<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-84589
[RESOURCEPHOENIX.COM LOGO]
4,000,000 SHARES
CLASS A COMMON STOCK
ReSourcePhoenix.com is offering 4,000,000 shares of its Class A common
stock. This is ReSourcePhoenix.com's initial public offering and no public
market currently exists for its shares. The shares being sold in the offering
have been approved for quotation on the Nasdaq National Market under the symbol
"RPCX." The initial public offering price is $8.00 per share.
------------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price....................................... $ 8.00 $32,000,000
Underwriting Discounts and Commissions...................... $ 0.56 $ 2,240,000
Proceeds to ReSourcePhoenix.com............................. $ 7.44 $29,760,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Some of our security holders have granted the underwriters a 30-day option
to purchase up to an additional 600,000 shares of Class A common stock to cover
over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the
shares of Class A common stock to purchasers on October 19, 1999.
------------------------------
ROBERTSON STEPHENS THOMAS WEISEL PARTNERS LLC
The date of this prospectus is October 13, 1999.
<PAGE> 2
Description of Artwork
Front Inside Cover
What if there was a company that...
Offered the cost-effective benefits
of outsourcing--
While providing the flexibility, control
and scalability of an in-house financial
and management reporting system--
And provided access to leading enterprise
resource planning software via the Internet?
There is.
ReSourcePhoenix.com(TM)
Inside Gatefold
Graphical collage of people performing the tasks included
in the ReSourcePhoenix solution.
Under the graphic is the following text:
Software
Enterprise Resource Planning
Sales Force Automation
Functional Software
Web-based Applications
Professional Expertise
Accounting
Information Technology
Finance
Business Processes
Financial and Management Reporting
Transaction Processing
Budgeting and Analysis
Project Management
Sales Contact Management
Investor Services
Accounting Management
Internet
Internet-based Communication
Virtual Private Network
Hosted Applications
ReSourcePhoenix.com Solutions
ReFOCOS(SM)
M.A.R.S.
S.T.A.R.
<PAGE> 3
UNTIL NOVEMBER 8, 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR CLASS A
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENT OR SUBSCRIPTION.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 4
Information Regarding Forward Looking Statements............ 12
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Capitalization.............................................. 14
Dilution.................................................... 15
Selected Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 28
Management.................................................. 39
Relationship with Phoenix Companies and Certain
Transactions.............................................. 44
Principal Stockholders...................................... 46
Description of Capital Stock................................ 47
Shares Eligible For Future Sale............................. 50
Underwriting................................................ 51
Legal Matters............................................... 53
Experts..................................................... 53
Where You Can Find More Information......................... 53
Index to Financial Statements............................... F-1
</TABLE>
<PAGE> 4
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" and the
financial statements, carefully before making an investment decision.
RESOURCEPHOENIX.COM
ReSourcePhoenix.com provides outsourced financial and management reporting,
accounting management, transaction processing and record keeping services. We
allow our clients to focus on their core businesses by outsourcing the
infrastructure and operations of these critical back-office functions. Our
primary service offerings include:
- financial and management reporting;
- accounting and finance management;
- transaction processing;
- financial budgeting and analysis;
- implementation, integration and operation of financial and management
reporting software, hardware, network and communications infrastructure;
- sales tracking;
- sales force contact management; and
- investor services record keeping.
Today's companies increasingly need financial and management reporting
systems that can collect, organize and disseminate business information in a
timely, accurate, relevant and easy-to-use format. This need is particularly
acute for early stage and middle market companies that rely upon this
information, but have limited capital and personnel resources to manage these
systems and simultaneously focus on growing their business.
We are pioneering the use of the Internet to integrate leading enterprise
resource planning software applications with the expertise of information
technology, finance, accounting and transaction processing professionals.
Enterprise resource planning software integrates the back-office aspects of the
business, including planning, inventory management, customer service,
manufacturing, sales and marketing. Our solution offers the cost-effective
benefits of outsourcing while providing the flexibility, control, customization,
integration and scalability of an in-house system. We offer our clients access
to the leading enterprise resource planning software applications, which often
are too costly and complex for early stage and middle market companies to obtain
and operate.
We believe that our success will be driven by the increased demand for
outsourced financial and management reporting solutions. Reasons for this growth
include a desire by companies to focus on their core business, the inability of
many early stage and middle market companies to cost-effectively acquire
complete financial management solutions and difficulties in attracting and
retaining qualified information technology, accounting, finance and transaction
processing professionals. In addition, we believe that this growth will be
fueled by the inability of many companies to effectively adopt and implement
leading enterprise resource planning applications in-house, as well as the
challenges inherent in developing and maintaining software applications,
hardware, and data and communications networks.
By outsourcing these critical back-office functions, companies can reduce
or eliminate the costs of:
- purchasing leading enterprise resource planning applications and
associated hardware;
- integrating and implementing the software and hardware with existing
systems;
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- recruiting, hiring and training an extensive staff of information
technology, accounting, finance and transaction processing professionals;
- ongoing training of these professionals in their respective operational
areas;
- expanding overhead to support the growing organization; and
- ongoing technology and process upgrades.
We provide comprehensive, high-quality client service through our three
primary service offerings. Our ReFOCOS service is a financial outsourcing
solution that includes reporting, accounting, transaction processing, budgeting
and analysis solutions. M.A.R.S. is a sales force automation software
application for specialized financial services clients that can be licensed to
clients or purchased by clients as a hosted application service. Our S.T.A.R.
services are similar to ReFOCOS, but designed to provide investor services to
sponsors of limited partnerships and real estate investment trusts. As of
September 1, 1999, all but one of our ReFOCOS clients, who collectively
generated approximately 37.4% of our revenues for the six months ended June 30,
1999, could access our service using the Internet. The remainder of our service
clients, who collectively generated 25.9% of revenues for the six months ended
June 30, 1999, access our service using non-Internet communications. During the
same period, we derived approximately 36.7% of our revenue from software,
including license fees and related services.
In providing our services, we offer our clients access to a broad range of
professionals who are highly qualified and specialized in their areas of
functional expertise. In addition, we develop a business partnership with each
client by assessing the client's needs and implementing a value-added solution
based on our internally developed best practices. At the time of our formation,
we provided information technology, accounting, finance and transaction
processing services to entities affiliated with Phoenix Leasing Incorporated, a
sponsor and syndicator of publicly-traded limited partnerships. Phoenix Leasing
is controlled by Gus Constantin, our chairman, chief executive officer and
controlling stockholder. As of September 1, 1999, we had 36 clients, including
33 unaffiliated clients and 3 clients affiliated with Phoenix Leasing. We have
never lost a ReFOCOS client because of service or pricing issues.
We incorporated in Delaware in July 1999 and our operating subsidiary was
incorporated in California in September 1996. Our headquarters are located at
2401 Kerner Boulevard, San Rafael, California 94901 and our telephone number is
(415) 485-4500. Our Web site address is www.resourcephoenix.com. The information
on our Web site is not a part of this prospectus.
2
<PAGE> 6
THE OFFERING
The calculation of the shares of common stock outstanding in the table
below is based on the number of shares outstanding as of September 1, 1999 after
giving effect to a 1 to 0.72 reverse stock split. The shares of common stock
outstanding assumes no exercise of the underwriters' over-allotment option and
excludes (1) 1,260,000 shares of Class A common stock that have been reserved
for issuance under our stock option plan and (2) 360,000 shares of Class A
common stock that have been reserved for purchase by employees under our
employee stock purchase plan.
Class A Common stock offered by
ReSourcePhoenix.com.................. 4,000,000 shares
Common stock to be outstanding after
the offering:
Class A common stock................. 4,028,000 shares
Class B common stock................. 7,172,000 shares
Total............................. 11,200,000 shares
Over-allotment option offered by
selling security
holders.............................. 600,000 shares
Voting rights:
Class A common stock................. 1 vote per share
Class B common stock................. 5 votes per share
Use of proceeds........................ To repay indebtedness, capital
expenditures and general corporate
purposes, including working capital
Nasdaq National Market symbol.......... RPCX
SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table should be read with the financial statements and notes
to those statements appearing elsewhere in this prospectus. The pro forma as
adjusted column reflects the sale of 4,000,000 shares of Class A common stock
offered by this prospectus at an initial public offering price of $8.00 per
share after deducting underwriter discounts and commissions and estimated
expenses payable by us. Additionally, pro forma per share data gives effect to
the number of shares whose proceeds are to be used to pay the dividend declared
on September 12, 1999, as described in Note 4 of the Notes to Pro Forma
Unaudited Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Total revenue............................ $ 1,175 $ 5,340 $ 4,686 $ 2,312 $ 4,161
Total operating expenses................. 1,298 6,121 10,354 4,204 11,766
Loss from operations..................... (123) (781) (5,668) (1,892) (7,605)
Net loss................................. (123) (740) (5,657) (1,933) (7,588)
Basic and diluted net loss per share..... $ (0.02) $ (0.10) $ (0.79) $ (0.27) $ (1.05)
Shares used in computing basic and
diluted net loss per share............. 7,200 7,200 7,200 7,200 7,200
Pro forma basic and diluted net loss
per share.............................. $ (0.73) $ (1.04)
Shares used in computing pro forma basic
and diluted net loss per share......... 7,325 7,325
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------------------------
PRO FORMA PRO FORMA
ACTUAL AS ADJUSTED AS FURTHER ADJUSTED
------ ----------- -------------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 128 $ 2,299 $27,749
Working capital (deficit)................................ (709) (1,709) 26,991
Total assets............................................. 3,348 5,519 30,969
Total liabilities........................................ 2,042 5,213 1,963
Total stockholder's equity............................... 1,306 306 29,006
</TABLE>
3
<PAGE> 7
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our Class A common stock. Our business,
operating results and financial condition could be adversely affected by any of
the following risks. The trading price of our Class A common stock could decline
due to any of these risks, and you could lose all or part of your investment.
You should also refer to the other information set forth in this prospectus,
including our financial statements and the related notes.
RISKS ASSOCIATED WITH OUR OPERATIONS
OUR SUCCESS DEPENDS ON THE ACCEPTANCE AND INCREASED USE OF INTERNET-BASED
SOFTWARE APPLICATIONS AND BUSINESS PROCESS OUTSOURCING SOLUTIONS. WE CANNOT BE
SURE THAT THESE SOLUTIONS WILL GAIN MARKET ACCEPTANCE.
Our business model depends on the adoption of Internet-based software
applications and business process outsourcing solutions by commercial users. Our
business would suffer dramatically if these solutions are not accepted or not
perceived to be effective. The market for Internet services, virtual private
networks and widely distributed Internet-enabled packaged application software
has only recently begun to develop. The growth of Internet-based business
process outsourcing solutions could also be limited by:
- concerns over transaction security and user privacy;
- inadequate network infrastructure for the entire Internet; and
- inconsistent performance of the Internet.
In addition, growth in demand for and acceptance of Internet-based software
applications and business process outsourcing solutions, including our ReFOCOS
service, by early stage and middle market companies is highly uncertain. It is
possible that our outsourced business information solutions may never achieve
market acceptance. If the market for our services does not grow or grows less
than we currently anticipate, our business, financial condition and operating
results would be seriously harmed.
OUR REFOCOS SERVICE IS TARGETED AT EARLY STAGE AND MIDDLE MARKET COMPANIES,
WHICH MAY BE MORE LIKELY TO BE ACQUIRED OR TO CEASE OPERATIONS THAN OTHER
COMPANIES. AS A RESULT, OUR CLIENT BASE MAY BE MORE VOLATILE THAN THE CLIENT
BASES OF COMPANIES THAT HAVE GREATER EMPHASIS ON MORE ESTABLISHED COMPANIES.
Our ReFOCOS service is targeted at early stage and middle market companies,
which may be more likely to be acquired or to cease operations than other
companies. As a result, our client base may be more volatile than the client
bases of companies that have greater emphasis on more established companies. We
have lost six unaffiliated clients to date, two because the clients were
acquired and three because the clients ceased operations. If we experience
greater than expected client turnover, either because our clients are acquired,
cease operations or for any other reason, our business, financial condition and
operating results could be seriously harmed.
OUR GROWTH WILL BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL.
We must continue to attract and retain qualified information technology,
accounting, finance and transaction processing professionals in order to perform
services to our existing and future clients. The personnel capable of filling
these positions are in great demand and recruiting and training them requires
substantial resources. We may not be able to hire the necessary personnel to
implement our business strategy, or we may need to pay higher compensation for
employees than we currently expect. We cannot assure you that we will succeed in
attracting and retaining the personnel we need to grow.
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<PAGE> 8
OUR CURRENT AND HISTORICAL FINANCIAL INFORMATION MAY NOT BE COMPARABLE TO OUR
FUTURE FINANCIAL RESULTS.
Our historical revenues were derived primarily from services that we do not
expect to be the focus of our business in the future. We introduced our S.T.A.R.
services and our original ReFOCOS service in 1993. Our Web-enabled ReFOCOS
service and our hosted M.A.R.S. service, were introduced in November 1998 and
August 1999, respectively. As of September 1, 1999, all but one of our ReFOCOS
clients, who collectively generated approximately 37.4% of our revenues for the
six months ended June 30, 1999, could access our service using the Internet. The
remainder of our service clients, who collectively generated 25.9% of revenues
for the six months ended June 30, 1999, access our service using non-Internet
communications. During the same period, we derived approximately 36.7% of our
revenues from software, including license fees and related services. Because our
historical revenues were derived from a different type of service than the
services that we plan to emphasize in the future, our historical financial
results may not be comparable to our future financial results. In addition, our
M.A.R.S. and S.T.A.R. services are marketed to specialized financial services
clients. Our ReFOCOS services are marketed to a broader, less specialized market
than either of our M.A.R.S. or S.T.A.R. services. We do not have much experience
selling to the market that we have targeted for our ReFOCOS service. We may be
unsuccessful in our efforts to market to this target market.
We recently began to market M.A.R.S. as a hosted application in which our
clients can outsource to us several functions, including database management,
call center services, telemarketing services and sales transaction processing.
Our strategy is to emphasize hosting M.A.R.S. in our data centers while
continuing to offer M.A.R.S. as a licensed software product to our clients that
prefer a software-only solution. As a result, we expect that software license
fees will decline as a percentage of revenues as we add clients to our
outsourced M.A.R.S. services and devote greater resources to our other
outsourced financial and management reporting services.
WE EXPECT TO CONTINUE TO INCUR LOSSES AND EXPERIENCE NEGATIVE CASH FLOW.
We expect to have significant operating losses and to record significant
net cash outflow on a quarterly and annual basis. Our business has not generated
sufficient cash flow to fund our operations without requiring external sources
of capital. Starting our company and building our network required substantial
capital and other expenditures. As a result, we reported net loss from
operations of approximately $14.0 million for the period from January 1, 1997,
the date on which we began operations as a separate company, through June 30,
1999, and reported net cash used in operating and investing activities of $8.2
million for the same period. Further developing our business and expanding our
network will require significant additional capital and other expenditures. We
may not be able to obtain additional capital on terms favorable to us or at all.
OUR STOCK PRICE COULD FLUCTUATE DRAMATICALLY BECAUSE OF FLUCTUATIONS IN OUR
QUARTERLY OPERATING RESULTS. THIS COULD RESULT IN SUBSTANTIAL LOSSES TO
INVESTORS.
Period-to-period comparisons of our operating results may not be a good
indication of our future performance. Moreover, our operating results in some
quarters may not meet the expectations of stock market analysts or investors. In
that event, our stock price would likely fall significantly. As a result of the
evolving nature of the markets in which we compete, we may have difficulty
accurately forecasting our revenue in any given period. In addition to the
factors discussed elsewhere in this section, a number of factors may cause our
revenue to fall short of our expectations or cause our operating results to
fluctuate, including:
- the announcement or introduction of new or enhanced products or services
by our competitors;
- pricing changes by us or our competitors;
- the timing and frequency of new client engagements or cancellations; and
- sales cycle fluctuations.
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We must implement our services for new clients in a timely and
cost-effective manner. To the extent that we are unable to staff client
implementations using internal staff, we will need to delay our client
implementations or hire outside software and systems integration consultants,
whose services generally are much more costly. If we delay implementation for
any client, we may not meet the expectations of that client, which could damage
our relationship with that client. A delay in implementation would also postpone
our recognition of revenues from that client, perhaps into a subsequent
financial reporting period, which could cause us not to meet analyst or investor
expectations for that period. If we hire outside software and systems
integration consultants, our operating expenses will increase and our operating
results will be harmed.
Stock markets often experience significant price and volume fluctuations.
These fluctuations, as well as general economic and political conditions
unrelated to our performance, may adversely affect the price of our Class A
common stock. In particular, following initial public offerings, the market
prices for stocks of Internet and technology-related companies often reach
levels that bear no relationship to the operating performance of these
companies. These market prices are generally not sustainable and could vary
widely. The market prices of the securities of Internet-related and
technology-related companies have been especially volatile. If our Class A
common stock trades to high levels following this offering, it could eventually
experience a significant decline. In addition, if our performance falls below
the expectations of securities analysts or investors, the price of our Class A
common stock will likely fall significantly.
OUR OPERATING RESULTS DEPEND ON OUR RELATIONSHIPS WITH A LIMITED NUMBER OF
CLIENTS. AS A RESULT, THE LOSS OF A SINGLE CLIENT MAY SERIOUSLY HARM OUR
OPERATING RESULTS.
Our results of operations and our business depend on our relationships with
a limited number of large clients. As a result, the loss of a single client may
seriously harm our operating results. Set forth below is the percentage of
revenues during 1998 and the six months ended June 30, 1999 for each of our
clients that accounted for more than 10% of our revenues and for our ten largest
clients combined:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Phoenix Leasing (an affiliate) 41% 18%
GE Capital Aviation Services/PIMC 20% 10%
John Hancock Advisors -- 30%
Total of ten largest clients combined: 86% 84%
</TABLE>
We cannot assure you that we will be able to maintain our historical rate
of growth or our current level of revenues derived from any of our clients in
the future. The termination of our business relationships with any of our
significant clients or a material reduction in the use of our services by any of
our significant clients, could seriously harm our business and operating
results.
WE RELY ON THIRD PARTIES TO SUPPLY US WITH THE SOFTWARE, HARDWARE AND SERVICES
NECESSARY TO PROVIDE OUR SERVICES. THE LOSS OF ANY OF THIS THIRD PARTY SOFTWARE,
HARDWARE OR SERVICES MAY BE DIFFICULT TO REPLACE AND MAY HARM OUR OPERATING
RESULTS.
A substantial portion of the software that is integrated into our services
is licensed from third parties, including Oracle Corporation and Necho Systems
Corp. If we were to lose the right to use the software that we have licensed
from Oracle, Necho or other third parties, our operations would be seriously
harmed. Our agreements with our software vendors are non-exclusive. Our vendors
may choose to compete with us directly. Oracle, for example, recently announced
a Web-enabled version of its enterprise resource planning software that it plans
to market directly to middle market businesses. Our vendors may also enter into
strategic relationships with our competitors. These relationships may take the
form of strategic investments, or marketing or other contractual arrangements.
Our competitors may also license and utilize the same technology in competition
with us. We cannot assure you that the vendors of technology used in our
products will continue to support this technology in its current form. We also
cannot assure you that we will be able to adapt our own offerings to changes in
this technology. In addition, we cannot assure you
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<PAGE> 10
that the financial or other difficulties of our vendors will not adversely
affect the technologies incorporated into our services, or that if these
technologies become unavailable we will be able to find suitable alternatives.
In addition, we depend on third parties, such as Cisco Systems, Inc. and
Sun Microsystems, Inc., to supply servers, routers, firewalls, encryption
technology and other key components of our telecommunications and network
infrastructure. If any of our vendors fail to provide needed products or
services in a timely fashion or at an acceptable cost, our business, financial
condition and operating results could be seriously harmed. A disruption in
telecommunications capacity could prevent us from maintaining our standard of
service. Some of the key components of our system and network are available only
from sole or limited sources in the quantities and quality we demand.
We also depend on the services of software and systems integration firms to
help us establish service with new clients. If the services of these firms
became unavailable for any reason, our services to new clients could be delayed.
In addition, we could be forced to pay higher rates for the services of these or
substitute firms. If either of these events were to occur, our business,
financial condition and operating results could be seriously harmed.
OUR BUSINESS AND REPUTATION MAY BE HARMED IF WE MAKE MISTAKES IN PERFORMING OUR
SERVICES.
Our business is subject to various risks resulting from errors and
omissions in performing services for our clients. We perform accounting,
finance, transaction processing, tax reporting, transfer agency and other
services for our clients. We process data received from our clients that is
critical to our clients' businesses and operations. We may make mistakes in
performing our services, which may result in claims being made against us. If we
do make mistakes, we cannot assure you that our financial reserves or insurance
will be adequate to cover any claims made against us. In addition, our business
reputation will be seriously harmed if we make any mistakes, which could
adversely affect our relationships with our existing clients and our ability to
attract new clients.
OUR SOFTWARE PRODUCTS AND THE SOFTWARE THAT WE HAVE INTEGRATED INTO OUR SERVICES
MAY HAVE UNKNOWN DEFECTS THAT COULD HARM OUR REPUTATION OR DECREASE MARKET
ACCEPTANCE OF OUR SERVICES.
We derived approximately 36.2% of our revenues from licensing our M.A.R.S.
software product during the six months ended June 30, 1999. Our clients rely on
this software to perform critical business functions such as sales and expense
tracking and fulfillment/inventory tracking. Because our clients depend on our
M.A.R.S. software for their critical systems and business functions, any
interruptions caused by unknown defects in our software could damage our
reputation, cause our clients to initiate product liability suits against us,
divert our research and development resources, cause us to lose revenue or delay
market acceptance of the outsourced business service that is based on this
software. Any of these things could harm our business. Our software may contain
errors or defects, particularly when new versions or enhancements are released.
We may not discover software defects that affect our current software or
enhancements until after they are sold. Although we have not experienced any
material software defects to date, any defects could cause our clients to
experience severe system failures.
The software applications that we license from Oracle, Necho and other
third parties and integrate into our service offerings may contain defects when
introduced or when new versions or enhancements are released. We cannot assure
you that software defects will not be discovered in the future. If our services
incorporate software that has defects and these defects adversely affect our
service offerings, our business, reputation and operating results may be harmed.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE
MUCH GREATER RESOURCES.
