5 million in the year ended December 31, 1999 and in the six months ended
June 30, 2000, respectively, and increased expenses related to the development
and launch of our HitBox subscription-based information services. In the future,
we intend to increase spending on technology development and operations and
sales and marketing in order to enhance our services and expand our sales and
distribution channels. As a result of increases in these operating expenses as
well as other expenses, we may incur losses in future periods.
Net loss attributable to common stockholders for the year ended December
31, 1999 and the six months ended June 30, 2000 includes $467,000 and $451,000,
respectively, related to the accretion of the discount recorded on redeemable
preferred stock that was sold in June 1999 and June 2000. The amount of the
remaining unamortized discount on the redeemable preferred stock on the date
that it is actually redeemed will be recorded as a dividend in arriving at net
income (loss) attributable to common stockholders. The unamortized discount as
of June 30, 2000 was $7.2 million. Net loss attributable to common stockholders
for the year ended December 31, 1999 also includes a dividend of $15.0 million
to our preferred stock investors resulting from the change in the rate at which
the shares of convertible redeemable preferred stock are convertible into shares
of common stock (see Note 5 to our consolidated financial statements included
elsewhere in this prospectus). In the six months ended June 30, 2000, net loss
attributable to common stockholders also includes accretion of $2.7 million
related to the beneficial conversion feature embedded in convertible redeemable
preferred stock that was sold in June 2000.
27
<PAGE> 32
RESULTS OF OPERATIONS
The following table sets forth selected consolidated statements of
operations data for the periods indicated, expressed as a percentage of total
revenue:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ----------------
1997 1998 1999 1999 2000
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Information services -- advertising sales........ 90.1% 83.3% 88.8% 90.5% 74.1%
Information services -- subscriptions............ -- -- 0.8 -- 20.5
Technology services.............................. 9.9 16.7 10.4 9.5 5.4
----- ----- ----- ----- -----
Total revenue................................. 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of revenue.................................. -- -- -- -- 3.7
Sales and marketing.............................. 18.3 20.0 35.6 27.1 37.5
Technology development and operations............ 15.1 25.9 35.5 29.9 49.5
General and administrative....................... 35.9 27.5 28.1 26.3 41.4
Stock-based compensation......................... -- -- 20.8 -- 50.8
----- ----- ----- ----- -----
Total operating expenses...................... 69.3 73.4 120.0 83.3 182.9
Income (loss) from operations...................... 30.7 26.6 (20.0) 16.7 (82.9)
----- ----- ----- ----- -----
Other income (expense), net........................ 0.3 (0.1) 2.0 2.3 2.1
----- ----- ----- ----- -----
Income (loss) before provision for (benefit from)
income taxes..................................... 31.0 26.5 (18.0) 19.0 (80.8)
----- ----- ----- ----- -----
Provision for (benefit from) income taxes.......... 12.3 11.3 (5.7) 6.0 6.7
----- ----- ----- ----- -----
Net income (loss).................................. 18.7% 15.2% (12.3)% 13.0% (87.5)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Revenue
Total revenue increased from $4.8 million for the six months ended June 30,
1999 to $6.9 million for the six months ended June 30, 2000 or
period-over-period revenue growth of 45.3%. No single customer accounted for
more than 10.0% of our total revenue in either period.
Information services -- advertising sales. Advertising sales revenue
increased from $4.3 million, or 90.5% of total revenue, for the six months ended
June 30, 1999 to $5.1 million, or 74.1% of total revenue, for the six months
ended June 30, 2000. Advertising sales revenue increased in absolute dollars
primarily because of increased sales of banner ads due to increased distribution
of our basic HitBox service and the resulting increase in traffic to our web
sites. In addition, our ability to sell additional advertising improved as a
result of the growth of our advertising sales force.
Information services -- subscriptions. We commenced our subscription-based
information services in the third quarter of 1999 and recognized $1.4 million in
subscription revenue for the six months ended June 30, 2000, which represented
20.5% of total revenue compared to $0 in the same period of the previous year.
We expect future subscription revenue to increase both in absolute dollars and
as a percentage of total revenue as the result of the acquisition of new
customers and growth in accounts and an increase in page views from our existing
customers.
Technology services. Technology services revenue derived from web site
hosting services decreased from $451,000, or 9.5% of total revenue, for the six
months ended June 30, 1999 to $371,000, or 5.4% of total revenue, for the six
months ended June 30, 2000. As we have discontinued our focus on hosting
services, we anticipate that revenue from hosting services will decline in the
future.
28
<PAGE> 33
Operating expenses
Cost of revenue. Cost of revenue consists entirely of commissions owed to
HitBox customers for the right to display the banner advertisements of
advertising customers on their web sites. We began offering this service to our
advertising customers in January 2000, and the related cost of revenue was
$255,000 for the six months ended June 30, 2000. We intend to expand the number
of HitBox customers who display the banner advertisements of our advertising
customers on their web sites and we expect to increase the number of advertisers
who advertise on our HitBox customers' web sites. As a result, we anticipate
that our cost of revenue will continue to increase.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, sales commissions and marketing costs including advertising,
marketing materials, trade shows, and public relations. Sales and marketing
expenses increased from $1.3 million, or 27.1% of total revenue, for the six
months ended June 30, 1999 to $2.6 million, or 37.5% of total revenue, for the
six months ended June 30, 2000. The increase was attributable primarily to
expenses related to an increase of sales and marketing personnel totaling
$710,000, rents related to our new facility totaling $142,000, trade shows of
$46,000 and recruiting fees of $102,000. We intend to continue to expand and
enhance our sales and marketing organization to improve sales of our
subscription services and advertising inventory. In addition, to the extent we
develop indirect channels of distribution, our expenses associated with sales
personnel and marketing activities will likely increase. As a result, we expect
sales and marketing expenses to continue to increase in the future.
Technology development and operations. Technology development and
operations expenses consist primarily of salaries and consulting expenses,
amortization of capitalized software development costs, Internet connectivity
charges, equipment depreciation and other expenses related to improving and
supporting our network. Technology development and operations expenses increased
from $1.4 million, or 29.9% of total revenue, for the six months ended June 30,
1999 to $3.4 million, or 49.5% of total revenue, for the six months ended June
30, 2000. The increase is primarily a result of increased salaries and other
costs associated with additional personnel and consultants totaling $681,000,
amortization of capitalized software development costs totaling $455,000, rents
related to our new facility totaling $242,000, and increased equipment
depreciation and Internet connectivity charges totaling $843,000. We intend to
hire additional personnel and expand and improve our network to support our new
fee-based subscription services and to process more user behavior information.
As a result, we anticipate that our technology development and operations
expenses will continue to increase.
We account for the software development component of our technology
development and operations costs in accordance with Statement of Position, or
SOP, 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." In accordance with SOP 98-1, our internal and external costs
incurred to develop internal-use computer software during the application
development stage are capitalized. Our application stage costs generally include
software configuration, coding, installation to hardware and testing. We also
capitalize the costs of upgrades and enhancements that result in additional
functionality. We expense costs for maintenance and minor upgrades and
enhancements as these costs are incurred. Our capitalized software development
costs are amortized on a straight-line basis over the estimated useful lives of
the related software applications ranging from two months to 30 months. As a
result of the application of SOP 98-1, we capitalized software development costs
of $385,000 and $722,000 for the six months ended June 30, 1999 and 2000,
respectively. We recorded amortization of capitalized software development costs
of $279,000 and $729,000 for the six months ended June 30, 1999 and 2000,
respectively.
General and administrative. General and administrative expenses consist
primarily of compensation and related costs of our executive, financial and
other administrative functions, consulting and professional fees and
depreciation. General and administrative expenses increased from $1.3 million,
or 26.3% of total revenue, for the six months ended June 30, 1999 to $2.9
million, or 41.4% of total revenue, for the six months ended June 30, 2000. The
increase was largely due to a bonus of $1.3 million paid to our President and
Chief Executive Officer related to his purchase of our common stock as well as
increases in professional fees of
29
<PAGE> 34
$261,000 and rents related to our new facility of $86,000. We expect general and
administrative expenses to increase in future periods to support the anticipated
growth of our business.
Stock-based compensation
In connection with the grant of certain stock options to employees, we
recorded unearned stock-based compensation charges within stockholders' equity
of $10.7 million in the six months ended June 30, 2000, representing the
difference between the exercise price of these options and the fair value of our
common stock as of the date of grant or the appropriate measurement date.
Amortization of stock-based compensation was $3.4 million for the six months
ended June 30, 2000. We will amortize these amounts over the respective vesting
periods of the options using an accelerated graded vesting method in accordance
with Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans." We
expect to amortize the remaining stock-based compensation in the amount of $4.1
million, $4.4 million, $2.1 million, $637,000 and $132,000 during the years
ended December 31, 2000, 2001, 2002, 2003 and 2004.
Provision for income taxes
Income tax expense increased from $287,000 in the six months ended June 30,
1999 to $463,000 in the six months ended June 30, 2000. During the six months
ended June 30, 2000, we recorded a valuation allowance for the entire amount of
its net deferred tax asset due to the uncertainty surrounding the ultimate
realization of such asset at that time. We had not recorded a valuation
allowance for any prior periods as we had consistently reported net taxable
income until the fourth quarter of 1999. The valuation allowance is based on
available evidence, including our recent and planned operating performance,
which reflects significant expenditures for sales and marketing and technology
development costs related to our transition to a subscription services revenue
model and uncertainty about the ultimate profitability of this revenue model.
The change in the effective tax rate to 31.7% in 1999 was a result of
non-deductible stock-based compensation expense.
Net income (loss)
We reported net income of $617,000 for the six months ended June 30, 1999
compared to the net loss of $6.1 million for the six months ended June 30, 2000.
We incurred a net loss in the six months ended June 30, 2000 substantially as a
result of stock-based compensation expense of $3.5 million as compared to $0 in
the six months ended June 30, 1999, increased sales and marketing, technology
development and operations and general and administrative expenses as a
percentage of total revenue in the six months ended June 30, 2000 and the full
valuation allowance provided against our net deferred tax asset. The increase in
sales and marketing and technology development and operations expenses are
substantially related to the launch of our subscription-based information
services including HitBox Enterprise, HitBox Pro and StatMarket as described
more fully above. The increase in general and administrative expenses is
substantially related to the increase in personnel costs associated with the
growth in our executive team and a bonus of $1.3 million paid to our President
and Chief Executive Officer as described more fully in the discussion of general
and administrative expenses above.
Net income (loss) attributable to common stockholders
Net income attributable to common stockholders was $589,000 in the first
six months of 1999 compared to a net loss attributable to common stockholders of
$9.2 million in the first six months of 2000. Charges against net income (loss)
to arrive at net income (loss) attributable to common stockholders increased
from $28,000 in the first six months of 1999 to $3.2 million in the first six
months of 2000. The increase was largely a result of the accretion of $2.7
million of a beneficial conversion feature related to the issuance of our
convertible redeemable preferred stock in June 2000.
30
<PAGE> 35
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue
Total revenue increased from $5.5 million for 1998 to $9.6 million for 1999
or year-to-year revenue growth of 74.4%. No single customer accounted for more
than 10% of our total revenue in 1998 or 1999.
Information services -- advertising sales. Advertising sales revenue
increased from $4.6 million, or 83.3% of total revenue, for 1998 to $8.5
million, or 88.8% of total revenue, for 1999. Advertising sales revenue
increased primarily because of increased sales of banner ads due to increased
distribution of our basic HitBox service and the resulting increase in traffic
to our web sites. In addition, our ability to sell additional advertising
improved as a result of the growth of our advertising sales force.
Information services -- subscriptions. We commenced our subscription-based
information services in the third quarter of 1999 and recognized $74,000 in
subscription revenue in 1999. Subscription revenue was 0.8% of total revenue for
1999.
Technology services. Technology services revenue derived from web site
hosting services increased from $918,000, or 16.7% of total revenue, for 1998 to
$1.0 million, or 10.4% of total revenue, for 1999.
Operating expenses
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, sales commissions and marketing costs including advertising,
marketing materials, trade shows, and public relations. Sales and marketing
expenses increased from $1.1 million, or 20.0% of total revenue, for 1998 to
$3.4 million, or 35.6% of total revenue, for 1999. The increase was attributable
to an increase in salaries and wages for our sales and marketing personnel
totaling $647,000, an increase in spending on advertising, marketing materials,
trade shows and public relations totaling $1.0 million, and an increase in
depreciation of $160,000.
Technology development and operations. Technology development and
operations expenses consist primarily of salaries and consulting expenses,
amortization of capitalized software development costs, Internet connectivity
charges, equipment depreciation and other expenses related to improving and
supporting our network. Technology development and operations expenses increased
from $1.4 million, or 25.9% of total revenue, for 1998 to $3.4 million, or 35.5%
of total revenue, for 1999. The increase is primarily a result of increased
salaries and other costs associated with additional personnel totaling $718,000
and from increased equipment depreciation and Internet connectivity charges
totaling $917,000. As a result of the application of SOP 98-1, we capitalized
software development costs of $447,000 and $1.2 million for 1998 and 1999,
respectively. We recorded amortization of capitalized software development costs
of $277,000 and $799,000 for 1998 and 1999, respectively.
General and administrative. General and administrative expenses consist
primarily of compensation and related costs of our executive, financial and
other administrative functions, consulting and professional fees and
depreciation. General and administrative expenses increased from $1.5 million,
or 27.5% of total revenue, for 1998 to $2.7 million, or 28.1% of total revenue,
for 1999. The increase was attributable to increases in salaries and other costs
associated with new personnel totaling $902,000 and increases associated with
professional fees, the relocation of our principal offices and other
administrative expenses necessary to support our growth totaling $172,000.
Stock-based compensation
In connection with the grant of certain stock options to employees, we
recorded unearned stock-based compensation charges within stockholders' equity
of $6.1 million for the year ended December 31, 1999, representing the
difference between the exercise price of these options and the fair value of our
common stock as of the date of grant or the appropriate measurement date.
Amortization of stock-based compensation was $2.0 million for 1999.
31
<PAGE> 36
Provision for (benefit from) income taxes
Income tax expense decreased from $624,000 in 1998 to a $550,000 tax
benefit in 1999, primarily as a result of our ability to carryback our 1999 net
loss against prior years when we had recognized income tax expense. The
effective tax rate was reduced from a 42.7% tax rate provision in 1998 to a
31.7% tax rate benefit in 1999, primarily as a result of non-deductible
stock-based compensation.
Net income (loss)
We reported net income of $837,000 in 1998 compared to a net loss of $1.2
million in 1999. We incurred a net loss in 1999 substantially as a result of
stock-based compensation expense of $2.0 million and increased sales and
marketing and technology development and operations expenses as a percentage of
total revenue in 1999. The increase in sales and marketing and technology
development and operations expenses are substantially related to the launch of
our subscription-based information services including HitBox Enterprise, HitBox
Pro and StatMarket as described more fully above.
Net income (loss) attributable to common stockholders
Net income attributable to common stockholders was $837,000 in 1998
compared to a net loss attributable to common stockholders of $16.6 million in
1999. Charges against net loss in 1999 to arrive at net loss attributable to
common stockholders were $15.5 million. The charges consisted of a dividend of
$15.0 million to the preferred stock investors as a result of the change in the
rate at which the convertible redeemable preferred stock is convertible into
common stock (see Note 5 to our consolidated financial statements included
elsewhere in this prospectus), and the accretion of $467,000 of a discount on
our redeemable preferred stock that was sold in June 1999. There were no charges
against net income to arrive at net income attributable to common stockholders
in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue
Total revenue increased from $1.6 million for 1997 to $5.5 million for 1998
or year-to-year revenue growth of 239.8%. No single customer accounted for more
than 10% of our total revenue in either 1997 or 1998.
Information services -- advertising sales. Advertising sales revenue
increased from $1.5 million, or 90.1% of total revenue, for 1997 to $4.6
million, or 83.3% of total revenue, for 1998. Advertising sales revenue
increased primarily because of increased sales of banner ads, which was due to
increased distribution of our basic HitBox service and the resulting increase in
traffic to our web sites.
Technology Services. Technology services revenue derived from hosting
services increased from $160,000, or 9.9% of total revenue, for 1997 to
$918,000, or 16.7% of total revenue, for 1998. This increase was primarily due
to our increased ability to provide hosting services resulting from the
expansion of our network operations center.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $296,000,
or 18.3% of total revenue, for 1997 to $1.1 million, or 20.0% of total revenue,
for 1998. The increase was attributable to an increase in salaries and bonuses
associated with additional sales and marketing personnel totaling $549,000 and
an increase in spending on advertising, marketing materials, trade shows and
public relations totaling $156,000.
Technology development and operations. Technology development and
operations expenses increased from $245,000, or 15.1% of total revenue, for 1997
to $1.4 million, or 25.9% of total revenue, for 1998. The increase primarily
resulted from increases in salaries and bonuses totaling $583,000, equipment
depreciation and Internet connectivity charges totaling $333,000, and
amortization of capitalized software development costs. As a result of the
application of SOP 98-1, we capitalized software development costs of $274,000
and
32
<PAGE> 37
$447,000 for 1997 and 1998, respectively. We recorded amortization of
capitalized software development costs of $6,000 and $277,000 for 1997 and 1998,
respectively.
General and administrative. General and administrative expenses increased
from $581,000, or 35.9% of total revenue, for 1997 to $1.5 million, or 27.5% of
total revenue, for 1998. The increase was attributable to increases in salaries
and bonuses totaling $596,000, depreciation totaling $189,000, professional fees
and recruiting fees totaling $63,000, and other administrative expenses
necessary to support our growth.
Provision for (benefit from) income taxes
Income tax expense increased from $199,000 in 1997 to $624,000 in 1998,
primarily as a result of an increase in income before income taxes. Our
effective tax rate increased from 39.6% in 1997 to 42.7% in 1998 primarily as a
result of certain expenses that are not deductible for tax purposes.
Net income
Although net income increased from $304,000 in 1997 to $837,000 in 1998,
net income decreased as a percentage of revenue from 18.7% in 1997 to 15.2% in
1998. Operating expenses grew on a percentage basis more than revenue as a
result of significant increases in technology development and operations
expenses substantially due to increased product development efforts in 1998 as
compared to 1997. This operating cost increase was partially offset by lower
percentage growth in general and administrative expenses as compared to revenue.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly consolidated statements
of operations for the eight quarters ended June 30, 2000, as well as the
percentage of total revenue represented by each item. We believe this unaudited
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this prospectus and includes all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of our results of operations for the quarters presented. You
should read this information in conjunction with our annual audited consolidated
financial
33
<PAGE> 38
statements and related notes appearing elsewhere in this prospectus. The results
of operations for any quarter are not necessarily indicative of the results of
operations for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS:
Revenue:
Information
services -- advertising
sales.......................... $1,259 $1,404 $1,975 $2,339 $1,939 $ 2,268 $ 2,727 $ 2,403
Information
services -- subscriptions...... -- -- -- -- 12 62 357 1,065
Technology services.............. 268 220 189 262 281 273 223 148
------ ------ ------ ------ ------ ------- ------- -------
Total revenue.................. 1,527 1,624 2,164 2,601 2,232 2,603 3,307 3,616
------ ------ ------ ------ ------ ------- ------- -------
Operating expenses:
Cost of revenue.................. -- -- -- -- -- -- 100 155
Sales and marketing.............. 314 274 511 781 1,038 1,084 784 1,816
Technology development and
operations..................... 428 388 568 857 869 1,118 1,557 1,870
General and administrative....... 558 390 441 814 474 970 688 2,181
Stock-based compensation......... -- -- -- -- -- 1,998 1,222 2,293
------ ------ ------ ------ ------ ------- ------- -------
Total operating expenses....... 1,300 1,052 1,520 2,452 2,381 5,170 4,351 8,315
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) from operations...... 227 572 644 149 (149) (2,567) (1,044) (4,699)
Other income (expense), net........ 1 3 (4) 115 38 39 121 26
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) before provision for
(benefit from) income taxes...... 228 575 640 264 (111) (2,528) (923) (4,673)
Provision for (benefit from) income
taxes............................ 97 246 203 84 (35) (802) 463 --
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss).................. $ 131 $ 329 $ 437 $ 180 $ (76) $(1,726) $(1,386) $(4,673)
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
Information
services -- advertising
sales...................... 82.4% 86.5% 91.3% 89.9% 86.9% 87.1% 82.5% 66.4%
Information services --
subscriptions.............. -- -- -- -- 0.5 2.4 10.8 29.5
Technology services.......... 17.6 13.5 8.7 10.1 12.6 10.5 6.7 4.1
----- ----- ----- ----- ----- ----- ----- ------
Total revenue.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ------
Operating expenses:
Cost of revenue.............. -- -- -- -- -- -- 3.0 4.3
Sales and marketing.......... 20.6 16.9 23.6 30.0 46.5 41.6 23.7 50.2
Technology development and
operations................. 28.0 23.9 26.2 32.9 38.9 43.0 47.1 51.7
General and administrative... 36.5 24.0 20.4 31.3 21.2 37.3 20.8 60.3
Stock-based compensation..... -- -- -- -- -- 76.8 37.0 63.4
----- ----- ----- ----- ----- ----- ----- ------
Total operating expenses... 85.1 64.8 70.2 94.2 106.6 198.7 131.6 229.9
----- ----- ----- ----- ----- ----- ----- ------
Income (loss) from
operations................... 14.9 35.2 29.8 5.8 (6.6) (98.7) (31.6) (129.9)
Other income (expense), net.... 0.1 0.2 (0.2) 4.4 1.7 1.5 3.7 .7
----- ----- ----- ----- ----- ----- ----- ------
Income (loss) before provision
for (benefit from) income
taxes........................ 15.0 35.4 29.6 10.2 (4.9) (97.2) (27.9) (129.2)
Provision for (benefit from)
income taxes................. 6.4 15.1 9.4 3.2 (1.6) (30.8) 14.0 --
----- ----- ----- ----- ----- ----- ----- ------
Net income (loss).............. 8.6% 20.3% 20.2% 7.0% (3.3)% (66.4)% (41.9)% (129.2)%
===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
Our quarterly operating results may vary significantly from quarter to
quarter, are difficult to predict and may fluctuate due to a variety of factors,
many of which are beyond our control. We may experience
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<PAGE> 39
seasonality in our business, among other things, due to business buying patterns
and declines in Internet usage during the summer months. We believe that
period-to-period comparisons of our historical operating results are not
meaningful and that you should not rely upon them as an indication of future
performance. If we fail to meet the expectations of investors because they have
relied too heavily on these period-to-period comparisons, the market price of
our common stock may be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
From inception until June 1999, we financed our operations primarily from
cash flow from operations and capital lease obligations. In June 1999, we issued
15,034,712 shares of our convertible redeemable preferred stock and 100 shares
of our redeemable preferred stock to entities affiliated with TA Associates,
Inc. and Summit Partners, LLC. These entities purchased the preferred stock for
an aggregate cash payment of $5.0 million and the contribution of 2,088,154
shares of our previously outstanding common stock which they had acquired from
our founders and a key executive. The common stock was purchased by the entities
directly from the founders and key executive for $25.0 million in cash to
provide immediate liquidity to the founders and key executive. The then fair
value of the common stock was $5.0 million, resulting in an excess over fair
value of $20.0 million. Because the common stock was purchased on a pro-rata
basis from the founders and key executive, the excess of the purchase price over
the fair value was recorded as a dividend. Immediately prior to our preferred
stock financing in June 1999, all of our common stock was owned by Blaise P.
Barrelet, our Chairman and Chief Internet Architect, Agnes L. Barrelet, one of
our Vice Presidents, and Michael S. Christian, a Senior Vice President and
Secretary and together they controlled our business. By exercising their
control, they were able to and did cause us to enter into this financing
transaction at terms which resulted in their receiving a constructive cash
dividend of $20.0 million. This is significant when compared to our total
stockholders' deficit at December 31, 1999 of $22.8 million and our net loss in
1999 of $1.2 million.
Upon the closing of this offering, each of the 15,034,712 outstanding
shares of convertible redeemable preferred stock will be converted into
approximately 0.4699 shares of common stock, for a total of 7,889,066 shares,
and each of the 100 outstanding shares of redeemable preferred stock will be
redeemed for $150,000 per share, for an aggregate of $15.0 million. The
aggregate consideration to us of $29.7 million ($30.0 million, net of issuance
costs of $303,000) has been allocated to the two series of securities based on
their relative fair values at the time of issuance. The value ascribed to the
redeemable preferred stock of $8.2 million ($8.3 million, net of issuance costs
of $83,000) is based on its present value, as the 100 shares of redeemable
preferred stock are redeemable for $15.0 million on June 18, 2005 but are not
convertible and have no stated interest or dividend rights. The value ascribed
to the 15,034,712 shares of convertible redeemable preferred stock of $21.5
million ($21.7 million, net of issuance costs of $220,000) is based on the fair
value per common share implied by the total consideration paid and the
conversion rate into which the preferred stock is convertible into common stock.
In June 2000, we issued an additional 1,754,034 shares of our convertible
redeemable preferred stock and an additional 11.66667 shares of our redeemable
preferred stock and warrants to purchase the number of shares of our common
stock equal to $1.75 million divided by the conversion price of the convertible
redeemable preferred stock in effect on the date of exercise to the same
entities in exchange for cash proceeds of $3.5 million. The conversion price of
the convertible redeemable preferred stock on the date we issued the warrants
was $2.1232 per share. Upon the closing of this offering, each of the 1,754,034
shares of convertible redeemable preferred stock will be converted into
approximately 0.4699 shares of common stock, for a total of 824,221 shares, and
each of the 11.66667 shares of redeemable preferred stock will redeemed for
$150,000 per share, for an aggregate of $1.75 million.
The aggregate consideration to us of $3.5 million has been allocated among
the 1,754,034 shares of convertible redeemable preferred stock, 11.66667 shares
of redeemable preferred stock and the warrants based on their relative fair
values at the time of issuance. The value ascribed to the redeemable preferred
stock of $394,000 is based on its present value, as the redeemable preferred
stock is redeemable for $1.75 million on June 18, 2005 but is not convertible
and has no stated interest or dividend rights. The value ascribed to the
convertible redeemable preferred stock of $2.7 million is based on the fair
value of the common shares
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<PAGE> 40
underlying the convertible redeemable preferred stock plus a 10.0% premium
associated with the security's redemption and other rights and preferences. The
value ascribed to the warrants of $397,000 is based on their fair value
determined using the Black-Scholes option pricing model with the following
assumptions on the date of issuance:
- exercise price of $2.1232;
- fair value of common stock of $8.00;
- expected dividend yield of 0.0%;
- expected volatility of 70.0%;
- risk-free interest rate of 6.31%; and
- contractual life of 3.0 years.
