UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934. For the fiscal year ended December 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934. For the transition period from __________ to
__________.
Commission File Number 000-27449
ReSourcePhoenix.com
(exact name of Registrant as specified in its charter)
Delaware 52-2190830
(State of incorporation) (I.R.S. Employer Identification No.)
2401 Kerner Boulevard
San Rafael, CA 94901
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 485-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $.001 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
----- -----
Based on the closing sale price of the Registrant's Class A common stock on
the Nasdaq National Market System on March 3, 2000, the aggregate market value
of the voting and non-voting common stock held by non-affiliates of the
Registrant was $76,769,358.
At March 3, 2000, the number of shares outstanding of the Registrant's Class
A common stock was 4,028,000 and the number of shares outstanding of the
Registrant's Class B common stock was 7,172,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Registrant's Annual Meeting of Stockholders to be held on May
18, 2000.
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PART I
Item 1. 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
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complicated technology in the hands of users without providing the additional
training or support that is required to operate this technology effectively.
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:
o the desire by companies to focus on their core businesses;
o the difficulties of attracting and retaining qualified personnel in
information technology, accounting, finance, transaction processing and
other business specialties;
o the time and expense required to keep these personnel current in their
skills;
o the inability of many companies to effectively adopt and implement
advanced business processes;
o the challenges inherent in developing and maintaining software
applications, and data and communications networks; and
o 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:
o Maintain focus on growing their businesses. Our solution allows our
clients to focus on executing their business strategy. By outsourcing
these critical back-office functions to us, our clients minimize the
distractions of managing the personnel and technology necessary to
perform these tasks and instead focus on their core businesses.
o 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.
o 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:
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-- 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.
o 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 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.
o 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:
o 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.
o 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.
o 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
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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 including Research
and Development, Development and Quality Assurance.
o 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 launched a comprehensive advertising
campaign, which includes Internet, radio and print advertisements, in
September 1999.
o Offer integrated e-commerce solutions. We plan to offer integrated
software applications to our clients that seek e-commerce solutions.
Our goal is to offer our clients a complete solution including online
transaction processing, integration of databases, and management of
network architecture and back-office operations. We recently entered
into relationships with BroadVision and Vitria to integrate their
solutions into our service offerings.
o 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.
o 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 certain banking institutions for
venture-backed, early stage companies, and with Sun Micro Systems and
Cisco Systems, two leading producers of network infrastructure, in
which these companies have agreed to refer prospective clients to us.
We plan to develop additional relationships with leading law firms,
venture capital firms and other professional services firms that
service early stage and middle market companies.
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Our Offerings
Each of our service offerings is summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Product Target Market Services Offered
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial o Early stage o Reporting, including: management reporting; investor and bank
Outsourcing and middle reporting; statutory reporting; regulatory reporting; and income,
(formerly ReFOCOS) market companies VAT, property, sales and use tax reporting
o Accounting, including: month-end, quarter-end and year-end
closings; and account reconciliations
o Transaction processing, including: accounts payable;
disbursements; travel and entertainment expense reporting and
processing; billing; cash receipts; and collections activities
o Budgeting and analysis
o Operation of financial and management reporting software,
databases, hardware, network and other communications
infrastructure
- --------------------------------------------------------------------------------------------------------------------------
S.T.A.R. o Sponsors of o Transfer agency and investor servicing through call center support
(Syndication limited o Distribution processing
Tracking And partnerships o Tax (K-1 and 1099) reporting
Reporting) o Sponsors of o Sales and marketing support
real estate o Blue sky and compliance reporting
investment trusts o Multi-level support of broker selling agreements
o Investor proxy support
o Investor and broker contact management and follow-up
- --------------------------------------------------------------------------------------------------------------------------
M.A.R.S. (Marketing o Mutual funds o Sales tracking
And Representative o Issuers of o Contact management
Sales) variable o Fulfillment/inventory tracking
annuities
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Our Financial Outsourcing service, formerly referred to as ReFOCOS, is a
solution that includes reporting, accounting, transaction processing, budgeting
and analysis solutions. We target our Financial Outsourcing 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.
Our S.T.A.R. services are similar to our Financial Outsourcing services,
but are designed to provide investor services to sponsors of limited
partnerships and real estate investment trusts. We begin by implementing the
client on 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.
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 also 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
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to offer M.A.R.S. as a licensed software product to our clients that prefer a
software-only solution.
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 operations manager and numerous functional and
technical support specialists to provide service to our clients.
We monitor the quality of our service through client feedback mechanisms.
Our goal 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
operations 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 implementation, our business process operations group
becomes the primary interface for day-to-day contact with the client,
coordinating the efforts of both functional and technical support specialists as
necessary. By regularly soliciting feedback, the salesperson helps our
operations group stay informed and ensure that all of the client's needs are
addressed.
Specialized client support. Each client is supported by a team of
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 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:
o 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.
o 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
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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. These factors contribute to improved success in recruiting and
sustaining high retention rates.
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:
o scalability;
o customizable and reliable security;
o flexible communication and networking worldwide;
o high availability (uptime); and
o 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.
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. Our
data center recently earned the industry leading ICSA.Net Tru Secure(TM)
certification.