Our current and potential competitors include applications service
providers, systems integrators, and software and hardware vendors. Our
competitors, who may operate in one or more of these areas, include companies
such as Andersen Consulting, DIGEX, Inc., Exodus Communications, Inc.,
International Business Machines Corporation, PricewaterhouseCoopers LLP, and
USInternetworking, Inc. Some of our
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<PAGE> 11
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to rapidly gain market share by addressing the needs of our prospective clients.
These relationships may take the form of strategic investments or marketing or
other contractual arrangements.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
We cannot be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:
- more quickly develop and expand their network infrastructures and service
offerings;
- better adapt to new or emerging technologies and changing customer needs;
- negotiate more favorable licensing agreements with software application
vendors;
- more successfully recruit qualified information technology, accounting,
finance and transaction processing professionals;
- negotiate more favorable services agreements with software and systems
integrators;
- devote greater resources to the marketing and sale of their services; and
- adopt more aggressive pricing policies.
Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs. We cannot be sure that we will be
able to match cost reductions by our competitors. In addition, we believe that
there is likely to be consolidation in our markets, which could increase price
and other competition in ways that could seriously harm our business, financial
condition and operating results. Finally, there are few substantial barriers to
entry, and we have no patented technology that would bar competitors from our
market. See "Business -- Competition."
WE RELY ON RAPIDLY CHANGING TECHNOLOGY AND MUST ANTICIPATE NEW TECHNOLOGIES.
The technologies in which we have invested are rapidly evolving. As a
result, we must anticipate and rapidly adapt to changes in technology to keep
pace with the latest technological advances that are likely to affect our
business and competitive position. For example, we recently adapted our ReFOCOS
service, which formerly used a client-server communications architecture, to use
an Internet communications architecture. Our future success will depend on our
ability to deploy advanced technologies and respond to technological advances in
a timely and cost effective manner. Even if we are able to deploy new
technologies in a timely manner, we may incur substantial cost in doing so. If
we are unable to develop or successfully introduce new technology on an as
needed basis or if we are unable to do so in a cost effective manner, our
business, financial condition and operating results would be seriously harmed.
WE PLAN TO EXPAND VERY RAPIDLY AND MANAGING OUR GROWTH MAY BE DIFFICULT.
We have recently begun to aggressively expand our operations. To the extent
that our business continues to grow both geographically and in terms of the
number of products and services we offer, we must:
- expand, train and manage our employee base effectively;
- enlarge our network and infrastructure to accommodate new clients;
- expand our infrastructure and systems to accommodate the growth of our
existing clients; and
- improve our management, financial and information systems and controls.
We must recruit qualified information technology personnel, for which there
is high demand and short supply. In addition, we must also recruit qualified
accounting, finance and transaction processing personnel, which are also in high
demand. We recently opened our first office outside of northern California and
plan
8
<PAGE> 12
to open additional sales offices and data centers outside of California. We
don't have much experience operating a multi-office business.
There will be additional demands on our operations group and sales,
marketing and administrative resources as we increase our service offerings and
expand our target markets. The strains imposed by these demands are magnified by
the early stage nature of our operations. If we cannot manage our growth
effectively, our business, financial condition or operating results could be
seriously harmed.
WE DEPEND ON A LIMITED NUMBER OF KEY EXECUTIVES WHO WOULD BE DIFFICULT TO
REPLACE.
Our success depends in significant part on the continued services of our
senior management personnel. Gus Constantin, our chairman and chief executive
officer, founded us and our predecessor business more than 27 years ago. Bryant
Tong, our president and chief operating officer, has worked for us and our
predecessor business for more than 16 years. David Brunton, our vice president
and chief financial officer, has worked for us and our predecessor business for
more than 12 years. Losing one or more of our key executives could seriously
harm our business, financial condition and operating results. We cannot assure
you that we will be able to retain our key executives or that we would be able
to replace any of our key executives if we were to lose their services for any
reason. If we had to replace any of our key executives, we would not be able to
replace the significant amount of knowledge that many of our key executives have
about us.
WE COULD BE HARMED IF OUR PRODUCTS, SERVICES OR TECHNOLOGIES ARE NOT COMPATIBLE
WITH OTHER PRODUCTS, SERVICES OR TECHNOLOGIES.
We believe that our ability to compete successfully also depends on the
continued compatibility of our services with products, services and network
architectures offered by various vendors. If we fail to conform to a prevailing
or emerging standard, our business, results of operations and financial
condition could be seriously harmed. We cannot be sure that their products will
be compatible with ours or that they will adequately address changing customer
needs. We also cannot be sure what new industry standards will develop. We also
cannot be sure that we will be able to conform to these new standards quickly
enough to stay competitive. In addition, we cannot be sure that products,
services or technologies developed by others will not make our products,
services or technologies noncompetitive or obsolete.
IF WE DO NOT EFFECTIVELY ADDRESS OUR MARKET, WE MAY NEVER REALIZE A RETURN ON
THE INVESTMENTS WE HAVE MADE TO EXECUTE OUR STRATEGY.
We have made substantial investments to pursue our strategy. These
investments include:
- developing relationships with particular software providers, including
Oracle and Necho;
- investing to develop unique product features, including invoice reporting
and imaging functions; and
- developing implementation resources around specific applications.
These investments may not be successful. More cost-effective strategies may
be available to compete in this market. We may have chosen to focus on the wrong
application areas or to work with the wrong partners. Potential customers may
not value the specific product features in which we have invested. We cannot
assure you that our strategy will prove successful.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US, EVEN WITHOUT MERIT, COULD
COST A SIGNIFICANT AMOUNT OF MONEY TO DEFEND AND DIVERT MANAGEMENT'S ATTENTION
AWAY FROM OUR BUSINESS.
As the number of software products in our target market increases and the
functionality of these products further overlaps, software industry participants
may become increasingly subject to infringement claims. Someone may even claim
that our technology infringes their proprietary rights. Any infringement claims,
even if without merit, can be time consuming and expensive to defend. For
example, we recently incurred significant expenses to successfully defend a
meritless copyright infringement lawsuit that was
9
<PAGE> 13
filed against us. These suits may divert management's attention and resources
and could cause service implementation delays. They also could require us to
enter into costly royalty or licensing agreements. If successful, a claim of
product infringement against us and our inability to license the infringed or
similar technology could adversely affect our business.
WE MAY BE LIABLE IF WE LOSE CLIENT DATA FROM NATURAL DISASTERS OR FOR ANY OTHER
REASON.
We currently conduct all of our data processing and network operations at
our facility in San Rafael, California. In the event of a catastrophic disaster
at our San Rafael data operations center, SunGard Recovery Services Inc. will
provide business resumption of our critical systems at their data center in
Philadelphia.
We have comprehensive disaster recovery procedures in place, including
uninterruptible power supply systems with seven day capacity, back-up power
generators, nightly backup of our critical data, systems with off-site data
vaults, and 24 and 72 hour service level agreements for recovering systems and
data from the last available backup. However, we cannot assure you that our
disaster recovery procedures are sufficient, or that our client's data would be
recoverable in the event of a disaster.
Our operations are dependent on SunGard being able to successfully provide
back-up processing capability if we are unable to protect our computer and
network systems against damage from a major catastrophe such as an earthquake or
other natural disaster, fire, power loss, security breach, telecommunications
failure or similar event. We cannot assure you that the precautions that we have
taken to protect ourselves against these types of events will prove to be
adequate. If we suffer damage to our data or operations center, experience a
telecommunications failure or experience a security breach, our operations could
be seriously interrupted. We cannot assure you that any such interruption or
other loss will be covered by our insurance. Any such interruption or loss could
seriously harm our business and results of operations.
IF OUR COMPUTER SYSTEMS AND SOFTWARE PRODUCTS ARE NOT YEAR 2000-COMPLIANT, OUR
SERVICES COULD BE DISRUPTED.
We confront the Year 2000 problem in three contexts.
Our clients. Many of our clients and prospective clients maintain their
operations on computer systems that may not be Year 2000-compliant. The failure
of any clients to ensure that their systems are Year 2000-compliant could
seriously harm their businesses, which in turn could seriously harm our
business, financial condition and operating results. In addition, clients or
prospective clients may delay purchasing software and related services,
including our ReFOCOS, S.T.A.R. and M.A.R.S. services and M.A.R.S. software, due
to concerns related to the Year 2000 problem.
Our services. We sell computer-related services, so our risk of lawsuits
relating to Year 2000 issues may be greater than that of companies in other
industries. Because our computer products and services may incorporate
components from different providers, it may be difficult to determine which
component may cause a Year 2000 problem. As a result, we may become subject to
Year 2000-related lawsuits whether or not our products and services are Year
2000-compliant.
Our suppliers. Our business could be adversely affected if we cannot obtain
products, services or systems that are Year 2000-compliant when we need them. In
addition, if our vendors and service providers cannot deliver their products
because of Year 2000 compliance problems, our business, financial condition and
operating results could be seriously harmed.
10
<PAGE> 14
RISKS RELATED TO THIS OFFERING
WE CANNOT BE CERTAIN THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR OUR CLASS A
COMMON STOCK.
Prior to this offering, there has been no public market for our Class A
common stock. We cannot assure you that an active trading market for the Class A
common stock will develop or continue as a result of this offering. If no active
trading market develops for our Class A common stock, you may have difficulty
selling our Class A common stock, which could adversely affect the price you are
able to obtain for our Class A common stock.
GUS CONSTANTIN CAN EXERT SUBSTANTIAL CONTROL OVER OUR COMPANY.
Gus Constantin, our founder, chairman and chief executive officer, owns all
of the shares of our Class B common stock, each share of which entitles its
holder to five votes on most stockholder actions. As a result, Mr. Constantin
will have 89.9% of the combined voting power of both classes of our common stock
after this offering. Holders of Class A common stock will be entitled to one
vote per share and in the aggregate will have 10.1% of the combined voting power
of both classes of our common stock after this offering. As a result of his
stock ownership after this offering, Mr. Constantin will be in a position,
without the approval of our public stockholders, to take corporate actions that
could conflict with the interests of our public stockholders, such as:
- amending our charter documents;
- approving or defeating mergers or takeover attempts;
- determining the amount and timing of dividends paid to himself and to
holders of Class A common stock;
- changing the size and composition of our board of directors and
committees of our board of directors; and
- otherwise controlling management and operations and the outcome of most
matters submitted for a stockholder vote.
OUR OFFERING PRICE DOES NOT NECESSARILY RELATE TO ANY ESTABLISHED CRITERIA OF
VALUE. OUR STOCK PRICE MAY TRADE AT PRICES BELOW OUR OFFERING PRICE.
Through negotiations with the underwriters, we will determine the public
offering price of the shares of our Class A common stock. This price will not
necessarily relate to our book value, assets, past operating results, financial
condition or any other established criteria of value. As a result, the shares
being offered may trade at market prices below the initial public offering
price.
APPROXIMATELY 8.0 MILLION, OR 66.7%, OF OUR TOTAL OUTSTANDING SHARES ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR CLASS A COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have 4,028,000 shares of Class A common stock
outstanding. This includes the 4,000,000 shares that we are selling in this
offering, which may be resold in the public market immediately as long as these
shares are not purchased by our affiliates. The remaining 66.7%, or 8,018,291
shares, of our total outstanding shares, including shares subject to options
that will become exercisable upon our initial public offering, will become
available for resale in the public market as shown in the chart below.
As restrictions on resale end, the market price of our Class A common stock
could drop significantly if the holders of restricted shares sell them or are
perceived by the market as intending to sell them.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES TOTAL OUTSTANDING DATE OF AVAILABILITY FOR SALE INTO PUBLIC MARKET
- --------- ----------------- ------------------------------------------------
<C> <C> <S>
8,018,291 66.7% 181 days after the date of this prospectus, subject in some
cases to volume limitations
</TABLE>
11
<PAGE> 15
For a more detailed description, see "Shares Eligible for Future Sale."
OUR MANAGEMENT HAS BROAD DISCRETION OVER USE OF THE PROCEEDS FROM THIS OFFERING
AND MAY NOT USE THE PROCEEDS EFFECTIVELY.
The net proceeds of this offering are estimated to be approximately $28.7
million at an initial public offering price of $8.00 per share and after
deducting the underwriting discounts and commissions and estimated offering
expenses. Our management will retain broad discretion as to the allocation of
the proceeds of this offering. See "Use of Proceeds."
OUR CHARTER DOCUMENTS COULD DETER A TAKEOVER EFFORT, WHICH COULD INHIBIT YOUR
ABILITY TO RECEIVE AN ACQUISITION PREMIUM FOR YOUR SHARES.
Provisions of our certificate of incorporation, bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. In addition, we are subject to the
provisions of Section 203 of the Delaware General Corporation Law. This statute
could prohibit or delay the accomplishment of mergers or other takeover or
change in control in attempts with respect to us and, accordingly, may
discourage attempts to acquire us. See "Description of Capital Stock."
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains forward looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words such
as "expect," "anticipate," "intend" and "plan." Our actual results may differ
materially from those discussed in these statements. Factors that could
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this prospectus.
You should rely only on the information contained in this prospectus when
making a decision about whether to invest in our Class A common stock. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of Class A common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of when this prospectus or any shares
of our Class A common stock is delivered.
-------------------------
ReSourcePhoenix.com, ReFOCOS, S.T.A.R. and M.A.R.S. are trademarks of
ReSourcePhoenix.com. This prospectus contains trademarks and trade names of
other companies.
12
<PAGE> 16
USE OF PROCEEDS
Our net proceeds from the sale of the 4,000,000 shares of Class A common
stock offered by this prospectus are estimated to be approximately $28.7 million
based upon an initial public offering price of $8.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
We currently estimate that the net proceeds of the offering will be used as
follows:
- 20% to 25% for repayment of indebtedness;
- 30% to 40% for capital expenditures; and
- 30% to 40% for general corporate purposes, including working capital.
As of the date of this prospectus, we can only estimate the particular uses
for the net proceeds to be received upon completion of the offering. As a
result, the foregoing estimates and our use of proceeds are subject to change at
our management's discretion. The amounts actually expended for each of the
purposes listed above may vary significantly depending upon a number of factors,
including the progress of our marketing programs and capital spending
requirements.
From time to time, in the ordinary course of business, we may pursue the
acquisition of new or complementary businesses, products or technologies in an
effort to enter into new business areas, diversify our sources of revenue and
expand our product and service offerings. A portion of the net proceeds may be
used to fund acquisitions or investments. We currently have no arrangements,
agreements or understandings, and are not engaged in active negotiations for any
material acquisitions or investments.
DIVIDEND POLICY
Except for a dividend paid to our sole stockholder on September 12, 1999,
we have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends in the foreseeable future. We currently intend
to retain any future earnings for the expansion and operation of our business.
13
<PAGE> 17
CAPITALIZATION
The following table sets forth, as of June 30, 1999, our total
capitalization on an actual basis and pro forma as adjusted to give effect to
the sale of 4,000,000 shares of Class A common stock in this offering at an
initial public offering price of $8.00 per share and the application of the
estimated net proceeds after deducting underwriting discounts and commissions
and estimated offering expenses. This table should be read in conjunction with
our historical consolidated financial statements and the related notes included
elsewhere in this prospectus. The indicated number of shares of common stock
outstanding does not include 846,291 shares of Class A common stock issuable
upon exercise of stock options granted under our stock option plan at a weighted
average exercise price of $2.08 per share.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Preferred stock, $0.001 par value per share; 5,000,000
shares authorized, actual and as adjusted, no shares
issued or outstanding, actual and as adjusted............. $ -- $ --
Class A common stock, $0.001 par value per share; 27,800,000
shares authorized, actual and as adjusted, no shares,
issued and outstanding, actual and 4,000,000 shares,
issued and outstanding, as adjusted....................... -- 28,700
Class B common stock, $0.001 par value per share; 7,200,000
shares authorized, actual and as adjusted, 7,200,000
issued and outstanding, actual and as adjusted............ 15,291 14,007
Accumulated deficit......................................... (13,985) (13,701)
-------- --------
Total stockholders' equity.................................. $ 1,306 $ 29,006
======== ========
</TABLE>
14
<PAGE> 18
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$1.3 million, or $0.18 per share of common stock. Pro forma net tangible book
value per share represents the amount of our pro forma total tangible assets
less pro forma total liabilities divided by the pro forma number of shares of
common stock outstanding as of June 30, 1999. Without taking into account any
other changes in pro forma net tangible book value, other than to give effect to
our sale of the 4,000,000 shares of Class A common stock in this offering and
the receipt and application of the net proceeds from this offering, the pro
forma net tangible book value as of June 30, 1999 would have been approximately
$29.0 million, or $2.56 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $2.38 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$5.44 per share to investors purchasing Class A common stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $8.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $0.18
Increase per share attributable to new investors.......... 2.38
-----
Pro forma net tangible book value per share after this
offering.................................................. $2.56
-----
Dilution per share to new investors......................... $5.44
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the difference between the number of shares of Class A common stock purchased
from us, the total consideration paid and the average price per share paid by
our existing stockholder and by new investors, at an initial public offering
price of $8.00 per share and before deducting underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 7,200,000 64.3% $15,291,000 32.3% $ 2.12
New investors.............................. 4,000,000 35.7 32,000,000 67.7 $ 8.00
---------- ----- ----------- -----
Total............................ 11,200,000 100.0% 47,291,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of outstanding options. As of
September 1, 1999, options to purchase 846,291 shares of Class A common stock
were outstanding at a weighted average exercise price of $2.08 per share. To the
extent that these options are exercised, new investors will experience further
dilution.
15
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data should be read with our consolidated
financial statements and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The consolidated statement of operations
data for the fiscal years ended December 31, 1996, 1997 and 1998 and the
consolidated balance sheet data at December 31, 1997 and 1998, are derived from
our consolidated financial statements which have been audited by Arthur Andersen
LLP, our independent public accountants, and are included elsewhere in this
prospectus. The consolidated statements of operations data for the fiscal years
ended December 31, 1994 and 1995 and the six-month periods ended June 30, 1998
and June 30, 1999, and the consolidated balance sheet data at June 30, 1999, are
derived from our unaudited interim consolidated financial statements included
elsewhere in this prospectus. Our unaudited consolidated financial statements
have been prepared on a basis consistent with our audited consolidated financial
statements and, in the opinion of our management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the consolidated results of operations for these periods. Please be advised that
historical results are not necessarily indicative of the results to be expected
in the future, and results of interim periods are not necessarily indicative of
results for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue:
Contract service revenue....... $ 691 $ 896 $ 1,175 $ 2,255 $ 2,460 $ 1,240 $ 1,740
Contract service
revenue-affiliate........... -- -- -- 3,085 2,182 1,034 913
Software revenue............... -- -- -- -- 44 38 1,508
------- ------- ------- ------- ------- ------- -------
Total revenue............... 691 896 1,175 5,340 4,686 2,312 4,161
------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Cost of providing services..... 325 442 570 2,874 4,479 2,297 2,472
Cost of providing software
revenue..................... -- -- -- -- 157 41 319
General and administrative..... 188 222 298 2,035 2,072 750 1,172
Research and development....... -- -- -- 566 2,216 654 1,289
Client acquisition............. 345 347 418 513 1,123 321 995
Depreciation and
amortization................ 5 8 12 133 307 141 228
Stock-related compensation..... -- -- -- -- -- -- 5,291
------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 863 1,019 1,298 6,121 10,354 4,204 11,766
------- ------- ------- ------- ------- ------- -------
Loss from operations............. (172) (123) (123) (781) (5,668) (1,892) (7,605)
Other revenue (expense).......... -- -- -- 41 11 (41) 17
------- ------- ------- ------- ------- ------- -------
Net loss......................... $ (172) $ (123) $ (123) $ (740) $(5,657) $(1,933) $(7,588)
======= ======= ======= ======= ======= ======= =======
Basic and diluted net loss per
share.......................... $ (0.02) $ (0.02) $ (0.02) $ (0.10) $ (0.79) $ (0.27) $ (1.05)
Shares used in computing basic
and diluted net loss per
share.......................... 7,200 7,200 7,200 7,200 7,200 7,200 7,200
Pro forma basic and diluted net
loss per share................. $ (0.73) $ (1.04)
Shares used in computing pro
forma basic and diluted net
loss
per share...................... 7,325 7,325
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
----------- ----------- ----------- ------ ------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.......... $ -- $ -- $ -- $ 106 $ 503 $ 128
Accounts receivable................ 219 300 303 889 601 1,046
Property and equipment............. 232 250 256 686 694 1,994
Other assets....................... -- -- -- 51 24 159
Total assets....................... 451 550 559 1,732 1,822 3,348
Accounts payable and accrued
liabilities...................... 446 369 361 874 1,195 962
Deferred revenue................... -- -- -- -- 627 1,001
Payable to stockholder............. -- -- -- -- -- 79
Total liabilities.................. 446 369 361 874 1,822 2,042
Stockholder's equity............... 5 181 198 858 -- 1,306
</TABLE>
17
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes appearing elsewhere in this prospectus. The following
discussion contains forward-looking statements. Our actual results may differ
materially from those projected in the forward-looking statements. Factors that
might cause future results to differ materially from those projected in the
forward-looking statements include those discussed in "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
ReSourcePhoenix.com provides outsourced financial and management reporting,
accounting management, transaction processing and record keeping services. We
allow our clients to focus on their core businesses by outsourcing the
infrastructure and operations of these critical back-office functions.
Our operating subsidiary, ReSource/Phoenix, Inc., commenced operations on
January 1, 1997. Before this time, we operated as part of Phoenix Leasing
Incorporated, a sponsor and syndicator of publicly-traded limited partnerships,
for more than 25 years. In August 1999, we reorganized into a holding company
structure. As a result, we currently conduct all of our operations through our
wholly-owned subsidiary ReSource/Phoenix, Inc.
At the time of our formation, we provided information technology,
accounting, finance and transaction processing services to entities affiliated
with Phoenix Leasing which had at that time total combined assets of more than
$200 million. We currently provide services to three clients affiliated with
Phoenix Leasing. See "Relationship with Phoenix Companies and Certain
Transactions." Financial information for periods prior to January 1, 1997 have
been derived from the financial statements of Phoenix Leasing using principles
of carve-out accounting.