The warrants are not exercisable if we complete an initial public offering, sell
all or substantially all of our assets for at least $150 million or sell greater
than 50.0% of our voting stock for at least $150 million prior to April 2001.
Therefore, the fair value determined using the Black-Scholes option pricing
model was discounted by 80.0% based on the contingency surrounding the ultimate
exercisability of the warrants.
In connection with the June 2000 transaction described above, we accreted
the entire amount of the beneficial conversion feature embedded in the 1,754,034
shares of convertible redeemable preferred stock at the date of issuance because
the security was immediately convertible. The value of the beneficial conversion
feature was measured using its intrinsic value, i.e., the excess of the
aggregate fair value of the common stock into which the convertible redeemable
preferred stock is convertible over the proceeds allocated to the security. The
intrinsic value of the beneficial conversion feature of $3.9 million exceeded
the proceeds allocated to the convertible redeemable preferred stock of $2.7
million; therefore, we limited recognition of the beneficial conversion feature
to the $2.7 million of proceeds allocated to the convertible redeemable
preferred stock.
In the event of a liquidation, dissolution, winding up or change of control
of our company, the holders of the redeemable preferred stock shall be entitled
to be paid (in preference to the holders of convertible redeemable preferred
stock and common stock) an amount equal to $150,000 per share. The redeemable
preferred stock is redeemable as follows:
- At any time on or after June 18, 2005, upon the written request of the
holders of at least two-thirds of the then outstanding shares of
redeemable preferred stock, all or, if less than all, a specified
percentage of shares of redeemable preferred stock are redeemable in
three annual installments.
- All outstanding shares of redeemable preferred stock are redeemable
automatically upon the closing of any offering by us of our capital stock
to the public pursuant to an effective registration statement under
Section 5 of the Securities Act of 1933, as amended.
The convertible redeemable preferred stock is redeemable at $2.1232 per
share plus declared and unpaid dividends on or after June 18, 2005, at the
option of the holders of at least two-thirds of the then outstanding shares of
convertible redeemable preferred stock. Upon any liquidation, dissolution,
winding up or change of control of us, the holders of the convertible redeemable
preferred stock are entitled to be paid (subject to the prior payment of the
preference amount to the holders of redeemable preferred stock) the preference
amount, in preference to the holders of common stock.
In April 2000, we entered into a $3.0 million revolving line of credit
arrangement with a commercial bank that expires in April 2001. The line of
credit provides up to $3.0 million for general corporate purposes and to finance
capital equipment purchases. To the extent we borrow funds for equipment
purchases, we can convert the borrowings to a loan with a term of 36 months. As
of June 30, 2000, we borrowed funds under our line of credit in the amount of
$1.3 million. As a result of our borrowings and a standby letter of credit
arrangement entered into in connection with a lease, our available credit under
the line of credit has been reduced by the amount of our borrowings and the
standby letter of credit to approximately $1.4 million. In
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<PAGE> 41
order for us to use our line of credit, we must meet certain financial
requirements including the maintenance of unrestricted cash and cash equivalents
plus eligible accounts receivable in the amount of the greater of:
- 1.5 times current liabilities and all bank debt; or
- the previous three month's operating cash usage.
There are also approximately fifteen other affirmative and negative covenants
applying to this line. In connection with obtaining our line of credit, we
issued a five-year warrant to purchase 13,333 shares of our common stock at an
exercise price of $15.00 per share.
In August 2000, we borrowed $2.0 million under a subordinated loan
agreement with a commercial bank that expires on December 15, 2000. Borrowings
bear interest at the bank's prime rate plus 3.5%. The agreement provides up to
$2.0 million for general working capital. In order for us to borrow under our
agreement, we must achieve certain revenue and expense objectives.
There are also approximately 23 other affirmative and negative covenants
related to this loan. In connection with obtaining this loan, we issued a
three-year warrant to purchase 41,666 shares of our common stock at an exercise
price of $8.10 per share. Our commercial bank is eligible to receive additional
warrants if any borrowings under the loan remain outstanding on the dates set
forth in the following table:
<TABLE>
<CAPTION>
DATE WARRANTS EXERCISE PRICE
---- -------- --------------
<S> <C> <C>
- October 15, 2000............................. 8,333 $8.10
- November 15, 2000............................ 8,333 $8.10
</TABLE>
If our borrowings under the loan are not repaid on December 15, 2000,
warrants to purchase an additional 500 shares will be issued at an exercise
price of $8.10 per share for each day the borrowings remain unpaid.
Net cash provided by (used in) operating activities was $1.0 million, $1.3
million, $1.2 million and $(1.2) million in 1997, 1998, 1999 and the six-month
period ended June 30, 2000. Net cash provided by operating activities in 1997
consisted primarily of net income and an increase in payables and accrued
expenses. Net cash provided by operating activities in 1998 consisted primarily
of net income and non-cash depreciation and amortization expenses. Net cash
provided by operating activities in 1999 consisted primarily of non-cash
expenses including stock-based compensation and depreciation and amortization
plus increased payables and accrued expenses offset by a net loss and increased
receivables. Net cash used in operating activities in the six months ended June
30, 2000 was primarily a result of an operating loss plus an increase in
accounts receivable offset by non-cash stock-based compensation, depreciation
and amortization, and an increase in accounts payable and accrued expenses.
Since our inception, our investing activities have consisted primarily of
purchases of fixed assets and investments in software development. Capital
expenditures were principally related to our network operating center and
computer equipment for our employees. Cash used in investing activities totaled
$572,000, $1.1 million, $2.9 million and $2.4 million in 1997, 1998, 1999 and
the six-month period ended June 30, 2000, respectively. We will continue to
invest heavily in our network operations center and in our software development
to ensure reliability of our network and to rapidly introduce new services and
enhancements to our existing services and web sites.
Cash provided by (used in) financing activities was ($292,000), $4.6
million and $4.7 million in 1998, 1999 and the six month periods ended June 30,
2000, respectively. Our financing activities over the last three and one-half
years consisted primarily of the sale of our preferred stock and borrowings
under our line of credit, offset by the payment of notes payable.
As of June 30, 2000, we had $4.4 million of cash and cash equivalents and
$5.2 million in working capital. Upon completion of this offering, we are
required to redeem all of our redeemable preferred stock outstanding for an
aggregate cash payment of $16.75 million and to pay a note payable to a former
stockholder totaling $182,000 plus the related unamortized discount of $18,000
at June 30, 2000. We believe that the net proceeds from the sale of common stock
in this offering, together with our current cash and cash
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<PAGE> 42
equivalents, will be sufficient to redeem the redeemable preferred stock and to
meet our working capital and capital expenditure requirements for at least the
next twelve months. If this offering is not completed, we will not be required
to immediately redeem our redeemable preferred stock, and we anticipate we will
have sufficient cash to fund operations over the next twelve months without the
offering proceeds. However, we may need to raise additional funds in the event
that we pursue acquisitions or investments in complementary businesses,
technologies, or experience operating losses that exceed our expectations. If we
raise additional funds through the issuance of equity or convertible debt
securities, our existing stockholders may experience dilution. In the event that
additional financing is required, we may not be able to obtain it on acceptable
terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is effective for fiscal
years beginning after June 15, 2000. Because we hold no derivative financial
instruments and do not engage in any hedging activities, the adoption of SFAS
No. 133 is not expected to have a material impact on our financial position or
results of operations.
Staff Accounting Bulletin ("SAB") No. 101 provides the views of the
Securities and Exchange Commission in applying generally accepted accounting
principles to selected revenue recognition issues. We have adopted the
requirements of SAB No. 101.
Emerging Issues Task Force ("EITF") No. 00-02, "Accounting for Web Site
Development Costs," is effective for fiscal quarters beginning after June 30,
2000, although earlier application is encouraged. We have been accounting for
web site development costs in accordance with EITF No. 00-02 since its
inception.
FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB 25," clarifies the application of APB
25 for:
- the definition of employee for purposes of applying APB 25;
- the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998 or January 12, 2000. The
adoption of FIN 44 did not and is not expected to have a material impact on the
Company's financial position or results of operations.
MARKET RISK
For the reasons described in detail below, we believe that our exposure to
market risk is immaterial.
Foreign Currency Exchange Rate Risk
To date, our revenues have been denominated in U.S. dollars and are
generated primarily from customers in the United States. As a result, we have
experienced limited exposure to foreign currency exchange risk. With the
incorporation of our subsidiaries in France and the Netherlands in the first
half of 2000 and our plans for further international expansion, we anticipate
future revenues from international markets to be denominated in the currency of
the applicable market. As a result, our operating results may become subject to
significant fluctuations based upon changes in exchange rates of certain
currencies in relation to the U.S. dollar. We will analyze our exposure to
currency fluctuations and may engage in financial hedging techniques in the
future to minimize the effect of these potential fluctuations; however, exchange
rate fluctuations may adversely affect our financial results in the future.
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<PAGE> 43
Interest Rate Risk
As of June 30, 2000, we had cash and cash equivalents of $4.4 million
consisting of cash and highly liquid, short-term investments. The short-term
investments have primarily 15-day maturities with historically stable interest
rates and therefore have minimal exposure to interest rate fluctuations. Our
outstanding notes payable and capital lease obligations are all at fixed
interest rates and therefore have minimal exposure to interest rate
fluctuations. Our line of credit bears interest at the prime rate plus
one-quarter of a percent; therefore, we are exposed to interest expense
increases to the extent the prime rate increases. We currently have
approximately $1.3 million in outstanding borrowings under our line of credit.
Interest expense resulting from possible increases in the prime rate would be
insignificant.
YEAR 2000 COMPLIANCE
We currently are not aware of any Year 2000 problems in any of our critical
systems and services. However, our business could be harmed if we were to
experience a Year 2000 problem in the future and we cannot guarantee that we
will not experience Year 2000 problems in the future or that third parties that
we rely on will not experience Year 2000 problems that will affect us.
39
<PAGE> 44
BUSINESS
We provide detailed, real-time web site user behavior information and
analysis to online customers. Our services allow businesses to outsource the
collection, processing and reporting of users' interaction with their web pages
and to avoid large, up-front hardware and software expenses. With the
information we provide, businesses can observe how Internet users interact with
a web site, click from page to page, or buy products or services and use this
information to improve advertising strategies, site content, site structure and
product or service offerings.
The services we provide to our business customers are designed to assist
them in making important decisions and identifying growth opportunities. Our
technology serves web sites with varying levels of Internet user activity from
just a few visits per week to millions of visits per day and is currently used
to monitor over 150,000 accounts and 450 billion page views per month. We sell
our HitBox services to businesses ranging from emerging Internet companies with
low annual revenue to established businesses with high annual revenue. By way of
illustration, these customers include Cisco, Conseco Inc., ehobbies.com, Inc.,
Hewlett-Packard Company, Lucent Technologies, Inc., Paymybills.com, Inc.,
Proflowers, Inc., Skechers USA, Inc. and SkyDesk, Inc.
INDUSTRY BACKGROUND
Growth of the Internet
The Internet has emerged as an important medium for communications and
electronic commerce, or eCommerce, involving millions of users and web sites.
Internet growth is expected to continue as access becomes more widely available
across both wireline and wireless infrastructures. International Data
Corporation, or IDC, estimates that the number of web users worldwide will
increase from 144 million at the end of 1998 to approximately 602 million by the
end of 2003. IDC also estimates the total value of eCommerce revenue is expected
to increase from approximately $268.0 billion in 2000 to approximately $2.4
trillion in 2004. Forrester Research estimates that spending on software and
services to support eCommerce alone exceeded $3.1 billion in 1999 and will grow
to $14.5 billion by 2003.
Access to the Internet through wireless devices is a fast growing segment
of Internet access. IDC forecasts that the number of users in the United States
of wireless devices that have the ability to send and receive information over
the Internet will increase from 2.8 million in 1998 to 61.5 million in 2003.
The Need to Understand Internet User Behavior
As businesses increasingly rely on the Internet and the amount of money
spent by online businesses grows, businesses are competing in a new and rapidly
evolving environment. In addition to creating challenges, the Internet also
creates opportunities to measure and analyze Internet user behavior. The ability
to understand customer preferences based on Internet user behavior can provide a
competitive business advantage. This understanding can help businesses make
informed and insightful decisions about their online strategies and change their
Internet content, commerce and advertising to suit customer preference, thereby
better attracting and retaining customers.
As users increasingly gain access to the Internet through wireless devices,
we believe the importance of analysing the behavior of these wireless users will
accelerate. To efficiently meet demands of mobile Internet users, businesses
need to understand and respond to customer preferences on the wireless Internet.
Limitations of Traditional Software Approaches to Understanding Internet User
Behavior
Online user interaction occurs in a dynamic environment and generates
volumes of user data from which businesses could benefit. This data provides
information about business and consumer preferences and purchasing activities.
The collection, analysis and presentation of Internet user data being constantly
generated by millions of users requires complex technologies.
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<PAGE> 45
When users request web content on the Internet, their request may be served
from many places other than the original publisher's computers. This makes it
difficult to collect and understand user behavior using software. Currently,
many companies use software products to collect user data from the computers
that publish their web pages, also known as the file servers. Those products can
be slow and difficult to use and capture only incomplete information. Software
products place the data collection, processing and storage burdens on the
purchasers and fail to capture user information from sources beyond the file
server such as servers in other companies' networks that store copies of web
pages, called proxy servers; and networks of file servers distributed
geographically communicating by specialized software, called distributed hosting
networks. As a result, many businesses using these conventional software
approaches may fail to capture this important information.
The Internet permits businesses to outsource the collection of this
critical business information to new, trusted service providers able to process
and analyze the information for their customers. To be most effective, an
outsourced service that measures and analyzes Internet user behavior must:
- deliver timely and accurate information about actual user behavior;
- respect the privacy of users;
- be flexible and easy to use and implement; and
- function in most current and emerging Internet environments.
OUR SERVICES
We provide detailed, real-time web site user behavior information and
analysis to our customers. We collect, process and store the information on our
network. Therefore, our customers do not have to acquire or support hardware or
software or train personnel to realize the benefits of our services.
Furthermore, our services are easy to implement, require minimal upfront cost
and provide user-friendly and meaningful online reports via the Internet on
demand. The intelligence we provide to our business customers assists them in
making important decisions and identifying growth opportunities.
Our Internet User Behavior Measurement and Analysis Service
Our HitBox services:
- collect and measure information about Internet users such as the web page
they loaded just before arriving at our customer's web site; the
frequency of their visits to our customers' web sites; their ISPs; their
local time zones; their browser software; their operating systems, screen
settings, color settings, and other information regarding the software
they use; and the search engines and search terms that they use;
- present detailed reports on user behavior such as the most common paths
that users take within a customer's web site, the most popular pages, the
pages from which users exit a site, and graphical displays of visitor
volume patterns;
- provide secure, real-time access to customer reports over the Internet
through desk-top computers and wireless devices;
- provide historical analysis based upon archived Internet user information
in our network; and
- protect user privacy and anonymity.
Our HitBox services minimize our customer's initial costs by our charging
monthly subscription fees and by not requiring the up-front costs associated
with the acquisition and implementation of traditional hardware and software
products. Additionally, our customers can quickly implement our service offering
because we host our HitBox services in our network.
Unlike a software vendor, we collect and store in our network the Internet
user behavior information from all of our customers' accounts. This permits us
to provide value-added information services. Our HitBox
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<PAGE> 46
services collect information based on the browser activity of Internet users, in
contrast to software-based solutions that rely on the server activity of
Internet content providers. As a result, we measure requests for content from
Internet users without regard to how or from where the content is served. Our
HitBox technology is also generally able to distinguish between automated
requests for content and actual users.
We publish this user information in our large and growing database in a
number of ways. StatMarket provides numerous statistics about broad Internet
trends such as overall usage, browser technology, screen settings and other
similar statistics. We publish on HitBox.com a traffic-based ranking of web
sites to which we provide services. We also have a consumer-oriented portal
called Yep.com that features the web sites using our HitBox services.
Benefits of Our Services to Our Customers
Our Internet user behavior measurement and analysis services provide the
following benefits to our customers:
Internet Intelligence. Our HitBox services allow businesses to develop
clear insights and more informed and responsive business strategies by providing
them with accurate and timely information about the behavior and preferences of
their Internet users.
- Accurate, Valuable Data. Our HitBox services collect, measure and report
important information about Internet user behavior on our customers' web
sites based on the browser activity of actual Internet users. Our HitBox
services also put our customers' information into relative context by
comparing their data to that in our aggregate database of information
from many customers' accounts.
- Available on Demand. Customer information is presented in easy-to-read
graphical reports that are available over the Internet 24 hours a day,
seven days a week. Reports can be generated on demand with a mouse click.
- Real-Time Information. Our customers can react to information about
Internet user behavior in real time rather than waiting for reports of
historical information. When an Internet user accesses one of our
customers' web pages, our network immediately updates the customer's data
in our database and on our web sites.
Rapid Implementation. Our HitBox technology allows online businesses to
begin collecting and measuring information about Internet users within seconds
of inserting our HitBox sensors into their web pages. As a service provider, we
provide information to our customers, not software. All software used by HitBox
technology to process data resides in our network. We also store the information
in our network, so our customers do not have to implement hardware or software
products to realize the benefits of the HitBox services.
Ease of Use. Our HitBox services do not require our customers to provide
extensive training or on-going support.
Flexibility. As our customers change their web sites, our HitBox services
can be easily adapted to collect and measure Internet user behavior on new web
pages. As a service provider, we make it easier for our customers to grow their
online businesses.
Environment Independence. We provide both wireline and wireless HitBox
services to online businesses, whatever their Internet environment. Our HitBox
services are compatible with operating systems and browsers such as Windows,
Linux, Unix, MacOS, Hyper Text Markup Language (HTML), Handheld Devices Markup
Language (HDML), Wireless Application Protocol (WAP), Internet Explorer,
Netscape Navigator and PalmOS. HitBox Wireless can measure and report real-time
detailed statistics about wireless Internet user behavior. We believe we are the
first to market such a wireless service, and we have filed for patent protection
of our technology.
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STRATEGY
Our objective is to be one of the leading providers of Internet information
services that collect, measure and report Internet user behavior. Our primary
strategies to achieve this objective are:
Lead through Innovation. We plan to continue to refine our proprietary core
technology and to develop new, enhanced versions of our existing HitBox
Enterprise, HitBox Wireless and other HitBox services. We also plan to develop
technologies that measure usage of new Internet access devices as they are
developed, including additional wireless devices.
Increase the Depth of Our Internet Intelligence. We intend to increase the
amount of information about Internet user behavior contained in our database to
enhance the value of our services. In particular, we intend to increase the
number of domestic and international Internet web sites that carry our HitBox
technology. By increasing the number of the data collection sources we employ,
we acquire more comprehensive information which is of higher value to our
customers.
Focus on Potential HitBox Enterprise Customers. We intend to aggressively
market our services to customers who can utilize our HitBox Enterprise service.
We believe our technology and services provide distinctive capabilities to these
customers who are building online businesses. Customers can develop awareness
and insight into their businesses and improve growth opportunities through the
information and analysis that we provide. We intend to build loyalty among our
these customers and, through their support and recommendation of us, increase
penetration of our services.
Expand Direct Sales and Develop Indirect Distribution Channels. We intend
to increase the size of our sales and marketing organization and to develop
indirect distribution channels. Specifically, we intend to increase the number
of employees dedicated to selling our HitBox services and Internet advertising.
We plan to develop indirect channels to improve distribution of our HitBox
services and to expand our customer base by entering into co-marketing or
distribution agreements with companies that have a relationship with our
customers or potential customers.
Measure Wireless Internet User Behavior. An increasing portion of Internet
access will come through wireless devices. We believe it will be important for
businesses to understand user behavior in this market. We believe that our
HitBox Wireless service offers measurement and analysis of wireless Internet
user behavior. We intend to pursue our objective to become an industry standard
in measuring user behavior on the wireless Internet through a focus on marketing
our HitBox Wireless service.
Expand Brand Awareness and Increase Market Penetration. We intend to
improve awareness of our brands through increased sales and marketing efforts.
For example, we are making a portion of our StatMarket information available to
major news media. We are also pursuing resale agreements and co-marketing
agreements with commerce service providers, Internet service providers and other
providers of web-related products and services to businesses. We intend to use
this combination of marketing efforts, service innovation and resale and
co-marketing agreements to accelerate market penetration of our services.
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<PAGE> 48
TECHNOLOGY
Our technology provides us a proprietary method for collecting, processing
and reporting data from web sites across the Internet. We collect statistical
data from each visitor to a site via the insertion of a HitBox sensor on web
pages we monitor. Each of our HitBox services is completely Internet-based,
obviating the need for customer server resources or information technology
personnel to administer the application. We offer businesses multiple data
measurement and reporting services using the information collected by our
network. Our proprietary HitBox data collection process and a description of how
we process and report collected data are illustrated by the following chart:
[CHART]
(1) The browser, whether from a wireline or wireless device, requests content,
like a web page, from a server.
(2) The server sends requested content with an embedded HitBox sensor to the
browser.
(3) The HitBox sensor embedded in the requested content causes the browser to
send information to our network.
(4) We provide online services and reports based on the behavioral information
that we collect from the browser.
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The HitBox sensors have multiple functions, all of which are executed
simultaneously. First, when a browser accesses any content on the Internet with
an embedded HitBox sensor, the HitBox sensor directs the browser to request a
file from our network. Second, our network reads data from the browser request,
including an anonymous user profile unique to the browser. Third, when our
network receives and analyzes the browser request, the HitBox sensor acts as a
placeholder for the file that we send back to the user, which is either an
invisible image file, our HitBox banner or a third-party banner. Finally, we
update the anonymous profile on the browser to reflect the visit to a site
within the HitBox community.
We currently own and operate the network facilities that support our
technology services. Our network operations center is comprised of a large
interconnected collection of servers connected to the Internet through several
Internet access providers. In the future, we may house our servers in
third-party facilities, and we may deliver some content through network services
with geographic diversity.
As of July 31, 2000, we had approximately 59 employees engaged in
technology development and operations activities. Our technology development
expenditures were approximately $245,000, $1.4 million, $3.4 million and $3.4
million for 1997, 1998, 1999 and the six months ended June 30, 2000,
respectively.
SUBSCRIPTION SERVICES AND WEB PROPERTIES
We offer the following subscription services and web properties based on
our core HitBox technology for collecting and reporting information about
Internet user behavior:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
SUBSCRIPTION SERVICES
<S> <C>
------------------------------------------------------------------------------------------------
HitBox Enterprise Our premium Internet user behavior measurement and analysis
service that delivers statistics and reporting tools for
fees. (www.hitboxenterprise.com)
------------------------------------------------------------------------------------------------
HitBox Pro Our mid-level service that delivers basic statistics and
reporting for fees. (http://resources.hitbox.com)
------------------------------------------------------------------------------------------------
HitBox Our entry-level service that provides statistics and
reporting in exchange for placing advertising on pages that
are tracked. (www.resources.hitbox.com)
------------------------------------------------------------------------------------------------
StatMarket Delivery of information on broad Internet usage patterns
based on data aggregated from HitBox customers for fees.
(http://statmarket.com)
------------------------------------------------------------------------------------------------
HitBox Wireless Our wireless Internet user behavior measurement and analysis
for fees. (www.hitboxwireless.com)
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
WEB PROPERTIES
<S> <C>
------------------------------------------------------------------------------------------------
HitBox.com Community site for web site operators. Supported by
advertising revenue. No fee to users.
------------------------------------------------------------------------------------------------
Yep.com Consumer portal showcasing users of our HitBox services.
Supported by advertising revenue. No fee to users.
------------------------------------------------------------------------------------------------
</TABLE>
Subscription Services
Our HitBox services allow our customers to gauge the number of visitors to
their web site, their origination, popular viewing times, the nature of the
equipment used and visitors' navigation within the site. All of our HitBox
services identify and report:
- Internet user behavior with page-to-page path tracking capability,
including point of entry, user paths and exit page;
- usage statistics, including unique visitors and page views;
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<PAGE> 50
- referral information, including Internet address, domain, e-mail or
newsgroup that directed the visitor to the site, major Internet service
providers, referring search engines and keyword search used;
- loyalty metrics, including number of reloads and return visitors;
- browser type;
- operating system type;
- certain types of additions to browser software capabilities;
- the user's screen colors and resolution;
- timing metrics, including rush hours, time spent and traffic during prime
time; and
- traffic history and projections.
HitBox Enterprise
HitBox Enterprise, our premium fee-based HitBox service, is designed to
serve the needs of high-value web properties. HitBox Enterprise provides
real-time statistics and detailed anonymous aggregate profiles of visitors to a
customer's web site. In addition to our standard HitBox features, HitBox
Enterprise provides the following premium services:
- benchmark comparisons with broad Internet statistics from our StatMarket
service;
- tracking of secure web pages;
- greater multi-page tracking capability;
- standardized e-mail reports and graphics e-mailed on demand; and
- increased levels of password protection.
HitBox Pro
HitBox Pro is a mid-level fee-based version of our HitBox service for
online businesses that do not require all of the statistics and reports offered
in our HitBox Enterprise service.
HitBox
HitBox is our entry-level Internet user measurement and analysis service.
Our HitBox customers enjoy the same statistics and reports as our HitBox Pro
customers. Instead of charging a fee, we exchange our basic HitBox service for
the right to place a banner ad on the customer's web site, which we use to
derive advertising sales revenue.
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<PAGE> 51
StatMarket
StatMarket is our service that provides customers with information on broad
Internet usage trends. We update and publish the information on StatMarket.com
regularly based on information collected from millions of users of web sites
containing embedded HitBox sensors. Businesses subscribe to our StatMarket
service to monitor these trends.
[STATMARKET SCREENSHOT]
HitBox Wireless
HitBox Wireless provides real-time measurement and reporting of Internet
user behavior from those who access the Internet with wireless devices capable
of displaying graphics such as web-enabled phones and web-connected organizers.
HitBox Wireless provides Internet user behavior intelligence in the wireless
Internet environment, including the following statistics:
- page-to-page path tracking;
- timing metrics including rush hours, time spent and traffic during
prime-time;
- traffic history and projections;
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<PAGE> 52
- types of wireless devices used;
- service providers;
- area codes of web-enabled phone users;
- screen resolutions; and
- the type of software code used to create web pages supported by the
device.
Web Properties
HitBox.com
HitBox.com serves as a community for webmasters allowing them to interact
with each other and share ideas. Many webmasters who frequent HitBox.com use the
HitBox Internet user behavior measurement and analysis technology. Webmasters
visit HitBox.com regularly to check their statistics. In addition to webmasters,
HitBox.com is also a destination for general Internet users. HitBox.com
categorizes sites that use HitBox technology and ranks each by number of
visitors to the site. These rankings give our customers a venue to promote their
sites and generate additional traffic.
[HITBOX.COM SCREENSHOT]
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<PAGE> 53
Yep.com
Yep.com is our consumer-oriented portal. Its navigation engine showcases
those web sites that use our HitBox services. We also provide technologies,
tools and content to users of Yep.com that we believe make the experience of
surfing the Internet more enjoyable and productive. The Yep.com search
architecture includes topics of interests to consumers such as arts and
literature, business and career, entertainment and other similar topics. We rank
the Internet sites listed on Yep.com based on the sites' popularity and quality.
A site's popularity is measured by the average number of unique daily page
visits. A site's quality is based on number of bookmarks, speed of web site,
length of users' stays, number of same-day visits, number of repeat visitors and
other similar criteria.
[yep.com SCREEN SHOT]
CUSTOMERS
Our HitBox customers range from small Internet businesses to Fortune 100
companies. No single customer has accounted for more than 10.0% of our revenue
in a calendar year. The following is a list of our
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<PAGE> 54
customers for HitBox services, representative of the range of customers in terms
of size as determined by the customers' annual revenue:
<TABLE>
<S> <C>
Akamai Technologies, Inc. LoqueSea.com, Inc.
Bamboo Online/IPIX Lucent Technologies, Inc.
Bullseye Art Ltd. Mercado Libre, Inc.
Carfax, Inc. Mondera.com
Cisco Systems, Inc. Oscott Computers
Conseco Inc. Paymybills.com, Inc.
Discovery Channel Peakhour Pty Ltd
ehobbies.com, Inc. Proflowers, Inc.
ESPN Qingniao.net Holdings LTD
Free Lance Star, The Seafood.com, Inc.
Freei Networks, Inc. Skechers USA, Inc.
Hewlett-Packard Company SkyDesk, Inc.
Iberia Airlines SportsYA, Inc.
inOnMedia Corp. SupermarketsOnline, Inc.
International Merchant System The Drudge Report
Janssen Pharmaceutical Venclick.com
</TABLE>
CASE STUDIES
We believe that case studies illustrating some of the benefits to
businesses of using our HitBox technology are helpful to explain some of the
specific reasons a potential customer may choose to subscribe to our services.
The following case studies illustrate some of the benefits provided to
businesses that utilize our HitBox technology.
- An online provider of vehicle history data, was centralizing its large
server operations into a single server bank. This customer's systems were
soon becoming overloaded with the management of the log files and
reporting of server activities. They switched to HitBox Enterprise and
soon benefited by eliminating log files and having their Internet user
behavior information available real-time on our web site.
- A large manufacturer and marketer of communications technology, built a
new web site for its business partners and needed a web site analysis
service that could be implemented immediately with little to no drain on
their resources. This customer chose HitBox Enterprise because the
customer could begin collecting data within a couple of days. This
allowed them to focus their internal resources on the vital aspects of
their web site and be more responsive to their channel partners.
- An online retailer of floral products, needed a service that could
effectively measure many kinds of customer activity soon enough to make
fast resource allocation and design changes. HitBox Enterprise provides
them with accurate, real-time information about their Internet users on a
page-by-page basis that they use to monitor advertising campaigns,
observe and manipulate traffic patterns, and anticipate resource
requirements for their holiday selling seasons.
SALES AND MARKETING
We currently market our basic HitBox service primarily through word of
mouth and the exposure that we get from existing users posting our banners on
their web pages. We sell and market our HitBox Enterprise service and
advertising inventory primarily through our direct sales force, which consisted
of approximately 37 sales personnel as of July 31, 2000. Most of our sales force
operates out of our San Diego office. We expect to use contractual relationships
with companies that can promote or resell our services, such as Internet service
providers and interactive agencies. We recently opened sales offices in France
and the Netherlands to pursue international sales and marketing opportunities.
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Our marketing organization provides market direction and supports sales
efforts through awareness and lead generation programs. Key marketing programs
include:
- market analysis;
- regular press releases showcasing the information in our database and web
properties;
- public relations activities and speaking engagements;
- direct mail and e-mail programs;
- brochures, data sheets and website marketing; and
- industry-focused programs.
To increase the sales of our subscription services, we intend to hire a
large number of additional direct sales personnel and establish referral and
resale relationships. Accordingly, we anticipate a significant increase in our
sales and marketing expenditures in the foreseeable future.
We have a dedicated advertising sales team of approximately 12 personnel as
of July 31, 2000 that sells advertising directly to advertisers and to agencies
who represent advertisers.
COMPETITION
The market for Internet intelligence and information, including user
profiling, online advertising services and systems and web site traffic analysis
is new, rapidly evolving and intensely competitive. We expect competition to
increase both from existing competitors and new market entrants for various
components of our services. We compete primarily on the basis of product
functionality, depth, timeliness and quality of Internet user information and
level of service.
We believe that we compete in the following markets and with companies in
each market including the companies listed below:
Web Site Traffic Measurement. Accrue Software, Inc., Engage Technologies,
Inc., NetGenesis Corp. and WebTrends Corporation market software that measures
site-specific Internet usage.
Internet User Measurement Services. MediaMetrix, Inc. and NetRatings, Inc.
collect information from a representative sample of Internet users called panels
and extrapolate this data to estimate broad usage patterns across the Internet.
Some information collected by these companies competes with information offered
by our StatMarket Service.
In addition, we face competition from individual web sites that develop
independent methods of measuring their own audience or from other companies that
develop alternative audience measurement technologies to those already provided
by us. Some of the largest web publishers use internally-developed interactive
marketing software rather than the commercial services or software offered by us
and our competitors.
In the market for our HitBox services, we currently compete in several
areas such as:
- price;
- timely, accessible reporting;
- ease of use;
- product performance;
- service; and
- speed of implementation.
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As we also derive revenue from the sale of advertising on the Internet, we
compete with Internet advertising providers such as major ISP's, content
providers, large web publishers, web search engine and portal companies and
content aggregation companies.
Many of our current competitors, as well as a number of potential
competitors, have longer operating histories, greater name recognition and
substantially greater financial, technical and marketing resources than we have,
including competitors affiliated with America Online, Microsoft and IBM. Our
current and potential competitors also may have more extensive customer bases
and larger proprietary databases. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to more effectively distribute their products or to enhance
their product and service offerings.
INTELLECTUAL PROPERTY
To protect our proprietary rights, we rely generally on copyright,
trademark and trade secret laws and confidentiality agreements or licenses with
employees, consultants, vendors, clients and corporate parties. WebSideStory,
HitBox, StatMarket and Yep.com have been registered as service marks by the U.S.
Patent and Trademark Office, and Yep and Traffic have received a Notice of
Allowance which means these marks should register as soon as the U.S. Patent and
Trademark Office receives copies showing how we use these marks. HitBox has also
been registered in the European Union and in Japan. We have registered with the
United States Copyright Office the copyrights in our web properties, HitBox.com,
Yep.com and StatMarket.com. We also have applied for six patents, two of which
we applied for provisionally, covering certain aspects of our technology and
business methods.
Despite these protections, a third party could, without authorization,
disclose, copy or otherwise obtain and use our technology or develop similar
technology or services independently. Our proprietary rights will not prohibit
competitors from developing services similar to ours by development efforts that
do not infringe on our rights. In addition, the laws of some foreign countries
will not protect our proprietary rights to the same extent as do the laws of the
United States, and effective patent, copyright, trademark and trade secret
protection may not be available in these jurisdictions. In order to protect our
intellectual property rights we may institute litigation or other proceedings
against third parties that we believe are infringing our rights. These actions
may be costly and may divert our management's time and attention.
We currently have six patent applications pending, two of which were filed
provisionally, in the United States relating to web-based multiple-page tracking
of visitor paths for both wireline and wireless Internet access and relating to
email tracking. We have also filed three of these patent applications worldwide.
We cannot assure you that our pending, or any future, patent applications will
be granted, that any existing or future patents will not be challenged,
invalidated or circumvented, or that the rights granted under or any patent that
may issue will provide competitive advantages to us. Many of our current and
potential competitors dedicate substantially greater resources to the protection
and enforcement of intellectual property rights, especially patents. If a
blocking patent has issued or issues in the future to a third party, we would
need either to obtain a license to, or to design around, that patent. We may not
be able to obtain a license on acceptable terms, if at all, or design around the
patent, which could harm our ability to provide our services.
We pursue the registration of our service marks in the United States and in
other countries although we have not secured registration of all of our marks.
As of July 31, 2000, we had four registered United States service marks, HitBox,
StatMarket, WebSideStory and the Yep.com logo and we have applied for
registration of three additional service marks, The Pulse of the Internet,
Traffic and Yep, which we believe are key to identifying and differentiating our
services from those of our competitors. HitBox is also registered as a service
mark in Japan and in the European Union.
We may, in the future, license our proprietary rights, in particular our
HitBox technology, to third parties. These licensees may fail to abide by
compliance and quality control guidelines with respect to our proprietary rights
or take actions that would severely harm our ability to use our proprietary
rights and our business.
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We attempt to avoid infringing known proprietary rights of third parties in
our product development efforts. It is difficult to proceed with certainty in a
rapidly evolving technological environment in which there exist numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. In addition, the true scope of many recently issued
patents regarding methods of conducting business is very uncertain. If we were
to discover that our technology violates third-party proprietary rights, we
might not be able to obtain licenses or continue offering our services based on
our technology without substantial reengineering. Any efforts to undertake this
reengineering might not be successful, and any necessary licenses might not be
available on commercially reasonable terms, if at all.
Litigation for claims of infringement might not be avoided or settled
without incurring substantial expenses and damage awards. In addition, any of
these claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources and could result in injunctions
preventing us from delivering our services based on our technology or licensing
our technology to third parties or clients. These claims could harm our
business.
In the future, we may seek to license third party technology to be
integrated with our internally-developed technology. We cannot assure you that
third-party technology licenses will be available to us on commercially
reasonable terms. The unavailability of any of these technologies could harm our
business. In addition, by using technology licensed from third parties, we may
be charged with infringement by other parties. Even if we receive broad
indemnification from our licensors, they may not be sufficiently capitalized and
may not be able to indemnify us in the event of infringement, resulting in
substantial exposure to us. Any infringement claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources in addition to potential product redevelopment costs and delays, all
of which could harm our business.
UNITED STATES AND FOREIGN GOVERNMENT REGULATION
There are currently few laws or regulations expressly applicable to the
Internet. Several recently passed federal laws could have an impact on our
business. The Digital Millennium Copyright Act is intended to reduce the
liability of online service providers for listing or linking to third party web
sites that include materials that infringe copyrights or other rights of others.
In order to comply with the Digital Millennium Copyright Act, we have posted the
required information on our web sites and have agreed to remove allegedly
infringing material posted by third parties on our web sites. The Children's
Online Protection Act and the Children's Online Privacy Protection Act are
intended to restrict the distribution of certain materials deemed harmful to
children and impose additional restrictions on the ability of online services to
collect user information from children. In order to comply with the Children's
Online Privacy Protection Act, we recently modified all of our web site
registration procedures to block our receipt of information from those under the
age of 13. In addition, the Protection of Children From Sexual Predators Act of
1998 requires online service providers to report evidence of violations of
federal pornography laws. Currently, the U.S. Congress is also considering
pending legislation which would significantly expand the authority of the
Federal Trade Commission, or FTC, to enforce the privacy rights of Internet
users. If these laws are passed, our privacy policies and methods might receive
additional regulatory scrutiny not previously required. This legislation may
impose significant costs on our business or subject us to additional
liabilities.
The FTC regulates the collection, use and sharing of information concerning
Internet users. Several state attorneys general enforce consumer protection laws
affecting Internet-based businesses. Regulatory inquiries and litigation of
these types are often expensive and time-consuming. Several state legislatures
have passed laws relating to usage of unsolicited email, or "spam." In addition,
federal, state, local and foreign governmental organizations also are
considering, and may consider in the future, other legislative and regulatory
proposals that would regulate the Internet. Areas of potential regulation
include libel, pricing, privacy, quality of products and services and
intellectual property ownership.
In the European Union, there is a range of legislation addressing, or
having an impact on, Internet related businesses. In particular, the European
Union adopted the Directive on Electronic Signatures and the Directive on
Electronic Commerce in 1995. These Directives required European Union member
countries to
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implement their terms into national law by October 24, 1998. Although some
individual European nations have passed laws that go beyond the minimum
requirements of the European Union Directives, many European countries have not
yet implemented any national privacy legislation.
The 1995 European Union Directive on Data Protection applies to the
processing of personal data which is defined to include collection, storage,
consultation and disclosure of information about identified or identifiable
individuals. Because we do not collect personal data as defined under the
European Union Directives, and because we do not associate the information we do
collect with identified or identifiable individuals, we believe that the data we
collect and provide to our customers does not constitute personal data regulated
by this Directive.
The governments of other states or foreign countries might attempt to
regulate our transmissions or levy sales or other taxes relating to our
activities. The laws governing the Internet, however, remain largely unsettled,
even in areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet and Internet
advertising. In addition, the growth and development of the market for Internet
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, that may impose additional burdens on companies
conducting business over the Internet. Our business and financial results could
be materially harmed by the adoption or modification of laws or regulations
relating to the Internet.
We do not know how courts or governments will interpret both existing and
new laws. New laws or the application of existing laws and regulations may
affect our business and these laws and regulations may be inconsistent. In
addition, our business may be indirectly affected by our clients being subject
to such legislation. Increased regulation of the Internet may decrease the
growth in the use of the Internet, decreasing the demand for our services,
increasing our cost of doing business, or otherwise significantly affect our
business and financial results.
EMPLOYEES
On July 31, 2000, we had 142 employees, including:
- 58 in sales and marketing;
- 59 in technology development and operations; and
- 25 in general administration.
We have never had a work stoppage, no employees are represented under
collective bargaining agreements and we consider current relations with
employees to be good.
FACILITIES
Our principal offices currently occupy approximately 40,000 square feet
located at 10182 Telesis Court, 6th Floor, San Diego, California under a lease
that expires in January 2007 and also mandates that we lease approximately
21,000 square feet of additional space at the same site in September 2000. We
believe that our facilities are adequate for our current operations and that
additional space can be obtained if needed.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings in the ordinary course
of business.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information about our directors,
executive officers and key employees as of July 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION CLASS(1)
---- --- -------- --------
<S> <C> <C> <C>
John J. Hentrich................ 50 President and Chief Executive Officer and Director III
Blaise P. Barrelet.............. 37 Chairman of the Board of Directors and Chief III
Internet Architect
Michael S. Christian............ 40 Senior Vice President and Secretary
Terance A. Kinninger............ 44 Senior Vice President and Chief Financial Officer
Meyar Sheik..................... 38 Senior Vice President and Chief Marketing Officer
Thomas H. Stigler............... 43 Senior Vice President, Enterprise Sales and
Business Development
Randall K. Broberg.............. 39 General Counsel and Chief Privacy Officer
Benjamin H. Ball(2)(3).......... 34 Director I
Kurt R. Jaggers(2)(3)........... 41 Director II
Walter G. Kortschak(2)(3)....... 41 Director II
</TABLE>
------------
(1) Indicates the class of each director. Classes I, II, and III will be up for
election at the annual meetings of stockholders in 2001, 2002 and 2003,
respectively, and directors of each class will hold office for three year
terms.
(2) Member of the compensation committee.
(3) Member of the audit committee.
John J. Hentrich has served as our President and Chief Executive Officer
since December 1999 and has served as a member of our board of directors since
March 2000. He served as our Senior Vice President and Chief Financial Officer
from November 1999 to December 1999. Prior to joining us, from May 1991 to
November 1999, he was a partner in the San Diego office of Baker & McKenzie
where he specialized in representation of advanced technology enterprises and
chaired the San Diego corporate and securities practice. Mr. Hentrich holds a
B.A. degree in philosophy from Fordham University, a Ph.D. in philosophy from
Yale University and a J.D. from Yale Law School. Mr. Hentrich is also currently
a director of a private company.
Blaise P. Barrelet has served as our Chairman of the Board of Directors
since he founded WebSideStory in 1996 and since January 2000 has served as our
Chief Internet Architect. From 1996 until December 1999, he served as our
President and Chief Executive Officer and oversaw all of our Internet technology
development. He served as director of the software division at Tekelec Group,
France, from 1991 to 1993. In 1994, he co-founded Reword Corporation, an
Internet software localization company.
Michael S. Christian currently serves as our Senior Vice President and
Secretary and has been an officer of the company since February 1998. Mr.
Christian served as a member of our board of directors from June 1999 to March
2000. Prior to joining us, Mr. Christian served as international counsel to
Banque Worms, a French commercial bank, from 1989 to 1994 and was an associate
lawyer with the San Diego office of Baker & McKenzie from 1995 to 1998. Mr.
Christian holds a B.A. degree in literature from the University of California at
San Diego and a J.D. from the Harvard Law School.
Terance A. Kinninger has served as our Senior Vice President and Chief
Financial Officer since April 2000. Prior to joining us, Mr. Kinninger served as
Senior Vice President of Finance and Operations and Chief Financial Officer of
MetaCreations Corporation, a software company, from July 1995 to January 2000
and was Chief Financial Officer, Senior Vice President, Business Development and
a General Manager of Delphi Information Systems, a software company, from
October 1990 to June 1995. Mr. Kinninger was also previously employed by Coopers
and Lybrand, LLP as a certified public accountant and holds a B.S. degree from
Miami University.
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Meyar Sheik has served as our Senior Vice President and Chief Marketing
Officer since he joined us in April 2000. Mr. Sheik served as Vice President
Worldwide Marketing and Strategic Alliances of Supernova, Inc., a software
company, from October 1997 to March 2000 and Vice President Worldwide Marketing
of Proginet Corp., a software company, from June 1994 to July 1997. Mr. Sheik
has also held positions at Legent Corporation, ASYST Software Technologies and
Macmillan Software Company. Mr. Sheik holds a B.S. degree in Electrical
Engineering from the New York Institute of Technology, and an M.B.A. from the
Rochester Institute of Technology.
Thomas H. Stigler has served as our Senior Vice President, Enterprise Sales
and Business Development since he joined us in February 2000. Mr. Stigler served
as Vice President, Sales and Business Strategy for Digital Lava, Inc., a
software and services company, from November 1995 to September 1999, was an
account executive for Sybase, Inc., a software company, from February 1995 to
November 1995 and was a District Manager for Hitachi Data Systems, Inc. from
January 1993 to February 1995. From December 1980 to January 1993, he served as
an account executive, marketing manager and representative at IBM Corporation.
Mr. Stigler holds a B.S. degree from Northwestern University.
Randall K. Broberg has served as our General Counsel and Chief Privacy
Officer since joining us in April 2000. Mr. Broberg is an Internet and
intellectual property law specialist. Prior to joining us, he was a shareholder
in the La Jolla, California office of Heller Ehrman White & McAuliffe from
December 1998 to April 2000, specializing in the representation of Internet
companies, and a partner and of counsel at the San Diego office of Baker &
McKenzie from August 1994 to December 1998. Prior to that he was General Counsel
and Director of Corporate Development at Directed Electronics, Inc. Mr. Broberg
holds an A.B. from Stanford University and a J.D. from the University of
Virginia School of Law.
Benjamin H. Ball has served as a member of our board of directors since
June 1999. Mr. Ball is a founding partner of Francisco Partners, a private
equity investment firm, where he has been employed since October 1999. Prior to
co-founding Francisco Partners, Mr. Ball served as a Vice President for TA
Associates, Inc., a private equity investment firm, from 1997 to 1999. Mr. Ball
holds an A.B. from Harvard College and an M.B.A from Stanford University.
Kurt R. Jaggers has served as a member of our board of directors since
December 1999. Mr. Jaggers has served as a Managing Director of TA Associates,
Inc., since January 1997, was a Principal there from January 1993 to December
1996 and was Vice President from 1990 to 1992. Mr. Jaggers received a B.S.
degree and an M.S. degree in electrical engineering, followed by an M.B.A. from
Stanford University. He is currently a director of Invitrogen Corporation, a
biotechnology company, as well as several private companies.
Walter G. Kortschak has served as a member of our board of directors since
June 1999. Mr. Kortschak is a Managing Partner and a Managing Member of various
entities affiliated with Summit Partners, LLC, a private equity capital firm,
where he has been employed since June 1989. Summit Partners, LLC, and its
affiliates manage a number of venture capital funds, including Summit Ventures
V, L.P., Summit V Advisors (QP) Fund, L.P., Summit V Advisors Fund, L.P. and
Summit Investors III, L.P. Mr. Kortschak holds a B.S. in engineering from Oregon
State University, an M.S. in engineering from The California Institute of
Technology and an M.B.A. from the University of California at Los Angeles. Mr.
Kortschak also serves as a member of the board of directors of Somera
Communications, Inc., a telecommunications equipment company, as well as several
private companies.
BOARD COMPOSITION
Our board of directors currently consists of five members. Prior to the
closing of this offering, our board of directors will be divided into three
classes, as nearly equal in number as possible. Each class upon election and
re-election at each year's annual meeting of stockholders will serve a
three-year term. Our By-laws provide that the authorized number of directors may
be changed only by resolution of the board of directors.
Executive officers are elected by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified. Our
directors have not historically received compensation for serving on our board,
but we reimburse the costs and expenses of attending meetings. We anticipate
that we
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may compensate our directors for their service in the future, but we have no
current estimate of what that compensation may be.
BOARD COMMITTEES
Our board of directors has established an audit committee and a
compensation committee. The audit committee consists of Messrs. Jaggers,
Kortschak and Ball. The audit committee reviews and monitors our financial
statements and accounting practices, makes recommendations to our board of
directors regarding the selection of independent auditors, reviews the results
and scope of the audit and other services provided by our independent auditors
and reviews and evaluates our audit and control functions.
The compensation committee consists of Messrs. Jaggers, Kortschak and Ball.
The compensation committee makes decisions concerning and makes recommendations
regarding salaries, benefits and incentive compensation for our employees,
consultants, directors and other persons compensated by our company. The
compensation committee also administers our stock plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
of any entity that has one or more of its executive officers serving as a member
of our board of directors or compensation committee. We did not have a
compensation committee during 1999. We appointed our compensation committee in
April 2000.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to us in all capacities
during the fiscal year ended December 31, 1999 by John J. Hentrich, Blaise P.
Barrelet, Agnes L. Barrelet and Michael S. Christian. These four officers are
referred to as the named executive officers in this prospectus. The compensation
described in this table does not include medical, group life insurance or other
benefits which are available generally to all of our salaried employees, nor
does it include certain perquisites and other personal benefits received.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------------------------
--------------------------------------- SECURITY
ALL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)(2) COMPENSATION($)
--------------------------- --------- -------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
John J. Hentrich, President, Chief
Executive Officer and
Director(3)..................... $ 21,000 $ -- $ -- 1,854,517 $ --
Blaise P. Barrelet, Chairman and
Chief Internet Architect(4)..... 510,000 -- 6,273(1) -- --
Agnes L. Barrelet, Vice
President(5).................... 340,000 -- -- -- --
Michael S. Christian, Senior Vice
President and Secretary(6)...... 100,000 200,000 7,599(1) -- --
</TABLE>
------------
(1) Represents a car allowance.
(2) Includes 1,324,654 shares issuable upon exercise of an option intended to
qualify as an incentive stock option under Section 422 of the Internal
Revenue Code of 1986, as amended, and 529,861 shares issuable upon exercise
of a warrant.
(3) John J. Hentrich joined us in November 1999 and was appointed President and
Chief Executive Officer in December 1999. His current annual base salary is
$275,000.
(4) The annual salary for Blaise P. Barrelet was reduced to $50,000 commencing
January 3, 2000. See "-- Employment Agreements."
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<PAGE> 62
(5) The annual salary for Agnes L. Barrelet was reduced to $50,000 commencing
January 3, 2000. See "-- Employment Agreements." Mrs. Barrelet served as one
of our executive officers until January 2000 and as a director until April
2000. Mrs. Barrelet is the spouse of Blaise P. Barrelet, our Chairman and
Chief Internet Architect.
(6) The annual base salary for Michael S. Christian was increased to $160,000
commencing April 25, 2000. See "-- Employment Agreements."
STOCK OPTION GRANTS
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, for the fiscal year ended December 31,
1999, certain information regarding options granted to each of the named
executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
PERCENTAGE
NUMBER OF OF TOTAL
SECURITIES OPTIONS/WARRANTS FAIR
UNDERLYING GRANTED TO EXERCISE VALUE
OPTIONS/WARRANTS EMPLOYEES PRICE PER PRICE ON
GRANTED IN FISCAL SHARE DATE OF EXPIRATION
NAME (#) YEAR(%) ($) GRANT DATE
---- ---------------- ---------------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
John J. Hentrich(1)... 529,861 19.8% $0.21 $3.29 12/20/03
John J. Hentrich(2)... 1,324,654 49.6 1.05 3.29 12/20/09
Blaise P. Barrelet.... -- -- -- -- --
Agnes L. Barrelet..... -- -- -- -- --
Michael S.
Christian........... -- -- -- -- --
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION TERM($)
---------------------------------------
NAME 0% 5% 10%
---- ----------- ----------- -----------
<S> <C> <C> <C>
John J. Hentrich(1)... $1,631,972 $2,007,652 $2,441,011
John J. Hentrich(2)... 2,967,225 5,708,018 9,912,933
Blaise P. Barrelet.... -- -- --
Agnes L. Barrelet..... -- -- --
Michael S.
Christian........... -- -- --
</TABLE>
------------
(1) Includes 529,861 shares issuable under an immediately exercisable warrant.