We introduced our S.T.A.R. and our original ReFOCOS services in 1993. Using
our S.T.A.R. service, we perform a variety of investor relations functions for
sponsors of limited partnerships and real estate investment trusts. Using our
original ReFOCOS service, we perform a wide variety of accounting, finance,
transaction processing and other related services for our clients. Our S.T.A.R.
and original ReFOCOS services are based on point-to-point client-server
technology.
In March 1999, we began licensing our M.A.R.S. software, which is a sales
force automation application aimed at the mutual fund and variable annuity
industries. All of our software clients have entered into annual software
maintenance and support contracts. The first of these contracts comes up for
renewal in the second quarter of 2000.
We introduced our Web-enabled ReFOCOS service and our hosted M.A.R.S.
service in November 1998 and August 1999, respectively. Our Web-enabled ReFOCOS
service is similar to our original ReFOCOS service, except that clients can now
access the service using conventional Internet browser software. We are
currently implementing our first hosted M.A.R.S. client. Our M.A.R.S. service
offerings will include a hosted software service in which we install and
maintain the M.A.R.S. software in our data operations center for our clients.
As of September 1, 1999, all but one of our ReFOCOS clients, who
collectively generated approximately 37.4% of our revenues for the six months
ended June 30, 1999, could access our service using the Internet. The remainder
of our service clients, who collectively generated 25.9% of revenues for the six
months ended June 30, 1999, access our service using non-Internet
communications. During the same period, we derived approximately 36.7% of our
revenues from software, including license fees and related services. Moving
forward, however, we expect that software revenues will decline as a percentage
of revenues as we add clients for our hosted M.A.R.S. service and as we devote
greater resources to our other outsourced business services.
18
<PAGE> 22
We will record aggregate negative compensation expense of approximately
$284,000 in the fourth quarter of 1999 in connection with the grant of stock
options to some of our officers and employees. This entire amount will be
recognized at the effective time of our initial public offering.
Contract service revenue. We derive contract service revenue from fees to
provide monthly information technology, accounting, finance and transaction
processing for both ReFOCOS and S.T.A.R. clients and from one-time installation
fees. We recognize monthly fees as these services are performed and installation
fees once installation is complete.
Contract service revenue -- affiliate. We derive contract service
revenue -- affiliate by providing our S.T.A.R. and ReFOCOS services to our
affiliates. Prior to August 1, 1999 we charged our affiliates the fully
allocated cost to provide such services. Effective August 1, 1999, we increased
our fees to affiliates to reflect a market rate. We recognize affiliate revenue
in the same manner as our contract service revenues. See "Relationship with
Phoenix Companies and Certain Transactions -- Intercompany Agreements."
Software revenue. We derive software revenue from software license fees,
consulting services, training and maintenance for our M.A.R.S. software.
Software license fee revenue consists principally of up-front license fees
earned from the licensing of the M.A.R.S. software. Revenue from up-front
software license agreements is recognized in accordance with the American
Institute of Certified Public Accountants Statement of Position 97-2. This
revenue is recognized when delivery has occurred, collection is deemed probable,
the fee is fixed or determinable, and vendor-specific objective evidence exists
to allocate the total fee to all delivered and undelivered elements of the
arrangement. To date, we have licensed our M.A.R.S. product primarily on a
perpetual basis. Consulting services and training revenues are recognized as
services are performed and accepted by the customers. Maintenance revenue is
recognized ratably over the term of the agreement. In instances where software
license agreements include a combination of consulting services, training and
maintenance, these separate elements are unbundled from the agreement based on
the element's fair value.
Components of costs and expenses. Cost of providing services includes
salaries and benefits for personnel in our S.T.A.R. and ReFOCOS operations
groups, fees paid to outside service providers other than implementation service
providers and other miscellaneous operating costs. Cost of providing software
revenue includes salaries and benefits for personnel in our M.A.R.S. technical
support and installation groups and costs related to consulting, training and
maintenance, and updates. Prior to the quarter ended June 30, 1998, these costs
were expensed as research and development. General and administrative expenses
includes salaries and benefits for management personnel, fees paid to outside
service providers for corporate-related services and other corporate overhead.
Research and development expenses include salaries and benefits for personnel
engaged in M.A.R.S. development, consulting fees paid to outside service
providers engaged in M.A.R.S. development and other miscellaneous costs
associated with M.A.R.S. development. Client acquisition expense includes
salaries, benefits and commissions paid to our sales and marketing and
implementation personnel, travel expenses of our sales and marketing and
implementation personnel, advertising expenses and fees paid to outside
implementation consultants.
19
<PAGE> 23
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
reflected in our consolidated statements of operations expressed as a percentage
of revenue.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1996 1997 1998 1998 1999
----- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Contract service revenue....................... 100.0% 42.2% 52.5% 53.6% 41.9%
Contract service revenue -- affiliate.......... -- 57.8 46.6 44.7 21.9
Software revenue............................... -- -- 0.9 1.7 36.2
----- ------ ------ ----- ------
Total revenue.......................... 100.0 100.0 100.0 100.0 100.0
----- ------ ------ ----- ------
Operating expenses:
Cost of providing services..................... 48.5 53.8 95.6 99.4 59.4
Cost of providing software revenue............. -- -- 3.4 1.8 7.7
General and administrative..................... 25.4 38.1 44.2 32.4 28.2
Research and development....................... -- 10.6 47.3 28.3 31.0
Client acquisition............................. 35.6 9.6 24.0 13.9 23.9
Stock-related compensation..................... -- -- -- -- 127.2
Depreciation and amortization.................. 1.0 2.5 6.6 6.1 5.5
----- ------ ------ ----- ------
Total operating expenses............... 110.5 114.6 221.1 181.9 282.9
----- ------ ------ ----- ------
Loss from operations............................. (10.5) (14.6) (121.1) (81.9) (182.9)
Other income (expense)........................... -- 0.8 0.3 (1.8) 0.4
----- ------ ------ ----- ------
Net loss......................................... (10.5)% (13.8)% (120.8)% (83.7)% (182.5)%
===== ====== ====== ===== ======
</TABLE>
Six Months Ended June 30, 1999 and 1998
Revenue. Total revenue increased 80.0% to $4.2 million for the six months
ended June 30, 1999 from $2.3 million for the six months ended June 30, 1998.
Contract service revenue. Contract service revenue increased 40.3% to $1.7
million for the six months ended June 30, 1999 as compared to $1.2 million in
the corresponding period of 1998. The increase was due primarily to a higher
number of S.T.A.R. and ReFOCOS clients in 1999 versus 1998. S.T.A.R. revenue was
$0.9 million, or 52.9% of total contract service revenue, and $0.8 million, or
66.7% of total contract service revenue, for the six months ended June 30, 1999
and 1998, respectively. ReFOCOS revenue was $0.8 million, or 47.1% of total
contract service revenue, and $0.4 million or 33.4% of total contract service
revenue for the six months ended June 30, 1999 and 1998, respectively. The
number of our S.T.A.R. clients increased to 13 at June 30, 1999 from 11 at June
30, 1998 and the number of our ReFOCOS clients increased to 11 at June 30, 1999
from eight at June 30, 1998.
Contract service revenue -- affiliate. Contract service revenue from
affiliates decreased 11.7% to $0.9 million for the six months ended June 30,
1999 from $1.0 million for the corresponding period in 1998. This decrease was
the result of the dissolution of three affiliated limited partnerships as these
partnerships reached the end of their stated terms.
Software revenue. Software revenue increased to $1.5 million for the six
months ended June 30, 1999 from $38,000 in the corresponding period of 1998, due
to the completion of the M.A.R.S. development phase. Prior to 1999, the M.A.R.S.
product was in Beta testing at client sites. Customer acceptance was contingent
upon installation of a final working copy of the software, which occurred during
the quarter ended June 30, 1999. As a result, software license revenue was
deferred until customer acceptance was received as required under SOP 97-2.
20
<PAGE> 24
Cost of providing service. Cost of providing service increased 7.6% to $2.5
million for the six months ended June 30, 1999 from $2.3 million for the six
months ended June 30, 1998. The increase is primarily due to additional salary
and benefit costs of $0.3 million associated with hiring additional operations
personnel required to provide services to new clients.
Cost of providing software revenue Cost of providing software revenue
increased 678.0% to $0.3 million for the six months ended June 30, 1999 from
$41,000 for the six months ended June 30, 1998. The increase is due to the
increase in M.A.R.S. contracts.
General and administrative expenses. General and administrative expenses
increased 56.3% to $1.2 million for the six months ended June 30, 1999 from $0.8
million for the six months ended June 30, 1998. The increase is due to
additional salaries and benefits of $0.4 million associated with hiring
additional management and administrative personnel to support our operations.
Research and development expenses. Research and development expenses
increased 97.1% to $1.3 million for the six months ended June 30, 1999 from $0.7
million for the corresponding period in 1998. The increase was due to additional
salary and benefits of $0.5 million associated with hiring additional employees
and direct costs of $0.1 million to support M.A.R.S. development.
Client acquisition expense. Client acquisition expenses increased 210.0% to
$1.0 million for the six months ended June 30, 1999 from $0.3 million for the
corresponding period in 1998. The increase was due to salary and benefit
expenses of $0.5 million related to adding sales, marketing and implementation
personnel and consulting fees of $0.2 million associated with the implementation
of our ReFOCOS product.
Stock-related compensation expense. Stock-related compensation expense is
related to our incentive compensation plan which went into effect on January 1,
1999. This plan was terminated on August 4, 1999 subject to the effectiveness of
our initial public offering. See "Management -- Stock Plans."
Years Ended December 31, 1998 and 1997
Revenue. Total revenue decreased 12.2% to $4.7 million in 1998 from $5.3
million in 1997, primarily due to a decrease in contract service revenue from
affiliates from $3.1 million in 1997 to $2.2 million in 1998.
Contract service revenue. Contract service revenue increased 9.1% to $2.5
million for the year ended December 31, 1998 from $2.3 million for the year
ended December 31, 1997. S.T.A.R. revenue was $1.7 million and $1.6 million for
the years ended 1998 and 1997, respectively, a 6.3% increase. ReFOCOS revenue
was $0.8 million and $0.7 million for the years ended 1998 and 1997,
respectively, a 14.3% increase. During this period, the number of our S.T.A.R.
clients increased to 13 in 1998 from 11 in 1997 and the number of ReFOCOS
clients increased to 14 in 1998 from five in 1997. A number of the new contract
service clients began service late in 1998 so we did not benefit from a full
year of revenue from these clients.
Contract service revenue -- affiliate. Contract service revenue from
affiliates decreased 29.3% from $3.1 million in 1997 to $2.2 million in 1998.
This decrease in contract service revenue from affiliates was due to the
disposal by an affiliate of certain of its business units for which we provided
contract services.
Software revenue. Software revenue increased from zero in 1997 to $44,000
in 1998. This increase consists of non-refundable installation fees for our
M.A.R.S. product.
Cost of providing services. Cost of providing services increased 55.8% to
$4.5 million in 1998 from $2.9 million in 1997. The increase was primarily due
to the increase in the number of clients serviced, which required us to add
personnel in our operations group and resulted in additional salaries and
benefits of $1.2 million for these personnel, as well as increased hiring and
consulting costs of $0.3 million.
Cost of providing software revenue. Cost of providing software revenue
increased $0.2 million in 1998 from zero in 1997. The increase was due to the
increase in M.A.R.S. contracts.
21
<PAGE> 25
General and administrative expenses. General and administrative expenses
increased 1.8% to $2.1 million in 1998 from $2.0 million in 1997. The increase
was primarily due to the hiring of additional management and administrative
personnel to support our operations.
Research and development expenses. Research and development expenses
increased 291.5% to $2.2 million in 1998 from $0.6 million in 1997. The increase
was primarily due to hiring additional full-time and contract personnel to
develop enhancements and new features to our M.A.R.S software product.
Client acquisition expenses. Client acquisition expenses increased 118.9%
to $1.1 million in 1998 from $0.5 million in 1997. The increase was primarily
due to salaries, benefits and travel expenses of $0.5 million associated with
hiring additional sales and implementation personnel for the M.A.R.S and ReFOCOS
services as well as $65,000 of costs associated with hiring additional
implementation consultants to transition our existing ReFOCOS clients to our
Web-enabled ReFOCOS service.
Years Ended December 31, 1997 and 1996
Revenue. Total revenue increased 354.5% to $5.3 million in 1997 from $1.2
million in 1996.
Contract service revenue. Contract service revenue increased 91.9% to $2.3
million in 1997 from $1.2 million in 1996. This increase was the result of
adding additional S.T.A.R. clients and, to a lesser extent, adding an additional
ReFOCOS client. S.T.A.R. revenue was $1.6 million and $0.7 million for the years
ended 1997 and 1996, respectively, a 128.6% increase. ReFOCOS revenue was $0.7
million and $0.5 million for the years ended 1997 and 1996, respectively, a
40.0% increase. During this period, the number of our S.T.A.R. clients increased
to 11 in 1997 from six in 1996 and the number of ReFOCOS clients increased to
five in 1997 from four in 1996.
Contract service revenue -- affiliate. We recognized contract service
revenue from affiliates of $3.1 million in 1997, but did not recognize any
contract service revenue from affiliates in 1996. Prior to January 1, 1997, we
operated as part of Phoenix Leasing and accordingly did not recognize revenues
for services that we provided to affiliates.
Cost of providing services. Cost of providing services increased 404.2% to
$2.9 million in 1997 from $0.6 million in 1996. The increase was due primarily
to providing additional services to affiliates, which required us to include
personnel in our operations group who formerly were included in the financial
results of Phoenix Leasing.
General and administrative expenses. General and administrative expenses
increased 582.9% to $2.0 million in 1997 from $0.3 million in 1996. The increase
was due to providing additional services to affiliates, which required us to
include personnel who formerly were included in the financial results of Phoenix
Leasing.
Research and development expenses. Research and development expenses
increased to $0.6 million in 1997 from zero in 1996. The increase is due to
hiring full-time employees and consultants to develop our M.A.R.S. product. The
initial development effort began in 1997.
Client acquisition expenses. Client acquisition expenses increased 22.7% to
$0.5 million in 1997 from $0.4 million in 1996. The increase is primarily due to
an increase in salaries, benefits and commissions paid to our sales force.
22
<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly consolidated
financial information for each of the eight quarters in the period ended June
30, 1999, as well as such data expressed as a percentage of our revenue for the
periods presented. This information has been derived from unaudited consolidated
statements of operations data that, in the opinion of management, are stated on
a basis consistent with the audited consolidated financial statements and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information in accordance with
generally accepted accounting principles. Our results of operations for any
quarter are not necessarily indicative of the results to be expected in any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1998 1998 1998 1998
------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Contract service revenue...................... $ 598 $ 608 $ 664 $ 575 $ 578 $ 643
Contract service revenue -- affiliate......... 912 908 553 481 589 559
Software revenue.............................. -- -- -- 39 3 2
------ ------ ------- ------- ------- -------
Total revenue........................... 1,510 1,516 1,217 1,095 1,170 1,204
Operating expense:
Cost of providing services.................... 884 793 1,177 1,120 1,155 1,027
Cost of providing software revenue............ -- -- -- 41 57 59
General and administrative.................... 670 705 338 412 503 819
Research and development...................... 177 354 289 365 628 934
Client acquisition............................ 125 114 164 157 247 555
Depreciation and amortization................. 35 43 68 73 80 86
Stock-related compensation.................... -- -- -- -- -- --
------ ------ ------- ------- ------- -------
Total operating expenses................ 1,891 2,009 2,036 2,168 2,670 3,480
------ ------ ------- ------- ------- -------
Loss from operations........................... (381) (493) (819) (1,073) (1,500) (2,276)
Other income (expense)......................... 16 12 (20) (21) 49 3
------ ------ ------- ------- ------- -------
Net loss....................................... $ (365) $ (481) $ (839) $(1,094) $(1,451) $(2,273)
====== ====== ======= ======= ======= =======
<CAPTION>
QUARTER ENDED
--------------------
MARCH 31, JUNE 30,
1999 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Contract service revenue...................... $ 808 $ 932
Contract service revenue -- affiliate......... 478 435
Software revenue.............................. 95 1,413
------- -------
Total revenue........................... 1,381 2,780
Operating expense:
Cost of providing services.................... 1,108 1,364
Cost of providing software revenue............ 129 190
General and administrative.................... 600 572
Research and development...................... 610 679
Client acquisition............................ 401 594
Depreciation and amortization................. 91 137
Stock-related compensation.................... 2,358 2,933
------- -------
Total operating expenses................ 5,297 6,469
------- -------
Loss from operations........................... (3,916) (3,689)
Other income (expense)......................... 9 8
------- -------
Net loss....................................... $(3,907) $(3,681)
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUE
-------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1998 1998 1998
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Contract service revenue...................... 39.6% 40.1% 54.6% 52.5% 49.4%
Contract service revenue -- affiliate......... 60.4 59.9 45.4 43.9 50.3
Software revenue.............................. -- -- -- 3.6 0.3
------ ------ ------- ------- -------
Total revenue........................... 100.0 100.0 100.0 100.0 100.0
Operating expense:
Cost of providing services.................... 58.5 52.3 96.7 102.3 98.7
Cost of providing software revenue............ 3.7 4.9
General and administrative.................... 44.4 46.5 27.8 37.6 43.0
Research and development...................... 11.7 23.4 23.7 33.3 53.7
Client acquisition............................ 8.3 7.5 13.5 14.3 21.1
Depreciation and amortization................. 2.3 2.8 5.6 6.7 6.8
Stock-related compensation.................... -- -- -- -- --
------ ------ ------- ------- -------
Total operating expenses................ 125.2 132.5 167.3 197.9 228.2
------ ------ ------- ------- -------
Loss from operations........................... (25.2) (32.5) (67.3) (97.9) (128.2)
------ ------ ------- ------- -------
Other income (expense)......................... 1.1 0.8 (1.6) (2.0) 4.2
Net loss....................................... (24.1)% (31.7)% (68.9)% (99.9)% (124.0)%
====== ====== ======= ======= =======
<CAPTION>
AS A PERCENTAGE OF REVENUE
-----------------------------------
DECEMBER 31, MARCH 31, JUNE 30,
1998 1999 1999
------------ --------- --------
<S> <C> <C> <C>
Revenue:
Contract service revenue...................... 53.4% 58.5% 33.5%
Contract service revenue -- affiliate......... 46.4 34.6 15.7
Software revenue.............................. 0.2 6.9 50.8
------- ------- -------
Total revenue........................... 100.0 100.0 100.0
Operating expense:
Cost of providing services.................... 85.3 80.2 49.1
Cost of providing software revenue............ 4.9 9.3 6.8
General and administrative.................... 68.0 43.4 20.6
Research and development...................... 77.6 44.2 24.4
Client acquisition............................ 46.1 29.0 21.5
Depreciation and amortization................. 7.1 6.6 4.9
Stock-related compensation.................... -- 170.7 105.5
------- ------- -------
Total operating expenses................ 289.0 383.6 232.7
------- ------- -------
Loss from operations........................... (189.0) (283.6) (132.7)
------- ------- -------
Other income (expense)......................... 0.2 0.7 0.3
Net loss....................................... (188.8)% (282.9)% (132.4)%
======= ======= =======
</TABLE>
Revenue. Our total revenues have fluctuated over the last eight quarters
primarily as a result of decreases in contract service revenue from affiliates,
the introduction of our M.A.R.S. software product and changes in contract
service revenue. The increase in revenue for the three quarters ended June 30,
1999
23
<PAGE> 27
was due to the addition of sales and marketing personnel beginning in October
1998 and the introduction of our M.A.R.S. product in March 1999.
Contract service revenue. Contract service revenue increased from $0.6
million for the quarter ended September 30, 1997 to $0.9 million for the quarter
ended June 30, 1999 primarily as a result of adding additional ReFOCOS clients.
Contract service revenue -- affiliate. Contract service revenue from
affiliates has fluctuated as a result of the disposition of affiliated entities.
Software revenue. We recognized $1.4 million in software license revenue
from our M.A.R.S. software product during the quarter ended June 30, 1999.
Software revenue in the quarter ended June 30, 1999 includes $0.6 million of
revenue deferred in prior periods, which was recognized at the time of final
installation and acceptance of our M.A.R.S. product by some of our customers.
Cost of providing services. Cost of providing services has generally
increased over the eight quarters ended June 30, 1999. These increases were
primarily due to the addition of additional personnel and infrastructure to
service new clients. Cost of providing services decreased in the quarter ended
December 31, 1998, primarily as a result of a decrease in consulting related
expenses. Cost of providing services increased from the quarter ended March 31,
1998 through the quarter ended June 30, 1998. The increase was primarily due to
the increase in the number of contract services offered coupled with additions
to our operations infrastructure. Some of these operational infrastructure costs
will be spread over future clients and as a result we expect that these costs as
a percentage of revenue will decline in the future. The reduction in costs as a
percentage of revenue for the quarter ended June 30, 1999 was due primarily to
the increase in software revenue recognized related to M.A.R.S. that had
previously been deferred. Prior to 1999, the M.A.R.S. product was in Beta
testing at client sites. Customer acceptance was contingent upon installation of
a final working copy of the software, which occurred during the quarter ended
June 30, 1999. As a result, all software revenue was deferred until customer
acceptance was received as required under SOP 97-2 except an insignificant
amount of non-refundable installation fees. Costs incurred related to the
development of our M.A.R.S. software product were expensed as research and
development when incurred because the product had not reached technological
feasibility until the quarter ended June 30, 1999.
Cost of providing software revenue. Cost of providing software revenue has
increased over the five quarters ended June 30, 1999. This increase has been due
to the increase in the number of M.A.R.S. contracts.
General and administrative expenses. General and administrative expenses
have fluctuated on a quarter-to-quarter basis as a result of the addition of
additional personnel and infrastructure to service new clients. The increase in
general and administrative expenses for the quarter ended December 31, 1998 was
primarily the result of an accrual for estimated legal fees.
Research and development expenses. Research and development expenses
increased due to increases in personnel and infrastructure. Research and
development expenses increased for the quarter ended December 31, 1998 due to
the hiring of an increased number of outside consultants to complete the
development of our M.A.R.S. software product.