(2) Includes 1,324,654 shares issuable under an immediately exercisable option
subject to a right of repurchase that lapses over three years.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
The following table sets forth, with respect to each of the named executive
officers, information regarding the number and value of securities underlying
unexercised options held by the named executive officers as of December 31,
1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES FAIR VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE PRICE AT YEAR-END(#) AT FISCAL YEAR-END($)
EXERCISE REALIZED FISCAL YEAR --------------------------- ---------------------------
NAME (#) ($) END EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Hentrich(1)..... -- $ -- $3.29 1,854,515 -- $4,599,197 $ --
Blaise P. Barrelet...... -- -- 3.29 -- -- -- --
Agnes L. Barrelet....... -- -- 3.29 -- -- -- --
Michael S. Christian.... 104,245 -- 3.29 735,022 36,491 2,389,557 118,632
</TABLE>
------------
(1) Includes 1,324,654 shares issuable under an immediately exercisable option
subject to a right of repurchase that lapses over three years and 529,861
shares issuable under an immediately exercisable warrant.
EMPLOYMENT AGREEMENTS
The employment with our executives is generally at will. The agreements we
enter into with our employees seek to ensure that we are the sole owner of all
intellectual property and inventions involving the activities or contributions
of our employees.
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<PAGE> 63
We entered into an agreement with John J. Hentrich as of February 2000 in
connection with his employment as President and Chief Executive Officer. The
agreement is for no specified term and provides for a base salary of $275,000
annually. The agreement also provides that Mr. Hentrich is entitled to receive
annual bonuses of $397,782, $502,898 and $120,868 in 2000, 2001 and 2002,
respectively, payable in scheduled monthly installments. In addition, Mr.
Hentrich is eligible for an annualized performance bonus to be determined by the
board of directors. Mr. Hentrich also received a grant of immediately
exercisable options to purchase 1,324,654 shares of our common stock at $1.05
per share, and an immediately exercisable warrant to purchase 529,861 shares of
our common stock at $0.21 per share. In February 2000, he exercised his warrant
and paid with a promissory note. In January 2000, he exercised his options and
also paid with a promissory note. These notes were to be forgiven upon achieving
certain goals and objectives, and both notes were forgiven in June 2000 in
accordance with their terms. See "Certain Transactions." Upon the termination of
Mr. Hentrich by the company without cause or constructive termination following
a change-in-control, Mr. Hentrich is entitled to one year's base salary plus an
amount equal to the greater of the prior year's performance bonus or the
estimated current year's bonus. Also, upon a change-in-control, 83,333 of Mr.
Hentrich's unvested shares will vest, and if Mr. Hentrich is constructively
terminated or terminated without cause within 60 days prior to or after a
change-in-control, all of Mr. Hentrich's shares will vest.
We have an employment agreement with each of Blaise P. Barrelet, our
Chairman and Chief Internet Architect, and Agnes L. Barrelet, our Vice President
and the spouse of Mr. Barrelet. We currently pay each of them $50,000 annually
plus a bonus as determined by the compensation committee. We lease an automobile
for Mr. Barrelet. These employment agreements may be terminated at any time by
either party. We provide medical benefits consistent with those provided to
employees generally.
We have an employment agreement with Michael S. Christian, our Senior Vice
President and Secretary. The agreement is for no specified term and provides for
a base salary of $160,000 annually. We also lease an automobile for Mr.
Christian. This agreement may be terminated at any time by either party. We
provide medical benefits to Mr. Christian consistent with those provided to
employees generally.
We have an employment agreement with Terance A. Kinninger, our Senior Vice
President and Chief Financial Officer. The agreement is for no specified term
and may be terminated at any time by either party. Mr. Kinninger currently earns
a base salary of $200,000 annually and in 2000, he is also eligible for an
annualized bonus of up to $50,000, contingent upon reasonable goals established
by the Chief Executive Officer. The agreement also provides for the grant of
nonstatutory options to purchase 137,500 shares of our common stock at an
exercise price of $2.04 per share. If Mr. Kinninger is terminated without cause
or if he resigns for good reason within one year following a change-in-control,
one-half of his unvested options will vest. In addition, if Mr. Kinninger's
employment is terminated within the first year of employment without cause or if
he resigns for good reason, up to 44,444 of his unvested shares will vest. Mr.
Kinninger is entitled to fringe benefits generally available to the executive
staff.
We have an employment agreement with Randall K. Broberg, our General
Counsel and Chief Privacy Officer. The agreement is for no specified term and
may be terminated at any time by either party. Mr. Broberg currently earns a
base salary of $170,000 annually. The agreement also provides for the grant of
incentive stock options to purchase 66,666 shares of our common stock at an
exercise price of $2.04 per share. If Mr. Broberg is terminated without cause
following a change-in-control, we will pay him a severance payment of $85,000.
If Mr. Broberg is terminated without cause during a one-year period following a
change-in-control, the 50% of his options remaining unvested at the date of such
termination shall vest. We provide medical benefits to Mr. Broberg consistent
with those provided to employees generally.
We have an employment agreement with Thomas H. Stigler, our Senior Vice
President, Enterprise Sales and Business Development. The agreement is for no
specified term and may be terminated at any time by either party. Mr. Stigler
currently earns a base salary of $150,000 annually. In addition, Mr. Stigler
also received a grant of incentive stock options to purchase 100,000 shares of
our common stock at an exercise price of $1.05 per share. If Mr. Stigler's
employment is terminated without cause during his first full year of employment,
his shares will vest daily based on a four-year vesting period from the date of
grant until the date of termination. If Mr. Stigler is terminated without cause
during a one-year period following a change-
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<PAGE> 64
in-control, the 50% of his options remaining unvested at the date of such
termination shall vest. We provide medical benefits to Mr. Stigler consistent
with those provided to employees generally.
We have an employment agreement with Meyar Sheik, our Senior Vice President
and Chief Marketing Officer. The agreement is for no specified term and may be
terminated at any time by either party. Mr. Sheik currently earns a base salary
of $175,000 annually and is also eligible to receive bonus compensation of up to
$115,000 contingent upon the achievement of certain financial goals. The
agreement also provides for the grant of nonstatutory stock options to purchase
83,333 shares of our common stock at an exercise price of $2.04 per share. If
Mr. Sheik is terminated without cause during a one-year period following a
change-in-control, the 50% of his options remaining unvested at the date of such
termination shall vest. Mr. Sheik is entitled to fringe benefits generally
available to the executive staff.
At the time of commencement of employment, our employees generally execute
an agreement in which they agree that their employment will be at will and that
they will comply with the policies outlined in the Employee Handbook. This
agreement also includes a proprietary information and inventions assignment
provision.
STOCK OPTION PLANS
1998 and 1999 Stock Option Plans
Our 1998 and 1999 Stock Option Plans, referred to as the 1998 and 1999
Option Plans, respectively, provide for the grant of incentive stock options,
which may provide for preferential tax treatment, to our employees, and for the
grant of nonstatutory stock options and stock purchase rights to our employees,
and directors and consultants. There are a total of 178,514 and 51,514 shares
outstanding subject to options granted pursuant to the 1998 Option Plan and the
1999 Option Plan, respectively. These options continue to be governed by the
terms of the plan pursuant to which they were granted, however no additional
options will be granted pursuant to either plan.
2000 Equity Incentive Plan
In November 1999, the board adopted our 2000 Equity Incentive Plan,
referred to as the 2000 Incentive Plan, which amended and restated both our 1998
Option Plan and our 1999 Option Plan. As of July 31, 2000 a total of 3,973,964
shares of common stock were reserved for issuance pursuant to the 2000 Incentive
Plan and upon the effectiveness of this offering, and at the end of each
calendar quarter thereafter, this share reserve automatically increases such
that the number of shares reserved for issuance shall equal 17.5% of the total
shares of capital stock outstanding at the end of such quarter.
The 2000 Incentive Plan provides for the grant of options to our directors,
officers, key employees, consultants and certain of our advisors. As of July 31,
2000, options to purchase 1,818,333 shares under the 2000 Incentive Plan were
outstanding, and 594,294 shares remain available for issuance pursuant to the
2000 Incentive Plan.
The 2000 Incentive Plan permits the granting of options intended to qualify
as incentive stock options within the meaning of Section 422 of the Internal
Revenue Code to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the 2000 Incentive Plan permits the granting of stock bonuses and
rights to purchase restricted stock. No person is eligible to be granted options
covering more than 1,333,333 shares of common stock in any calendar year.
The 2000 Incentive Plan is administered by a committee appointed by our
board of directors called the compensation committee. Subject to the limitations
set forth in the 2000 Incentive Plan, the compensation committee has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each stock award, to determine whether an
option is to be an incentive stock option or a nonstatutory stock option, to
establish vesting schedules, to specify the option exercise price and the type
of consideration to be paid upon exercise and, subject to certain restrictions,
to specify other terms of stock awards.
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<PAGE> 65
The maximum term of options granted under the 2000 Incentive Plan is ten
years. The aggregate fair market value, determined at the time of grant, of the
shares of common stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year (under
all of our incentive plans) may not exceed $100,000 or the options or portion
thereof which exceed such limit (according to the order in which they are
granted) shall be treated as nonstatutory stock options. Stock options granted
under the 2000 Incentive Plan are generally non-transferable. Options expire
three months after the termination of an optionee's service. In general, if an
optionee is permanently disabled or dies during his or her service, such
person's options may be exercised up to 12 months following such disability and
6 months following such death.
The exercise price of options granted under the 2000 Incentive Plan is
determined by the compensation committee in accordance with the guidelines set
forth in the 2000 Incentive Plan. The exercise price of an incentive stock
option cannot be less than 100.0% of the fair market value of the common stock
on the date of the grant. The exercise price of a nonstatutory stock option
cannot be less than 85.0% of the fair market value of the common stock on the
date of grant. Options granted under the 2000 Incentive Plan vest at the rate
specified in the option agreement. The exercise price of incentive stock options
granted to any person who at the time of grant owns stock representing more than
10.0% of the total combined voting power of all classes of our capital stock
must be at least 110.0% of the fair market value of such stock on the date of
grant and the term of such incentive stock options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the
2000 Incentive Plan shall be in such form and will contain such terms and
conditions as the compensation committee deems appropriate. The purchase price
under any restricted stock purchase agreement will not be less than 85.0% of the
fair market value of our common stock on the date of grant. Stock bonuses and
restricted stock purchase agreements awarded under the 2000 Incentive Plan are
generally non-transferable.
Pursuant to the 2000 Incentive Plan, shares subject to stock awards that
have expired or otherwise terminated without having been exercised in full
become available for grant, but exercised shares repurchased by us pursuant to a
right of repurchase will not then become available for grant.
Upon certain changes in control, all outstanding stock awards under the
2000 Incentive Plan must either be assumed or substituted for by the surviving
entity. In the event the surviving entity does not assume or substitute for such
stock awards, such stock awards will be accelerated and then terminated to the
extent not exercised prior to such change in control.
The compensation committee has the authority to amend or to terminate the
2000 Incentive Plan as long as such action does not adversely affect any
outstanding option, stock purchase right or stock bonus and provided that
stockholder approval shall be required to the extent required by applicable law.
The existence of the 2000 Incentive Plan does not affect the board's ability to
grant other incentives or compensation pursuant to other authority.
2000 EMPLOYEE STOCK PURCHASE PLAN
In April 2000, we adopted the 2000 Employee Stock Purchase Plan referred to
as the Purchase Plan. A total of 500,000 shares of common stock have been
reserved for issuance under the Purchase Plan. This share reserve shall
automatically increase each January 1, beginning with January 1, 2001, by the
lesser of 2.0% of the outstanding shares of capital stock of the Company on the
immediately preceeding December 31, 600,000 shares or such lesser number of
shares determined by the board. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Internal
Revenue Code. Under the Purchase Plan, the board may authorize participation by
eligible employees, including officers, in periodic offerings following the
commencement of the Purchase Plan.
Unless otherwise determined by the board, employees are eligible to
participate in the Purchase Plan only if they are employed by us or our
subsidiary designated by the board for at least 20 hours per week and are
customarily employed by us or our subsidiary designated by the board for at
least five months per calendar year. Employees who participate in an offering
may have up to 10.0% of their earnings withheld
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pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of the common stock on specified dates determined by the board. The price
of common stock purchased under the Purchase Plan shall be established by the
board, provided, however, that the purchase price on each purchase date shall
not be less than 85.0% of the lower of the fair market value of the common stock
at the participant's entry date in the offering period or the relevant purchase
date. Employees may end their participation in the offering at any time during
the offering period and participation ends automatically on termination of
employment.
In the event of a merger, reorganization, consolidation or liquidation, the
surviving, continuing, successor or purchasing corporation has discretion to
assume the Company's rights and obligations under the Purchase Plan. The board
has the authority to amend or terminate the Purchase Plan, provided, however,
that no such action may adversely affect any outstanding rights to purchase
common stock.
401(k) PLAN
We provide a Basic Savings Plan, or 401(k) Plan, that covers our full-time
employees located in the United States. Our 401(k) Plan is intended to qualify
under Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to our 401(k) Plan by employees or by us, and the investment
earnings thereon, are not taxable to employees until withdrawn from our 401(k)
Plan. If our 401(k) Plan qualifies under Section 401(k) of the Internal Revenue
Code of 1986, as amended, contributions by us, if any, will be deductible by us
when made.
Pursuant to our 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit of $10,500 in 2000
and to have the amount of such reduction contributed to our 401(k) Plan. Our
401(k) Plan permits, but does not require, additional matching contributions to
our 401(k) Plan by us on behalf of all participants in our 401(k) Plan. To date,
we have not made any matching contributions to our 401(k) Plan.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY
Our By-laws provide that we shall indemnify our directors and executive
officers and may indemnify other employees and agents to the fullest extent
permitted by Delaware law. We are also empowered under our By-laws to enter into
indemnification agreements with our directors and officers and to purchase
insurance on behalf of any person we are required or permitted to indemnify. We
currently have entered into indemnification agreements with each of the
following individuals:
- John J. Hentrich, our President and Chief Executive Officer;
- Blaise P. Barrelet, our Chairman and Chief Internet Architect;
- Agnes L. Barrelet, a Vice President;
- John T. Burke, our Corporate Controller;
- Terance A. Kinninger, our Senior Vice President and Chief Financial
Officer;
- Michael S. Christian, our Senior Vice President and Secretary;
- Meyar Sheik, our Senior Vice President and Chief Marketing Officer;
- Randall K. Broberg, our General Counsel and Chief Privacy Officer; and
- Thomas H. Stigler, our Senior Vice President, Enterprise Sales and
Business Development.
We intend to enter into a Delaware form of Indemnification Agreement in
connection with the reincorporation, with each of our directors and executive
officers, as well as Agnes L. Barrelet and John T. Burke.
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<PAGE> 67
In addition, our Amended and Restated Certificate of Incorporation provides
that our directors will not be personally liable to us or our stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability:
- for any breach of the director's duty of loyalty to us or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives an improper personal
benefit.
Our Amended and Restated Certificate of Incorporation also provides that if
the Delaware General Corporation Law is amended after the approval by our
stockholders of the restated certificate of incorporation to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of our directors shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law. This limitation of
liability does not apply to liabilities arising under the federal securities
laws or state or federal environmental laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
We maintain directors' and officers' liability insurance and intend to
continue to maintain this insurance in the future.
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<PAGE> 68
CERTAIN TRANSACTIONS
EXECUTIVE EMPLOYMENT AGREEMENTS
We have entered into employment agreements and stock option agreements with
each of our executive officers. See "Management -- Employment Agreements."
MANAGEMENT INDEBTEDNESS
In December 1999, we granted a warrant to purchase 529,861 common shares at
an exercise price of $0.21 per share to John J. Hentrich, our President and
Chief Executive Officer. The warrant was immediately vested and expires in
December 2003. The warrant was exercised in full on January 3, 2000 through the
issuance of a full recourse promissory note in the amount of $111,000. The note
bore interest at 6.5% per annum and was due and payable on January 3, 2003. The
principal plus interest was to be immediately forgiven upon: (1) the sale by our
stockholders of a majority of our common stock, (2) the sale by us of
substantially all of our assets, (3) our owning cash and cash equivalents in
excess of $4.0 million (except if this condition was satisfied because of a
public offering), or (4) the involuntary termination of Mr. Hentrich's
employment with us. If we are in registration for or have completed an initial
public offering of our equity securities prior to December 31, 2000, and the
note had not previously been forgiven, the principal plus interest would be
forgiven in 12 equal monthly installments commencing on the earlier of the date
that the initial public offering is completed or January 1, 2001. This note was
completely forgiven in June 2000 in accordance with its terms.
On March 23, 2000, Mr. Hentrich borrowed approximately $70,000 from us
under a non-recourse promissory note in order to meet required tax withholding
related to the warrant he exercised in January 2000. The note bore interest at
6.5% per annum and was due and payable on March 23, 2003. The principal plus
interest was to be immediately forgiven upon: (1) the sale by our stockholders
of a majority of our common stock, (2) the sale by us of substantially all of
our assets, (3) our owning cash and cash equivalents in excess of $4.0 million
(except if this condition was satisfied because of a public offering), or (4)
the involuntary termination of the Chief Executive Officer's employment with us.
If we are in registration for or have completed an initial public offering of
our equity securities prior to December 31, 2000, and the note had not
previously been forgiven, the principal plus interest would be forgiven in 12
equal monthly installments commencing on the earlier of the date that the
initial public offering was completed or January 1, 2001. This note was
completely forgiven in June 2000 in accordance with its terms.
On February 28, 2000, Mr. Hentrich exercised 1,324,654 options with an
exercise price of $1.05 per share into 165,490 shares of vested common stock and
1,159,164 shares of vesting common stock through the issuance of a full recourse
promissory note in the amount of $1.4 million. These options were originally
granted in December 1999 under the 2000 Plan. Unvested shares are subject to a
right of repurchase by us that lapses as the shares vest. The note bore interest
at 6.5% per annum and was due and payable on February 27, 2004. The principal
plus interest was to be forgiven in 24 equal monthly installments commencing on
April 1, 2000 unless Mr. Hentrich voluntarily resigned. The principal plus
interest was to be immediately forgiven upon: (1) a change in control of the
Company, (2) the involuntary termination of Mr. Hentrich's employment with us,
or (3) our owning cash and cash equivalents equal to or in excess of $4.0
million (except if this condition was satisfied because of a public offering).
If we are in registration for or have completed an initial public offering of
our equity securities prior to December 31, 2000, and the note had not
previously been forgiven, immediate forgiveness because of our ownership of at
least $4.0 million in cash and cash equivalents would not occur. This note was
completely forgiven in June 2000 in accordance with its terms.
FINANCING TRANSACTIONS
In June 1999, we issued an aggregate of 15,034,712 shares of our
convertible redeemable preferred stock and 100 shares of our redeemable
preferred stock to various entities affiliated with TA Associates, Inc. and
Summit Partners, LLC in exchange for 2,088,154 shares of common stock of the
Company and $5.0 million
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<PAGE> 69
in cash. These investors previously purchased the common stock for $25.0 million
from Blaise Barrelet, our Chairman and Chief Internet Architect, Agnes Barrelet,
one of our directors at the time and the spouse of Mr. Barrelet, and Michael
Christian, our Senior Vice President and Secretary. Kurt Jaggers, one of our
directors, is a managing director of TA Associates, Inc. Walter Kortschak,
another of our directors, is a managing member of Summit Partners, LLC. Upon the
closing of this offering, each of the 15,034,712 shares of convertible
redeemable preferred stock will be converted into approximately 0.4699 shares of
common stock, for a total of 7,064,845 shares, and each of the 100 shares of
redeemable preferred stock will be redeemed for $150,000 per share, for a total
of $15.0 million. In connection with this transaction, Mr. Christian was paid a
bonus of $200,000 which was recorded in general and administrative expense in
June 1999.
For financial reporting purposes, we have treated the fair value of the
common stock purchased from Mr. Barrelet, Mrs. Barrelet and Mr. Christian of
$5.0 million as a repurchase of the common stock by us. Because the common stock
was purchased on a pro-rata basis from the founders and key executive, the
excess of the purchase price of the common stock over its fair value of $20.0
million has been recorded as a dividend and charged to retained earnings.
Immediately prior to our preferred stock financing in June 1999, all of our
common stock was owned by Blaise P. Barrelet, our Chairman and Chief Internet
Architect, Agnes L. Barrelet, one of our Vice Presidents, and Michael S.
Christian, a Senior Vice President and Secretary and together they controlled
our business. By exercising their control, they were able to, and did, cause us
to enter into this financing transaction at terms which resulted in their
receiving a constructive cash dividend of $20.0 million.
The aggregate consideration to us of $29.7 million ($30.0 million less
issuance costs of $303,000) has been allocated to the two series of securities
based on their relative fair values at the time of issuance. The value ascribed
to the redeemable preferred stock of $8.2 million ($8.3 million less issuance
costs of $83,000) is based on its present value, as the 100 shares of redeemable
preferred stock are redeemable for $15.0 million on June 18, 2005 but is not
convertible and has no stated interest or dividend rights. The value ascribed to
the 15,034,712 shares of convertible redeemable preferred stock of $21.5 million
($21.7 million less issuance costs of $220,000) is based on the fair value per
common share implied by the total consideration paid and the conversion rate
into which the preferred stock is convertible into common stock.
In December 1999, our board of directors approved a change in the
conversion rate into which the convertible redeemable preferred stock is
convertible into common stock from one-to-0.1667 to one-to-0.4699. This change
was made for no additional cash consideration, as business factors that were
present at the time of the original investment were identified shortly after
consummation of the transaction and reflected in the adjusted conversion rate.
The change has been reflected as a dividend to the preferred stock investors of
$15.0 million, calculated as the product resulting from the increased number of
shares of common stock into which the shares of convertible redeemable preferred
stock are convertible multiplied by the fair value of our common stock on the
date of the change of $3.29 per share. The number of common shares into which
the convertible redeemable preferred stock was convertible was 2,505,785 before
the change in the conversion rate and 7,064,845 after the change.
In June 2000, we issued 1,754,034 additional shares of our convertible
redeemable preferred stock and 11.66667 additional shares of our redeemable
preferred stock and warrants to purchase the number of shares of our common
stock equal to $1.75 million divided by the conversion price of the convertible
redeemable preferred stock in effect on the date of exercise to various entities
affiliated with TA Associates, Inc. and Summit Partners, LLC in exchange for
cash proceeds of $3.5 million. The conversion price of the convertible
redeemable preferred stock on the date the warrants were issued was $2.1232 per
share. Upon the closing of this offering, each of the 1,754,034 shares of
convertible redeemable preferred stock will be converted into approximately
0.4699 shares of common stock, for a total of 824,221 shares, and each of the
11.66667 shares of redeemable preferred stock will redeemed for $150,000 per
share, for a total of $1.75 million.
The aggregate consideration to us of approximately $3.5 million has been
allocated among the convertible redeemable preferred stock, the redeemable
preferred stock and the warrants based on their relative fair values at the time
of issuance. The value ascribed to the redeemable preferred stock of $394,000
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<PAGE> 70
is based on its present value, as the redeemable preferred stock is redeemable
for $1.75 million on June 18, 2005 but is not convertible and has no stated
interest or dividend rights. The value ascribed to the convertible redeemable
preferred stock of approximately $2.7 million is based on the fair value of the
common shares underlying the convertible redeemable preferred stock plus a 10.0%
premium associated with the security's redemption and other rights and
preferences. The value ascribed to the warrants of $397,000 is based on their
fair value determined using the Black-Scholes option pricing model with the
following assumptions on the date of issuance: exercise price of $2.1232, fair
value of common stock of $8.00, expected dividend yield of 0.0%, expected
volatility of 70.0%, risk-free interest rate of 6.31% and contractual life of
3.0 years. The warrants are not exercisable if we complete an initial public
offering, sell all or substantially all our assets for at least $150 million or
sell greater than 50.0% of our voting stock for at least $150 million prior to
April 2001. Therefore, the fair value determined using the Black-Scholes option
pricing model was discounted by 80.0% based on the contingency surrounding the
ultimate exercisability of the warrants.
In connection with the June 2000 transaction described above, we accreted
the entire amount of the beneficial conversion feature embedded in the
convertible redeemable preferred stock at the date of issuance because the
security was immediately convertible. The value of the beneficial conversion
feature was measured using its intrinsic value, i.e., the excess of the
aggregate fair value of the common stock into which the convertible redeemable
preferred stock is convertible over the proceeds allocated to the security. The
intrinsic value of the beneficial conversion feature of $3.9 million exceeded
the proceeds allocated to the convertible redeemable preferred stock of $2.7
million; therefore, we limited recognition of the beneficial conversion feature
to the $2.7 million of proceeds allocated to the convertible redeemable
preferred stock.
In the event of a liquidation, dissolution, winding up or change of control
of us, the holders of the redeemable preferred stock shall be entitled to be
paid (in preference to the holders of convertible redeemable preferred stock and
common stock) an amount equal to $150,000 per share. The redeemable preferred
stock is redeemable:
- on or after June 18, 2005, at the option of the holders of at least
two-thirds of the then outstanding redeemable preferred stock; or
- automatically upon the close of any public offering by the Company of its
capital stock under the Securities Act of 1933.
The convertible redeemable preferred stock is redeemable at $2.1232 per
share plus declared and unpaid dividends on or after June 18, 2005, at the
option of the holders of at least two-thirds of the then outstanding convertible
redeemable preferred stock. Upon any liquidation, dissolution, winding up or
change of control of the Company, the holders of the convertible redeemable
preferred stock are entitled to be paid (subject to the prior payment to the
holders of redeemable preferred stock) the preference amount, in preference to
the holders of common stock.
The following table summarizes the financial aspects of the aforementioned
preferred stock financings:
<TABLE>
<S> <C>
Number of redeemable preferred shares issued 111.66667
Aggregate value ascribed to the redeemable preferred stock $ 8,647,000
Number of convertible redeemable preferred shares issued 16,788,746
Aggregate value ascribed to the convertible redeemable
preferred stock $24,466,000
Number of common equivalent shares 7,889,066
Aggregate value of the convertible redeemable preferred
stock
based on the mid-point of the filing range $63,113,000
Number of warrants issued 824,221
Aggregate value ascribed to the warrants $ 397,000
</TABLE>
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<PAGE> 71
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for:
- each stockholder known by us to own beneficially more than 5.0% of the
common stock;
- each of our directors;
- each of our named executive officers; and
- all directors and executive officers as a group.
The percentage of ownership in the following table is based on 24,466,325
shares of common stock outstanding on July 31, 2000, as adjusted to reflect the
conversion of all outstanding shares of convertible redeemable preferred stock
upon the closing of this offering. The table assumes no exercise of the
underwriters' over-allotment option.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by footnote and subject
to community property laws where applicable, to our knowledge the persons named
in the table below have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them. In computing the
number of shares beneficially owned by a person and the percentage ownership of
that person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60 days
after July 31, 2000 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
OUTSTANDING
NUMBER OF SHARES --------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1) OWNED OFFERING OFFERING
------------------- ---------------- -------- --------
<S> <C> <C> <C>
Blaise P. Barrelet(2).................................... 14,516,091 59.3% 49.3%
Agnes L. Barrelet(2)..................................... 14,516,091 59.3% 49.3%
John J. Hentrich(3)...................................... 1,854,515 7.6% 6.3%
Michael S. Christian(4).................................. 771,511 3.1% 2.6%
Benjamin H. Ball(5)...................................... 8,207 * *
One Maritime Plaza, Suite 2500
San Francisco, CA 94111
Kurt R. Jaggers(6)....................................... 3,944,533 16.1% 13.4%
TA Associates, Inc.
125 High Street, High Street Tower
Suite 2500
Boston, MA 02110
Walter G. Kortschak(7)................................... 3,944,533 16.1% 13.4%
Summit Partners, LLC
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301
Entities affiliated with Summit Partners, LLC(8)......... 3,944,533 16.1% 13.4%
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301
Entities affiliated with TA Associates, Inc.(9).......... 3,944,533 16.1% 13.4%
125 High Street, High Street Tower
Suite 2500
Boston, MA 02110
All executive officers and directors as a group (10
persons)(10)........................................... 25,031,185 99.3% 82.9%
</TABLE>
------------
* Represents beneficial ownership of less than 1.0% of the outstanding shares
of common stock.
(1) Unless otherwise indicated, the address for each person or entity named
below is c/o WebSideStory, Inc., 10182 Telesis Court, 6th Floor, San Diego,
California 92121.
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<PAGE> 72
(2) Includes 11,846,499 shares held by Blaise P. Barrelet, our Chairman and
Chief Internet Architect, and 2,669,592 shares held by Agnes L. Barrelet,
one of our Vice Presidents and the spouse of Blaise P. Barrelet.
(3) Includes 1,159,164 shares subject to a right of repurchase in favor of the
company which right lapses over time or upon the occurrence of certain
events.
(4) Includes 33,333 shares issued upon exercise of options and 738,178 shares
that are currently exercisable.
(5) Until October 1999, Mr. Ball was a Vice President of TA Associates, Inc.
and retains a pecuniary interest in 8,207 shares held by TA Investors LLC.
Mr. Ball does not have voting or dispositive power with respect to any
other of the shares owned by the TA funds and disclaims beneficial
ownership of these shares.
(6) Mr. Jaggers, one of our directors, is a Managing Director of TA Associates,
Inc. Mr. Jaggers does not have voting or dispositive power with respect to
the shares owned by any of the entities affiliated with TA Associates, Inc.
and disclaims beneficial ownership of these shares, except to the extent of
4,880.8387 shares of convertible preferred stock and 0.032464 shares of
redeemable preferred which he owns through TA Investors LLC.
(7) Mr. Kortschak, one of our directors, is a managing member of Summit
Partners, LLC, which is the general partner of Summit Partners, V, L.P.,
which is the general partner of each of the following funds: Summit
Ventures V, L.P. and Summit V Companion Fund, L.P. Summit Partners, LLC is
also the general partner of each of the following funds: Summit V Advisors
Fund, L.P. and Summit V Advisors Fund (QP), L.P. Mr. Kortschak is also a
general partner of Summit Investors III, L.P., which owns stock in our
company. Summit Partners, LLC, through an investment committee, has voting
and dispositive power with respect to shares owned by the entities
affiliated with Summit Partners, LLC. Mr. Kortschak is a member of the
investment committee of Summit Partners, LLC. Mr. Kortschak does not have
voting or dispositive power with respect to the shares owned by entities
affiliated with Summit Partners, LLC and disclaims beneficial ownership of
these shares.
(8) Includes 2,619,840 shares held by Summit Ventures V, L.P., 609,882 shares
held by Summit V Companion Fund, L.P., 56,558 shares held by Summit V
Advisors Fund, L.P., 185,075 shares held by Summit V Advisors Fund (QP),
L.P. and 61,070 shares held by Summit Investors III, L.P. each of which is
an affiliate of Summit Partners, LLC. Summit Partners V, L.P. is the
general partner of each of Summit Ventures V, L.P. and Summit V Companion
Fund, L.P. Summit Partners, LLC is the general partner of each of Summit
Partners V, L.P., Summit V Advisors Fund (QP), L.P. and Summit V Advisors
Fund, L.P. Summit Partners, LLC through an investment committee, exercises
sole voting and investment power with respect to the shares owned by
entities affiliated with Summit Partners, LLC. Mr. Kortschak is a member of
the investment committee of Summit Partners, LLC.
(9) Includes 2,878,524 shares held by TA/Advent VIII L.P., 541,639 shares held
by Advent Atlantic and Pacific III L.P., 54,692 shares held by TA
Executives Fund LLC and 57,570 shares held by TA Investors LLC. TA/Advent
VIII L.P., Advent Atlantic and Pacific III L.P., TA Executives Fund LLC and
TA Investors LLC are part of an affiliated group of investment
partnerships. The general partner of TA/ Advent VIII L.P. is TA Associates
VIII LLC. The general partner of Advent Atlantic and Pacific III L.P. is TA
Associates AAP III Partners L.P. TA Associates, Inc. is the general partner
of TA Associates AAP III Partners L.P. and is the sole manager of TA Advent
VIII L.P., TA Executives Fund LLC and TA Investors LLC. Each entity listed
above has sole voting power for the shares it holds.
(10) Includes shares described in the notes above, as applicable. All executive
officers and directors as a group include: Blaise P. Barrelet, John J.
Hentrich, Michael S. Christian, Benjamin H. Ball, Kurt R. Jaggers, Walter
G. Kortschak, Terance A. Kinninger, Randall K. Broberg, Thomas H. Stigler
and Meyar Sheik.
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<PAGE> 73
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering and the filing of our
restated certificate of incorporation, our authorized capital stock will consist
of 100,000,000 shares of common stock, $0.001 par value per share, and
10,000,000 shares of preferred stock, $0.001 par value per share. As of July 31,
2000, after giving effect to the conversion of all outstanding preferred stock
into common stock upon the closing of this offering, there were outstanding
24,466,325 shares of common stock held of record by 16 stockholders and
outstanding options to purchase 2,786,540 shares of common stock and outstanding
warrants to purchase 837,554 shares of common stock. Of the warrants to purchase
837,554 shares of common stock, warrants to purchase 824,221 shares terminate
and become void upon the closing prior to April 2001 of any of the following:
- an initial public offering;
- the sale of all or substantially all of our assets for at least $150
million; or
- the sale of greater than 50.0% of our voting stock for at least $150
million.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion, subscription or other rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be validly issued, fully paid
and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of our
convertible redeemable preferred stock will be converted into shares of common
stock, and we intend to redeem all outstanding shares of our redeemable
preferred stock. Upon conversion of the convertible redeemable preferred stock
and redemption of the redeemable preferred stock, those shares of preferred
stock will be cancelled and no longer available for issuance. Under the restated
certificate of incorporation, the board has the authority, without further
action by stockholders, to issue up to 10,000,000 shares of preferred stock in
one or more series. In addition, our board may fix the rights, preferences and
privileges, of any preferred stock it determines to issue. These rights may
include items such as a preferential return on our liquidation, the right to
receive dividends if declared by the board of directors, the right to protection
from dilutive issuances of securities, or the right to approve certain corporate
actions. Any or all of these rights may be superior to the rights of the common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay or prevent a change in our control or to make removal of our management
more difficult. Additionally, our issuance of preferred stock may decrease the
market price of our common stock. At present, we have no plans to issue any
shares of preferred stock.
REGISTRATION RIGHTS
The holders of 7,889,066 shares of our common stock and the holder of a
warrant to purchase 13,333 shares of our common stock are entitled to certain
registration rights with respect to the registration under the Securities Act of
the common stock into which those shares are convertible. These rights are
provided for under the terms of a registration rights agreement between us and
the holders of the registrable securities. Beginning June 18, 2000, holders of a
majority of the then outstanding registrable securities may require on up to two
occasions that we register for public resale all or any portion of their
registrable securities (representing offering proceeds aggregating not less than
$20.0 million for an initial public offering or $10.0 million otherwise). We
need not register these shares if the requested registration would occur within
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<PAGE> 74
180 days following the effective date of any other registration statement we
have filed. Also, we may defer the registration of these shares for up to 120
days if, in the good faith judgment of our board of directors, it would be
seriously detrimental to us and our stockholders for the registration statement
to be filed or if there is a valid business purpose or reason for delaying
filing or effectiveness. Furthermore, in the event we elect to register any of
our shares of common stock for purposes of effecting any public offering, the
holders of registrable securities are entitled to include their shares of common
stock in the registration, but we may limit the number of shares proposed to be
registered in view of market conditions. All expenses in connection with any
registration, other than underwriting fees, discounts and commissions, will be
borne by us.
ANTI-TAKEOVER PROVISIONS
Delaware Law
We are governed by the provisions of Section 203 of the Delaware Law. In
general, Section 203 prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sale or other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own) 15.0% or more of the corporation's voting stock. The statute
could have the effect of delaying, deferring or preventing a change in our
control.
Charter and By-law Provisions
Our By-laws provide that special meetings of our stockholders may be called
only by the Chairman of the board of directors, our chief executive officer or
by the board of directors pursuant to a resolution adopted by a majority of the
total number of authorized directors. Our restated certificate of incorporation
also specifies that the authorized number of directors may be changed only by
resolution of the board of directors and does not include a provision for
cumulative voting for directors. Under cumulative voting, a minority stockholder
holding a sufficient percentage of a class of shares may be able to ensure the
election of one or more directors. These provisions contained in our restated
certificate of incorporation and By-laws could delay or discourage certain types
of transactions involving an actual or potential change in control of us or our
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management or approve transactions that
stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Equiserve Trust
Company, 525 Washington Boulevard, Suite 4691, Jersey City, New Jersey 07310.
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<PAGE> 75
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. As described below, no shares
currently outstanding will be available for sale immediately after this offering
due to certain contractual restrictions on resale. Sales of substantial amounts
of our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have outstanding 29,466,325
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, all of the
shares sold in this offering will be freely tradable without restriction under
the Securities Act unless purchased by our affiliates.
The remaining 24,466,325 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701 described below, these restricted shares will be available for
sale in the public market as follows:
- no shares may be sold prior to 180 days from the date of this prospectus;
- 23,105,588 shares will have been held long enough to be sold under Rule
144 or Rule 701 between 181 and 365 days after the date of this
prospectus, however the resale of these restricted shares will be limited
by volume and other resale restrictions under Rule 144 because the
holders of these shares are our affiliates; and
- 24,466,325 shares will have been held long enough to be sold under Rule
144 or Rule 701 following one year after the date of this prospectus,
however the resale of certain of these restricted shares will be limited
by volume and other resale restrictions because the holders of certain of
these shares are our affiliates; and
- 24,466,325 shares will have been held long enough to be sold under Rule
144 or Rule 701 following two years after the date of this prospectus,
however the resale of certain of these restricted shares will be limited
by volume and other resale restrictions because the holders of certain of
these shares are our affiliates.
LOCK-UP ARRANGEMENTS
Holders of a total of 24,466,325 shares of common stock (including
preferred stock convertible into common stock and including all stock held by
executive officers and directors), and certain holders of options and warrants
to purchase shares of common stock have agreed not to sell or otherwise dispose
of any unrestricted shares of common stock for a period of 180 days after the
date of this prospectus without the prior written consent of Lehman Brothers
Inc. In addition, all options granted under our equity incentive plans are
subject to similar lock-up arrangements pursuant to agreements between the
optionees and us.
RULE 144
In general, under Rule 144, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1.0% of the number of shares of our common stock then outstanding which
will equal approximately 294,663 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
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<PAGE> 76
Sales under Rule 144 are also subject to manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
RULE 701
In general, under Rule 701, any of our employees, consultants or advisors
who purchases or receives shares from us in connection with a compensatory stock
purchase plan or option plan or other written agreement will be eligible to
resell their shares beginning 90 days after the date of this prospectus. Non-
affiliates will be able to sell their shares subject only to the manner-of-sale
provisions of Rule 144. Affiliates will be able to sell their shares without
compliance with the holding period requirements of Rule 144. However, all shares
issued under Rule 701 are subject to lock-up arrangements and will become
eligible for sale only when the lock-up agreements expire.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 7,889,066 shares of our
common stock and the holder of a warrant to purchase 13,333 shares of our common
stock will be entitled to rights with respect to the registration of their
shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights." Except for shares purchased by affiliates,
registration of their shares under the Securities Act would result in such
shares becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration.
STOCK OPTIONS
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering the shares of common stock reserved for
issuance upon exercise of outstanding options and options available for grant.
The registration statement is expected to be filed and become effective as soon
as practicable after the closing of this offering. Accordingly, shares
registered under the registration statement will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open market
beginning 180 days after the effective date of the registrant statement of which
this prospectus is a part upon completion of the lock-up period described above,
subject in certain cases to vesting.
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<PAGE> 77
UNDERWRITING
The underwriters named below, acting through their representatives, Lehman
Brothers Inc., U.S. Bancorp Piper Jaffray Inc., William Blair & Company, L.L.C.
and Fidelity Capital Markets, a Division of National Financial Services
Corporation, have severally agreed with us, subject to the terms and conditions
of the underwriting agreement, to purchase from us the number of shares of our
common stock set forth below opposite their respective names. The underwriters
are committed to purchase and pay for all these shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc. .......................................
U.S. Bancorp Piper Jaffray Inc. ............................
William Blair & Company, L.L.C. ............................
Fidelity Capital Markets, a Division of National Financial
Services Corporation......................................
-------
Total.....................................................
=======
</TABLE>
Commissions and Expenses
The representatives have advised us that the underwriters propose to offer
the shares of our common stock to the public at the public offering price set
forth on the cover page of this prospectus and to certain dealers at that price
less a concession of not in excess of $ per share, of which $ may
be reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction will change the amount of proceeds to be received by us as
indicated on the cover page of this prospectus. Our common stock is offered by
the underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
The following table summarizes the compensation to be paid to the
underwriters by us, which is equal to 7.0% of the initial public offering price
of the common stock sold by us in this offering.
<TABLE>
<CAPTION>
TOTAL
----------------------
WITHOUT WITH
PER OVER- OVER-
SHARE ALLOTMENT ALLOTMENT
-------- --------- ---------
<S> <C> <C> <C>
Underwriting Discounts and Commissions payable by
WebSideStory.....................................
</TABLE>
In addition, we estimate expenses payable by us in connection with this
offering, other than the underwriting discounts and commissions referred to
above, will be approximately $2.5 million.
Offering Price Determination
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
offered by this prospectus will be determined through negotiations between the
representatives of the underwriters and us. The factors to be considered in
these negotiations include prevailing market conditions, certain of our
financial information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
73
<PAGE> 78
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution through the Internet.
Over-Allotment Option
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 750,000
additional shares of our common stock to cover over-allotments, if any, at the
public offering price less the underwriting discount set forth on the cover page
of this prospectus. If the underwriters exercise their over-allotment option to
purchase any of the additional 750,000 shares of our common stock, the
underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares to be
purchased by each of them bears to the total number of 5,000,000 shares of
common stock offered in this offering. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the shares
offered hereby are being sold. We will be obligated, pursuant to the
over-allotment option, to sell shares to the underwriters to the extent the
over-allotment option is exercised. The underwriters may exercise the
over-allotment option only to cover over-allotments made in connection with the
sale of the shares of common stock offered in this offering.
Indemnity
The underwriting agreement contains covenants of indemnity between the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements
Each of our executive officers and directors and all of our other
stockholders have agreed not to offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to any shares of
common stock or any options or warrants to purchase any shares of common stock,
or any securities convertible into or exchangeable for shares of common stock
owned as of the date of this prospectus or thereafter acquired directly by those
holders or with respect to which they have the power of disposition, without the
prior written consent of Lehman Brothers Inc. This restriction terminates after
the close of trading of the shares on the 180th day of (and including) the day
the shares commenced trading on the Nasdaq National Market. However, Lehman
Brothers Inc. may, in its sole discretion and at any time or from time to time
before the termination of the 180-day period, without notice, release all or any
portion of the securities subject to lock-up agreements. There are no existing
agreements between the Representatives and any of our shareholders who have
executed a lock-up agreement providing consent to the sale of shares prior to
the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of Lehman Brothers Inc., subject to certain
exceptions, consent to the disposition of any shares held by shareholders
subject to lock-up agreements prior to the expiration of the lock-up period, or
issue, sell, contract to sell, or otherwise dispose of, any shares of common
stock, any options or warrants to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares of
common stock other than our sale of shares in this offering, the issuance of our
common stock upon the exercise of outstanding options or warrants, and the
issuance of options under existing stock option and incentive plans provided
that those options do not vest prior to the expiration of the lock-up period.
See "Shares Eligible for Future Sale."
Listing
We have applied to list the shares of our common stock for quotation on the
Nasdaq National Market under the symbol "WSSI."
74
<PAGE> 79
Syndicate Short Sales
The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares from the
issuer in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that might otherwise exist in the open market.
Stamp Taxes
Purchasers of shares of our common stock offered by this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
Offer and Sales in Canada
Any offers in Canada will be made only under an exception from the
requirements to file a prospectus in each province of Canada where a sale is
made.
Directed Share Program
At our request, certain of the underwriters have reserved up to 6.0% of the
shares of our common stock, the directed shares, for sale at the initial public
offering price to persons who are our directors, officers, employees, customers,
suppliers or who are otherwise associated with us and our affiliates, and who
have advised us of their desire to purchase such shares. The number of shares of
our common stock available for sale to the general public will be reduced to the
extent of sales of the directed shares to any of the persons for whom they have
been reserved. Any shares not so purchased will be offered by the underwriters
on the same basis as all other shares of common stock offered hereby. We have
agreed to indemnify those certain underwriters against certain liabilities and
expenses, including liabilities under the Securities Act, in connection with the
sales of directed shares.
LEGAL MATTERS
Gray Cary Ware & Freidenrich LLP in San Diego, California will pass upon
the validity of the shares of common stock offered by this prospectus and
certain other legal matters for us. Brobeck, Phleger & Harrison LLP in Irvine,
California will pass upon certain legal matters for the underwriters.
75
<PAGE> 80
EXPERTS
The audited financial statements at December 31, 1998 and 1999 and for each
of the three years in the period ended December 31, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, including the exhibits with the
registration statement, with respect to the shares offered by this prospectus.
This prospectus does not contain all the information contained in the
registration statement. For further information with respect to us and the
shares to be sold in this offering, we refer you to the registration statement.
Statements or descriptions contained in this prospectus as to the contents of
any contract, agreement or other document to which we make reference or which
are filed as exhibits are not necessarily complete. In each instance, we refer
you to the copy of the contract, agreement or other document filed as an exhibit
to the registration statement, each statement being qualified in all respects by
the more complete description of the matter involved.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file at the Security and
Exchange Commission's public reference room at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Security and Exchange
Commission's regional offices located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the operation of the public reference rooms. You can
receive copies of these documents upon payment of a duplicating fee by writing
to the Securities and Exchange Commission. Our Commission filings, including the
registration statement, will also be available to you on the Commission's
Internet site at http://www.sec.gov. We intend to send our stockholders annual
reports containing audited consolidated financial statements and quarterly
reports containing unaudited financial statements for the first three quarters
of each fiscal year.
76
<PAGE> 81
WEBSIDESTORY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and as of June 30, 2000 (unaudited)....................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999 and for the Six Months
Ended June 30, 1999 and 2000 (unaudited).................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1998 and 1999 and
for the Six Months Ended June 30, 2000 (unaudited)........ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 and for the Six Months
Ended June 30, 1999 and 2000 (unaudited).................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 82
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
WebSideStory, Inc.
The stock split and reincorporation described in Note 1 to the consolidated
financial statements have not been consummated at April 17, 2000. When they have
been consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of WebSideStory, Inc. and its subsidiary (the "Company")
at December 31, 1998 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above."