Client acquisition expenses. Client acquisition expenses have increased on
a quarter-to-quarter basis due to an increase in the number of new clients,
increases in our personnel and investments in infrastructure. We completed the
initial installations of our web-enabled ReFOCOS service during the quarter
ended December 31, 1998 and the increase in client acquisition expenses reflects
the use of outside consultants working in conjunction with our internal
implementation group to complete these projects.
Our quarterly operating results have in the past and will in the future
vary significantly depending on a variety of factors, including the number and
size of new clients starting services, the decision of one or more clients to
delay or cancel implementation or ongoing services, our ability to design,
develop and introduce new services and features for existing services on a
timely basis, transition costs to new
24
<PAGE> 28
technologies, expenses incurred for geographic expansion, price competition, and
general economic factors. A substantial majority of our operating expenses
particularly personnel and related costs, depreciation and rent, is relatively
fixed in advance of any particular quarter. Our agreements with our clients
generally do not have significant penalties for cancellation. As a result, any
decision by a client to delay or cancel implementation of our services or our
underutilization of personnel may cause significant variations in operating
results in a particular quarter and could result in additional losses for such
quarter. In addition, our business may be affected by the risks set forth in
"Risk Factors." Our future revenue and results of operations may vary
substantially.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through equity
contributions and loans from our sole stockholder, the Gus and Mary Jane
Constantin 1978 Living Trust.
At June 30, 1999, we had approximately $0.1 million of cash and cash
equivalents. Net cash used in operating activities in 1998, 1997 and 1996 was
$4.1 million, $0.7 million, and $0.1 million, respectively. The increase in cash
used in operating activities in 1998 compared to 1997 was primarily the result
of net losses.
Net cash used in investing activities was $0.3 million, $0.5 million and
zero in 1998, 1997 and 1996, respectively. The net cash used in investing
activities resulted primarily from capital expenditures for data processing
equipment, and furniture and fixtures. We expect to make additional capital
expenditures for new office space, furniture, equipment and fixtures to support
the continued growth of our operations.
Net cash provided by financing activities was $4.8 million, $1.2 million
and $0.1 million in 1998, 1997 and 1996, respectively. Net cash provided by
financing activities in 1998, 1997 and 1996 was primarily a result of equity
investments by our sole stockholder.
We believe that the net proceeds from this offering, together with existing
cash balances and anticipated cash flows from operations will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next 12 months. We may also utilize cash to acquire or invest in complementary
businesses or to obtain the right to use complementary technologies, although we
do not have any pending plans to do so. We may sell additional equity or debt
securities or enter into new credit facilities.
YEAR 2000
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates
because such systems were developed using two digits rather than four to
determine the applicable year. For example, computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This error could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. As a result, many companies' software and computer systems
may need to be upgraded or replaced to comply with such "year 2000"
requirements.
State of readiness. Our business is dependent on the operation of numerous
systems that could potentially be affected by year 2000-related problems. Those
systems include, among others:
- the M.A.R.S. software product that we license to customers;
- hardware and software systems that we use in our operations, including
our proprietary software systems as well as software supplied by third
parties;
- communications networks such as our client/server network, the Internet
and our private intranet;
- the hardware and software systems of our customers and suppliers; and
25
<PAGE> 29
- non-information technology systems and services, such as utilities,
telephone systems and building systems.
We are currently reviewing the year 2000 readiness of our hardware,
software and systems we depend on to run our operations. The phases of our year
2000 program are as follows:
- assignment of responsibility for issues, such as systems, facilities,
equipment, software and legal audit, which was completed in the summer of
1998;
- inventory of all aspects of our operations and relationships subject to
the year 2000 problem, which was completed in the summer of 1998 for
existing systems and is ongoing for new components as these new
components are added to our system;
- communication as necessary with significant suppliers to determine the
readiness of their products and systems, which was completed in August
1999 for critical suppliers and is ongoing for non-critical suppliers;
- comprehensive analysis, including impact analysis and cost analysis, of
our year 2000 readiness, which was completed in April 1999 for critical
components of our system and is ongoing for non-critical components of
our system; and
- testing and remediation, which was completed for our S.T.A.R. service in
June 1999, completed for our M.A.R.S. software product and service in
August 1999 and is expected to be completed for our ReFOCOS service in
September 1999.
To date, we have not encountered any material year 2000 problems with the
hardware and software systems we use in our operations that have not been
corrected. In addition, our vendors have certified to us that the hardware and
software they provide to us are year 2000-compliant. In the event that any such
vendors' products, services or systems do not meet the year 2000 requirements on
a timely basis, our business could be seriously harmed.
Risks. Year 2000-related errors or defects that affect the operation of our
software could result in:
- delay or loss of revenue;
- cancellation of customer contracts;
- diversion of development resources;
- damage to our reputation;
- increased customer support and warranty costs; and
- litigation costs.
Success of our year 2000 compliance efforts may also depend on the success
of our customers in dealing with their year 2000 issues. Our M.A.R.S. product is
generally integrated into enterprise systems involving sophisticated hardware
and complex software products which may not be year 2000-compliant and this may
have an adverse impact on or demand for our M.A.R.S. product.
Although we have not been a party to any litigation or arbitration
proceeding to date involving our products or services and related to year 2000
compliance issues, we cannot assure you that we will not in the future be
required to defend our products or services in such proceedings, or to negotiate
resolutions of claims based on year 2000 issues. The costs of defending and
resolving year 2000-related disputes, regardless of the merits of such disputes,
and any liability for year 2000-related damages, including consequential
damages, would seriously harm our business, financial condition and operating
results.
In addition, we believe that purchasing patterns of customers and potential
customers may be affected by year 2000 issues as companies expend significant
resources to correct or upgrade their current software systems for year 2000
compliance or defer additional software purchases until after 2000. As a result,
some customers and potential customers may have more limited budgets available
to purchase software products
26
<PAGE> 30
such as those offered by us, and others may choose to refrain from changes in
their information technology environment until after 2000. Still other companies
are accelerating purchases of software products prior to 2000, causing an
increase in short-term demand which may, in turn, cause a corresponding decrease
in long-term demand for software products. To the extent year 2000 issues cause
significant change in, delay in, or cancellation of, decisions to purchase our
products or services, our business could be materially adversely affected.
Contingency plan. We could experience material adverse effects on our
business if we fail to identify all year 2000 dependencies in our systems and in
the systems of our suppliers, customers and financial institutions. Therefore,
we have contingency plans for handling year 2000 problems that are not detected
and are correcting any identified problems prior to their occurrence. If
previously undetected year 2000 issues occur, we plan to consult with Oracle and
our other vendors to determine if the problem relates to products supplied by
these vendors and is wide-spread among users of these products. If the problems
are widespread, we will apply resolutions provided by these vendors. If the
problem is not widespread, we will investigate whether all of the latest year
2000 patches and configuration recommendations from the vendors have been
applied, and apply as necessary. If the problem persists we will investigate the
particular problem. If the problem seems to be hardware, operating system or
network related, we will apply the appropriate vendor fix or transfer operations
to our business resumption site at SunGard, whichever is a lower risk.
Costs. To date, we have not incurred any material costs directly associated
with our year 2000 compliance efforts, except for compensation expense
associated with our salaried employees who have devoted some of their time to
our year 2000 assessment and remediation efforts. We do not expect the total
cost of year 2000 problems to be material to our business, financial condition
and operating results. However, we have not completed our year 2000
investigation and we will continue to evaluate our products, software provided
by third parties and infrastructure systems that we rely on. Despite our
efforts, we may not identify and remediate all significant year 2000 problems on
a timely basis, remediation efforts may involve significant time and expense,
and unremediated problems may have a material adverse effect on our business.
See "Risk Factors -- If our computer systems and software products are not year
2000 compliant, our services could be disrupted."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because we do not currently
hold any derivative instruments and do not currently engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a material
impact on our financial position or results of operations.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. We do not expect the adoption of SOP 98-9 to have a material effect on
our results of operations or financial condition.
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<PAGE> 31
BUSINESS
OVERVIEW
ReSourcePhoenix.com provides outsourced financial and management reporting,
accounting management, transaction processing and record keeping services. We
allow our clients to focus on their core businesses by outsourcing the
infrastructure and operations of these critical back-office functions.
We are pioneering the use of the Internet to integrate leading enterprise
resource planning software applications with the expertise of information
technology, finance, accounting and transaction processing professionals. Our
solution offers the cost-effective benefits of outsourcing while providing the
flexibility, control, customization, integration and scalability of an in-house
system. We offer our clients access to leading enterprise resource planning
software applications, which often are too costly and complex for early stage
and middle market companies to obtain and operate.
INDUSTRY BACKGROUND
Businesses increasingly need financial and management reporting systems
that can collect, organize and disseminate information quickly and accurately
for strategic, financial and competitive reasons. This trend has increased the
competitive pressures on these companies to automate business processes and
invest in more complex technology as a way to improve their information
technology systems.
Shortfalls of traditional business information systems
Current solutions are complex and costly. We believe that many of the
leading enterprise resource planning software packages remain too complex and
costly to be effective business process automation solutions for early stage and
middle market companies. While many enterprise resource planning providers offer
products that are targeted for these companies, the initial purchase,
implementation, integration and operation of these packages generally require
specialized knowledge and take up to twelve months, and frequently longer.
Additionally, the infrastructure required to support these packages, once
implemented, is frequently cost prohibitive for many early stage and middle
market businesses. Faced with these challenges, many of these companies choose
to forgo the capabilities of leading enterprise resource planning software
packages in favor of less functional products.
Personnel gap. The high cost of automating business processes has been
exacerbated by the level of technical skill necessary to manage this technology
and the shortage of qualified information technology, accounting, finance, and
transaction processing professionals. There are indications that this shortage
will continue and become more severe. Management consulting firm A.T. Kearney
recently estimated that the shortage of high technology workers in Silicon
Valley resulted in one in three jobs requiring special recruitment efforts or
going unfilled, which leads to a loss of over $3 billion per year in lost
production and additional recruiting costs. A 1998 study by the Information
Technology Association of America found a shortage of 346,000 programmers,
systems analysts and computer scientists.
The emergence of ASPs and their limitations. Traditionally, companies
wanting to implement Internet-enabled applications had to develop their own
software applications or customize existing software packages. Recently, a
number of companies, known as application service providers, or ASPs, began
providing integrated software applications for business enterprises. ASPs manage
the hardware and software at their data centers and provide access to clients
over the Internet. ASPs do not, however, provide the accounting, financial
analysis, data compilation or transaction processing professionals and
infrastructure that is required to effectively operate these software
applications. Moreover, ASPs can exacerbate an existing problem by putting more
complicated technology in the hands of users without providing the additional
training or support that is required to operate this technology effectively.
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<PAGE> 32
Need for an outsourced solution
International Data Corporation estimates that outsourcing spending in the
United States will grow from approximately $51 billion in 1998 to more than $81
billion in 2003. Reasons for the growth in outsourcing include:
- the desire by companies to focus on their core businesses;
- the difficulties of attracting and retaining qualified personnel in
information technology, accounting, finance, transaction processing and
other business specialties;
- the time and expense required to keep these personnel current in their
skills;
- the inability of many companies to effectively adopt and implement
advanced business processes;
- the challenges inherent in developing and maintaining software
applications, and data and communications networks; and
- the ongoing cost to keep up with leading technologies.
Designing, developing and implementing information technology solutions for
individual businesses has become increasingly complex. Companies can improve
their core business processes, reduce costs and enhance their competitive
position by outsourcing these processes to an affordable, single-source provider
that integrates the functionality of leading enterprise resource planning
software applications with the expertise of information technology, accounting,
finance and transaction processing professionals.
OUR SOLUTION
We provide our clients with a single-source, cost-effective outsourced
financial and management reporting solution, which allows our clients to:
- Maintain focus on growing their businesses. Our solution allows our
clients to focus on executing their business strategy. By outsourcing to
us these critical back-office functions, our clients minimize the
distractions of managing the personnel and technology necessary to
perform these tasks and instead focus on their core businesses.
- Receive better business information. We allow our clients to utilize and
benefit from leading enterprise resource planning software applications,
which are often too costly and complex for early stage and middle market
companies to obtain and operate. These applications can provide more
detailed information on costs, expenses, trends, budgeting, sales and
other areas more quickly than less functional solutions.
- Reduce costs. Early stage and middle market companies often are
financially constrained and seek to reduce the use of capital for
non-core functions. By outsourcing these functions, these companies can
reduce or eliminate the costs of:
-- purchasing enterprise resource planning and other functional software
and computer hardware;
-- integrating and implementing the software and hardware with existing
systems;
-- recruiting, hiring and training an extensive staff of information
technology, accounting, finance, transaction processing and other
business professionals;
-- ongoing training of these personnel in their respective operational
areas;
-- expanding overhead to support the growing organization; and
-- ongoing technology and process upgrades.
- Gain access to the most advanced enterprise resource planning
applications available. We are committed to providing our clients with
the most advanced enterprise resource planning applications available. We
currently employ a dedicated information technology group whose function
is to
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<PAGE> 33
continually evaluate new applications and technologies, as well as
integrate new releases of existing software applications into our service
offerings. As a result, our clients have access to leading applications,
such as Oracle financial reporting and database applications, while
avoiding the complexity of keeping current with multiple product and
service roll-outs.
- Gain access to the expertise of a broad range of professionals. We offer
our clients access to a broad range of professionals who are
highly-qualified and specialized in areas of information technology,
accounting, finance and transaction processing. Our business
professionals assess each client's needs, reengineer and design each
client's business processes and implement a value-added solution. The
skills offered by these professionals generally are in short supply and
difficult for many companies to acquire. We believe that we are well
positioned to attract and retain these professionals because we offer
expanded opportunities for development and career advancement and
exposure to leading-edge technologies not customarily found at many early
stage and middle market companies.
OUR STRATEGY
Our objective is to become the leading single-source provider of financial
and management reporting services for early stage and middle market companies,
and selected financial services companies. Key elements of our strategy include:
- Target early stage and middle market companies. We plan to focus our
marketing efforts on early stage and middle market companies. These
companies often have difficulty collecting, organizing and disseminating
financial and business information and often are more receptive to
outsourcing as a means of solving these problems. We plan to establish
early relationships with these companies and grow with them as their
needs in these areas expand and become more complex.
- Build recurring revenue by continuing to emphasize client service. We
plan to continue to build recurring revenue by supporting our clients'
needs as they grow. We believe that our client service focus will enable
us to expand our existing client relationships and to add new clients.
- Extend technology leadership. We believe that our ability to offer the
latest, most technologically advanced services possible is critical to
expanding our current client relationships and client base. To this end,
we employ a sizable staff of business and information technology
professionals whose function is to expand and update our service
offerings so that our clients can benefit from the latest technology
available. We also aggressively recruit key professionals in
implementation and information technology management.
- Strengthen our brand. We believe that a strong brand is critical to
attracting and expanding our client base. Until now we have relied on our
own sales and marketing professionals, and referrals from our current
clients and strategic partners as our primary means of attracting new
clients. We plan to increase brand awareness by launching a comprehensive
advertising campaign, which includes Internet, radio and print
advertisements. This campaign began in September 1999.
- Broaden service offerings. We plan to broaden our service offerings,
including payroll and human resource management services, through
strategic alliances. These alliances could include co-marketing or
co-branding relationships. We believe that by offering these additional
services, we will be able to provide a more comprehensive solution to
alleviate the problems encountered by our clients performing these
functions internally.
- Develop additional relationships with trusted business partners of early
stage and middle market companies. We plan to leverage and expand our
relationships with the professional advisors, key suppliers and other
trusted business partners of early stage and middle market companies who
have the ability to refer business to us. For example, we currently have
relationships with Silicon Valley Bank and Imperial Bank, two leading
banking institutions for venture-backed, early stage companies, and with
Cisco, a leading producer of network infrastructure, in which these
companies have agreed to provide referrals for prospective clients to us.
We plan to develop additional
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<PAGE> 34
relationships with leading law firms, venture capital firms and other
professional services firms that service early stage and middle market
companies.
OUR OFFERINGS
Each of our service offerings is summarized below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRODUCT TARGET MARKET SERVICES OFFERED
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
REFOCOS (Financial - Early stage and - Reporting, including: management reporting;
Outsourcing Corporate middle market investor and bank reporting; statutory reporting;
Online Services) companies regulatory reporting; and income, VAT, property,
sales and use tax reporting
- Accounting, including: month-end, quarter-end and
year-end closings; and account reconciliations
- Transaction processing; including accounts
payable; disbursements; travel and entertainment
expense report; processing; billing; cash
receipts; and collections activities
- Budgeting and analysis
- Operation of financial and management reporting
software, databases, hardware, network and other
communications infrastructure
- -------------------------------------------------------------------------------------------------------
M.A.R.S. (Marketing And - Mutual funds - Sales tracking
Representative Sales)
- Issuers of variable - Contact management
annuities - Fulfillment/inventory tracking
- -------------------------------------------------------------------------------------------------------
S.T.A.R. (Syndication - Sponsors of limited - Transfer agency and investor servicing through
Tracking And Reporting) partnerships call center support
- Distribution processing
- Sponsors of real
estate investment - Tax (K-1 and 1099) reporting
trusts - Sales and marketing support
- Blue sky and compliance reporting
- Multi-level support of broker selling agreements
- Investor proxy support
- Investor and broker contact management and
follow-up
- -------------------------------------------------------------------------------------------------------
</TABLE>
Our ReFOCOS service is a financial outsourcing solution that includes
reporting, accounting, transaction processing, budgeting and analysis solutions.
We target our ReFOCOS service to early stage and middle market companies. We
perform the accounting, transaction processing and management reporting
functions for our clients. We also manage the applications, related databases,
hardware, communications network and infrastructure. All but one of our ReFOCOS
clients access the ReFOCOS service via the Internet.
M.A.R.S. is a sales force automation software application aimed at the
mutual fund and variable annuity industries. We currently license our M.A.R.S.
software to clients who operate the software using their own staff and
equipment. We recently began to market M.A.R.S. as a hosted application in which
our clients can outsource to us several functions, including database
management, call center services, telemarketing services and sales transaction
processing. Our strategy is to emphasize hosting M.A.R.S. in our data centers
while continuing to offer M.A.R.S. as a licensed software product to our clients
that prefer a software-only solution.
Our S.T.A.R. services are similar to ReFOCOS, but are designed to provide
investor services to sponsors of limited partnerships and real estate investment
trusts. We begin by implementing the client on
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the S.T.A.R. application. This typically requires minimal customization but
substantial data conversion. Once implemented, we manage the applications,
related databases, hardware, communications network and infrastructure. Our
clients access the system using dedicated point-to-point connections. In
addition to technology implementation and management, we perform a full range of
investor services including transfer agency, call center, distribution
processing, tax and other reporting.
CLIENT SERVICE
We believe that providing high levels of client service creates a
competitive advantage in the market for outsourced financial and management
reporting services. By assessing each client's needs, we create value-added
solutions through business process reengineering. Our client team includes a
sales representative, a client service manager and numerous functional and
technical support specialists to provide service to our clients.
We recently implemented a process to monitor the quality of our service
through client feedback mechanisms. Our policy is to solicit formal feedback
from our clients four times each year, twice in writing and twice in person, to
measure their level of satisfaction with our service. We use this information to
help develop and identify new service offerings and enhance existing offerings
provided to our clients to improve the levels of service. We also use client
feedback as a basis to recognize the achievements of our employees.
Sales. Since we believe that client service begins with the sales process,
we assign a sales representative to work closely with our information
technology, accounting, finance, transaction processing and other business
professionals to assess a potential client's needs. Using this assessment, the
sales representative identifies opportunities to add value through business
process reengineering and designs solutions that integrate the client's business
needs effectively. Our sales cycle typically ranges from two to six months.
Implementation and integration. Upon engagement by a client, a client
service manager works with a team of technical support specialists to transition
the client from its former system to our system. The team creates new processes
and reports, converts client data and integrates the client's existing hardware
and software to our systems. This process generally takes from one to four
months depending on the scope of the service that we provide.
Operations. After supervising the implementation, the client service
manager, together with our business process operations group, is the primary
interface for day-to-day contact with the client, coordinating the efforts of
both functional and technical support specialists as necessary. By visiting each
client regularly and tracking all correspondence and feedback, the client
service manager can ensure that all of the client's needs are addressed. Our
client-to-manager ratio is kept low to offer the most responsive service.
Specialized client support. Each client is supported by information
technology, accounting, finance and transaction processing professionals. Each
specialist is available to support the client directly, onsite or over the
phone, or indirectly through the client service manager and business process
operations group.
OUR PEOPLE
Attracting, training and retaining high quality information technology,
accounting, finance and transaction processing professionals is essential to our
growth. We believe that we are well-positioned to attract and retain these
professionals primarily for the following reasons:
- Financial and management reporting, accounting management, transaction
processing and record keeping services are our core businesses rather
than support functions. As a result, we can offer expanded opportunities
for development and career advancement, and exposure to the business
processes of multiple organizations and leading-edge technology.
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<PAGE> 36
- Our integration and implementation specialists are not required to spend
extended periods on out-of-town client assignments, which would typically
be required of these professionals if they worked for a consulting firm.
As a result, we can offer more attractive opportunities than many other
competing employers.
We hire motivated individuals with strong substantive skills and leadership
traits and provide them with ongoing technology and leadership skills training.
We emphasize retaining our information technology, accounting, finance and
transaction processing professionals through challenging work assignments and
incentive programs, including rewarding outstanding performance and client
service. Since July 1, 1997, our average annual retention rate for our
information technology, accounting, finance and transaction processing
professionals has been greater than 93%.
OUR NETWORK
Our information technology strategy focuses on delivering reliable, high
performance, integrated financial and management reporting solutions to anyone,
anytime, anywhere. To this end, our application, server and networking
architecture is designed to provide:
- scalability;
- customizable and reliable security;
- flexible communication and networking worldwide;
- high availability (uptime); and
- flexible application hosting and integration capability.
Scalability
We have installed hardware and software that are designed to operate in
parallel, to enable efficient expansion of our network infrastructure as needed.
We recently signed contracts with Sprint and Electric Light Wave as additional
Internet service providers, which services will commence later this year. These
additional Internet service providers will allow us to increase bandwidth and
network redundancy.