PRICEWATERHOUSECOOPERS LLP
San Diego, California
April 17, 2000, except for the portion
of Note 1 discussing the
stock split to which
the date is , 2000
and the portion of Note 1
discussing the reincorporation
to which the date is , 2000
F-2
<PAGE> 83
WEBSIDESTORY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
BALANCE
DECEMBER 31, SHEET
----------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
------ -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 330 $ 3,254 $ 4,431 $ 4,431
Restricted cash........................................... -- 100 -- --
Accounts receivable, net of allowance for doubtful
accounts of $0, $76 and $172............................ 93 636 1,953 1,953
Receivable from leasing company........................... 72 -- -- --
Income taxes receivable................................... -- 704 570 570
Deferred tax assets....................................... 143 921 96 96
Prepaid expenses and other current assets................. 106 204 553 553
------ -------- -------- --------
Total current assets.................................... 744 5,819 7,603 7,603
Property and equipment, net................................. 688 1,937 3,076 3,076
Acquired technology, net.................................... 141 -- -- --
Software development costs, net............................. 437 850 843 843
Intangible and other assets................................. 14 192 211 211
------ -------- -------- --------
$2,024 $ 8,798 $ 11,733 $ 11,733
====== ======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 112 $ 787 $ 511 $ 511
Accrued expenses.......................................... 42 243 1,597 1,597
Deferred revenue.......................................... 254 282 101 101
Amounts owed to customers................................. 20 174 64 64
Income taxes payable...................................... 274 -- -- --
Note payable to former president.......................... 50 -- -- --
Current portion of note payable to former stockholder..... 46 50 69 69
Current portion of capital lease obligations.............. 39 74 44 44
Obligation to redeem the redeemable preferred stock....... -- -- -- 16,750
------ -------- -------- --------
Total current liabilities............................... 837 1,610 2,386 19,136
Note payable to former stockholder, less current portion.... 231 165 113 113
Capital lease obligations, less current portion............. 70 29 22 22
Line of credit.............................................. -- -- 1,258 1,258
Deferred tax liabilities.................................... 204 322 96 96
Other long-term liabilities................................. -- -- 193 193
------ -------- -------- --------
Total liabilities....................................... 1,342 2,126 4,068 20,818
------ -------- -------- --------
Commitments (Note 8)
Redeemable preferred stock, 16,788,858 shares authorized:
Redeemable preferred stock, no par value; 100, 111.66667
and 0 shares designated, issued and outstanding at
December 31, 1999, June 30, 2000 and June 30, 2000 pro
forma; redemption value of $16,750,000.................. -- 8,636 9,480 --
Convertible redeemable preferred stock, no par value;
15,034,712, 16,788,746 and 0 shares designated, issued
and outstanding at December 31, 1999, June 30, 2000 and
June 30, 2000 pro forma; redemption value of
$16,750,000............................................. -- 20,829 22,931 --
------ -------- -------- --------
-- 29,465 32,411 --
------ -------- -------- --------
Stockholders' equity (deficit)
Common stock, $0.001 par value; 25,000,000, 30,827,531,
60,000,000 and 60,000,000 shares authorized at December
31, 1998 and 1999 and at June 30, 2000 and June 30, 2000
pro forma; 16,666,666, 14,682,757, 16,577,259 and
24,466,325 shares issued and outstanding at December 31,
1998 and 1999 and at June 30, 2000 and June 30, 2000 pro
forma................................................... 3 3 5 13
Additional paid-in capital................................ -- 6,824 18,188 33,841
Unearned stock-based compensation......................... -- (4,118) (11,378) (11,378)
Retained earnings (accumulated deficit)................... 679 (25,502) (31,561) (31,561)
------ -------- -------- --------
Total stockholders' equity (deficit).................... 682 (22,793) (24,746) (9,085)
------ -------- -------- --------
$2,024 $ 8,798 $ 11,733 $ 11,733
====== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE> 84
WEBSIDESTORY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Information services -- advertising
sales.................................... $ 1,460 $ 4,587 $ 8,521 $ 4,314 $ 5,130
Information services -- subscriptions...... -- -- 74 -- 1,422
Technology services........................ 160 918 1,005 451 371
----------- ----------- ----------- ----------- -----------
Total revenue............................ 1,620 5,505 9,600 4,765 6,923
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of revenue............................ -- -- -- -- 255
Sales and marketing........................ 296 1,103 3,414 1,292 2,600
Technology development and operations...... 245 1,423 3,412 1,425 3,427
General and administrative................. 581 1,513 2,699 1,255 2,869
Stock-based compensation(*)................ -- -- 1,998 -- 3,515
----------- ----------- ----------- ----------- -----------
Total operating expenses................. 1,122 4,039 11,523 3,972 12,666
----------- ----------- ----------- ----------- -----------
Income (loss) from operations................ 498 1,466 (1,923) 793 (5,743)
Other income (expense):
Interest expense........................... -- (31) (40) (21) (29)
Interest income............................ 5 26 118 22 93
Other income............................... -- -- 110 110 83
----------- ----------- ----------- ----------- -----------
Income (loss) before provision for (benefit
from) income taxes......................... 503 1,461 (1,735) 904 (5,596)
Provision for (benefit from) income taxes.... 199 624 (550) 287 463
----------- ----------- ----------- ----------- -----------
Net income (loss)............................ 304 837 (1,185) 617 (6,059)
Dividend to preferred stockholders as a
result of change in conversion terms of
convertible redeemable preferred stock
(Note 5)................................... -- -- (14,992) -- --
Accretion of discount on redeemable preferred
stock...................................... -- -- (467) (28) (451)
Accretion related to beneficial conversion
feature embedded in convertible redeemable
preferred stock............................ -- -- -- -- (2,719)
----------- ----------- ----------- ----------- -----------
Net income (loss) attributable to common
stockholders............................... $ 304 $ 837 $ (16,644) $ 589 $ (9,229)
=========== =========== =========== =========== ===========
Net income (loss) per share attributable to
common stockholders:
Basic...................................... $ 0.01 $ 0.05 $ (1.07) $ 0.04 $ (0.60)
=========== =========== =========== =========== ===========
Diluted.................................... $ 0.01 $ 0.04 $ (1.07) $ 0.03 $ (0.60)
=========== =========== =========== =========== ===========
Shares used in computing net income (loss)
per share attributable to common
stockholders:
Basic...................................... 30,303,030 18,011,623 15,595,899 16,524,175 15,271,693
=========== =========== =========== =========== ===========
Diluted.................................... 30,303,030 18,760,557 15,595,899 17,890,255 15,271,693
=========== =========== =========== =========== ===========
Unaudited pro forma net loss per share
attributable to common stockholders, basic
and diluted................................ $ (0.79) $ (0.36)
=========== ===========
Shares used in computing unaudited pro forma
net loss per share attributable to common
stock-holders, basic and diluted........... 20,420,966 24,217,269
=========== ===========
------------
(*) Stock-based compensation:
Sales and marketing.................... $ -- $ -- $ 44 $ -- $ 400
Technology development and
operations........................... -- -- 34 -- 321
General and administrative............. -- -- 1,920 -- 2,794
----------- ----------- ----------- ----------- -----------
$ -- $ -- $ 1,998 $ -- $ 3,515
=========== =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE> 85
WEBSIDESTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK NOTES RETAINED
-------------------- ADDITIONAL RECEIVABLE UNEARNED EARNINGS STOCKHOLDERS'
SHARES PAID-IN FROM STOCK-BASED (ACCUMULATED EQUITY
ISSUED AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) (DEFICIT)
----------- ------ ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996..... 30,303,030 $ 5 $ -- $ -- $ -- $ 1 $ 6
Net income....................... -- -- -- -- -- 304 304
----------- --- -------- ----- -------- -------- --------
BALANCE AT DECEMBER 31, 1997..... 30,303,030 5 -- -- -- 305 310
Repurchase of common stock (Note
3)............................. (13,636,364) (2) -- -- -- (463) (465)
Net income....................... -- -- -- -- -- 837 837
----------- --- -------- ----- -------- -------- --------
BALANCE AT DECEMBER 31, 1998..... 16,666,666 3 -- -- -- 679 682
Exercise of stock options........ 104,245 4 -- -- -- -- 4
Tax benefit from exercise of
stock options.................. -- -- 476 -- -- -- 476
Repurchase of common stock as
part of preferred stock
financing (Note 5)............. (2,088,154) (4) -- -- -- (4,971) (4,975)
Constructive dividend to common
stockholders as a result of
common stock repurchase (Note
5)............................. -- -- -- -- -- (20,025) (20,025)
Dividend to preferred
stockholders as a result of
change in conversion terms of
convertible redeemable
preferred stock (Note 5)....... -- -- 14,992 -- -- -- 14,992
Dividend to preferred
stockholders recorded in
additional paid-in capital due
to accumulated deficit (Note
5)............................. -- -- (14,992) -- -- -- (14,992)
Unearned stock-based
compensation................... -- -- 6,116 -- (6,116) -- --
Amortization of unearned
stock-based compensation....... -- -- -- -- 1,998 -- 1,998
Accretion of discount on
redeemable preferred stock..... -- -- (467) -- -- -- (467)
Adjustment of premium on
convertible redeemable
preferred stock................ -- -- 699 -- -- -- 699
Net loss......................... -- -- -- -- -- (1,185) (1,185)
----------- --- -------- ----- -------- -------- --------
BALANCE AT DECEMBER 31, 1999..... 14,682,757 3 6,824 -- (4,118) (25,502) (22,793)
JANUARY 1, 2000 TO JUNE 30, 2000
(UNAUDITED)
Exercise of stock options........ 1,894,502 2 1,527 (111) (1,391) -- 27
Unearned stock-based
compensation................... -- -- 9,273 -- (9,273) -- --
Beneficial conversion feature
embedded in convertible
redeemable preferred stock..... -- -- 2,719 -- -- -- 2,719
Accretion related to beneficial
conversion feature............. -- -- (2,719) -- -- -- (2,719)
Issuance of warrant.............. -- -- 397 -- -- -- 397
Amortization of stock-based
compensation................... -- -- -- -- 3,404 -- 3,404
Forgiveness of promissory note
related to exercise of
options........................ -- -- -- 111 -- -- 111
Accretion of discount on
redeemable preferred stock..... -- -- (451) -- -- -- (451)
Adjustment of premium on
convertible redeemable
preferred stock................ -- -- 618 -- -- -- 618
Net loss......................... -- -- -- -- -- (6,059) (6,059)
----------- --- -------- ----- -------- -------- --------
BALANCE AT JUNE 30, 2000
(UNAUDITED).................... 16,577,259 $ 5 $ 18,188 $ -- $(11,378) $(31,561) $(24,746)
=========== === ======== ===== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE> 86
WEBSIDESTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ----------------
1997 1998 1999 1999 2000
----- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 304 $ 837 $(1,185) $ 617 $(6,059)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 58 517 1,393 499 1,237
Deferred income taxes................................... (59) 120 (660) -- 599
Non-cash stock-based compensation....................... -- -- 1,998 -- 3,404
Forgiveness of promissory note related to exercise of
stock options......................................... -- -- -- -- 111
Changes in assets and liabilities, net of effect of
acquisition in 1998:
Accounts receivable................................... (4) (89) (543) (189) (1,317)
Income taxes receivable............................... -- -- (228) (16) 134
Prepaid expenses and other assets..................... (26) (94) (376) 6 (268)
Accounts payable and accrued expenses................. 343 (127) 876 1,110 1,078
Deferred revenue...................................... 120 128 28 238 (181)
Amounts owed to customers............................. -- 20 154 (20) (110)
Income taxes payable.................................. 256 16 (274) (274) --
Other long-term liabilities........................... -- -- -- -- 193
----- ------- ------- ------ -------
Net cash provided by (used in) operating
activities....................................... 992 1,328 1,183 1,971 (1,179)
----- ------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (298) (553) (1,643) (499) (1,644)
Capitalization of software development costs.............. (274) (447) (1,212) (385) (725)
Acquisition of Reword Corporation, net of cash acquired
(Note 3)................................................ -- (142) -- -- --
----- ------- ------- ------ -------
Net cash used in investing activities.............. (572) (1,142) (2,855) (884) (2,369)
----- ------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options................................. -- -- 4 4 27
Principal payments on note payable to former president.... -- (100) (50) (50) --
Principal payments on note payable to former
stockholder............................................. -- (58) (62) (15) (33)
Repurchase of common stock -- cash portion................ -- (130) -- -- --
Line of credit draws...................................... -- -- -- -- 1,258
Proceeds from sale of preferred stock and warrants, net of
issuance costs (Note 5)................................. -- -- 4,697 4,706 3,510
Proceeds from sale-leaseback transaction (Note 2)......... -- -- 72 72 --
Principal payments on capital leases...................... -- (4) (65) (30) (37)
----- ------- ------- ------ -------
Net cash (used in) provided by financing
activities....................................... -- (292) 4,596 4,687 4,725
----- ------- ------- ------ -------
Net increase (decrease) in cash and cash equivalents........ 420 (106) 2,924 5,774 1,177
Cash and cash equivalents at beginning of period............ 16 436 330 330 3,254
----- ------- ------- ------ -------
Cash and cash equivalents at end of period.................. $ 436 $ 330 $ 3,254 $6,104 $ 4,431
===== ======= ======= ====== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................... $ -- $ 31 $ 40 $ 21 $ 29
Cash paid for income taxes................................ 2 488 303 275 --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
TRANSACTIONS
Property and equipment acquired under capitalized
leases.................................................. $ -- $ 41 $ 59 $ 58 $ --
Execution of note payable as partial consideration for
stock repurchase........................................ -- 400 -- -- --
Execution of note payable to former president as partial
consideration in connection with the acquisition of
Reword Corporation...................................... -- 150 -- -- --
Execution of sale-leaseback transaction in December 1998
for which proceeds were funded in January 1999.......... -- 72 -- -- --
Tax benefit from exercise of nonstatutory stock options... -- -- 476 476 --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE> 87
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. THE COMPANY
BUSINESS
WebSideStory, Inc. (the "Company") was founded and commenced operations on
September 16, 1996. The Company provides detailed, real-time Internet web site
user behavior information and analysis.
The Company's basic information services are provided to subscribers in
exchange for the right to display banner advertisements on their web sites, from
which the Company derives advertising sales revenue. These banner advertisements
are either those of the Company, which direct Internet traffic to the Company's
web sites, or those of advertising customers, which direct traffic to the
advertisers' web sites. Advertising sales revenue is generated from the sale of
banner advertisements on the Company's web sites or the web sites of its
subscribers. Advertising contracts range in duration from one to three months.
Advertising rates are typically based upon the display of a minimum number of
"impressions," or times that an advertisement appears in pages viewed by users
of web sites, over the term of the contract. Rates for some contracts may also
be based on a minimum number of "click-throughs," where an end user must
actually click through a banner advertisement. From the Company's inception
through March 31, 2000, the Company derived a substantial majority of its
revenue from the sale of advertising to web sites that contained adult-oriented
content. In 1997, 1998 and 1999, revenue from the sale of advertising to these
web sites constituted 100%, 90% and 74% of total advertising sales revenue,
respectively. In the first quarter of 2000, the Company adopted a policy to
eliminate the sale of advertising to such web sites, and as of May 31, 2000, the
Company was no longer earning any revenue from the sale of advertising to these
web sites. For the six months ended June 30, 2000, advertising sales revenue
from these web sites constituted 39% of total advertising sales revenue.
Subscription services involve the sale of more advanced information
services to subscribers for a fee, which is either flat or based on the actual
number of web sites and page views monitored by the Company's service. Contracts
for subscription services range in duration from one month to a year.
Revenue derived from technology services contracts, which consist primarily
of Web hosting contracts, generally have three-month terms.
The Company's business consists of a single operating segment. The
Company's operations were located solely in the United States through December
1999. In February 2000, the Company established a wholly-owned subsidiary in
France, WebSideStory SAS, in order to pursue the sale of its products and
services in that market. Revenue from customers located outside of the United
States were immaterial for all of the periods presented. No single customer
accounted for 10% or more of the Company's revenue in any of the periods
presented.
REINCORPORATION
In April 2000, the Company's Board of Directors (the "Board") authorized
the reincorporation of the Company in the State of Delaware. The reincorporation
is expected to be certified by the State of Delaware before the effective date
of the Company's proposed initial public offering ("IPO").
STOCK SPLIT
In connection with its proposed IPO, the Company will be effecting a
one-for-six reverse common stock split. All per share and share amounts in the
consolidated financial statements have been retroactively restated to reflect
the effect of this reverse stock split.
F-7
<PAGE> 88
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
If the IPO contemplated by the Company is consummated as presently
anticipated, all of the convertible redeemable preferred stock outstanding as of
the closing will automatically convert into 7,889,066 shares of common stock
based on the shares of convertible redeemable preferred stock outstanding at
June 30, 2000. In addition, all of the redeemable preferred stock outstanding as
of the closing will be automatically redeemed for $16,750 (Note 5) using the
proceeds of the IPO. The obligation to redeem the redeemable preferred stock is
reflected in the pro forma balance sheet as a current liability. The unaudited
pro forma balance sheet as of June 30, 2000 reflects this conversion and
obligation as if such conversion had occurred and obligation had existed as of
June 30, 2000.
UNAUDITED FINANCIAL STATEMENTS
The interim financial statements as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 are unaudited and have been prepared on the same
basis as the audited financial statements. In the opinion of management, these
unaudited financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
information set forth therein in accordance with accounting principles generally
accepted in the United States. Operating results for interim periods are not
necessarily indicative of operating results for an entire year. All financial
statement disclosures related to the six months ended June 30, 1999 and 2000 and
subsequent to June 30, 2000 are unaudited.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of WebSideStory, Inc. and its wholly-owned subsidiary, Reword Corporation
("Reword"). All intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity date at
date of purchase of three months or less to be cash equivalents. Cash
equivalents consist of certificates of deposit.
RESTRICTED CASH
Restricted cash consists of a $100 certificate of deposit which is
restricted in connection with litigation with a competitor. In January 2000, the
amount became unrestricted as a result of settlement of the litigation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method based upon
the estimated useful lives of the assets ranging from three to five years.
Amortization of leasehold improvements is computed using the shorter of the term
of the
F-8
<PAGE> 89
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
related leases or the estimated useful lives of the improvements. Expenditures
for maintenance and repairs are charged to operations as incurred.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. An impairment loss would be
recognized when an asset's fair value, determined based on undiscounted cash
flows expected to be generated by the asset, is less than its carrying amount.
Any required impairment loss would be measured as the amount by which the
asset's carrying value exceeds its fair value, and would be recorded as a
reduction in the carrying value of the related asset and a charge to results of
operations. See Note 3 regarding an impairment of acquired technology identified
by the Company during 1999. No other impairment losses have been identified by
the Company.
REVENUE RECOGNITION
Advertising sales revenue is recognized ratably over the period in which
the related advertisements are displayed, provided that no significant Company
obligations to provide additional advertising remain at the end of the
respective periods. Company obligations typically include the guarantee of a
minimum number of impressions or click-throughs. Amounts owed to customers arise
to the extent that minimum guaranteed impressions or click-throughs under
prepaid advertising contracts are not met at the completion of the service
period. Deferred revenue represents undelivered impressions or click-throughs
under prepaid advertising contracts that have not been completed at the end of
an accounting period. Cost of revenue consists of amounts owed to subscribers
for the right to display the banner advertisements of advertising customers on
their web sites. Advertising revenue in these circumstances is recorded at gross
amounts since the Company acts as a principal in its relationship with
advertising customers. The Company contracts with advertisers, sets rates and
payment terms, decides to extend credit, and bears the risk of loss for
non-payment.
Subscription revenue is recognized ratably over the term of the related
service periods or on the basis of the actual number of page views and web sites
monitored by the Company's service. Revenue derived from technology services is
recognized ratably over the term of the related service periods. The Company
does not engage in any multiple element revenue transactions. Revenue is
recorded net of any discounts.
Revenue from barter transactions is recorded at the fair value of the
services provided in the transactions, if determinable. The Company has not
recorded any barter revenue from the provision of basic information services to
subscribers in exchange for the right to display banner advertisements on their
web sites. This is because the fair value of the services provided is not
determinable, as the Company does not have sufficient reliable history of
selling these services for cash, marketable securities or other barter
consideration that is readily convertible to a known amount of cash.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for 1997,
1998 and 1999 totaled $35, $192 and $955, respectively.
TECHNOLOGY DEVELOPMENT AND OPERATIONS COSTS
Technology development and operations costs include expenses incurred by
the Company to develop, enhance, manage, maintain and operate the Company's web
sites. The software development component of technology development and
operations costs is accounted for in accordance with Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." In accordance with SOP 98-1, internal and external costs incurred
to develop internal-use computer software
F-9
<PAGE> 90
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
during the application development stage are capitalized. Application stage
costs generally include software configuration, coding, installation to hardware
and testing. Costs of upgrades and enhancements that result in additional
functionality are also capitalized. Costs incurred for maintenance and minor
upgrades and enhancements are expensed as incurred. Capitalized software
development costs consist primarily of employee and employee-related costs and
are amortized on a straight-line basis over the estimated useful lives of the
related software applications ranging from 2 months to 30 months. The estimated
useful lives are based on planned or expected replacement or significant
modification of software applications, in response to the rapid rate of change
in the Internet industry and technology in general. The Company capitalized
software development costs of $274, $447 and $1,211 during 1997, 1998 and 1999.
Amortization expense for 1997, 1998 and 1999 totaled $6, $277 and $799.
The following table details, by useful life, the balance of capitalized
software development costs at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE (IN MONTHS) 1998 1999
----------------------- ----- -------
<S> <C> <C>
2-5.................................................. $ 6 $ 24
6-10................................................. 284 1,170
11-15................................................ 197 383
16-20................................................ 227 227
21-25................................................ 1 19
26-30................................................ 5 109
----- -------
720 1,932
Accumulated amortization............................. (283) (1,082)
----- -------
$ 437 $ 850
===== =======
</TABLE>
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its cash and temporary cash
investments with reputable financial institutions for which credit loss is not
anticipated. Accounts receivable are generally unsecured and are derived from
revenue earned from customers located primarily in the United States. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses as considered necessary. At December 31,
1998, no such allowances were established as all amounts were considered by
management to be fully collectible. At December 31, 1999 and June 30, 2000, the
Company established an allowance for potential credit losses of $76 and $172.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts shown for the Company's cash equivalents approximate
their fair values due to the short-term maturity of these instruments. The
carrying amounts shown for the Company's notes payable and capital lease
obligations are also considered by management to be reasonable indicators of
their fair values based upon borrowing rates that are currently available for
obligations of similar terms and maturities.
RECEIVABLE FROM LEASING COMPANY
In December 1998, the Company executed a sale-leaseback transaction with a
leasing company, simultaneous to which title to certain property and equipment
previously owned by the Company was transferred to the leasing company. The
leasing company funded the related proceeds to the Company in January 1999.
Accordingly, the Company has recorded a receivable due from the leasing company
at
F-10
<PAGE> 91
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, 1998. The proceeds received were equal to the net book value of the
assets transferred; therefore, no gain or loss was recorded in connection with
this sale-leaseback transaction. The Company has accounted for the leased assets
as a capital lease in the accompanying consolidated financial statements.
INCOME TAXES
The Company provides for income taxes utilizing the liability method. Under
the liability method, current income tax expense or benefit is the amount of
income taxes expected to be payable or refundable for the current year. A
deferred income tax asset or liability is computed for the expected future
impact of differences between the financial reporting and tax bases of assets
and liabilities and for the expected future tax benefit to be derived from tax
credit and loss carryforwards. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Tax rate
changes are reflected in income during the period such changes are enacted.
EMPLOYEE AND DIRECTOR STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee and director
stock-based compensation plans using the intrinsic value method and provides pro
forma disclosures of net income (loss) and net income (loss) per share as if a
fair value-based method had been applied in measuring compensation expense.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair value of the Company's common stock at the date of grant over
the amount an employee must pay to acquire the stock. Stock-based compensation
is amortized over the related vesting periods using an accelerated graded method
in accordance with Financial Accounting Standards Board Interpretation ("FIN")
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans."
NON-EMPLOYEE STOCK-BASED COMPENSATION
Stock-based awards issued to non-employees for goods or services are
accounted for using fair value methods and are remeasured to estimated fair
value at each period end until the earlier of the date that performance by the
non-employee is complete or the awards are fully vested. Estimated fair value is
generally based on the fair value of the Company's common stock.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for all periods presented consists solely of
net income (loss).
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is effective for fiscal
years beginning after June 15, 2000. Because the Company holds no derivative
financial instruments and does not engage in any hedging activities, adoption of
SFAS No. 133 is not expected to have a material impact on the Company's
financial position or results of operations.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," provides
the views of the Securities and Exchange Commission in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company has adopted the requirements of SAB No. 101.
Emerging Issues Task Force ("EITF") No. 00-02, "Accounting for Web Site
Development Costs," is effective for fiscal quarters beginning after June 30,
2000, although earlier application is encouraged. The
F-11
<PAGE> 92
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company has been accounting for web site development costs in accordance with
EITF No. 00-02 since its inception.
FIN 44, "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB 25," clarifies the application of APB
25 for (a) the definition of employee for purposes of applying APB 25, (b) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (c) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998 or January 12, 2000. Adoption of FIN 44 did not and is not expected to
have a material impact on the Company's financial position or results of
operations.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Weighted average shares exclude shares of unvested
common stock subject to lapsing repurchase rights by the Company. Diluted
earnings (loss) per share is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding
during the period increased to include dilutive potential common shares that
were outstanding during the period. The dilutive effect of outstanding stock
options is reflected in diluted earnings per share by application of the
treasury stock method. The Company has excluded all convertible redeemable
preferred stock, outstanding stock options and unvested common stock subject to
repurchase from the calculation of diluted loss per share for the year ended
December 31, 1999 and the six months ended June 30, 1999 and June 30, 2000
because such securities are antidilutive for these periods. The total number of
potential common shares excluded from the calculation of diluted loss per share
for the year ended December 31, 1999 was 10,625,874, consisting of 7,064,845
shares pertaining to the convertible redeemable preferred stock and 3,561,029
shares pertaining to outstanding common stock options. The total number of
potential common shares excluded from the calculation of diluted income per
share for the six months ended June 30, 1999 was 383,333 shares pertaining to
outstanding common stock options with an exercise price above the average fair
value of the common stock during this period. The total number of potential
common shares excluded from the calculation of diluted loss per share for the
six months ended June 30, 2000 was 12,328,473, consisting of 7,889,066 shares
pertaining to the convertible redeemable preferred stock, 3,420,747 shares
pertaining to outstanding common stock options and warrants, and 1,018,660
shares of unvested common stock subject to repurchase.
F-12
<PAGE> 93
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth the computation of basic and diluted
earnings (loss) per share for 1997, 1998 and 1999 and the six months ended June
30, 1999 and 2000:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss) attributable
to common stockholders..... $ 304 $ 837 $ (16,644) $ 589 $ (9,229)
=========== =========== =========== =========== ===========
Denominator:
Denominator for basic earnings
(loss) per
share -- weighted average
shares outstanding......... 30,303,030 18,011,623 15,595,899 16,524,175 15,271,693
Effect of dilutive securities:
Dilutive stock options
outstanding.............. -- 748,934 -- 858,660 --
Convertible redeemable
preferred stock.......... -- -- -- 507,420 --
----------- ----------- ----------- ----------- -----------
Denominator for diluted
earnings (loss) per
share -- adjusted weighted
average shares
outstanding................ 30,303,030 18,760,557 15,595,899 17,890,255 15,271,693
=========== =========== =========== =========== ===========
Basic earnings (loss) per
share......................... $ 0.01 $ 0.05 $ (1.07) $ 0.04 $ (0.60)
Diluted earnings (loss) per
share......................... $ 0.01 $ 0.04 $ (1.07) $ 0.03 $ (0.60)
</TABLE>
Unaudited pro forma net loss per share is computed as described above and
also gives effect, even if antidilutive, to potential common shares from the
convertible redeemable preferred stock that will automatically convert upon the
closing of the Company's proposed IPO (using the as-if converted method) and to
the number of common shares necessary (at the assumed offering price) to repay
the redeemable preferred stock that is automatically redeemable upon the closing
of the proposed IPO. Unaudited pro forma net loss per share for the year ended
December 31, 1999 excludes 3,561,029 potential common shares related to common
stock options as their impact would be antidilutive. Unaudited pro forma net
loss per share for the six months ended June 30, 2000 excludes 3,420,747
potential common shares related to common stock options and warrants and
1,018,660 shares of unvested common stock subject to repurchase as their impact
would be antidilutive.
F-13
<PAGE> 94
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A reconciliation of net loss attributable to common stockholders and
weighted average shares used in computing basic and diluted earnings (loss) per
share to unaudited basic and diluted pro forma net loss per share is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss attributable to common stockholders used in
computing basic and diluted loss per share.............. $ (16,644) $ (9,229)
Elimination of accretion of discount on redeemable
preferred stock......................................... 467 451
----------- -----------
Net loss attributable to common stockholders used in
computing basic and diluted pro forma net loss per
share................................................... $ (16,177) $ (8,778)
=========== ===========
Shares used in computing basic and diluted loss per
share................................................... 15,595,899 15,271,693
Adjustment to reflect assumed conversion of convertible
redeemable preferred stock.............................. 3,813,081 7,069,374
Adjustment to reflect assumed issuance of common stock to
repay redeemable preferred stock (at assumed offering
price of $8 per share).................................. 1,011,986 1,876,202
----------- -----------
Shares used in computing basic and diluted pro forma net
loss per share.......................................... 20,420,966 24,217,269
=========== ===========
Pro forma net loss per share, basic and diluted........... $ (0.79) $ (0.36)
</TABLE>
The amount of the remaining unamortized discount on the redeemable
preferred stock on the date that it is actually redeemed will be recorded as a
dividend in arriving at net income (loss) attributable to common stockholders.
The unamortized discount as of June 30, 2000 was $7,270.
3. RELATED PARTY TRANSACTIONS
ACQUISITION OF REWORD CORPORATION AND EXECUTION OF NOTE PAYABLE
On January 7, 1998, the Company acquired all of the outstanding capital
stock of Reword for total consideration of $300, consisting of $150 in cash and
the execution of a $150 note payable to the seller. Prior to its acquisition by
the Company, Reword was wholly-owned by the Company's primary stockholder and
former president. Because of the presence of a significant third-party minority
ownership interest in the Company at the date of the acquisition, the
acquisition has been recorded as a purchase for accounting purposes. The
purchase price was allocated to the assets and liabilities acquired based on
their estimated fair values. Of the total purchase price, $212 was allocated to
the language translation software acquired, which was being amortized over its
estimated useful life of three years. Amortization expense related to the
purchased technology totaled $71 during 1998 and 1999. At December 31, 1999, the
Company wrote off the remaining $70 balance of the acquired technology to
technology development and operations expenses. Management decided not to
further develop or market the software due to the Company's focus on selling
subscriptions to advanced web site analysis and because the technology was not
complementary to the Company's web site analysis technology. The Company's
original intentions were to further develop and license the software to assist
companies with the translation of the language elements within software
applications. The Company has not devoted any resources or incurred any costs in
the further development of this software. The Company does not intend to use
this software in current or future projects.
The note payable to the Company's former president bore interest at the
rate of 7% per annum and was payable in monthly installments of $10 plus accrued
interest through April 1, 1999. The note was repaid in
F-14
<PAGE> 95
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
full during the year ended December 31, 1999. Interest expense related to this
note totaled $7 and $2 during 1998 and 1999.
During 1997, the Company paid Reword $184 for consulting services and for
the use of certain equipment and facilities on a rental basis.