Customizable and reliable security
We deploy a multi-layered security defense against unauthorized data
access. Our defenses consist of electronic and procedural controls to regulate
physical access to sensitive locations within our data operations center,
network access control using CiscoSecure authentication components, server
operating system level controls with Cisco firewall and router-based lock-down
of network protocols, IP addresses and ports, database access controls for
applications, and for development and operations personnel, and application
access controls at the application, user, data and business function levels.
Flexible communication and networking worldwide
We support four client communication models, consisting of Internet Web
sites using secure socket layer technology, secure Internet-based virtual
private networks, or VPN, based on 56 to 168 bit encryption, secure dial-up
networks, and wide area networks using dedicated leased lines. Our VPN
architecture is a key differentiator between us and the typical ASP. With our
VPN networking option, we can run network based applications across multiple
customer locations around the world as if the servers, printers and system
interfaces were local at each and every site. This secure network solution works
well for distributed offices, telecommuters and travelers because it can be
deployed anywhere a customer can gain access to the Internet.
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High availability (uptime)
Our data operations center is designed to promote high availability. We use
industry leading hardware and service providers with proven compatibility, which
allows us to maintain availability during system maintenance. These providers
include Cisco ISP class networking hardware, software and security; Red Creek
hardware accelerated virtual private networks; UUNet Internet service provider;
Sun Enterprise UNIX servers and arrays; Dell multi-processor Intel based NT
servers; Microsoft operating systems, security, SMS and applications; Oracle
databases and applications; and Necho applications.
Flexible application hosting and integration capability
Our integrated systems model is designed to provide seamless integration of
industry leading Internet-based applications. In addition, we also have the
ability to deliver traditional client-server and "terminal-based" applications.
We have the ability to host a wide range of business applications on industry
leading operating system platforms that include Sun Solaris and Microsoft NT.
We efficiently support contemporary Web-enabled software applications that
are designed to give the modern "terminal," or Web browser, on a user's desktop
secure access to remote application servers at the hosting site. Moreover, the
VPN-based integration of our local area networks, or LANs, with our customers'
LANs also allows us to run software applications that were originally only
designed to run on private LANs or wide area networks. This class of software
includes client-server-based applications such as M.A.R.S. or Oracle Financial
Analyses, and terminal based applications such as S.T.A.R.
This cost-effective and secure VPN with our clients and us enables us to
initiate printing from desktops or our servers to local printers at our, and our
clients' remote sites. It also enables us to seamlessly integrate our hosted
applications, those of third-party partners, and our customers' applications
that they have chosen not to outsource, as if they were all on the same LAN in
the same data center.
SALES AND MARKETING
We market our services through a direct sales organization based in the
United States. Our sales force is organized by industry, with each sales
professional having responsibility for one or more target industries. We believe
that having an industry focus allows our sales professionals to leverage their
experience to deliver a better solution to existing and prospective clients.
Our sales force has, on average, 15 years of business experience. Because
the sale of our services requires a strong understanding of business functions
as well as the use of technology to facilitate business process and decision
support, we recruit our sales force from sources of those skills. For example,
two of our sales people each had over ten years experience at Arthur Andersen
LLP, including our Group Vice President, Sales and Marketing who was previously
a partner at Arthur Andersen.
Our marketing strategy includes building awareness of our brand and
developing strategic partner relationships. To this end, we recently launched a
comprehensive advertising campaign, which began in September 1999.
ReFOCOS
Our primary focus is to target early stage and middle market companies,
which we believe are more likely to be receptive to our service offerings.
Typically, there is less initial risk of adoption for early stage companies
because these companies generally do not have a significant investment in
hardware, software and human resource infrastructure. Additionally, we believe
that our solution is attractive to early stage companies because it requires
minimal up-front cost, is an economical ongoing solution, and is designed to
scale in a manner that is transparent to the client and which allows the client
to manage its growth more effectively. Moreover, early stage and middle market
companies can exhibit above average business growth, which can result in
increased service revenue as we expand our relationships with them.
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M.A.R.S. and S.T.A.R.
We currently market our M.A.R.S. software and services to the mutual fund
and variable annuity industries, money management firms and banks that sponsor
mutual funds. We plan to expand the industries to which we market our M.A.R.S.
software and service to include insurance and no-load mutual fund companies. Our
strategy is to emphasize hosting M.A.R.S. in our data centers while continuing
to offer M.A.R.S. as a licensed software product to our clients that prefer a
software-only solution. We market our S.T.A.R. service to sponsors of limited
partnerships and real estate investment trusts. We will continue to devote
resources to the marketing of our S.T.A.R. services and intend to pursue
additional sales opportunities as they arise.
CLIENTS
As of September 1, 1999, we had 36 clients, including 33 unaffiliated
clients and 3 clients that are affiliated with Phoenix Leasing. Of these
clients, 15 were ReFOCOS clients, 11 were M.A.R.S. clients and 15 were S.T.A.R.
clients. Set forth below is a representative list of our unaffiliated clients.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
REFOCOS CLIENTS M.A.R.S. CLIENTS S.T.A.R. CLIENTS
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
Thomas Weisel Partners John Hancock Advisors GE Capital Aviation
Services/PIMC
- -----------------------------------------------------------------------------------------------
GE Capital Aviation Aetna Insurance Co. Paine Webber/Pegasus
Services/PIMC
- -----------------------------------------------------------------------------------------------
GE Capital Aviation Heritage Asset Management Starwood Hotels and
Services/Aircraft Finance Trust Resorts
- -----------------------------------------------------------------------------------------------
Paine Webber/Pegasus Blackrock Advisors CIGNA Financial Partners
- -----------------------------------------------------------------------------------------------
Applied Telecommunications Deutsche Fund Management W.P. Carey
Technologies
- -----------------------------------------------------------------------------------------------
</TABLE>
We believe that our high quality service is the reason why we have never
lost a ReFOCOS client because of service or pricing issues. Our client contracts
can generally be terminated without significant penalties for cancellation.
BUSINESS PARTNERS
In developing our service offerings, we have formed relationships with some
of the leading product and service providers whose offerings support essential
business processes. These partners include Oracle, Necho, Cisco, Sun and Core
Technology Group, Inc.
We believe that we can help establish our partners in markets that are
difficult to reach. Early stage middle market companies are unlikely to purchase
a leading ERP solution directly from the ERP application vendor because of the
significant resource commitments that implementing such an application requires.
However, these companies may purchase a financial and management reporting
solution from us because we offer an outsourced, turn-key solution that
substantially reduces the resource commitments necessary to implement an ERP
application. As a result, our business partners benefit from increased market
share, and their ability to expand the relationships that we have initiated into
difficult to reach markets.
Each of our agreements with our software application partners allows us to
deploy packaged application software as a service without the need to establish
a separate licensing arrangement for each client. We plan to enter into
additional agreements with other software vendors from time to time.
Each of our key business relationships is described below:
Oracle Corporation. We have a contract with Oracle that permits us to
license its applications and use the software for the benefit of our customers.
The contract requires that we pay a one-time software
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license fee and annual maintenance fees, and pay additional amounts
incrementally as we add users. The contract continues for a perpetual term.
Necho Systems Corp. We have an agreement with Necho that permits us to
license its Web-based travel and expense reporting application, NavigatER, and
use the software for the benefit of our customers. This agreement requires that
we pay an initial software license fee, and pay additional amounts incrementally
as we add users. This agreement is for a perpetual term. In addition, the
agreement permits us to privately label the application. Necho has also agreed
to provide us with product demonstrations, collateral materials, sales force
training and sales and technical support. Finally, we have agreed to co-market
our products and services and Necho has established a referral link on their
website to ours for prospective clients with fewer than 200 users.
Cisco Systems, Inc. We purchase equipment and services from Cisco for use
in our data operations center as well as at client locations. We have conferred
with Cisco technical personnel on the design of our VPN communication solution.
As a result of meeting Cisco's stringent criteria for quality of service and
support, we have been designated as a Cisco Powered Network Partner. As a result
of our Cisco Powered Network Partner designation, we are eligible for
co-marketing programs, technology sharing benefits and joint selling benefits.
Sun Microsystems, Inc. We purchase equipment and services from Sun for use
in our data center. Sun has assigned us "named account" status, a status that is
reserved for accounts that Sun has determined merit dedicated special technical
and business support. Being designated a "named account" gives us the following
benefits:
- Executive level discussions of Sun's technical and business plans;
- Free technical design, capacity planning, evaluation equipment and
systems implementation; and
- Special payment terms for Sun's largest servers, allowing us to install
fully loaded servers with excess performance and scalability, with tiered
payments deferred until hardware resources are actually used.
Core Technology Group, Inc. Core Technology Group provides to us various
Oracle technology consulting services. We have entered into a relationship
whereby we have agreed to use Core Technology Group for implementation and
integration services on any prospective clients they refer to us with whom we
ultimately sign a contract.
Silicon Valley Bank. We have a contract with Silicon Valley Bank, through
its eSource unit, under which we are included on the eSource website as a
Silicon Valley Bank preferred provider. We believe that we are currently the
only preferred provider of the type of services we offer. The eSource website is
targeted to Silicon Valley Bank clients seeking help with particular business
problems. The agreement requires that we pay fees to Silicon Valley Bank for
clients it refers to us with whom we ultimately sign contracts. The agreement
also provides us with periodic access to Silicon Valley Bank's lenders and
business developers in order to educate them about our service offerings.
Imperial Bank. We have a relationship with Imperial Bank's Emerging Growth
Division which gives us periodic opportunities to meet with its lenders and
business developers to educate them about our service offerings. We have agreed
to pay Imperial fees for clients it refers to us with whom we ultimately sign
contracts.
COMPETITION
The market for outsourced financial and management reporting solutions is
extremely competitive. We anticipate that competition will continue to intensify
as the use of the Internet grows. In the market for outsourced financial process
and management reporting solutions, we anticipate that we will compete on the
basis of service, performance, experience, price, software functionality,
ability to attract professional staff and overall network design. With respect
to service, we believe that we have a competitive advantage because we combine
both information technology outsourcing and finance, accounting and transaction
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processing outsourcing. With respect to experience, we believe that we have a
competitive advantage because we have provided outsourced financial and
management reporting solutions since 1972. With respect to price, we believe
that we have a competitive advantage because we have negotiated relatively
favorable terms with Oracle, Necho and other vendors that supply components to
our system. With respect to our ability to attract professional staff, we
believe that we have a competitive advantage because of the career paths that we
are able to offer to our professional staff. See "-- Our People." While our
potential competitors come from many industry segments, we believe no single
company provides the cost-effective, single-source financial and management
reporting solution that we provide. Although we believe that we have several
competitive advantages with respect to our potential competitors, we cannot
assure you that we will be able to compete successfully in our selected markets.
See "Risk Factors -- The markets we serve are highly competitive and many of our
competitors have much greater resources" and "Risk Factors -- Our growth will be
limited if we are unable to attract and retain qualified personnel."
Prospective competitors include the following:
Application service providers. Our potential competitors include
application service providers such as USInternetworking, Oracle and Corio.
Oracle, a business partner of ours, recently introduced a hosted service
offering based on its Web-enabled enterprise resource planning software that it
markets directly to middle market companies. Some of these companies have
significantly greater market presence, brand recognition, and financial,
technical and personnel resources than we do.
Accounting firms. Our potential competitors include international, national
and regional accounting firms who provide systems integration and outsourced
finance and accounting services for their clients. Many of these firms have
greater name recognition or more extensive experience than we do.
PricewaterhouseCoopers LLP, KPMG LLP, and Ernst & Young LLP, among others,
provide professional consulting services in the use and integration of software
applications in single project client engagements and provide outsourced finance
and accounting services.
Software and systems integrators. Our potential competitors, who include
national, regional, and local commercial systems integrators who bundle their
services with software and hardware providers and perform a facilities
management outsourcing role for the customer, generally have greater name
recognition or more extensive experience than we do. EDS, Perot Systems,
Andersen Consulting and PricewaterhouseCoopers LLP, among others, provide
professional consulting services in the use and integration of software
applications in single-project client engagements. Large systems integrators may
establish strategic relationships with software vendors to offer services
similar to our ReFOCOS offerings. We expect that regional systems integrators
are likely to compete with us. Additionally, regional systems integrators may
align themselves with ISPs to offer complex Web site management combined with
professional implementation services.
Hardware and software companies. Our potential competitors include hardware
and software companies providing packaged application solutions as well as
network infrastructure. In order to build market share, both hardware and
software providers may establish strategic relationships in order to enhance
their service offerings. Oracle, a business partner of ours, recently introduced
a hosted service offering based on its Web-enabled enterprise resource planning
software that it markets directly to middle market companies. IBM Solutions
currently provides applications outsourcing around its Lotus Notes products and
delivers the service via the IBM network infrastructure. J.D. Edwards & Company,
a developer of enterprise resource planning software, has announced that it will
offer its software in an outsourced model. SAP AG has formed an outsourcing
organization to develop key partnerships with leading consulting firms with the
intent of offering SAP software. We believe that additional hardware and
software providers, potentially including our strategic partners, may enter the
outsourcing market in the future.
Other potential competitors. It is possible that new competitors or
alliances may emerge and gain market share. Such competitors could materially
affect our ability to obtain new contracts. Further, competitive pressure could
require us to reduce the price of our products and services thus affecting our
business, financial condition and results from operations.
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<PAGE> 41
EMPLOYEES
As of September 1, 1999, we had 166 full-time employees, including 14 in
sales and marketing, six in management, 128 in operations and 18 in research and
development. None of our employees are covered by collective bargaining
agreements. We believe that our relations with our employees are good.
FACILITIES
Our principal executive offices are located in San Rafael, California, in a
40,000 square-foot facility that we lease from one of our affiliates. See
"Relationship with Phoenix Companies and Certain Transactions -- Intercompany
Agreements."
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. We are not
aware of any legal proceedings threatened against us.
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<PAGE> 42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors and their ages as of September 1, 1999
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gus Constantin........................... 61 Chairman of the Board and Chief Executive Officer
Bryant Tong(2)........................... 44 President, Chief Operating Officer and Director
David Brunton............................ 49 Chief Financial Officer
Michael D'Almada-Remedios................ 36 Chief Technology Officer
W. Corey West............................ 37 Group Vice President Sales & Marketing
James Barrington(1)(2)................... 58 Director
Glen McLaughlin(1)(2).................... 64 Director
Roger Smith(1)(2)........................ 58 Director
</TABLE>
- ---------------
(1) Member of compensation committee of the board of directors.
(2) Member of audit committee of the board of directors.
GUS CONSTANTIN has served as our Chairman of the Board and Chief Executive
Officer since founding the company in 1996. In 1972, Mr. Constantin founded
Phoenix Leasing Incorporated, a company specializing in lease financing for
businesses. Mr. Constantin currently serves as Chairman of the Board and Chief
Executive Officer of Phoenix Leasing, as well as Phoenix Cable Incorporated,
Phoenix Precision Graphics, Inc. and Phoenix American Incorporated. Each of
these entities is located in San Rafael, California. Mr. Constantin devotes
approximately 40% of his professional time to us, 40% to Phoenix Leasing, 5% to
Phoenix Cable, and 15% to Phoenix Precision Graphics. From 1969 to 1972, he
served as Director, Computer and Technical Equipment of DCL Incorporated
(formerly Diebold Computer Leasing Incorporated), a corporation formerly listed
on the American Stock Exchange, and as Vice President and General Manager of DCL
Capital Corporation, a wholly-owned subsidiary of DCL Incorporated. Mr.
Constantin was actively engaged in marketing manufacturer leasing programs to
computer and medical equipment manufacturers and in directing DCL Incorporated's
IBM System/370 marketing activities. Prior to 1969, Mr. Constantin was employed
by IBM Corporation as a data processing systems engineer for four years. Mr.
Constantin received his B.S. in engineering from University of Michigan and his
M.S. in management science from Columbia University.
BRYANT TONG has served as our President and Chief Operating Officer since
May 1, 1999 and as a director since we commenced operations. Prior to assuming
his current positions, Mr. Tong served as our Executive Vice President and Chief
Operating Officer from January 1, 1998 to April 30, 1999 and as our Senior Vice
President, Financial Operations since we commenced operations. For more than the
last five years, Mr. Tong has served as Senior Vice President, Financial
Operations for Phoenix American Incorporated and each of its active
subsidiaries. Mr. Tong devotes substantially all of his professional time to us.
At various times throughout his tenure with Phoenix Leasing Incorporated, Mr.
Tong served as an instructor at Golden Gate University, teaching Advanced
Accounting. Mr. Tong received his B.S. in accounting and finance from the
University of California at Berkeley and is a Certified Public Accountant.
DAVID BRUNTON has served as Vice President and Chief Financial Officer
since January 1997. From February 1987 to December 1996, Mr. Brunton served as
Corporate Controller of Phoenix Leasing Incorporated and Phoenix American
Incorporated Mr. Brunton is currently an Assistant Vice President and Corporate
Controller of Phoenix Securities Inc., a registered broker/dealer. Mr. Brunton
devotes substantially all of his professional time to us. Mr. Brunton received
his B.A. in social welfare from the University of California at Chico and is a
Certified Public Accountant.
MICHAEL D'ALMADA-REMEDIOS has served as Vice President and Chief Technology
Officer since September 1998. From February 1992 to September 1998, Dr.
D'Almada-Remedios was with Wells Fargo
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<PAGE> 43
Bank, most recently as a vice president responsible for selecting technologies,
developing applications and running operations to support numerous areas of
consumer and business banking. Dr. D'Almada-Remedios received his B.Sc. in
physics and computer science from Kings College, University of London and his
Ph.D. in fluid dynamics and computer control from Nottingham (Trent) University,
England.
W. COREY WEST has served as Group Vice President Sales and Marketing since
October 1998. From July 1986 to October 1998, Mr. West was with Arthur Andersen
LLP, most recently as a partner. Mr. West received his B.S. in accounting and
finance from the University of Washington and is a Certified Public Accountant.
JAMES BARRINGTON has been a director since September 1999. Mr. Barrington
is currently a private business consultant. From 1965 to 1999, Mr. Barrington
was with Arthur Andersen LLP, serving primarily as an audit and business
advisory partner. Mr. Barrington received his B.S. in accounting from San Jose
State University and his M.B.A. from the University of California at Berkeley.
GLEN MCLAUGHLIN has been a director since August 1999. Since December 1986,
Mr. McLaughlin has served as President, Chief Executive Officer and a director
of Venture Leasing Associates, a general equipment leasing company. From 1982 to
1990, Mr. McLaughlin was a director of Phoenix American Inc. From 1995 to 1998,
Mr. McLaughlin was a director of Phoenix Receivables I, Inc. Mr. McLaughlin
currently serves on the Board of Directors of Phoenix Receivables II, Inc. and
Phoenix Receivables III, Inc. Mr. McLaughlin is also a director of Greater Bay
Bancorp, a bank holding company and several privately-held companies. Mr.
McLaughlin received his B.B.A. in accounting and business administration from
the University of Oklahoma and his M.B.A. in finance and business administration
from Harvard University.
ROGER SMITH has been a director since August 1999. Since January 1999, Mr.
Smith has been the owner of Smith Venture Group, a venture capital firm, a
position he also held from February 1994 to March 1998. From March 1998 to
January 1999, Mr. Smith was President of Venture Banking at Greater Bay Bancorp,
a bank holding company. Since July 1994, Mr. Smith has served on the board of
directors of Venture Lending and Leasing Inc., an investment company. Mr. Smith
received his B.S. in business administration from the University of Colorado and
his M.B.A. from the University of Santa Clara.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee was established in August 1999. Prior to that
time, the entire board of directors participated in compensation decisions. In
particular, Mr. Tong and Mr. Constantin, each an executive officer of
ReSourcePhoenix.com, participated in the deliberations concerning executive
officer compensation.
Mr. Tong is also the Senior Vice President, Financial Operations for
Phoenix American Incorporated and each of its active subsidiaries. Mr.
Constantin is the Chairman, Chief Executive Officer and controlling shareholder
of Phoenix American and each of its subsidiaries.
We provide services to Phoenix Leasing Incorporated, Phoenix Cable
Incorporated and Phoenix Precision Graphics, Inc., and we lease real estate from
Phoenix American Incorporated. Mr. Constantin, our Chairman, Chief Executive
Officer and controlling shareholder, is also the Chairman, Chief Executive
Officer and controlling shareholder of Phoenix Leasing, Phoenix Cable, Phoenix
Precision Graphics and Phoenix American. We believe that the terms of these
agreements are no less favorable to us than we could have received from an
unaffiliated third party. See "Relationship with Phoenix Companies and Certain
Transactions -- Intercompany Agreements."
Mr. McLaughlin, a director of ours and a member of our compensation
committee, is also a director of Phoenix Receivables II, Inc. and Phoenix
Receivables III, Inc. Mr. Constantin is the controlling shareholder of Phoenix
Receivables II and Phoenix Receivables III.
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<PAGE> 44
DIRECTOR COMPENSATION
Directors are elected each year for one-year terms and do not currently
receive any cash compensation for their service as directors, but are reimbursed
for reasonable expenses incurred in attending meetings. Each director will be
granted on a quarterly basis an option to purchase 540 shares of our Class A
common stock at an exercise price equal to the fair market value of our Class A
common stock on the date of grant. These options are fully vested at the time of
the grant.
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by or paid to our
Chief Executive Officer and to each of our most highly compensated executive
officers other than the Chief Executive Officer whose total annual salary and
bonus exceeded $100,000 for services rendered in all capacities to us during the
fiscal year ended December 31, 1998. These officers are referred to as the
"named executive officers" here and elsewhere in this prospectus.
SUMMARY COMPENSATION TABLE FOR LAST FISCAL YEAR
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Gus Constantin, Chairman and Chief Executive Officer...... $ -- $ -- $ --
Bryant Tong, President and Chief Operating Officer........ 179,624 7,750 7,800(1)
David Brunton, Chief Financial Officer.................... 100,000 10,160 --
</TABLE>
- ---------------
(1) Consists of an automobile allowance paid to Mr. Tong.
STOCK PLANS
Prior Plan
On January 1, 1999, we adopted an incentive plan for our key employees.
This plan allowed us to grant share appreciation and dividend income rights to
our employees. We terminated this plan on August 4, 1999 subject to the
effectiveness of this offering, and replaced all awards outstanding under the
plan with options granted pursuant to our 1999 stock plan.