STOCK REPURCHASE AND EXECUTION OF NOTE PAYABLE
In connection with a Stock Purchase Agreement dated February 6, 1998, the
Company repurchased all 13,636,364 outstanding shares of common stock held by
one of the founding stockholders for a per share purchase price of $0.039 and an
aggregate purchase price of $530, consisting of $130 in cash and the execution
of a $400 note payable to the former stockholder. The common stock was initially
sold to the founding stockholder for $2. The note, which does not bear a stated
interest rate, is payable in quarterly installments of $20 through January 1,
2003. However, in the event of a public offering of the Company's common stock,
upon the sale or transfer of the Company's business or assets or upon the
dissolution of the Company, the outstanding note balance would become
immediately payable. The Company recorded a discount in the amount of $65
relating to the imputation of interest associated with this note and is
amortizing such discount to interest expense over the term of the note using an
effective interest rate of 7% per annum, which it believes to be a reasonable
indicator of its incremental borrowing rate. At December 31, 1998 and 1999, the
balance of this note was $277 and $215, net of an unamortized discount totaling
$43 and $25. Future minimum payments under this note, including principal and
interest, total $60, $80, $80 and $20 during 2000, 2001, 2002 and 2003.
4. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
----- ------
<S> <C> <C>
PROPERTY AND EQUIPMENT:
Computers and office equipment............................ $ 805 $1,902
Furniture and fixtures.................................... 96 510
Leasehold improvements.................................... 7 184
----- ------
908 2,596
Accumulated depreciation and amortization................. (220) (659)
----- ------
$ 688 $1,937
===== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
----- ------
<S> <C> <C>
ACCRUED EXPENSES:
Accrued bonuses and commissions........................... $ -- $ 83
Accrued vacation.......................................... 15 67
Accrued professional fees................................. 10 60
Other accrued expenses.................................... 17 33
----- ------
$ 42 $ 243
===== ======
</TABLE>
5. REDEEMABLE PREFERRED STOCK
PREFERRED STOCK TRANSACTION
On June 18, 1999, new investors purchased 2,088,154 shares of common stock
from the Company's two founders and a key executive for an aggregate purchase
price of $25,000 or $11.97 per share. At the same
F-15
<PAGE> 96
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
time, the investors purchased 100 shares of redeemable preferred stock and
15,034,712 shares of convertible redeemable preferred stock from the Company for
aggregate consideration of 1) $5,000 and 2) the contribution of the shares of
common stock purchased from the founders and key executive. The fair value of
the common stock purchased from the founders and key executive was $4,975 or
$2.38 per share, resulting in an excess of consideration paid to the Company's
founders and key executive over the fair value of the common stock purchased of
$9.59 per share or a total of $20,025. For financial reporting purposes, the
fair value of the common stock purchased is treated as a repurchase of the
common stock by the Company. Because the common stock was purchased on a pro
rata basis from the founders and key executive, the excess of the purchase price
of the common stock over its fair value has been recorded as a dividend and
charged to accumulated deficit.
The aggregate consideration to the Company of $29,697 ($30,000 less
issuance costs of $303) has been allocated to the two securities based on their
relative fair values at the time of issuance. The value ascribed to the
redeemable preferred stock of $8,170 ($8,253 less issuance costs of $83) is
based on its present value, as the redeemable preferred stock is redeemable for
$15,000 on June 18, 2005 but is not convertible and has no stated interest or
dividend rights. Because the redeemable preferred stock has a fixed redemption
term, the resulting discount of $6,830 is being accreted, using the effective
interest method, over the period from issuance until redemption first becomes
available to the holders of the security on June 18, 2005. The value ascribed to
the convertible redeemable preferred stock of $21,527 ($21,747 less issuance
costs of $220) is based on the fair value per common share implied by the total
consideration paid by the investors and the Conversion Rate into which the
preferred stock is convertible into common stock. Because the convertible
redeemable preferred stock is redeemable for $15,000 at a fixed date in the
future, the resulting premium of $6,527 is being adjusted, using the effective
interest method, over the period from issuance until redemption first becomes
available to the holders of the security on June 18, 2005. In connection with
this transaction, the Company paid a $200 bonus to the key executive which was
recorded in general and administrative expense in June 1999.
On June 30, 2000, the existing investors purchased 1,754,034 additional
shares of convertible redeemable preferred stock, 11.66667 additional shares of
redeemable preferred stock, and warrants to purchase the number of shares of
common stock equal to $1,750 divided by the conversion price of the convertible
redeemable preferred stock in effect on the date of exercise, in exchange for
cash proceeds of $3,510. The aggregate consideration to the Company of $3,510
has been allocated to the three securities based on their relative fair values
at the time of issuance. The value ascribed to the redeemable preferred stock of
$394 is based on its present value, as the redeemable preferred stock is
redeemable for $1,750 on June 18, 2005 but is not convertible and has no stated
interest or dividend rights. Because the redeemable preferred stock has a fixed
redemption term, the resulting discount of $1,356 is being accreted, using the
effective interest method, over the period from issuance until redemption first
becomes available to the holders of the security on June 18, 2005. The value
ascribed to the convertible redeemable preferred stock of $2,719 is based on the
fair value of the common shares underlying the convertible redeemable preferred
stock plus a 10% premium associated with the security's redemption and other
rights and preferences. Because the convertible redeemable preferred stock is
redeemable for $1,750 at a fixed date in the future, the resulting premium of
$969 is being adjusted, using the effective interest method, over the period
from issuance until redemption first becomes available to the holders of the
security on June 18, 2005. The value ascribed to the warrants of $397 is based
on their fair value determined using the Black-Scholes option pricing model with
the following assumptions on the date of issuance: exercise price of $2.1232,
fair value of common stock of $8.00, expected dividend yield of 0%, expected
volatility of 70%, risk-free interest rate of 6.31% and contractual life of 3.0
years. The warrants are not exercisable if the Company completes an initial
public offering, sells all or substantially all its assets for at least $150
million or sells greater than 50% of its voting stock for at least $150 million
prior to April 2001. Therefore, the fair value determined using the
Black-Scholes option pricing
F-16
<PAGE> 97
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
model was discounted by 80% based on the contingency surrounding the ultimate
exercisability of the warrants.
If redemption is not timely, the redemption amounts bear interest at 12%
per annum from the redemption date through the date when redemption actually
occurs. The amount of the unamortized discount related to the redeemable
preferred stock was $6,364 and $7,270 at December 31, 1999 and June 30, 2000,
and the amount of the unamortized premium related to the convertible redeemable
preferred stock was $5,829 and $6,181 at December 31, 1999 and June 30, 2000.
In connection with the June 2000 transaction described above, the Company
accreted the entire amount of the beneficial conversion feature embedded in the
convertible redeemable preferred stock at the date of issuance because the
security was immediately convertible. The value of the beneficial conversion
feature was measured using its intrinsic value, i.e., the excess of the
aggregate fair value of the common stock into which the convertible redeemable
preferred stock is convertible over the proceeds allocated to the security. The
intrinsic value of the beneficial conversion feature of $3,890 exceeded the
proceeds allocated to the convertible redeemable preferred stock of $2,719;
therefore, the Company limited recognition of the beneficial conversion feature
to the $2,719 of proceeds allocated to the convertible redeemable preferred
stock.
CHARACTERISTICS AND TERMS
Redeemable preferred stock
The redeemable preferred stock is non-convertible, non-voting and not
entitled to dividends. In the event of a liquidation, dissolution, winding up or
change of control of the Company, the holders of the redeemable preferred stock
shall be entitled to be paid (in preference to the holders of convertible
redeemable preferred stock and common stock) an amount equal to $150,000 per
share (the "Redeemable Liquidation Preference Amount"). The redeemable preferred
stock is redeemable at the Redeemable Liquidation Preference Amount: 1) on or
after June 18, 2005, at the option of the holders of at least two-thirds of the
then outstanding redeemable preferred stock, or 2) automatically upon the close
of any public offering by the Company of its capital stock under the Securities
Act of 1933.
Convertible redeemable preferred stock
Holders of convertible redeemable preferred stock are entitled to elect up
to two directors, voting together as a separate class, and are entitled to
non-cumulative dividends when and if declared by the Board of Directors. Such
dividends are shared with the holders of common stock as if the convertible
redeemable preferred stock and the common stock were a single class of stock.
Holders of convertible redeemable preferred stock are entitled to the number of
votes equal to the number of shares of common stock into which the convertible
redeemable preferred stock may be converted. In December 1999, the Board of
Directors approved a change in the conversion rate into which the convertible
redeemable preferred stock is convertible into common stock from one-to-0.1667
to one-to-0.4699. This change was made for no consideration, as business factors
that were present at the time of the original investment were identified shortly
after consummation and reflected in the adjusted conversion rate. The change has
been reflected as a dividend to the preferred stock investors of $14,992,
calculated as the product resulting from the increased number of shares of
common stock into which the shares of convertible redeemable preferred stock are
convertible multiplied by the fair value of the Company's common stock on the
date of the change of $3.29 per share. The number of common shares into which
the convertible redeemable preferred stock was convertible was 2,505,785 before
the change in the Conversion Rate and 7,064,845 after the change. The number of
common shares into which the convertible redeemable preferred stock was
convertible was 7,064,845 and 7,889,066 at December 31, 1999 and June 30, 2000.
F-17
<PAGE> 98
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
All shares of convertible redeemable preferred stock are convertible into
common stock at the Conversion Rate 1) at the option of the holders of at least
two-thirds of the then outstanding convertible redeemable preferred stock, or 2)
automatically upon the close of the Company's first underwritten initial public
offering of its common stock under the Securities Act of 1933. Conversion upon
the Company's first underwritten initial public offering is automatic provided
that: 1) aggregate proceeds net of underwriting discounts and commissions exceed
$20 million, 2) the value of the Company immediately prior to the offering is
equal to or greater than $150 million on a fully-diluted basis, 3) the common
stock offered for sale is listed on either the New York Stock Exchange or the
Nasdaq National Market, and 4) all outstanding shares of the Company's
redeemable preferred stock and all declared but unpaid dividends thereon are
redeemed in full. The Conversion Rate is subject to adjustment for dilution,
including stock splits, stock dividends, stock distributions and the issuance of
stock options, stock rights and convertible securities. The Company has reserved
the full number of shares of common stock deliverable upon conversion of the
convertible redeemable preferred stock.
The convertible redeemable preferred stock is redeemable at $2.1232 per
share plus declared and unpaid dividends (the "Convertible Liquidation
Preference Amount") on or after June 18, 2005, at the option of the holders of
at least two-thirds of the then outstanding convertible redeemable preferred
stock. Upon any liquidation, dissolution, winding up or change of control of the
Company, the holders of the convertible redeemable preferred stock are entitled
to be paid (subject to the prior payment of the Redeemable Liquidation
Preference Amount to the holders of redeemable preferred stock) the Convertible
Liquidation Preference Amount, in preference to the holders of common stock.
Warrants
The warrants entitle the holders to purchase the number of shares of common
stock equal to $1,750 divided by the conversion price of the convertible
redeemable preferred stock in effect on the date of exercise. The warrants are
exercisable in whole or in part from April 1, 2001 through June 1, 2003;
however, they are not exercisable if the Company completes an initial public
offering, sells all or substantially all its assets for at least $150 million or
sells greater than 50% of its voting stock for at least $150 million prior to
April 1, 2001. The warrants are exercisable for an aggregate purchase price of
$1,750. The conversion price of the convertible redeemable preferred stock on
the date the warrants were issued was $2.1232 per share.
6. COMMON STOCK
As at December 31, 1999, 30,827,531 common shares were authorized and
14,682,757 were issued and outstanding.
Dividend rights and restrictions
Holders of common stock are entitled to non-cumulative dividends when and
if declared by the Board of Directors. In general, dividends or other
distributions may be legally made to common stockholders if:
(a) retained earnings immediately prior to the distribution equals or
exceeds the amount of the distribution;
(b) immediately after the distribution, total assets (not including
deferred charges) are at least equal to 1.25 times the Company's
liabilities (not including deferred taxes, deferred revenue and other
deferred credits) and current assets are at least equal to 1.25 times the
Company's current liabilities; and
(c) the Company is able to meet its liabilities as they mature.
If the distribution is in connection with the repurchase of shares,
retained earnings in the aforementioned test includes all amounts that had been
previously deducted therefrom in connection with a previous
F-18
<PAGE> 99
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
repurchase of shares. When the planned reincorporation described in Note 1 has
been consummated, dividends may be legally made in the amount of the Company's
surplus (defined as additional paid-in capital plus retained earnings) or, if
there is no such surplus, in the amount of net income for the year in which the
dividend is declared and/or the preceding year.
7. STOCK-BASED COMPENSATION
In February 1998, the Company executed a nonstatutory stock option
agreement with a key executive which entitles the executive to purchase an
aggregate of 875,758 shares of common stock at an exercise price of $0.039 per
share. The option was immediately vested as to 50% of the underlying shares at
the time of grant whereas the remaining 50% of the option shares vest ratably
from the grant date through February 2000. As part of the preferred stock
financing transaction in June 1999 (Note 5), new investors purchased 104,245
shares of common stock from the key executive that were purchased pursuant to
this option. Under the agreement, 0 and 104,245 shares of common stock were
purchased for $0 and $4 during the years ended December 31, 1998 and 1999, and
771,513 options were outstanding as of December 31, 1999. During the six months
ended June 30, 2000, 33,333 shares of common stock were purchased under the
agreement, and 738,180 options remain outstanding as of June 30, 2000. The key
executive's option expires in February 2003. All shares issued pursuant to the
exercise of this option are subject to the Company's right of repurchase if the
key executive ceases to be an employee at any time after the grant of the
option. The right of repurchase expires if the Company's common stock is listed
on any United States securities exchange. None of the outstanding shares
purchased under the agreement are expected to be repurchased by the Company due
to the Company's anticipated IPO.
In November 1999, the Board adopted the Company's 2000 Equity Incentive
Plan (the "2000 Plan"). No more than 3,973,964 common shares may be issued under
the Plan. At December 31, 1999, 1,714,309 common shares are available for
issuance under the 2000 Plan. Options were previously granted under the
Company's 1998 Stock Option Plan (the "1998 Plan") and 1999 Stock Option Plan
(the "1999 Plan"). The 2000 Plan provides for the granting of incentive stock
options to employees and nonstatutory stock options to employees, directors and
consultants to the Company. In addition, the 2000 Plan permits the granting of
stock bonuses and rights to acquire restricted stock. Vesting provisions and
other terms and conditions are determined by the Board of Directors at the time
of grant. Options granted under the Plans generally vest over three or four
years. Options generally expire ten years from the date of grant.
Stock option transactions under the Company's 1998, 1999 and 2000 Plans are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999 JUNE 30, 2000
------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
period................................. -- -- 250,167 $6.00 2,259,655 $1.64
Options granted.......................... 250,167 $6.00 2,142,988 1.39 1,176,000 1.85
Options exercised........................ -- -- -- -- (1,331,309) 1.06
Options canceled......................... -- -- (133,500) 5.83 (259,332) 1.67
------- --------- ----------
Options outstanding at end of period..... 250,167 6.00 2,259,655 1.64 1,845,014 2.19
======= ========= ==========
Options exercisable at end of period..... -- -- 1,324,863 1.05 121,632 4.76
======= ========= ==========
</TABLE>
In December 1999, the Company granted an option to purchase 529,861 common
shares at an exercise price of $0.21 per share to the Company's newly appointed
Chief Executive Officer. The option was immediately vested and expires in
December 2003. The option was exercised in full on January 3, 2000 through the
issuance of a full recourse promissory note in the amount of $111. The note bore
interest at 6.5%
F-19
<PAGE> 100
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
per annum and was due and payable on January 3, 2003. The principal plus
interest was to be immediately forgiven upon: (1) the sale by the Company's
stockholders of a majority of the Company's common stock, (2) the sale by the
Company of substantially all its assets, (3) the Company owning cash and cash
equivalents in excess of $4,000 (except if this condition was satisfied because
of a public offering), or (4) the involuntary termination of the Chief Executive
Officer's employment with the Company. If the Company was in registration for or
had completed an initial public offering of its equity securities prior to
December 31, 2000, and the note had not previously been forgiven, the principal
plus interest was to be forgiven in 12 equal monthly installments commencing on
the earlier of the date that the initial public offering was completed or
January 1, 2001. This note was completely forgiven in June 2000 in accordance
with its terms, and the amount of the note was recorded as compensation expense
in June 2000.
On March 23, 2000, the Chief Executive Officer borrowed $70 from the
Company under a non-recourse promissory note in order to meet required tax
withholding related to the stock option exercised in January 2000. The note bore
interest at 6.5% per annum and was due and payable on March 23, 2003. The
principal plus interest was to be immediately forgiven upon : (1) the sale by
the Company's stockholders of a majority of the Company's common stock, (2) the
sale by the Company of substantially all its assets, (3) the Company owning cash
and cash equivalents in excess of $4,000 (except if this condition was satisfied
because of a public offering), or (4) the involuntary termination of the Chief
Executive Officer's employment with the Company. If the Company was in
registration for or had completed an initial public offering of its equity
securities prior to December 31, 2000, and the note had not previously been
forgiven, the principal plus interest was to be forgiven in 12 equal monthly
installments commencing on the earlier of the date that the initial public
offering was completed or January 1, 2001. This note was completely forgiven in
June 2000 in accordance with its terms, and the amount of the note was recorded
as compensation expense in June 2000.
On February 28, 2000, the Chief Executive Officer exercised 1,324,654
options with an exercise price of $1.05 per share into 165,490 shares of vested
common stock and 1,159,164 shares of vesting common stock through the issuance
of a full recourse promissory note in the amount of $1,391. These options were
originally granted in December 1999 under the 2000 Plan. The vesting common
stock vests monthly over the remaining 29 months of the original term of the
option. Unvested shares are subject to a right of repurchase by the Company that
lapses as the shares vest. The note bore interest at 6.5% per annum and was due
and payable on February 27, 2004. The principal plus interest was to be forgiven
in 24 equal monthly installments commencing on April 1, 2000 unless the Chief
Executive Officer voluntarily resigned. The principal plus interest was to be
immediately forgiven upon: (1) a change in control of the Company, (2) the
involuntary termination of the Chief Executive Officer's employment with the
Company, or (3) the Company owning cash and cash equivalents equal to or in
excess of $4,000 (except if this condition was satisfied because of a public
offering). If the Company was in registration for or had completed an initial
public offering of its equity securities prior to December 31, 2000, and the
note had not previously been forgiven, immediate forgiveness because of the
Company's ownership of at least $4,000 in cash and cash equivalents would not
occur. Because forgiveness of the note was considered probable on the date it
was issued, the exercise price of the related options was reduced to zero
resulting in a new measurement date. Accordingly, unearned stock-based
compensation of $5,032 was recorded for the excess of the fair value of the
Company's common stock at the date the note was issued over unearned stock-based
compensation previously recorded related to the options of $2,965. This note was
completely forgiven in June 2000 in accordance with its terms.
F-20
<PAGE> 101
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes information about all options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.039 771,513 3.15 $0.039 735,022 $0.039
0.21 529,861 3.97 0.21 529,861 0.21
1.05 1,997,821 9.94 1.05 1,324,863 1.05
6.00 - 6.60 261,834 9.13 6.17 0 --
--------- ---------
3,561,029 7.54 1.08 2,589,746 0.59
========= =========
</TABLE>
Other than the 1,018,660 shares of vesting common stock purchased by the
Chief Executive Officer, there are no other shares of vesting common stock
outstanding at June 30, 2000.
In connection with the grant of stock options, the Company recorded
unearned stock-based compensation within stockholders' equity of $6,116 and
$9,273 during the year ended December 31, 1999 and the six months ended June 30,
2000. Amortization of unearned stock-based compensation, net of any charges
reversed during the period for the forfeiture of unvested awards, was $1,998 and
$3,515 during the year ended December 31, 1999 and the six months ended June 30,
2000. At June 30, 2000, the remaining unearned stock-based compensation of
$11,378 will be amortized as follows: $4,139 in the remainder of fiscal 2000,
$4,379 in fiscal 2001, $2,091 in fiscal 2002, $637 in fiscal 2003 and $132 in
fiscal 2004. The amount of stock-based compensation expense to be recorded in
future periods could decrease if awards for which accrued but unamortized
compensation expense has been recorded are forfeited.
Had compensation expense for employee stock options been determined based
on the fair value of the options on the date of grant, the Company's net income
(loss) and net income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1998 1999
----- --------
<S> <C> <C>
Net income (loss) attributable to common stockholders
As reported............................................. $ 837 $(16,644)
Pro forma............................................... 836 (16,653)
Net income (loss) per share (diluted)
As reported............................................. 0.04 (1.07)
Pro forma............................................... 0.04 (1.07)
</TABLE>
F-21
<PAGE> 102
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The weighted-average grant-date fair value per share of options granted
during 1998 and 1999 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1998 1999
------ -----
<S> <C> <C>
Exercise price equal to fair value of common stock on the
grant date:
Weighted-average exercise price........................... $0.039 $ --
Weighted-average option fair value........................ 0.003 --
Exercise price greater than fair value of common stock on
the grant date:
Weighted-average exercise price........................... 6.00 6.60
Weighted-average option fair value........................ 0.0 0.0
Exercise price less than fair value of common stock on the
grant date:
Weighted-average exercise price........................... -- 0.87
Weighted-average option fair value........................ -- 2.51
</TABLE>
The fair value of the options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Expected life.......................................... 2.0 years 1.7 years
Risk-free interest rate................................ 5.4% 5.9%
Expected volatility.................................... 0.0% 0.0%
Expected divided yield................................. 0.0% 0.0%
</TABLE>
The volatility of the Company's common stock underlying the options was not
considered because the Company's equity was not publicly traded as of December
31, 1999. For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting periods using an
accelerated graded method in accordance with FIN 28.
8. QUALIFIED RETIREMENT PLAN
The Company sponsors an employee savings plan that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
savings plan, participating employees may defer a portion of their pre-tax
earnings, up to the Internal Revenue Service annual contribution limit.
Additionally, the Company may elect to make matching contributions into the
savings plan at its sole discretion. To date, the Company has not made any
matching contributions into the savings plan.
9. COMMITMENTS
The Company leases its primary office facilities and certain automobiles
under noncancelable operating lease arrangements which expire on various dates
through January 2007 and, with respect to the office leases, contain certain
renewal options. Rent expense under noncancelable operating lease arrangements
is accounted for on a straight-line basis and totaled $41, $103 and $304 during
1997, 1998 and 1999.
The Company also leases certain computer and office equipment under capital
leases that mature on various dates through September 2003. As of December 31,
1999, $175 of such equipment is included in property and equipment ($109 net of
accumulated amortization). The weighted-average interest rate associated with
such capital leases approximates 16.4% at December 31, 1999.
F-22
<PAGE> 103
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In August 1999, the Company entered into a lease for approximately 40,000
square feet for its principal offices at an average of approximately $84 per
month. The Company began occupying the space in January 2000. The lease requires
the Company to lease approximately 21,000 square feet of additional space at the
same site beginning in September 2000 for $42 per month during the first year or
an average of $46 per month over the term of the lease.
Future minimum lease payments under capital and operating lease
arrangements are as follows at December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------
<S> <C> <C>
2000................................................. $ 85 $ 1,026
2001................................................. 15 1,591
2002................................................. 12 1,564
2003................................................. 7 1,588
2004................................................. -- 1,644
Thereafter........................................... -- 3,462
---- -------
Total minimum payments............................... 119 $10,875
=======
Amount representing interest......................... (16)
----
Present value of minimum lease payments.............. 103
Less current portion of capital lease obligations.... (74)
----
Long-term portion of capital lease obligations....... $ 29
====
</TABLE>
10. INCOME TAXES
The components of the provision for (benefit from) income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Current
Federal............................................ $204 $396 $ 26
State.............................................. 53 108 1
---- ---- -----
257 504 27
Deferred
Federal............................................ (58) 97 (410)
State.............................................. -- 23 (167)
---- ---- -----
(58) 120 (577)
---- ---- -----
$199 $624 $(550)
==== ==== =====
</TABLE>
F-23
<PAGE> 104
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
----- ------
<S> <C> <C>
Deferred tax assets
Stock-based compensation related to nonstatutory stock
options............................................... $ -- $ 699
Capitalized legal costs.................................. -- 117
State net operating loss carryforward.................... -- 83
Accrued bonuses and vacation............................. 114 54
Deferred state income taxes.............................. 37 --
Research and development tax credits..................... -- 76
Other.................................................... 8 33
----- ------
159 1,062
Deferred tax liabilities
Depreciation and amortization............................ (33) (99)
Capitalized software development costs................... (187) (364)
----- ------
$ (61) $ 599
===== ======
</TABLE>
The Company had not provided a valuation allowance against net deferred tax
assets at December 31, 1997, 1998 and 1999 because management believed that such
assets were more likely than not to be realized based upon historical and
expected trends in operating results. During the three months ended March 31,
2000, the Company recorded a valuation allowance for the entire amount of its
net deferred tax asset due to the uncertainty surrounding the ultimate
realization of such asset at that time. The valuation allowance is based on
available evidence, including the Company's recent and planned operating
performance, which reflects significant expenditures for sales and marketing and
technology development costs related to the Company's transition to a
subscription revenue model and uncertainty about the ultimate profitability of
this revenue model.
At December 31, 1999, the Company had a net operating loss carryforward for
state purposes of $940. The expiration period for the net operating loss
carryforward will begin in 2005. At December 31, 1999, the Company has federal
and state research and development credit carryforwards of $51 and $55, which
begin expiring in 2020 and 2005.
A reconciliation of the income tax expense computed using the U.S. federal
statutory tax rate (34%) and the Company's provision for income taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Computed expected federal tax expense....................... $171 $497 $(590)
State taxes, net of federal benefit......................... 30 91 (71)
Stock-based compensation related to incentive stock
options................................................... -- -- 125
Other....................................................... (2) 36 (14)
---- ---- -----
$199 $624 $(550)
==== ==== =====
</TABLE>
11. BANK REVOLVING LINE OF CREDIT
In August 1999, the Company entered into a $4 million revolving line of
credit arrangement with a commercial bank that expires on August 2, 2000. The
line of credit provided up to $3 million for general corporate purposes and up
to $1 million to finance capital equipment expenditures. In September 1999, the
Company entered into a standby letter of credit arrangement with its bank for
$360 as part of the security
F-24
<PAGE> 105
WEBSIDESTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
arrangement underlying its new headquarters lease. The letter of credit
obligation, which will decrease annually by one third under the terms of the
lease, is deducted from the borrowing availability under the line of credit. As
of December 31, 1999, there were no borrowings under the line of credit. As of
December 31, 1999, the Company violated the minimum net income requirements
imposed by the line of credit agreement and, as a result, was unable to borrow
under the line of credit. In April 2000, the Company negotiated an amendment to
the line of credit agreement that expires in April 2001. The amended agreement
provides for a total of $3 million for general working capital purposes and
capital equipment purchases. The covenants were restated to include a minimum
liquidity covenant (defined as unrestricted cash and cash equivalents plus
eligible accounts receivable), measured monthly, of the greater of 1) 1.5 times
current liabilities and all bank debt, or 2) the previous three month's
operating cash usage. Borrowings under the line of credit bear interest at the
bank's prime rate plus .25%. Equipment draws made under the line of credit will
be converted to a term loan in April 2001, which is repayable in 36 equal
principal payments plus interest. The Company drew $1,258 under the line of
credit in the six months ended June 30, 2000.
A five-year warrant to purchase 13,333 shares of common stock at $15.00 per
share was granted in connection with this amendment. The fair value of the
warrant on the date of issuance was $45 and will be recorded as a deferred
facility fee and amortized to interest expense over the life of the loan. The
fair value was calculated on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: 5 year contractual life, 6.47%
risk-free interest rate, 70% expected volatility and 0% expected dividend yield.
In August 2000, the Company borrowed $2 million under a subordinated loan
agreement with a commercial bank that expires on December 15, 2000. The
agreement provides for a total of $2 million for general working capital
purposes. The financial covenants require that the Company achieve certain
revenue and expense objectives. Borrowings under the loan bear interest at the
bank's prime rate plus 3.5%.
A three-year warrant to purchase 41,666 shares of common stock at $8.10 per
share was granted in connection with this agreement. The bank is eligible to
receive additional warrants if any borrowings under the loan remain outstanding
at certain dates. If the borrowings remain outstanding on October 15, 2000 and
November 15, 2000, 8,333 warrants at an exercise price of $8.10 per share will
be issued on each date. If the borrowings are not repaid on their maturity date
of December 15, 2000, 500 additional warrants will be issued at an exercise
price of $8.10 per share for each day the borrowings remain unpaid.
The fair value of the warrant on the date of issuance was $168 and will be
recorded as a deferred facility fee and amortized to interest expense over the
life of the loan. The fair value was calculated on the date of issuance using
the Black-Scholes option pricing model with the following assumptions: 3 year
contractual life, 6.25% risk-free interest rate, 70% expected volatility and 0%
expected dividend yield.
F-25
<PAGE> 106
INSIDE BACK COVER
Three screenshots of the HitBox Enterprise reporting interface.
The heading reads, "Internet Intelligence on Demand"
The subheadings read:
"Is my marketing effective?"
"What do my customers want?"
"How is my business performing?"
<PAGE> 107
LOGO
5,000,000 SHARES
[WEBSIDESTORY LOGO]
COMMON STOCK
----------------------------
PROSPECTUS
, 2000
----------------------------
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
WILLIAM BLAIR & COMPANY
FIDELITY CAPITAL MARKETS
a division of National Financial Services Corporation
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the registrant in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates except for the SEC registration fee, the NASD filing
fee, and the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC Registration fee........................................ $ 15,180
NASD filing fee............................................. 6,250
Nasdaq stock market listing application fee................. 95,000
Blue sky qualification fees and expenses.................... 5,000
Director and officer liability insurance.................... 600,000
Printing and engraving expenses............................. 350,000
Legal fees and expenses..................................... 550,000
Accounting fees and expenses................................ 450,000
Transfer agent and registrar fees........................... 70,000
Miscellaneous............................................... 308,570
----------
Total..................................................... $2,450,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The registrant's Certificate of Incorporation and By-laws include
provisions to (i) eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Section 102(b)(7) of the General Corporation Law of Delaware (the "Delaware
Law") and (ii) require the registrant to indemnify its directors and officers to
the fullest extent permitted by Section 145 of the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. Pursuant to
Section 145 of the Delaware Law, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they are
or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The registrant believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
These provisions do not eliminate the directors' duty of care, and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware Law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the registrant, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
acts or omissions that the director believes to be contrary to the best
interests of the registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the registrant or its stockholders, for improper
transactions between the director and the registrant and for improper
distributions to stockholders and loans to directors and officers. The provision
also does not affect a director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
II-1
<PAGE> 109
The registrant has entered into indemnity agreements with each of its
directors and executive officers that require the registrant to indemnify such
persons against all expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a director or an
executive officer of the registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the registrant as to which indemnification is being
sought nor is the registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The registrant maintains directors' and officers' liability insurance and
intends to continue to maintain this insurance in the future. The registrant
also has an insurance policy covering the officers and directors of the
registrant with respect to certain liabilities, including liabilities arising
under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company since the
Company's inception in September 1996 that were not registered under the
Securities Act. Prior to the reincorporation in Delaware in ,
2000, it had been operating under the laws of California.
(a) In September 1996, the registrant issued 30,303,030 shares of common
stock to its founders for $0.00033 per share or an aggregate purchase
price of $10,000 in cash in its original capitalization. The Company
relied on Section 4(2) of the Securities Act for this offering.
(b) In June 1999, the registrant issued an aggregate of 15,034,712 shares
of its convertible redeemable preferred stock and 100 shares of its
redeemable preferred stock to entities associated with TA Associates,
Inc. Summit Partners, LLC in exchange for 2,088,154 shares of the
registrant's common stock, which they had purchased for $25 million in
cash, or $11.97 per share, from Blaise Barrelet, Agnes Barrelet and
Michael Christian, and $5 million in cash. Each of the investors were
accredited investors and the offering was made without general
solicitation. The Company relied on Regulation D promulgated under
Section 4(2) of the Securities Act.
(c) In December 1999, the registrant issued an option to purchase 1,324,654
shares of its common stock at an exercise price of $1.05 per share to
John Hentrich. Mr. Hentrich exercised his option in February 2000. The
Company issued the option to Mr. Hentrich, the President and Chief
Executive Officer of the Company, pursuant to the Company's 2000 Equity
Incentive Plan and relied on Rule 701 in connection with the issuance
of the option and the underlying securities.
(d) In December 1999, the registrant issued a warrant to purchase 529,861
shares of its common stock at an exercise price of $0.21 per share to
John Hentrich. Mr. Hentrich exercised his warrant in January 2000. The
Company relied on Rule 701 in connection with the issuance of the
warrant and the underlying shares to Mr. Hentrich, the President and
Chief Executive Officer of the Company.
(e) In January 2000, the registrant issued 33,333 shares of its common
stock to Michael Christian on the exercise of a stock option for an
aggregate purchase price of $1,300 at an exercise price of $0.039 per
share. The Company issued the option to Mr. Christian, the Senior Vice
President and Secretary of the Company, in reliance on Rule 701 in
connection with the issuance of the option and the underlying
securities.
(f) In March 2000, the registrant issued a warrant to purchase 13,333
shares of our common stock at an exercise price of $15 per share to
Imperial Bank. The Company relied on Regulation D promulgated under
Section 4(2) of the Securities Act in connection with this offering.
II-2
<PAGE> 110
(g) In May 2000, the registrant issued 6,655 shares of its common stock to
Keith Fisher, a former employee of the Company, on the exercise of a
stock option for an aggregate purchase price of $24,600. He exercised
3,565 options at an exercise price of $6.00 per share and 3,090 options
at an exercise price of $1.05 per share. The Company issued the options
to Mr. Fisher pursuant to the Company's 1998 Stock Option Plan and 2000
Equity Incentive Plan and relied on Rule 701 in connection with the
issuance of the option and the underlying securities.
(h) From September 1996 (inception) to July 31, 2000, the registrant
granted options to purchase an aggregate of 3,798,822 shares of common
stock to directors, executive officers and employees pursuant to its
option plans including options to purchase 250,167 shares at an
exercise price of $6.00, options to purchase 133,167 shares at an
exercise price of $6.60, options to purchase 2,411,488 shares at an
exercise price of $1.05, options to purchase 510,833 shares at an
exercise price of $2.04, options to purchase 154,167 shares at an
exercise price of $2.34 and options to purchase 339,000 shares at an
exercise price of $3.12 per share. In addition, in February 1998, the
registrant issued options to purchase an aggregate of 875,757 shares of
common stock to Michael Christian, one of its key employees. Mr.
Christian exercised his option to purchase 104,245 shares of common
stock in July 1999 and 33,333 shares of common stock in January 2000.
The Company relied on Rule 701 in the issuance of the options and
underlying securities to these directors, employees and consultants.
(i) In June 2000, the registrant issued an aggregate of 1,754,034 shares of
its convertible redeemable preferred stock and 11.66667 shares of its
redeemable preferred stock to various entities associated with TA
Associates, Inc. and Summit Partners, LLC, in exchange for $3.5 million
in cash. In addition, the registrant issued warrants to purchase the
number of shares of common stock equal to $1,750,000 divided by the
conversion price of the convertible redeemable preferred stock in
effect on the date of exercise for $10,000 in cash. Each of the
investors were accredited investors and the offering was made without
general solicitation. The Company relied on Regulation D promulgated
under Section 4(2) of the Securities Act.
(j) In August 2000, the registrant issued a warrant to purchase 41,666
shares of common stock at an exercise price of $8.10 per share to
Imperial Bank. The Company relied on Regulation D promulgated under
Section 4(2) of the Securities Act in connection with this offering.
The sale and issuance of the securities in the above transactions were
exempt from registration under the Securities Act by virtue of Rule 4(2) or Rule
701, or Regulation D, as transactions not involving a public offering. There
were no underwriters used in connection with any of the transactions set forth
in this Item 15. For additional information concerning these equity investment
transactions, see the section entitled "Certain Transactions" in the prospectus.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
3.1.1** Amended and Restated Articles of Incorporation.
3.1.2** Certificate of Amendment of Amended and Restated Articles of
Incorporation.
3.1.3 Form of Amended and Restated Certificate of Incorporation of
WebSideStory, Inc., to be filed immediately prior to and to
become effective upon closing of this offering.
3.2.1** Amended and Restated Bylaws of WebSideStory, Inc.
3.2.2* Form of By-laws of WebSideStory, Inc., to be in effect after
the closing of this offering.
4.1** Reference is made to Exhibits 3.1.1, 3.1.2, 3.2.1 and 3.2.2
for provisions of the charter documents defining the rights
of securityholders.
4.2* Specimen common stock certificate.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1** 1998 Stock Option Plan, as amended.
</TABLE>
II-3
<PAGE> 111
<TABLE>
<S> <C>
10.1.1** Form of Nonstatutory Stock Option Agreement under the 1998
Stock Option Plan.
10.1.2** Form of Incentive Stock Option Agreement under the 1998
Stock Option Plan.
10.2** 1999 Stock Option Plan, as amended.
10.2.1** Form of Nonstatutory Stock Option Agreement under the 1999
Stock Option Plan.
10.2.2** Form of Incentive Stock Option Agreement under the 1999
Stock Option Plan.
10.3** 2000 Equity Incentive Plan.
10.3.1** Amendment to 2000 Equity Incentive Plan.
10.3.2** Form of Omnibus Stock Option Agreement under the 2000 Equity
Incentive Plan.
10.4** Form of 2000 Employee Stock Purchase Plan.
10.4.1** Form of Subscription Agreement under the 2000 Employee Stock
Purchase Plan.
10.5+** Agreement, dated March 25, 1999, by and between the
registrant and Level (3) Communications.
10.6+** Agreement, dated May 29, 1998, by and between the registrant
and Digex Business Internet.
10.7+** Agreement, dated February 5, 1999, by and between the
registrant and Sprint Communications.
10.8+** Agreement, dated May 1, 1997, by and between the registrant
and Verio, Inc. (formerly ATMNet, Inc.).
10.9** Akamai FreeFlow Services Order Form, dated March 20, 2000,
by and between the registrant and Akamai Technologies, Inc.
10.10** Employment Agreement, dated June 24, 1999, by and between
the registrant and Blaise P. Barrelet.
10.11** Employment Agreement, dated June 24, 1999, by and between
the registrant and Agnes L. Barrelet.
10.12** Noncompetition Agreement, dated June 24, 1999, by and
between the registrant and Blaise P. Barrelet.
10.13** Noncompetition Agreement, dated June 24, 1999, by and
between the registrant and Agnes L. Barrelet.
10.14** Employment Agreement, dated February 28, 2000, by and
between the registrant and John J. Hentrich, as amended on
April 15, 2000.
10.15** Proprietary Information and Inventions Agreement, dated
November 19, 1999, by and between the registrant and John J.
Hentrich.
10.16** Stock Option Agreement, dated December 20, 1999, by and
between the registrant and John J. Hentrich.
10.17** Promissory Note, dated January 3, 2000, by John J. Hentrich
in favor of the registrant.
10.18** Promissory Note, dated February 28, 2000, by John J.
Hentrich in favor of the registrant.
10.19** Secured, Non-Recourse Promissory Note, dated March 23, 2000,
by John J. Hentrich in favor of the registrant.
10.21** Employment Agreement, dated April 10, 2000, by and between
the registrant and Terance A. Kinninger.
10.22** Incentive Stock Option Agreement, dated April 10, 2000, by
and between the registrant and Terance A. Kinninger.
10.23** Employment Agreement, dated April 7, 2000, by and between
the registrant and Meyar Sheik.
10.24** Employment Agreement, dated February 25, 2000, by and
between the registrant and Thomas H. Stigler.
10.25** Incentive Stock Option Agreement, dated February 28, 2000,
by and between the registrant and Thomas H. Stigler.
10.26** Employment Agreement, dated April 25, 2000, by and between
the registrant and Randall K. Broberg.
10.27** Employment Agreement, dated April 25, 2000, by and between
the registrant and Michael S. Christian.
</TABLE>
II-4
<PAGE> 112
<TABLE>
<S> <C>
10.28** Nonstatutory Stock Option Agreement, dated February 23,
1998, by and between the registrant and Michael S.
Christian.
10.29** Incentive Stock Option Agreement, dated April 10, 2000, by
and between the registrant and Meyar Sheik.
10.30** Incentive Stock Option Agreement, dated April 10, 2000, by
and between the registrant and Randall K. Broberg.
10.31** Office lease, dated November 4, 1998, by and between the
registrant and PS Business Parks, Inc. and an amendment
thereto dated February 14, 2000.
10.32** Office lease, dated August 23, 1999, by and between the
registrant and LNR Seaview, Inc.
10.33** Credit Agreement, dated August 4, 1999, by and between the
registrant and Imperial Bank.
10.33.1** Intellectual Property Security Agreement, by and between the
registrant and Imperial Bank.
10.34** Credit Agreement, dated March 27, 2000, by and between the
registrant and Imperial Bank.
10.35** Warrant to Purchase Common Stock, dated March 27, 2000, by
and between the registrant and Imperial Bancorp.
10.36 Subordinated Loan Agreement, dated August 11, 2000, by and
between the registrant and Imperial Creditcorp.
10.37 Warrant to Purchase Common Stock, dated August 11, 2000, by
and between the registrant and Imperial Credit Corp.
10.38 Patent Mortgage and Security Agreement, dated August 11,
2000, by and between the registrant and Imperial Creditcorp.
10.39 General Security Agreement, dated August 11, 2000, by the
registrant.
10.40 Financing Statement.
10.41 Imperial Creditcorp Inc., Corporate Resolution Regarding
Credit.
10.42** Stockholders Agreement, dated June 18, 1999, by and among
the registrant and certain investors set forth on Exhibit A
to the Agreement.
10.43** Registration Rights Agreement, dated June 18, 1999, by and
among the registrant and certain of its stockholders.
10.44** WebSideStory, Inc. 401(k) Plan.
10.45.1** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and John Hentrich.
10.45.2** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Blaise Barrelet.
10.45.3** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Agnes Barrelet.
10.45.4** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and John Burke.
10.45.5** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Terance Kinninger.
10.45.6** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Michael Christian.
10.45.7** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Meyar Sheik.
10.45.8** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Randall Broberg.
10.45.9** Indemnification Agreement, dated June 1, 2000, by and
between the registrant and Thomas H. Stigler.
10.46** Form of Indemnity Agreement to be entered into by the
registrant and each of its directors, officers and certain
additional personnel following the reincorporation of the
registrant.
10.47** Stock Purchase Agreement, dated June 16, 2000, by and among
the registrant, the registrant's founding stockholders and
certain investors set forth on Exhibit A to the Agreement.
</TABLE>
II-5
<PAGE> 113
<TABLE>
<S> <C>
10.48** Certified Copy of Certificate of Amendment of Amended and
Restated Articles of Incorporation of the registrant, as
filed with the California Secretary of State on June 30,
2000.
10.49.1** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit Ventures V, L.P.
10.49.2** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit V Companion Fund, L.P.
10.49.3** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit V Advisors Fund, L.P.
10.49.4** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit V Advisors Fund (QP),
L.P.
10.49.5** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit Investors III, L.P.
10.49.6** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and TA/Advent VIII L.P.
10.49.7** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Advent Atlantic and Pacific
III L.P.
10.49.8** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and TA Executives Fund LLC.
10.49.9** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and TA Investors LLC.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Gray Cary Ware & Freidenrich LLP. Reference is
made to Exhibit 5.1.
24.1** Power of Attorney. Reference is made to page II-6.
27** Financial Data Schedule.
</TABLE>
------------
* To be filed by amendment.
** Previously filed by Registrant.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
All such schedules have been omitted because the information required to be
set forth therein is not applicable or is provided elsewhere.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 of this registration
statement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-6
<PAGE> 114
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 115
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on August 18, 2000.
WebSideStory, Inc.
By: /s/ JOHN J. HENTRICH
------------------------------------
John J. Hentrich
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN J. HENTRICH President and Chief August 18, 2000
-------------------------------------------------------- Executive Officer, Director
John J. Hentrich
* Chairman of the Board, Chief August 18, 2000
-------------------------------------------------------- Internet Architect and
Blaise P. Barrelet Director
* Senior Vice President and August 18, 2000
-------------------------------------------------------- Chief Financial Officer
Terance A. Kinninger (Principal Financial
Officer)
* Corporate Controller August 18, 2000
-------------------------------------------------------- (Principal Accounting
John T. Burke Officer)
* Director August 18, 2000
--------------------------------------------------------
Kurt R. Jaggers
* Director August 18, 2000
--------------------------------------------------------
Walter G. Kortschak
* Director August 18, 2000
--------------------------------------------------------
Benjamin H. Ball
*By: /s/ JOHN J. HENTRICH
---------------------------------------------------
John J. Hentrich
Attorney-in-fact
</TABLE>
II-8
<PAGE> 116
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
3.1.1** Amended and Restated Articles of Incorporation.
3.1.2** Certificate of Amendment of Amended and Restated Articles of
Incorporation.
3.1.3 Form of Amended and Restated Certificate of Incorporation of
WebSideStory, Inc., to be filed immediately prior to and to
become effective upon closing of this offering.
3.2.1** Amended and Restated Bylaws of WebSideStory, Inc.
3.2.2* Form of By-laws of WebSideStory, Inc., to be in effect after
the closing of this offering.
4.1** Reference is made to Exhibits 3.1.1, 3.1.2, 3.2.1 and 3.2.2
for provisions of the charter documents defining the rights
of securityholders.
4.2* Specimen common stock certificate.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1** 1998 Stock Option Plan, as amended.
10.1.1** Form of Nonstatutory Stock Option Agreement under the 1998
Stock Option Plan.
10.1.2** Form of Incentive Stock Option Agreement under the 1998
Stock Option Plan.
10.2** 1999 Stock Option Plan, as amended.
10.2.1** Form of Nonstatutory Stock Option Agreement under the 1999
Stock Option Plan.
10.2.2** Form of Incentive Stock Option Agreement under the 1999
Stock Option Plan.
10.3** 2000 Equity Incentive Plan.
10.3.1** Amendment to 2000 Equity Incentive Plan.
10.3.2** Form of Omnibus Stock Option Agreement under the 2000 Equity
Incentive Plan.
10.4** Form of 2000 Employee Stock Purchase Plan.
10.4.1** Form of Subscription Agreement under the 2000 Employee Stock
Purchase Plan.
10.5+** Agreement, dated March 25, 1999, by and between the
registrant and Level (3) Communications.
10.6+** Agreement, dated May 29, 1998, by and between the registrant
and Digex Business Internet.
10.7+** Agreement, dated February 5, 1999, by and between the
registrant and Sprint Communications.
10.8+** Agreement, dated May 1, 1997, by and between the registrant
and Verio, Inc. (formerly ATMNet, Inc.).
10.9** Akamai FreeFlow Services Order Form, dated March 20, 2000,
by and between the registrant and Akamai Technologies, Inc.
10.10** Employment Agreement, dated June 24, 1999, by and between
the registrant and Blaise P. Barrelet.
10.11** Employment Agreement, dated June 24, 1999, by and between
the registrant and Agnes L. Barrelet.
10.12** Noncompetition Agreement, dated June 24, 1999, by and
between the registrant and Blaise P. Barrelet.
10.13** Noncompetition Agreement, dated June 24, 1999, by and
between the registrant and Agnes L. Barrelet.
10.14** Employment Agreement, dated February 28, 2000, by and
between the registrant and John J. Hentrich, as amended on
April 15, 2000.
10.15** Proprietary Information and Inventions Agreement, dated
November 19, 1999, by and between the registrant and John J.
Hentrich.
10.16** Stock Option Agreement, dated December 20, 1999, by and
between the registrant and John J. Hentrich.
10.17** Promissory Note, dated January 3, 2000, by John J. Hentrich
in favor of the registrant.
10.18** Promissory Note, dated February 28, 2000, by John J.
Hentrich in favor of the registrant.
10.19** Secured, Non-Recourse Promissory Note, dated March 23, 2000,
by John J. Hentrich in favor of the registrant.
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10.21** Employment Agreement, dated April 10, 2000, by and between
the registrant and Terance A. Kinninger.
10.22** Incentive Stock Option Agreement, dated April 10, 2000, by
and between the registrant and Terance A. Kinninger.
10.23** Employment Agreement, dated April 7, 2000, by and between
the registrant and Meyar Sheik.
10.24** Employment Agreement, dated February 25, 2000, by and
between the registrant and Thomas H. Stigler.
10.25** Incentive Stock Option Agreement, dated February 28, 2000,
by and between the registrant and Thomas H. Stigler.
10.26** Employment Agreement, dated April 25, 2000, by and between
the registrant and Randall K. Broberg.
10.27** Employment Agreement, dated April 25, 2000, by and between
the registrant and Michael S. Christian.
10.28** Nonstatutory Stock Option Agreement, dated February 23,
1998, by and between the registrant and Michael S.
Christian.
10.29** Incentive Stock Option Agreement, dated April 10, 2000, by
and between the registrant and Meyar Sheik.
10.30** Incentive Stock Option Agreement, dated April 10, 2000, by
and between the registrant and Randall K. Broberg.
10.31** Office lease, dated November 4, 1998, by and between the
registrant and PS Business Parks, Inc. and an amendment
thereto dated February 14, 2000.
10.32** Office lease, dated August 23, 1999, by and between the
registrant and LNR Seaview, Inc.
10.33** Credit Agreement, dated August 4, 1999, by and between the
registrant and Imperial Bank.
10.33.1** Intellectual Property Security Agreement, by and between the
registrant and Imperial Bank.
10.34** Credit Agreement, dated March 27, 2000, by and between the
registrant and Imperial Bank.
10.35** Warrant to Purchase Common Stock, dated March 27, 2000, by
and between the registrant and Imperial Bancorp.
10.36 Subordinated Loan Agreement, dated August 11, 2000, by and
between the registrant and Imperial Creditcorp.
10.37 Warrant to Purchase Common Stock, dated August 11, 2000, by
and between the registrant and Imperial Credit Corp.
10.38 Patent Mortgage and Security Agreement, dated August 11,
2000, by and between the registrant and Imperial Creditcorp.
10.39 General Security Agreement, dated August 11, 2000, by the
registrant.
10.40 Financing Statement.
10.41 Imperial Creditcorp Inc., Corporate Resolution Regarding
Credit.
10.42** Stockholders Agreement, dated June 18, 1999, by and among
the registrant and certain investors set forth on Exhibit A
to the Agreement.
10.43** Registration Rights Agreement, dated June 18, 1999, by and
among the registrant and certain of its stockholders.
10.44** WebSideStory, Inc. 401(k) Plan.
10.45.1** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and John Hentrich.
10.45.2** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Blaise Barrelet.
10.45.3** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Agnes Barrelet.
10.45.4** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and John Burke.
10.45.5** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Terance Kinninger.
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10.45.6** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Michael Christian.
10.45.7** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Meyar Sheik.
10.45.8** Indemnification Agreement, dated May 15, 2000, by and
between the registrant and Randall Broberg.
10.45.9** Indemnification Agreement, dated June 1, 2000, by and
between the registrant and Thomas H. Stigler.
10.46** Form of Indemnity Agreement to be entered into by the
registrant and each of its directors, officers and certain
additional personnel following the reincorporation of the
registrant.
10.47** Stock Purchase Agreement, dated June 16, 2000, by and among
the registrant, the registrant's founding stockholders and
certain investors set forth on Exhibit A to the Agreement.
10.48** Certified Copy of Certificate of Amendment of Amended and
Restated Articles of Incorporation of the registrant, as
filed with the California Secretary of State on June 30,
2000.
10.49.1** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit Ventures V, L.P.
10.49.2** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit V Companion Fund, L.P.
10.49.3** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit V Advisors Fund, L.P.
10.49.4** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit V Advisors Fund (QP),
L.P.
10.49.5** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Summit Investors III, L.P.
10.49.6** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and TA/Advent VIII L.P.
10.49.7** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and Advent Atlantic and Pacific
III L.P.
10.49.8** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and TA Executives Fund LLC.
10.49.9** Warrant to Purchase Common Stock, dated June 30, 2000, by
and between the registrant and TA Investors LLC.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Gray Cary Ware & Freidenrich LLP. Reference is
made to Exhibit 5.1.
24.1** Power of Attorney. Reference is made to page II-6.
27** Financial Data Schedule.
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* To be filed by amendment.
** Previously filed by Registrant.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