1999 Stock Option Plan
We have established a stock option plan pursuant to which a total of
1,260,000 shares of Class A common stock have been reserved for issuance to
provide additional incentive to its employees, officers, directors and
consultants. Under the stock option plan, we may grant stock options and stock
purchase rights to our employees, officers, directors and consultants. Our board
of directors, or a committee to whom the board has delegated authority, which we
refer to as the "plan administrator", selects the individuals to whom options
and stock purchase rights are granted, interprets and adopts rules for the
operation of the stock option plan and specifies the vesting, exercise price and
other terms of options and stock purchase rights. As of September 1, 1999,
options to purchase an aggregate of 846,291 shares of Class A common stock had
been granted, at a weighted average exercise price of $2.08 per share.
The maximum term of an incentive stock option granted under the plan is
generally limited to ten years. If an optionee terminates his or her service
with us, the optionee generally may exercise only those options vested as of the
date of termination of service. Unless otherwise specified in the option
agreement, the optionee must effect such exercise within three months of
termination of service for any reason other than death or disability, and within
one year after termination due to death or disability. The exercise price of
incentive stock options granted under the stock option plan must be at least
equal to the fair market value of our Class A common stock on the date of grant.
Payment of the exercise price may be made by
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<PAGE> 45
such methods as determined by the plan administrator and may include cash,
check, a promissory note or shares of our Class A common stock valued at the
fair market value on the date of exercise.
Terms of any stock purchase rights granted under the stock option plan
shall be determined by the plan administrator at the time such rights are
issued. Upon the termination of a purchaser's service with us, we shall have an
option to repurchase his or her shares at the original price paid by the
purchaser.
In the event we are acquired or merge with another entity or transfer all
or substantially all of our assets to an entity not controlled by us, then each
outstanding option and stock purchase right shall automatically vest and become
fully exercisable unless the successor entity assumes such option or stock
purchase right or replaces it with a comparable option or right.
STOCK OPTION GRANTS TO EMPLOYEES
On August 4, 1999, we granted options to purchase an aggregate of 846,291
shares of our Class A common stock to some of our employees under our 1999 stock
option plan. These grants are subject to the effectiveness of this offering and
are intended to replace awards made under our previous incentive plan, which was
terminated. Our executive officers received the following option grants:
<TABLE>
<CAPTION>
NUMBER OF SHARES
EXECUTIVE OFFICER SUBJECT TO OPTION
----------------- -----------------
<S> <C>
Bryant Tong............................................. 402,314
David Brunton........................................... 42,480
Michael D'Almada-Remedios............................... 25,200
W. Corey West........................................... 53,856
</TABLE>
These options have an exercise price of $2.08 per share and will vest fully
upon the effectiveness of this offering.
1999 Employee Stock Purchase Plan
Concurrently with the offering, we intend to establish an Employee Stock
Purchase Plan under which a total of 360,000 shares of Class A common stock will
be made available for sale. The purchase plan, which is intended to qualify as
an employee stock purchase plan within the meaning of Section 423 of the
Internal Revenue Code of 1986, as amended, will be administered by our board of
directors or by a committee appointed by the board. Employees are eligible to
participate if they are employed by us or one of our subsidiaries designated by
the board for at least 20 hours per week and for more than five months in any
calendar year. The purchase plan permits eligible employees to purchase Class A
common stock through payroll deductions, which may not exceed 15% of an
employee's total compensation, subject to certain limitations. The purchase plan
will be implemented in a series of consecutive, overlapping offering periods,
each approximately six months in duration. Offering periods will begin on the
first trading day on or after April 30 and October 31 of every other year and
terminate on the last trading day in the period six months later. However, the
first offering period shall be the period of approximately 24 months commencing
on the date upon which the registration statement of which this prospectus is a
part is declared effective by the SEC and terminating on the last trading day in
the period ending October 31, 2001. Each participant will be granted an option
to purchase stock on the first day of the six-month purchase period and such
option will be automatically exercised on the last date of each offering period.
The purchase price of each share of Class A common stock under the purchase plan
will be equal to 85% of the lesser of the fair market value per share of Class A
common stock on the start date of that offering period or on the date of
purchase. Employees may modify or end their participation in the offering at any
time during the offering period. Participation ends automatically on termination
of employment with us. The purchase plan will terminate in 2009 unless sooner
terminated by our board.
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<PAGE> 46
401(K) PLAN
We have a 401(k) Retirement Savings and Investment Plan covering our
full-time employees located in the United States. The plan is intended to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended,
so that contributions to the plan by employees or by us, and the investment
earnings thereon, are not taxable to employees until withdrawn from the plan,
and so that contributions by us, if any, will be deductible by us when made.
Under the plan, eligible employees may elect to make payroll deductions up to
15% of their compensation, up to the statutorily prescribed annual limit, which
was $10,000 in 1998, and to have the amount of such deduction contributed to the
plan. The plan permits, but does not require, additional matching contributions
by us on behalf of all participants. To date, we have not made any matching
contributions to the plan.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
We have entered into an employment agreement with Bryant Tong, our
President and Chief Operating Officer. The term of the employment agreement is
until December 31, 2001 and is renewable for one-year periods thereafter. Under
the agreement, we are obligated to pay Mr. Tong an annual salary of $180,000,
current benefits, a car allowance and a bonus based on certain revenue, expense
and net income criteria. Effective upon our initial public offering, Mr. Tong's
salary will increase to $275,000. Additionally, if Mr. Tong's employment with us
terminates for any reason, we are obligated to pay Mr. Tong a termination
payment equal to his then current base compensation plus the pro rata portion of
his bonus through the termination date.
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<PAGE> 47
RELATIONSHIP WITH PHOENIX COMPANIES AND CERTAIN TRANSACTIONS
RELATIONSHIP WITH GUS CONSTANTIN
Upon completion of the offering, Gus Constantin will own approximately
64.0% of the common stock outstanding, or 59.0% if the underwriters'
over-allotment option is exercised in full. As the sole holder of our Class B
common stock, he will control 89.9% (87.8% if the underwriter's over-allotment
option is exercised in full) of our total voting power. As long as Mr.
Constantin controls a majority of the voting power, he will be able, acting
alone, to:
- elect at least a majority of our board of directors;
- amend our certificate of incorporation or effect a merger, sale of assets
or other major corporate transaction;
- defeat any non-negotiated takeover attempt;
- determine the amount and timing of dividends paid to himself and to
holders of Class A common stock; and
- otherwise control our management and operations and the outcome of most
matters submitted for a stockholder vote.
Mr. Constantin is also the controlling shareholder of several other companies,
known generally as the Phoenix companies.
On September 12, 1999, we paid a dividend of $1,000,000 to our sole
stockholder, the Gus and Mary Jane Constantin 1978 Living Trust. This dividend
was paid in the form of a promissory note, which accrues interest at 9% per
year. This note is secured by a security interest on our assets. We expect to
repay this note fully from the net proceeds of the offering, at which time the
security interest will be released.
From time to time, our sole stockholder, the Gus and Mary Jane Constantin
1978 Living Trust, has loaned money to our operating subsidiary,
ReSource/Phoenix, Inc., to fund its operations. As of September 14, 1999, we
owed an aggregate of $2.25 million to the living trust. These loans are
evidenced by promissory notes, which accrue interest at 9% per year. These loans
are secured by a security interest on the assets of ReSource/Phoenix, Inc. We
expect to repay these loans fully from the net proceeds of the offering, at
which time the security interest will be released.
Effective as of the date of our initial public offering, we have agreed to
pay Gus Constantin an annual salary of $275,000.
RELATIONSHIP WITH PHOENIX COMPANIES
In the normal course of business, we have from time-to-time entered into
various business transactions and agreements with several of the Phoenix
companies. We may enter into additional transactions with the Phoenix companies
in the future. The following is a summary of each of the material agreements
that we have entered into with the Phoenix companies. Such summaries include all
material information contained in the agreements, but are qualified by those
agreements, which are filed as exhibits to the registration statement of which
this prospectus is a part.
Administrative Services Agreements
We have entered into Administrative Services Agreements with each of
Phoenix Leasing Incorporated, Phoenix Cable Incorporated and Phoenix Precision
Graphics, Inc. under which we provide accounting, tax, legal, administrative,
financial, data processing and other consulting services to these companies for
a monthly fee. These agreements are substantially identical. To date, we have
been paid $5.2 million by Phoenix Leasing Incorporated, $0.6 million by Phoenix
Cable Incorporated and $0.3 million by Phoenix Precision Graphics, Inc. under
prior agreements. Under the new agreements, Phoenix Leasing will pay us $243,000
per month, Phoenix Cable will pay us $42,000 per month and Phoenix Precision
Graphics will pay us $32,000 per month. We believe that the terms of these
agreements
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<PAGE> 48
are no less favorable to us than we could have received from an unaffiliated
third party. Gus Constantin, our Chairman, Chief Executive Officer and
controlling shareholder, is also the Chairman, Chief Executive Officer and
controlling shareholder of each of Phoenix Leasing, Phoenix Cable and Phoenix
Precision Graphics.
Prior to August 1, 1999, we provided accounting services to Phoenix
American Incorporated and Phoenix American provided tax, legal, administrative,
financial, data processing and other consulting services to us. For the six
months ended June 30, 1999 and the year ended December 31, 1998, we paid Phoenix
American $557,000 and $494,000, respectively, for these services. Effective
August 1, 1999, Phoenix American transferred these operations to us. Gus
Constantin, our Chairman, Chief Executive Officer and controlling stockholder,
is also the Chairman, Chief Executive Officer and controlling shareholder of
Phoenix American.
Real Estate Lease
We lease approximately 40,000 square feet of the building that contains our
principal executive offices and our data operations center from Phoenix American
Incorporated. The lease is for a term of two years, with five successive options
to renew for one-year terms. Under the lease, we pay $53,650 per month in rent
and have a right of first refusal to lease additional space in the building if
and when it becomes available. We believe that the terms of our lease agreement
are no less favorable to us than we could have received from an unaffiliated
third party. Mr. Constantin is the Chairman, Chief Executive Officer and
controlling shareholder of Phoenix American.
All future transactions between us and our officers, directors and
principal stockholders and their affiliates will be approved by a majority of
the board, including a majority of the independent and disinterested directors
of the board.
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<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of September 1, 1999 by:
- each person or entity known to us to own beneficially more than 5% of
either class of our common stock;
- each of our directors;
- each of our named executive officers; and
- all executive officers and directors as a group.
The address of each person listed below is c/o ReSourcePhoenix.com, 2401
Kerner Boulevard, San Rafael, CA 94901-5529.
<TABLE>
<CAPTION>
CLASS B
CLASS A COMMON STOCK COMMON
------------------------------------- STOCK PERCENT OF TOTAL
PERCENT OF OWNERSHIP ------------ VOTING POWER
SHARES ---------------------- SHARES ----------------------
BENEFICIALLY BEFORE AFTER BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING(1) OWNED OFFERING OFFERING(1)
---- ------------ -------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gus Constantin(2).................... 540 * * 7,172,000 100.0% 89.3%
Bryant Tong(3)....................... 402,854 72.6% * -- 1.0 0.9
David Brunton(3)..................... 42,480 * * -- * *
James Barrington..................... 540 * * -- * *
Glen McLaughlin...................... 540 * * -- * *
Roger Smith.......................... 540 * * -- * *
All directors and executive officers
as a group (8 persons)(4).......... 526,550 95.0% 11.0% 7,172,000 100.0% 89.5%
</TABLE>
- ---------------
* Less than one percent.
Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Class A common stock subject
to options held by that person that are currently exercisable or
exercisable within 60 days of September 1, 1999 are deemed outstanding.
Such shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person. Except as indicated
in the footnotes to this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name.
(1) Assumes no exercise of the underwriters' over-allotment option. If the
over-allotment option is exercised, Mr. Tong will sell the first 80,500
shares to be sold pursuant to such option and Mr. Constantin will sell the
remainder of the shares to be sold pursuant to such option.
(2) All of these shares are held by the Gus and Mary Constantin 1978 Living
Trust, of which Mr. Constantin and his wife are trustees. The living trust
can be amended or revoked at any time at the option of Mr. Constantin and
his wife. Mr. Constantin and his wife, as trustees of the living trust, are
authorized to exercise all rights with respect to the Class B common stock
held by the trust, including the right to vote and dispose of such shares.
The address of each of Mr. Constantin and his wife is: c/o
ReSourcePhoenix.com, 2401 Kerner Boulevard, San Rafael, CA 94901-55529.
(3) Consists of shares of Class A Common Stock subject to options that will
fully vest upon the closing of our initial public offering.
(4) Includes 526,550 shares of Class A Common Stock subject to options that will
fully vest upon the closing of our initial public offering.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
Pursuant to our certificate of incorporation, we have authority to issue an
aggregate of 40,000,000 shares of capital stock, consisting of 27,800,000 shares
of Class A common stock, par value $0.001 per share, 7,200,000 shares of Class B
common stock, par value $0.001 per share, and 5,000,000 shares of preferred
stock, par value $0.001 per share.
Set forth below is a description of the common stock and the preferred
stock that may be issued under our certificate of incorporation. The following
description and all information in this prospectus gives effect to a 1-to-0.72
reverse split of our common stock effected on September 14, 1999.
COMMON STOCK
Shares of Class A common stock and Class B common stock are identical in
all respects, except for voting rights and certain conversion rights, as
described below.
Voting rights. Each outstanding share of Class A common stock is entitled
to one vote on all matters submitted to a vote of our stockholders, including
the election of directors, and each share of Class B common stock is entitled to
five votes on each such matter. Except as required by applicable law, holders of
the Class A common stock and Class B common stock vote together as a single
class on all matters. There is no cumulative voting in the election of
directors.
For so long as there are any shares of Class B common stock outstanding,
any action that may be taken at a meeting of the stockholders may be taken by
written consent in lieu of a meeting if we receive consents signed by
stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present and voted. This could permit the holders of Class B common
stock to take action regarding certain matters without providing other
stockholders the opportunity to voice dissenting views or raise other matters.
The right to take such action by written consent of stockholders will expire
when there are no longer any shares of Class B common stock outstanding.
Dividends, distributions and stock splits. Holders of Class A common stock
and Class B common stock are entitled to receive dividends at the same rate if,
as and when such dividends are declared by our board of directors out of assets
legally available therefor after payment of dividends required to be paid on
shares of preferred stock, if any.
In the case of dividends or distributions payable in Class A common stock
or Class B common stock, only shares of Class A common stock will be distributed
with respect to the Class A common stock and only shares of Class B common stock
will be distributed with respect to the Class B common stock. In the case of
dividends or other distributions consisting of other voting shares, we will
declare and pay such dividends in two separate classes, identical in all
respects except that the voting rights of each such security paid to the holders
of the Class A common stock shall be one-fifth of the voting rights of each such
security paid to the holders of Class B common stock. In the case of dividends
or other distributions consisting of non-voting securities convertible into, or
exchangeable for, our voting securities, we will provide that such convertible
or exchangeable securities and the underlying securities be identical in all
respects, except that the voting rights of each security underlying the
convertible or exchangeable security paid to the holders of the Class A common
stock shall be one-fifth of the voting rights of each security underlying the
convertible or exchangeable security paid to the holders of Class B common
stock, and such underlying securities paid to the holders of Class B common
stock shall convert into the security paid to the holders of the Class A common
stock upon the same terms and conditions applicable to the conversion of Class B
common stock into Class A common stock.
Neither the Class A common stock nor the Class B common stock may be
subdivided or combined in any manner unless the other class is subdivided or
combined in the same proportion.
Conversion. The shares of Class A common stock are not convertible.
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<PAGE> 51
Each share of Class B common stock is convertible into one share of Class A
common stock at any time at the option of the holder. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon the sale or transfer of such share of Class B common stock other than to an
entity that he controls. The holders of Class B common stock shall have, upon
conversion of their shares of Class B common stock into shares of Class A common
stock, one vote per share of Class A common stock held.
Liquidation. In the event of any dissolution, liquidation, or winding up of
our affairs, whether voluntary or involuntary, after payment of our debts and
other liabilities and making provision for the holders of preferred stock, if
any, our remaining assets will be distributed ratably among the holders of the
Class A common stock and the Class B common stock, treated as a single class.
Mergers and other business combinations. Upon a merger, combination, or
other similar transaction in which shares of common stock are exchanged for or
changed into other stock or securities, cash and/or any other property, holders
of the Class A common stock and Class B common stock will be entitled to receive
an equal amount per share of stock, securities, cash, and/or any other property,
as the case may be, into which or for which each share of any other class of
common stock is exchanged or changed; provided that in any transaction in which
shares of capital stock are distributed, such shares so exchanged for or changed
into may differ as to voting rights and conversion rights to the extent and only
to the extent that the voting rights and conversion rights of Class A common
stock and Class B common stock differ at that time.
All shares of Class A common stock and Class B common stock outstanding are
fully paid and nonassessable, and all the shares of Class A common stock and
Class B common stock to be outstanding upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of undesignated preferred
stock none of which are outstanding. Our board has the authority to issue
preferred stock in one or more series and to establish the rights and
restrictions granted to or imposed on any unissued shares of preferred stock and
to fix the number of shares constituting any series without any further vote or
action by the stockholders. Our board has the authority, without approval of the
stockholders, to issue preferred stock that has voting and conversion rights
superior to the common stock, which could have the effect of delaying or
preventing a change in control. We currently have no plans to issue any shares
of preferred stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Our certificate of incorporation and bylaws and the Delaware General
Corporation Law contain provisions that could discourage potential takeover
attempts and make it more difficult for our stockholders to change management or
receive a premium for their shares.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly-held 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 including approval by at
least 66.7% of the outstanding stock not owned by the interested stockholder. A
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. For purposes of Section
203, an "interested stockholder" is defined to include any person that is:
- the owner of 15% or more of the outstanding voting stock of the
corporation;
- an affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock outstanding of the corporation, at any time
within three years immediately prior to the relevant date; and
- an affiliate or associate of the persons described in the foregoing
bullet points.
48
<PAGE> 52
Stockholders may, by adopting an amendment to the corporation's certificate of
incorporation or bylaws, elect for the corporation not to be governed by Section
203, effective 12 months after adoption. Neither our certificate of
incorporation nor our bylaws exempt us from the restrictions imposed under
Section 203. Section 203 may encourage companies interested in acquiring us to
negotiate in advance with our board because stockholder approval of the
transaction, as discussed above, would be unnecessary.
Annual meetings of stockholders will be held to elect our board and
transact such other business as may be properly brought before the meeting.
Special meetings of stockholders may be called by the Chairman or the Chief
Executive Officer or by a majority of the board. Our certificate of
incorporation and bylaws provide that any action required or permitted to be
taken by our stockholders may be effected at a duly called annual or special
meeting of the stockholders or may be taken by a consent in writing by
stockholders.
Our certificate of incorporation may be amended with the approval of a
majority of the board and the holders of a majority of our outstanding voting
securities.
The number of directors will be fixed by resolution of the board. The size
of the board is currently fixed at five members. The directors will be elected
for annual terms at the annual meeting of the stockholders, except for filling
vacancies. Directors may be removed with the approval of the holders of a
majority of our voting power present and entitled to vote at a meeting of
stockholders. Vacancies and newly-created directorships resulting from any
increase in the number of directors may be filled by a majority of the directors
then in office, a sole remaining director, or the holders of a majority of the
voting power present and entitled to vote at a meeting of stockholders.
The presence, in person or by proxy, of the holders of a majority of the
votes entitled to be cast by the stockholders entitled to vote generally shall
constitute a quorum for stockholder action at any meeting.
LIMITATION OF LIABILITY; INDEMNIFICATION
Our certificate of incorporation contains provisions permitted under the
Delaware General Corporation Law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except for specified wrongful acts,
including:
- for any breach of the director's duty of loyalty to us or our
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 relating to
unlawful stock repurchases or dividends; or
- for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or those of any
stockholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws.
Our bylaws also contain provisions indemnifying our directors and officers
to the fullest extent permitted by the Delaware General Corporation Law. We plan
to enter into separate indemnification agreements with our directors and
officers that may, in some cases, be broader than the specific indemnification
provisions contained in our certificate of incorporation, bylaws or the Delaware
General Corporation Law. The indemnification agreements may require us, among
other things, to indemnify the officers and directors against liabilities, other
than liabilities arising from willful misconduct, that may arise by reason of
their status or service as directors or officers. These agreements also may
require us to advance the expenses incurred by the officers and directors as a
result of any proceeding against them as to which they could be identified. We
believe that these indemnification arrangements are necessary to attract and
retain qualified individuals to serve as directors and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A common stock is
ChaseMellon Shareholder Services LLC.
49
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 4,028,000 shares of Class A
common stock and 7,172,000 shares of Class B common stock outstanding assuming
no exercise of the underwriters' over-allotment option. Of this amount, the
4,000,000 shares of Class A common stock offered by this prospectus and 28,000
shares of Class A common stock subject to Rule 144(k) will be available for
immediate sale in the public market as of the date of this prospectus.
Approximately 846,291 shares of Class A common stock that are currently subject
to outstanding options and 7,172,000 shares of Class B common stock will be
available for sale in the public market following the expiration of 180-day
lock-up agreements with the representatives of our underwriters, subject in some
cases to compliance with the volume and other limitations of Rule 144.
<TABLE>
<CAPTION>
DAYS AFTER THE DATE OF THIS APPROXIMATE SHARES
PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
--------------------------- ------------------------ ---------------------------------------
<S> <C> <C>
Upon effectiveness 4,028,000 Freely tradable shares sold in offering
and saleable pursuant to Rule 144(k)
181 days 8,018,291 Lock-up released, resales subject in
some cases to volume limitations
</TABLE>
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell within any
three-month period commencing 90 days after the date of this prospectus a number
of shares that does not exceed the greater of (a) 1% of the then outstanding
shares of common stock (approximately 112,000 shares immediately after the
offering) or (b) the average weekly trading volume during the four calendar
weeks preceding the sale, subject to the filing of a Form 144 with respect to
the sale. A person who is not deemed to have been an affiliate of ours at any
time during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least two years is entitled to sell these shares
under Rule 144(k) without regard to the limitations described above. Persons
deemed to be affiliates must always sell under Rule 144, even after the
applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the Class A common stock will
develop or be sustained after the offering. Any future sale of substantial
amounts of Class A common stock in the open market may adversely affect the
market price of the Class A common stock offered by this prospectus.
Our directors, executive officers, and other significant stockholders have
agreed that they will not sell any common stock without the prior written
consent of BancBoston Robertson Stephens Inc. for a period of 180 days from the
date of this prospectus. We have also agreed not to issue any shares during the
lock-up period without the consent of BancBoston Robertson Stephens Inc., except
that we may, without this consent, grant options and sell shares under our stock
incentive and purchase plans although the shares may not be resold into the
public market during the lock-up period.
We intend to file a registration statement on Form S-8 under the Securities
Act shortly after the completion of the offering to register the shares of Class
A common stock subject to outstanding stock options that may be issued under
these plans, which will permit the resale of these shares in the public market
without restriction after the lock-up period expires.
50
<PAGE> 54
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc. and Thomas Weisel Partners LLC, have
severally agreed with us, subject to the terms and conditions set forth in the
underwriting agreement, to purchase from us the number of shares of Class A
common stock set forth opposite their names below. The underwriters are
committed to purchase and pay for all such shares if they are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc........................... 1,900,000
Thomas Weisel Partners LLC.................................. 1,900,000
E*TRADE Securities, Inc..................................... 100,000
Suretrade, Inc.............................................. 100,000
---------
Total............................................. 4,000,000
=========
</TABLE>
We have been advised by the representatives that the underwriters propose
to offer the shares of Class A common stock to the public at the initial public
offering price set forth on the cover page of this prospectus and to make
certain dealers at such price less a concession of not in excess of $0.34 per
share, of which $0.10 may be reallowed to other dealers. After the initial
public offering, the public offering price, concession and reallowance to
dealers may be reduced by the representatives. No such reduction shall change
the amount of proceeds to be received by us as set forth on the cover page of
this prospectus. The Class A common stock is offered by the underwriters as
stated in this prospectus, subject to receipt and acceptance by them and subject
to their right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Over-allotment Option. Some of our security holders have granted to the
underwriters an option, exercisable during the 30-day period after the date of
this prospectus, to purchase up to 600,000 additional shares of Class A common
stock at the same price per share as we will receive for the 4,000,000 shares
that the underwriters have agreed to purchase. To the extent that the
underwriters exercise this option, each of the underwriters will have a firm
commitment to purchase approximately the same percentage of these additional
shares that the number of shares of Class A common stock to be purchased by it
shown in the above table represents as a percentage of the 4,000,000 shares
offered in this offering. If purchased, such additional shares will be sold by
the underwriters on the same terms as those on which the 4,000,000 shares are
being sold. These security holders will be obligated, according to the option,
to sell shares to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of the shares of Class A common stock offered in this offering. We will not
receive any of the proceeds from the sale of these shares.
51
<PAGE> 55
The following table summarizes the compensation to be paid to the
underwriters by us and the selling security holders:
<TABLE>
<CAPTION>
TOTAL
------------------------
WITHOUT WITH
PER OVER- OVER-
SHARE ALLOTMENT ALLOTMENT
----- ---------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by
us............................................... $0.56 $2,240,000 $2,240,000
Underwriting discounts and commissions payable by
selling security holders......................... 0.56 0 336,000
</TABLE>
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will be
approximately $1,060,000.
Indemnity. The underwriting agreement contains covenants of indemnity among
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, directors,
stockholders, and optionholders has agreed with the representatives, for a
period of 180 days after the date of this prospectus, subject to certain
exceptions, 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,
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, with certain exceptions, thereafter acquired
directly by such holders or with respect to which they have or hereafter acquire
the power or disposition, without the prior written consent of BancBoston
Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to the lock-up agreements. There are no agreements
between the representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the period of
180 days after this prospectus.
Future Sales. In addition, we have agreed that during the period of 180
days after the date of this prospectus, we will not, subject to certain
exceptions, without the prior written consent of BancBoston Robertson Stephens
Inc.:
- Consent to the disposition of any shares held by stockholders prior to
the expiration of the period of 180 days after the date of this
prospectus; 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 (1) the sale of shares in this
offering, (2) the issuance of common stock upon the exercise or
conversion of outstanding options, warrants or convertible securities,
(3) our issuance of stock options under existing stock option plans and
(4) our issuance of common stock under the Employee Stock Purchase Plan.
See "Shares Eligible for Future Sale."
Listing. Our Class A common stock has been approved for quotation on the
Nasdaq National Market under the symbol RPCX.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price for
the Class A common stock offered hereby will be determined through negotiations
between us and the representatives. Among the factors to be considered in such
negotiations will be 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, the present state of our development and other factors deemed
relevant.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, persons participating in this offering
may engage in transactions, include stabilizing bids,
52
<PAGE> 56
syndicate covering transactions or the imposition of penalty bids, that may have
the effect of stabilizing or maintaining the market price of the common stock at
a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the purchase
of the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with this offering. A "penalty bid"
is an arrangement permitting the representatives to reclaim the selling
concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
Directed Share Program. At our request, the underwriters have reserved up
to 212,500 shares of Class A common stock to be issued by us and offered hereby
for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of ReSourcePhoenix.com. 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. The
number of shares of common stock available for sale to the general public will
be reduced to the extent such individuals purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered hereby.
New Underwriter. Thomas Weisel Partners LLC, one of the representatives of
the underwriters, was organized and registered as a broker-dealer in December
1998. Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager on 73 filed public offerings of equity securities, of which 46 have
been completed, and has acted as a syndicate member in an additional 38 public
offerings of equity securities. We provide services to Thomas Weisel Partners,
for which Thomas Weisel Partners paid us $255,000 in the six months ended June
30, 1999.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Class A common
stock offered hereby are being passed upon for ReSourcePhoenix.com by Wilson
Sonsini Goodrich & Rosati, Palo Alto, California. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares to be sold in the offering. This
prospectus does not contain all the information contained in the registration
statement. For further information with respect to ReSourcePhoenix.com and the
shares to be sold in the offering, reference is made to the registration
statement and the exhibits and schedules filed with the registration statement.
We have described all material information for each contract, agreement or other
document filed with the registration statement in the prospectus. However,
statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. As a
result, you should refer to the copy of the contract,
53
<PAGE> 57
agreement or other document filed as an exhibit to the registration statement
for a 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 that we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings, including the
registration statement, are also available to you without charge from the SEC
Web site, which is located at http://www.sec.gov.
54
<PAGE> 58
RESOURCEPHOENIX.COM AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholder's
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
Pro Forma Unaudited Consolidated Financial Statements....... F-15
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
ReSourcePhoenix.com:
We have audited the accompanying consolidated balance sheets of
ReSourcePhoenix.com (a Delaware corporation) and subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholder's equity and cash flows each of the three years in the period then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
ReSourcePhoenix.com and subsidiary as of December 31, 1998 and 1997 and the
consolidated results of its operations and its cash flows for each of the three
years in the period then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
August 4, 1999
F-2
<PAGE> 60
RESOURCEPHOENIX.COM AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
-------------------- ENDED
12/31/97 12/31/98 6/30/99
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 106 $ 503 $ 128
Accounts receivable, net of allowance of $11 at December
31, 1997, $8 at December 31, 1998 and $13 at June 30,
1999................................................... 544 419 957
Receivable from affiliates................................ 345 182 89
Prepaid expenses and other current assets................. 51 20 159
------ ------ --------
Total current assets.............................. 1,046 1,124 1,333
Property and equipment, net of accumulated depreciation of
$133 at December 31, 1997, $439 at December 31, 1998
and $668 at June 30, 1999.............................. 686 694 1,994
Note receivable from employee............................. -- -- 21
Other assets.............................................. -- 4 --
------ ------ --------
Total assets...................................... $1,732 $1,822 $ 3,348
====== ====== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.................. $ 874 $1,195 $ 962
Deferred revenue.......................................... -- 627 1,001
Payable to shareholder.................................... -- -- 79
------ ------ --------
Total current liabilities......................... 874 1,822 2,042
Commitments and Contingencies
Stockholder's Equity:
Preferred stock, $.001 par value 5,000,000 shares
authorized, none issued and outstanding................ -- -- --
Class A common stock, $.001 par value; 27,800,000 shares
authorized, none issued and outstanding................ -- -- --
Class B common stock, $.001 par value; 7,200,000 shares
authorized, issued and outstanding at December 31, 1997
and 1998; 7,200,000 authorized, issued and outstanding
at June 30, 1999....................................... 1,598 6,397 15,291
Accumulated deficit....................................... (740) (6,397) (13,985)
------ ------ --------
Total stockholder's equity........................ 858 -- 1,306
------ ------ --------
Total liabilities and stockholder's equity........ $1,732 $1,822 $ 3,348
====== ====== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 61
RESOURCEPHOENIX.COM AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR YEAR YEAR ENDED ENDED
ENDED ENDED ENDED 06/30/98 06/30/99
12/31/96 12/31/97 12/31/98 (UNAUDITED) (UNAUDITED)
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Contract service revenue.................... $ 1,175 $ 2,255 $ 2,460 $ 1,240 $ 1,740
Contract service revenue-affiliate.......... -- 3,085 2,182 1,034 913
Software revenue............................ -- -- 44 38 1,508
---------- ---------- ---------- ---------- ----------
Total revenue........................ 1,175 5,340 4,686 2,312 4,161
Operating expenses:
Cost of providing services.................. 570 2,874 4,479 2,297 2,472
Cost of providing software revenue.......... -- -- 157 41 319
General and administrative.................. 298 2,035 2,072 750 1,172
Research and development.................... -- 566 2,216 654 1,289
Client acquisition.......................... 418 513 1,123 321 995
Stock-related compensation.................. -- -- -- -- 5,291
Depreciation and amortization............... 12 133 307 141 228
---------- ---------- ---------- ---------- ----------
Total operating expenses............. 1,298 6,121 10,354 4,204 11,766
Loss from operations.......................... (123) (781) (5,668) (1,892) (7,605)
Other income (expense)........................ -- 41 11 (41) 17
---------- ---------- ---------- ---------- ----------
Net loss...................................... $ (123) $ (740) $ (5,657) $ (1,933) $ (7,588)
========== ========== ========== ========== ==========
Basic and diluted net loss per share.......... $ (0.02) $ (0.10) $ (0.79) $ (0.27) $ (1.05)
Shares used in computing basic and diluted net
loss per share.............................. 7,200,000 7,200,000 7,200,000 7,200,000 7,200,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 62
RESOURCEPHOENIX.COM AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS B
COMMON PLI'S TOTAL
STOCK EQUITY IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT THE COMPANY DEFICIT EQUITY
---------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996.................. $ -- $ -- $ -- $ --
Net loss.................................. -- (123) -- (123)
Capital contributed from PLI.............. -- 123 -- 123
---------- ------- ----- -------- -------
BALANCE, DECEMBER 31, 1996................ -- -- -- --
Net loss.................................. -- -- (740) (740)
Capital contribution from stockholder..... 1,000 1,598 -- -- 1,598
---------- ------- ----- -------- -------
BALANCE AT DECEMBER 31, 1997.............. 1,000 1,598 -- (740) 858
Net loss.................................. -- -- (5,657) (5,657)
Capital contribution from stockholder..... 4,799 -- -- 4,799
---------- ------- ----- -------- -------
BALANCE AT DECEMBER 31, 1998.............. 1,000 6,397 -- (6,397) --
Net loss.................................. -- -- (7,588) (7,588)
Capital contribution from stockholder..... 3,603 -- -- 3,603
Cancellation of stock..................... (1,000) -- -- -- --
Issuance of Stock......................... 7,200,000 -- -- -- --
Compensation payable in stock............. 5,291 -- -- 5,291
---------- ------- ----- -------- -------
BALANCE AT JUNE 30, 1999 (UNAUDITED)...... 7,200,000 $15,291 $ -- $(13,985) $ 1,306
========== ======= ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 63
RESOURCEPHOENIX.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR YEAR YEAR ENDED ENDED
ENDED ENDED ENDED 6/30/98 6/30/99
12/31/96 12/31/97 12/31/98 (UNAUDITED) (UNAUDITED)
------------ -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................. $(123) $ (740) $(5,657) $(1,933) $(7,588)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 12 133 307 141 228
Stock-related compensation............................. -- -- -- -- 5,291
Change in operating assets and liabilities:
Accounts receivable.................................. (3) (544) 125 5 (538)
Receivable from affiliates........................... -- (345) 163 277 72
Prepaid expenses and other current assets............ -- (51) 27 37 (135)
Accounts payable and accrued liabilities............. (9) 874 321 (75) (233)
Deferred revenue..................................... -- -- 627 119 374
----- ------ ------- ------- -------
Net cash used in operating activities............. (123) (673) (4,087) (1,429) (2,529)
INVESTING ACTIVITIES
Purchase of property and equipment....................... -- (496) (315) (113) (54)
----- ------ ------- ------- -------
Net cash used in investing activities............. -- (496) (315) (113) (54)
FINANCING ACTIVITIES
Proceeds from capital contribution....................... 123 1,275 4,799 1,624 2,129
Proceeds from Note payable to Shareholder................ -- -- -- -- 79
----- ------ ------- ------- -------
Net cash provided by financing activities......... 123 1,275 4,799 1,624 2,208
Net increase (decrease) in cash and cash equivalents....... -- 106 397 82 (375)
Cash and cash equivalents, beginning of period............. -- -- 106 106 503
----- ------ ------- ------- -------
Cash and cash equivalents, end of period................... $ -- $ 106 $ 503 $ 188 $ 128
===== ====== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES
Contribution of property and equipment from affiliate.... $ 146 $ 323 $ -- $ -- $ 1,474
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 64
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION:
The consolidated financial statements of ReSourcePhoenix.com and Subsidiary
("the Company") include the accounts of ReSourcePhoenix.com ("the Holding
Company"), a Delaware corporation, and ReSource/Phoenix, Inc. ("the Subsidiary")
a California company incorporated on September 26, 1996. The Holding Company was
formed on July 27, 1999 and on August 4, 1999 the shareholder of the Subsidiary
contributed the shares of the Subsidiary in exchange for shares of Class B
common stock of the Holding Company. The consolidated financial statements
reflect this reorganization. Revenues, expenses, assets and liabilities of the
Subsidiary are included in the respective line items in the consolidated
financial statements for all periods presented after the elimination of
intercompany accounts and transactions. The Holding Company has no operations.
The Company provides financial, information technology and investor related
services on an outsource basis to unaffiliated third parties. The Company also
provides these services to affiliated companies. In addition, the Company has
developed contact management and sales tracking support software for use by the
mutual fund industry. The Company commenced operating as a division of Phoenix
Leasing Inc. ("PLI") in 1994. On January 1, 1997, the operations were sold to
the controlling shareholder of Phoenix American, Inc., the parent company of PLI
and transferred to the Company. On January 1, and April 1, 1997 certain
personnel of PLI were also transferred to the Company and certain assets of PLI
were sold to the Company. All asset transfers were made at historical cost.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES:
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of June 30, 1999 and for the six months ended
June 30, 1999 and 1998 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the consolidated financial position at such dates and the
operations and cash flows for the periods then ended. Operating results for the
period ended June 30, 1999, are not necessarily indicative of results that may
be expected for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CARVE OUT ACCOUNTING
The consolidated results of operations for the year ended December 31, 1996
are presented on a carve out basis from the historical accounting records of
PLI. The carved out consolidated financial statements include all revenues and
costs directly attributable to the Company. Only revenues and costs related to
third-party contracts are carved out as the Company derived no revenues from PLI
or affiliates. The results also include allocation of general corporate expenses
of PLI. No income tax provision has been provided as the carved out operations
resulted in losses. Interest on PLI's debt has not been allocated to the Company
for the carved out period.
All of the allocations and estimates in the carved out consolidated
financial statements are based on assumptions that management believes are
reasonable under the circumstances. However, these allocations
F-7
<PAGE> 65
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and estimates are not necessarily indicative of the costs and expenses that
would have resulted if the Company had been operating as a separate entity.
REVENUE RECOGNITION
The Company's revenues are derived from two sources, contract services and
software.
Contract services include monthly contractual payments for ongoing
accounting, finance, data center operations and other functions in addition to
up front implementation fees. Contract service revenue is recognized as the
services are provided. Contract services are also provided to affiliates and
reported as affiliate revenue.
Software revenue consists principally of up front license fees earned from
the licensing of the Company's software, related consulting services, and
training and maintenance, which includes updates and technical support. License
fee revenue includes software maintenance and support, training, and system
implementation consulting. American Institute of Certified Public Accountants'
Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2) provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. In accordance with SOP 97-2, revenue from up
front software license agreements is recognized when delivery has occurred,
collection is deemed probable, the fee is fixed or determinable and
vendor-specific objective evidence exists to allocate the total fee to all
delivered and undelivered elements of the arrangement. Revenue is deferred in
cases where the license arrangement calls for future delivery of products or
services for which the Company does not have vendor-specific objective evidence
to allocate a portion of the total fee to the undelivered element. In such
cases, revenue is recognized when the undelivered elements are delivered or
vendor-specific objective evidence of the undelivered elements becomes
available. If license arrangements include the rights to unspecified future
products, revenue is recognized over the contractual or estimated economic term
of the arrangement. Consulting service and training revenues are recognized as
services are performed and accepted by the customer. Maintenance revenue is
recognized ratably over the term of the agreement. In instances where software
license agreements include a combination of consulting services, training, and
maintenance, these separate elements are unbundled from the arrangement based on
the element's relative fair value. The Company provides implementation services,
such as implementation planning, loading of software, training of customer
personnel, data conversion, building simple interfaces, running test data, and
assisting in the development and documentation of procedures. Customer personnel
are dedicated to participate in the services being performed. As such, this
service element qualifies for separate accounting in accordance with SOP 97-2.
DEFERRED REVENUE
Deferred revenue represents amounts received from customers under certain
license, maintenance and service agreements for which the revenue earnings
process has not been completed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid financial instruments,
primarily money market funds, purchased with an original maturity of three
months or less.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated on a
straight-line basis over estimated useful lives ranging from 3 to 10 years.
F-8
<PAGE> 66
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPONENTS OF COSTS AND EXPENSES
Cost of providing services includes salaries and benefits for personnel in
our S.T.A.R. and ReFOCOS operations groups, fees paid to outside service
providers other than implementation service providers and other miscellaneous
operating costs. Cost of providing software revenue includes salaries and
benefits for personnel in our M.A.R.S. technical support and installation groups
and costs related to consulting, training and maintenance, and updates. Prior to
the quarter ended June 30, 1998, these costs were expensed as research and
development. General and administrative expenses includes salaries and benefits
for management personnel, fees paid to outside service providers for
corporate-related services and other corporate overhead. Research and
development expenses include salaries and benefits for personnel engaged in
M.A.R.S. development, consulting fees paid to outside service providers engaged
in M.A.R.S. development and other miscellaneous costs associated with M.A.R.S.
development. Client acquisition expense includes salaries, benefits and
commissions paid to our sales and marketing and implementation personnel, travel
expenses of our sales and marketing and implementation personnel, advertising
expenses and fees paid to outside implementation consultants.
Research and development costs are expensed as incurred. Financial
accounting standards require the capitalization of certain software development
costs after technological feasibility of the software is established. In the
development of the Company's new products and enhancements to existing products,
the technological feasibility of the software was not established until
substantially all product development was complete, including the development of
a working model. Internal software development costs that met the criteria for
capitalization were insignificant and were charged to research and development
expense in the accompanying consolidated statements of operations.
CONCENTRATION OF CREDIT RISK
The Company does not require collateral or other security to support credit
sales, but does perform ongoing credit evaluations of its customers' financial
condition. The Company provides allowances for bad debts based on historical
experience and specific identification, which, to date, have been insignificant.
For the year ended December 31, 1998, two customers, PLI (an affiliate) and
GE Capital Aviation Services/PIMC, accounted for 41% and 20% of the Company's
net revenues. For the six months ended June 30, 1999, three customers, PLI, GE
Capital Aviation Services/PIMC and John Hancock Advisors, accounted for 18%,
10%, and 30% of the Company's net revenues.
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131") establishes
standards for the reporting of financial and descriptive information about
reportable operating segments. Because the Company's financial information is
internally evaluated as a single operating segment and decisions regarding
resource allocation are made considering the Company's operations as a whole, no
separate segment information is presented. All of the Company's operations are
in the United States.
INCOME TAXES
The Company has elected to be treated as a subchapter S corporation as
defined by the Federal Internal Revenue Code. As such, the Company is not
subject to federal taxes on its income and items of income, gain, loss,
deductions and credit are reportable by individual stockholders of the Company.
Accordingly, no liability or provision for such taxes is recorded on the
Company's consolidated financial statements. Upon the completion of the
Company's proposed initial public offering, the Company will terminate its
election to be taxed as a subchapter S corporation.
F-9
<PAGE> 67
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued and,
as amended, is required to be adopted by the Company in fiscal 2001. Because the
Company does not currently use any derivative instruments, management does not
anticipate that the adoption of the new Statement will have a significant effect
on consolidated results of operations or the consolidated financial position of
the Company.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4
extending the deferral of the application of certain provisions of SOP 97-2 as
amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. The Company's management does not
expect the adoption of SOP 98-9 to have a material effect on its results of
consolidated operations or consolidated financial position.
NOTE 3. PROPERTY AND EQUIPMENT:
Major classes of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
DECEMBER 31, DECEMBER 31, 1999
1997 1998 (UNAUDITED)
------------ ------------ -----------
<S> <C> <C> <C>
Furniture, fixtures and equipment.......... $ 527 $ 812 $2,278
Software................................... 292 321 384
----- ------ ------
819 1,133 2,662
Less accumulated depreciation and
amortization............................. (133) (439) (668)
----- ------ ------
Net Property and Equipment................. $ 686 $ 694 $1,994
===== ====== ======
</TABLE>
The Company received a transfer of property and equipment in the amount of
$389,000 less accumulated depreciation of $66,000 from PLI on January 1, 1997 at
historical cost. Also, effective June 1, 1999, property and equipment in the
amount of $1,592,000, less accumulated depreciation of $118,000 was transferred
at historical cost from an affiliate to the Company. The Company is continuing
to depreciate these assets based on their original useful lives.
NOTE 4. STOCKHOLDER'S EQUITY
Pursuant to its Amended and Restated Certificate of Incorporation, the
Company is authorized to issue an aggregate of 40,000,000 shares of capital
stock, consisting of 27,800,000 shares of Class A common stock, par value $0.001
per share, 7,200,000 shares of Class B common stock, par value $0.001 per share,
and 5,000,000 shares of preferred stock, par value $0.001 per share.
COMMON STOCK
Shares of Class A common stock and Class B common stock are identical in
all respects, except for voting rights and certain conversion rights, as
described below.
Voting Rights. Each outstanding share of Class A common stock is entitled
to one vote on all matters submitted to a vote of the Company's stockholders,
including the election of directors, and each share of Class B common stock is
entitled to five votes on each such matter. Except as required by applicable
law, holders of the Class A common stock and Class B common stock vote together
as a single class on all matters. There is no cumulative voting in the election
of directors.
F-10
<PAGE> 68
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For so long as there are any shares of Class B common stock outstanding,
any action that may be taken at a meeting of the stockholders may be taken by
written consent in lieu of a meeting if the Company receives consents signed by
stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present and voted. This could permit the holders of Class B common
stock to take action regarding certain matters without providing other
stockholders the opportunity to voice dissenting views or raise other matters.
The right to take such action by written consent of stockholders will expire
when there are no longer any shares of Class B common stock outstanding.
Dividends, Distributions and Stock Splits. Holders of Class A common stock
and Class B common stock are entitled to receive dividends at the same rate if,
as and when such dividends are declared by the Company's Board of Directors out
of assets legally available therefor after payment of dividends required to be
paid on shares of preferred stock, if any.
Conversion. The shares of Class A common stock are not convertible.
Each share of Class B common stock is convertible into one share of Class A
common stock at any time at the option of the holder. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon the sale or transfer of such share of Class B common stock to any person.
The holders of Class B common stock shall have, upon conversion of their shares
of Class B common stock into shares of Class A common stock, one vote per share
of Class A common stock held.
Liquidation. In the event of any dissolution, liquidation, or winding up of
the Company's affairs, whether voluntary or involuntary, after payment of the
Company's debts and other liabilities and making provision for the holders of
preferred stock, if any, the Company's remaining assets will be distributed
ratably among the holders of the Class A common stock and the Class B common
stock, treated as a single class.
Mergers and Other Business Combinations. Upon a merger, combination, or
other similar transaction in which shares of common stock are exchanged for or
changed into other stock or securities, cash and/or any other property, holders
of the Class A common stock and Class B common stock will be entitled to receive
an equal amount per share of stock, securities, cash, and/or any other property,
as the case may be, into which or for which each share of any other class of
common stock is exchanged or changed; provided that in any transaction in which
shares of capital stock are distributed, such shares so exchanged for or changed
into may differ as to voting rights and conversion rights to the extent and only
to the extent that the voting rights and conversion rights of Class A common
stock and Class B common stock differ at that time.
PREFERRED STOCK
On August 4, 1999, 5,000,000 shares of undesignated preferred stock were
authorized for issuance. The Company's board has the authority to issue
preferred stock in one or more series and to establish the rights and
restrictions granted to or imposed on any unissued shares of preferred stock and
to fix the number of shares constituting any series without any further vote or
action by the stockholders. The Company's board has the authority, without
approval of the stockholders, to issue preferred stock that has voting and
conversion rights superior to the common stock, which could have the effect of
delaying or preventing a change in control.
NOTE 5. STOCK BASED INCENTIVE PLANS:
On January 1, 1999, the Company adopted an Incentive Plan ("the Phantom
Plan") for its key employees, whereby share appreciation and dividend income
rights were granted to such employees by reference to the Company's common
shares. Upon exercise of such rights, the employees are required to
F-11
<PAGE> 69
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provide to the Company an amount equal to $2.08 per share. The rights granted
under the Phantom Plan vest ratably over four years.
Additionally, the Phantom Plan contains terms and conditions that provide
for its modification. In the event of a sale of the Company, each participant in
the Phantom Plan shall receive a pro rata portion of the sale price, less the
initial share value, as defined. Participants may also elect, after the end of
the first year after the date of the award of such shares, to cash out of the
Phantom Plan and receive from the Company an amount equal to two times the pro
rata portion of the change in the Company's pre-tax earnings multiplied by the
vesting percentage. In the event of an initial public offering, the Company
shall issue to each participant a number of shares of the Company's common stock
in settlement of the rights then outstanding.
Compensation expense of $5,291,000 related to the Phantom Plan has been
recognized to reflect the cumulative rights vested as of June 30, 1999. This
charge increases common stock, as the Company expects the issuance of shares
related to a proposed initial public offering to represent the most probable
outcome. For purposes of calculating compensation expense under the Phantom
Plan, the fair value of the Company's common stock was based on an independent
third party valuation.
On August 4, 1999, the Company terminated the Phantom Plan, subject to the
effectiveness of the Company's proposed initial public offering. All outstanding
awards under the Phantom Plan have been terminated and replaced by option grants
under the Stock Option Plan (defined below), in each case subject to the
effectiveness of the Company's proposed initial public offering.
On August 4, 1999, the Board of Directors adopted its 1999 Stock Plan ("the
Stock Option Plan") pursuant to which a total of 1,260,000 shares of Class A
common stock have been reserved for issuance to provide additional incentive to
its employees, officers, directors and consultants. Pursuant to the Stock Option
Plan, the Company may grant stock options and stock purchase rights to
employees, officers, directors and consultants. The Board of Directors granted
options to purchase an aggregate of 846,291 shares of Class A common stock at a
weighted average exercise price of $2.08 per share, subject to the effectiveness
of the Company's proposed initial public offering. These grants will vest fully
upon the effectiveness of the Company's initial public offering.
Upon the completion of the anticipated initial public offering, the Company
will recognize compensation expense in an amount equal to the excess of the fair
value of common stock over the exercise price of such options to the extent that
such expense exceeds the amounts previously recognized under the Phantom Plan at
June 30, 1999.
The maximum term of an incentive stock option granted under the Stock
Option Plan is generally limited to ten years. If an optionee terminates his or
her service, the optionee generally may exercise only those options vested as of
the date of termination of service. Unless otherwise specified in the option
agreement, the optionee must effect such exercise within three months of
termination of service for any reason other than death or disability, and within
one year after termination due to death or disability. The exercise price of
incentive stock options granted under the Stock Option Plan must be at least
equal to the fair market value of the Company's Class A common stock on the date
of grant. Terms of any stock purchase rights granted under the Stock Option Plan
shall be determined by the Plan Administrator at the time such rights are
issued. Upon the termination of a purchaser's service with the Company, the
Company shall have an option to repurchase his or her shares at the original
price paid by the purchaser.
In the event the Company is acquired or merged with another entity or
transfers all or substantially all of the Company's assets, then each
outstanding option and stock purchase right shall automatically vest and become
fully exercisable unless the successor entity assumes such option or stock
purchase right or replaces it with a comparable option or right.
F-12
<PAGE> 70
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. EMPLOYEE STOCK PURCHASE PLAN
Concurrently with the offering, the Company intends to establish an
Employee Stock Purchase Plan ("the Purchase Plan") under which a total of
360,000 shares of Class A common stock will be made available for sale. The
Purchase Plan, which is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code of 1986, as
amended, will be administered by the Company's Board of Directors or by a
committee appointed by the Board. Employees are eligible to participate if they
are employed by the Company or one of its subsidiaries designated by the Board
for at least 20 hours per week and for more than five months in any calendar
year. The Purchase Plan permits eligible employees to purchase Class A common
stock through payroll deductions, which may not exceed 15% of an employee's
total compensation, subject to certain limitations. The Purchase Plan will be
implemented in a series of consecutive, overlapping offering periods, each
approximately six months in duration. Offering periods will begin on the first
trading day on or after April 30 and October 31 of every other year and
terminate on the last trading day in the period six months later. However, the
first offering period shall be the period of approximately 24 months commencing
on the date upon which the Company's registration statement is declared
effective by the Securities and Exchange Commission and terminating on the last
trading day in the period ending October 31, 2001. Each participant will be
granted an option to purchase stock on the first day of the six-month purchase
period and such option will be automatically exercised on the last date of each
offering period. The purchase price of each share of Class A common stock under
the Purchase Plan will be equal to 85% of the lesser of the fair market value
per share of Class A common stock on the start date of that offering period or
on the date of purchase. Employees may modify or end their participation in the
offering at any time during the offering period. Participation ends
automatically on termination of employment with the Company. The Purchase Plan
will terminate in 2009 unless sooner terminated by the Company's Board of
Directors.
NOTE 7. NET LOSS PER SHARE
Basic and diluted net loss per common share is calculated by dividing net
loss by the weighted average number of common shares outstanding. During the
three years ended December 31, 1998, and during the six months ended June 30,
1999, there were no common share equivalents.
The weighted average number of shares used for basic and diluted per share
amounts has been adjusted, for all periods presented, to reflect the February
11, 1999 issuance of 7,200,000 shares of the Subsidiary's common stock, and the
collateral cancellation of the 1,000 shares previously issued and outstanding.
The Subsidiary common stock was exchanged on August 4, 1999 for 7,200,000 shares
of Class B common stock of the Holding Company (as adjusted to give effect to
the Company's 1 to 0.72 reverse stock split on September 14, 1999).
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net loss........................ $ (123,000) $ (740,000) $(5,657,000) $(1,933,000) $(7,588,000)
Basic and diluted net loss per
common share.................. $ (0.02) $ (0.10) $ (0.79) $ (0.27) $ (1.05)
Weighted average number of
common shares used for basic
and diluted per share
amounts....................... 7,200,000 7,200,000 7,200,000 7,200,000 7,200,000
</TABLE>
NOTE 8. COMMITMENTS AND CONTINGENCIES:
The Company is not currently involved in any material legal proceedings.
The Company is not aware of any legal proceedings pending against it.
F-13
<PAGE> 71
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. RELATED PARTY TRANSACTIONS:
On January 1, 1997 the Company received certain assets, liabilities, third
party service contracts and certain employees from an affiliated company owned
by the Company's controlling stockholder. These assets and liabilities were
transferred at historical cost.
The Company provides accounting, investor administration and information
technology services to certain affiliates, wholly owned by the Company's
stockholder. The Company received $913,000 for the 6 months ended June 30 1999,
and $2,182,000 and $3,085,000 for the years ended December 31, 1998 and 1997,
respectively, for the provision of these services. These services were charged
at the fully allocated cost to provide such services.
On April 1, 1997 the Company also received from the same affiliated company
certain employees who performed corporate functions including legal, human
relations, facilities, word processing and communications. These employees were
transferred back to the affiliate as of January 1, 1998. For the 9 months ended
December 31, 1997 the Company charged the affiliates for these services, and
these charges are included in the service fees referred to above and in the
consolidated statements of operations. For the six months ended June 30, 1999,
and the year ended December 31, 1998 the Company paid the affiliate $557,000 and
$494,000, respectively, for these services, which is included in the
consolidated statements of operations. Effective August 1, 1999, these functions
will be transferred back to the Company.
The Company has amounts due from affiliates for services of $89,000,
$182,000 and $345,000 as of June 30, 1999, December 31, 1998 and December 31,
1997, respectively.
The Company leases its office space under a noncancellable operating lease
with an affiliate. The term of the lease is two years beginning August 1, 1999,
with five successive options to renew for one year terms. The rental payment
terms are subject to negotiation at each option period. Future minimum rental
payments under noncancellable leases are as follows:
<TABLE>
<S> <C>
1999............................................ $ 268,250
2000............................................ 644,000
2001............................................ 376,000
----------
$1,288,250
</TABLE>
During the three years ended December 31, 1998 and the six months ended
June 30, 1999, the Company was charged rent expense by the affiliate which has
been offset against affiliate revenue.
NOTE 10. PROFIT SHARING:
The Company has a profit sharing plan covering substantially all employees
who meet certain age and service requirements. Contributions to the plan by the
Company are made at the discretion of the Board of Directors. The profit sharing
expense was $92,000, $133,000, $213,000 and $116,000 for the six months ended
June 30, 1999 and the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE 11. SUBSEQUENT EVENT (UNAUDITED):
On August 26, 1999, the Company issued two secured notes payable to its
shareholder for $1,245,000 and $1,005,000 (includes $79,000 payable to
shareholder at June 30, 1999). On September 12, 1999, the Company declared a
dividend of $1,000,000, which was paid in the form of a secured note payable to
its sole stockholder. All three notes bear interest at a rate of 9% per annum.
The proceeds are to be used to fund the operations of the Company.
F-14
<PAGE> 72
RESOURCEPHOENIX.COM AND SUBSIDIARY
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
The following consolidated financial statements present the
ReSourcePhoenix.com and Subsidiary ("the Company") Pro Forma Unaudited
Consolidated Balance Sheet at June 30, 1999 and the Pro Forma Unaudited
Consolidated Statements of Operations for the year ended December 31, 1998 and
the six month period ended June 30, 1999.
The following Pro Forma Consolidated Balance Sheet as of June 30, 1999
gives effect to the proposed initial public offering as if it had occurred on
June 30, 1999. The Pro Forma Unaudited Consolidated Statements of Operations for
the year ended December 31, 1998 and the six months ended June 30, 1999 give
effect to the proposed initial public offering as if it occurred on January 1,
1998. Both the Pro Forma Consolidated Balance Sheet and Pro Forma Consolidated
Statements of Operations include adjustments directly attributable to the
initial public offering and expected to have a continuing impact on the Company.
The pro forma information is derived from historical consolidated financial
statements of the Company. The information has been prepared in accordance with
the rules and regulations of the SEC and is provided for comparative purposes
only. The pro forma information does not purport to be indicative of the results
that actually would have occurred had the combination been effected at the
beginning of the periods presented.
F-15
<PAGE> 73
RESOURCEPHOENIX.COM AND SUBSIDIARY
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED (UNAUDITED) ENDED SIX MONTHS
6/30/99 ----------- 6/30/99 ENDED
(UNAUDITED) (UNAUDITED) (UNAUDITED) 6/30/99
----------- PRO FORMA ----------- PRO FORMA (UNAUDITED)
ACTUAL ADJUSTMENTS AS ADJUSTED ADJUSTMENTS AS FURTHER ADJUSTED
----------- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents...... $ 128 $ 2,171 $ 2,299 $25,450 $ 27,749
Accounts receivable............ 957 -- 957 -- 957
Receivable from affiliates..... 89 -- 89 -- 89
Prepaid expenses and other
current assets.............. 159 -- 159 -- 159
-------- ------- -------- ------- --------
Total current assets... 1,333 2,171 3,504 25,450 28,954
Property and equipment, net.... 1,994 -- 1,994 -- 1,994
Note from employee............. 21 -- 21 -- 21
-------- ------- -------- ------- --------
Total assets........... $ 3,348 $ 2,171 $ 5,519 $25,450 $ 30,969
======== ======= ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities................. $ 962 $ -- $ 962 $ -- $ 962
Deferred revenue............... 1,001 -- 1,001 -- 1,001
Payable to shareholder......... 79 (79) -- -- --
Notes payable to shareholder... -- 3,250 3,250 (3,250) --
-------- ------- -------- ------- --------
Total current
liabilities.......... 2,042 3,171 5,213 (3,250) 1,963
======== ======= ======== ======= ========
Commitments and contingencies
Stockholder's Equity:
Class A common stock........... -- -- -- 28,700 28,700
Class B common stock........... 15,291 (1,000) 14,291 (284) 14,007
-------- ------- -------- ------- --------
Accumulated deficit............ (13,985) -- (13,985) 284 (13,701)
-------- ------- -------- ------- --------
Total stockholder's
equity............... 1,306 (1,000) 306 28,700 29,006
-------- ------- -------- ------- --------
Total liabilities and
stockholder's
equity............... $ 3,348 $ 2,171 $ 5,519 $25,450 $ 30,969
======== ======= ======== ======= ========
</TABLE>
F-16
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RESOURCEPHOENIX.COM AND SUBSIDIARY
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR
YEAR ENDED
ENDED PRO FORMA 12/31/98
12/31/98 ADJUSTMENTS --------
-------- ----------- AS
ACTUAL (UNAUDITED) ADJUSTED
(UNAUDITED)
<S> <C> <C> <C>
Revenue:
Contract service revenue.................................. $ 2,460 -- $ 2,460
Contract service revenue -- affiliate..................... 2,182 -- 2,182
Software revenue.......................................... 44 -- 44
------- ------- -------
Total revenue............................................... 4,686 -- 4,686
Operating expenses:
Cost of providing services................................ 4,479 -- 4,479
Cost of providing software revenue........................ 157 -- 157
General and administrative................................ 2,072 -- 2,072
Research development...................................... 2,216 -- 2,216
Client acquisition........................................ 1,123 -- 1,123
Depreciation and amortization............................. 307 -- 307
Stock-related compensation................................ -- (284) (284)
------- ------- -------
Total operating expenses.................................... 10,354 (284) 10,070
------- ------- -------
Loss from operations........................................ (5,668) 284 (5,384)
Other income................................................ 11 -- 11
------- ------- -------
Net loss.................................................... $(5,657) 284 $(5,373)
======= ======= =======
Pro forma basic and diluted net loss per share.............. $ (0.73)
=======
Shares used in computing pro forma basic and diluted net
loss per share............................................ 7,325
</TABLE>
F-17
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RESOURCEPHOENIX.COM AND SUBSIDIARY
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
SIX MONTHS ENDED
ENDED 6/30/99
6/30/99 PRO FORMA AS
ACTUAL ADJUSTMENTS ADJUSTED
---------- ----------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue:
Contract service revenue............................... $ 1,740 -- $ 1,740
Contract service revenue -- affiliate.................. 913 -- 913
Software revenue....................................... 1,508 -- 1,508
------- -------- --------
Total revenue............................................ 4,161 -- 4,161
Operating expenses:
Cost of providing services............................. 2,472 -- 2,472
Cost of providing software revenue..................... 319 -- 319
General and administrative............................. 1,172 -- 1,172
Research and development............................... 1,289 -- 1,289
Client acquisition..................................... 995 -- 995
Depreciation and amortization.......................... 228 -- 228
Stock-related compensation............................. 5,291 -- 5,291
------- -------- --------
Total operating expenses................................. 11,766 -- 11,766
Loss from operations..................................... (7,605) -- (7,605)
------- -------- --------
Other income............................................. 17 -- 17
------- -------- --------
Net loss................................................. $(7,588) -- $ (7,588)
======= ======== ========
Pro forma basic and diluted net loss per share........... $ (1.04)
Shares used in computing pro forma basic and diluted net
loss per share......................................... 7,325
</TABLE>
F-18
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RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma information presented is not necessarily indicative
of future consolidated results of operations of the Company or the consolidated
results of operations that would have resulted had the initial public offering
taken place on January 1, 1998. The unaudited pro forma consolidated statements
of operations for the six months ended June 30, 1999 and the year ended December
31, 1998 have been determined based on the consolidated statements of operations
assuming the initial public offering occurred as of January 1, 1998 for the
purposes of the unaudited pro forma consolidated statements of operations. The
unaudited pro forma consolidated balance sheet at June 30, 1999 reflects the
Company's consolidated financial position as if the initial public offering
occurred on June 30, 1999.
2. UNAUDITED PRO FORMA FINANCIAL ADJUSTMENTS
Pro forma adjustments to the June 30, 1999 pro forma consolidated balance
sheet have been presented in two columns. The first pro forma adjustments column
and the "as adjusted" column reflect: (A) the dividend of a note payable to the
Company's sole shareholder, and (B) the loans by the Company's sole shareholder
to the Company. The second pro forma adjustments column and the "as further
adjusted" column reflect: (C) the repayment of the note payable to the Company's
sole shareholder, (D) the repayment of the Company's sole shareholder of the
loans made to the Company, (E) recognition of compensation expense related to
the Company's Stock Option Plan, and (F) application of the remaining net
proceeds of the Company's initial public offering.
Pro forma adjustments that result specifically from the initial public
offering include the subsequent repayment of the notes payable as described in
Note 11 of the Notes to Consolidated Financial Statements, as well as the
issuance of 4,000,000 shares of Class A common stock and the payment of
$1,060,000 of estimated offering costs consisting primarily of financial
advisory fees, attorneys, accountants, financial printing, and other related
charges.
As described in Note 5 of the Notes to Consolidated Financial Statements,
compensation expense related to the Company's Stock Option Plan has been
recognized in an amount equal to the excess of the fair market value of common
stock over the exercise price of such options to the extent that such expense
exceeds the amounts previously recognized under the Phantom Plan as of June 30,
1999. The incremental negative compensation expense recognized in the pro forma
unaudited consolidated financial statements upon the establishment of the Stock
Option Plan is $284,000. For purposes of calculating compensation expense under
the Stock Option Plan, the fair value of the Company's Class A common stock was
based on an initial public offering price of $8.00 per share. As this adjustment
is also related specifically to the initial public offering, it is presented as
such.
3. UNAUDITED PRO FORMA INCOME TAX ADJUSTMENTS
The reincorporation of the Company under the proposed initial public
offering will result in the creation of deferred tax assets. However, an income
tax benefit will not be recognized on a pro forma basis for any period presented
because the Company has experienced operating losses since inception. Since the
Company's utilization of these deferred tax assets is dependent on future
profits, which are not assured, a valuation allowance equal to the net deferred
tax assets has been provided in the pro forma unaudited consolidated financial
statements.
F-19
<PAGE> 77
RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA NET LOSS PER SHARE
The net loss per share and shares used in computing the basic and diluted
net loss per share are based upon the historical weighted average common shares
outstanding increased by 125,000 to give effect to the number of shares whose
proceeds are to be used to pay the dividend described in Note 2 above and Note
11 of the Notes to Consolidated Financial Statements, based on an assumed
initial public offering price of $8.00 per share.
The net loss per share and shares used in computing the diluted net loss
per share are not adjusted to include the issuance of stock options to purchase
846,291 shares of Class A common stock, contingent upon the Company's initial
public offering, pursuant to the Stock Option Plan, as described in Note 5 of
the Notes to Consolidated Financial Statements, as they are antidilutive.
F-20
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