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 128 bit encryption, secure dial-up networks,
and wide area networks, or WANs, 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
and Cisco hardware accelerated virtual private networks; Sprint, Electric Light
Wave and UUNet Internet service providers; Sun Enterprise UNIX servers and
arrays; Dell multi-processor Intel based NT servers; Microsoft operating
systems, security, SMS and applications; Oracle databases; Vitria middleware;
and Oracle, BroadVision 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 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 WANs. This class of software includes client-server-based
applications such as M.A.R.S. or Oracle Financial Applications, 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 personnel each had over ten years experience at Arthur Andersen
LLP, including our Senior 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 launched a
comprehensive advertising campaign, which began in September 1999. This campaign
began with print advertisements and radio commercials in Northern California. We
recently expanded this campaign nationally. We will continue to target emerging
growth and middle-market companies. In addition, we plan to continue to direct a
large part of our marketing dollars towards the venture capital community,
attorneys, CPAs and financial institutions that work with our target companies.
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Financial Outsourcing
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.
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 December 31, 1999, we had 50 clients with signed service contracts or
letters of intent, including 47 unaffiliated clients and three clients that are
affiliated with Phoenix Leasing. Of the unaffiliated clients, 23 were Financial
Outsourcing clients, 10 were M.A.R.S. clients and 14 were S.T.A.R. clients. Set
forth below is a representative list of our unaffiliated clients.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Financial Outsourcing Clients S.T.A.R. Clients M.A.R.S. Clients
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Air Transport Leasing Coordinated Services Aeltus Investments
Blackstone First Winthrop Heritage Asset Management
GE Capital Aviation Services/ GE Capital Aviation Services/ John Hancock Advisors
Aircraft Finance Trust PIMC
GE Capital Aviation Starwood Hotels and Resorts The Alger Fund
Services/PIMC
Thomas Weisel Partners W.P. Carey Wells Fargo Bank
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Our five largest clients accounted for 59% of our total revenue in 1999,
75% in 1998 and 88% in 1997. See "Risk Factors - 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."
We believe that our high quality service is the reason why we have never
lost a Financial Outsourcing client because of service or pricing issues. Our
client contracts can generally be terminated without significant penalties for
cancellation.
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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,
BroadVision, Vitria, and Core Technology Group.
We believe that we can help establish our partners in markets that are
difficult to reach. Early stage and 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. While our clients are not
required to establish a separate licensing arrangement for the applications, our
client contracts require the client to acknowledge that they are a sublicensee
and are subject to certain restrictions regarding use of the applications. 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 clients.
The contract requires that we pay a one-time software 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
Web site 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:
o executive level discussions of Sun's technical and business plans;
o free technical design, capacity planning, evaluation equipment and
systems implementation; and
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o 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.
BroadVision, Inc. We have a relationship with BroadVision under which we
license the entire suite of BroadVision One-To-One e-business applications for
one-to-one customer relationship management. We intend to integrate BroadVision
with our clients' existing back office operations and outside supply chain or
third-party service providers. We believe that this integration will extend our
Financial Outsourcing service to include integrated e-commerce solutions.
Vitria Technology, Inc. We have a relationship with Vitria, an e-business
platform provider, pursuant to which we license Vitria's BusinessWare software.
We are currently integrating this software into our financial outsourcing
service. When this integration is complete, this integrated service offering
will allow our clients to exchange information over the Internet among
applications, customers, third-party vendors and accounting functions. We
believe that this relationship will provide greater flexibility in the expansion
of products and services we provide now and in the future.
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.
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
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, BroadVision 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. 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, NaviSite, Oracle and
Corio. Oracle, a business partner of ours, recently introduced a hosted service
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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 Financial Outsourcing 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 operating results.
Employees
As of December 31, 1999, we had 221 full-time employees, including 26 in
sales and marketing, seven in management, 165 in operations and 23 in research
and development. None of our employees are covered by collective bargaining
agreements. We believe that our relations with our employees are good.
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RISK FACTORS
This report 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
below and elsewhere in this report.
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:
o concerns over transaction security and user privacy;
o inadequate network infrastructure for the entire Internet; and
o 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
Financial Outsourcing 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 Financial Outsourcing 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 whose client bases consist of more established
companies.
Our Financial Outsourcing 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 whose client bases consist of more established
companies. We have lost six unaffiliated clients to date, including 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 for our existing and future clients. The personnel capable of filling
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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.
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 Financial Outsourcing service in 1993. Our Web-enabled
Financial Outsourcing service and our hosted M.A.R.S. service were introduced in
November 1998 and August 1999, respectively. For the years 1998 and 1999, we
derived approximately 67% and 50%, respectively, of total revenue from our
S.T.A.R. services. For the years 1998 and 1999, we derived approximately 1% and
25%, respectively, of total revenue from the sale of 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 Financial Outsourcing services
are marketed to a broader, less specialized market than either of our M.A.R.S.
or S.T.A.R. services. We may be unsuccessful in our efforts to market to this
target market.
In August 1999 we 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 $23.1 million for the period from January 1, 1997, the date on
which we began operations as a separate company, through December 31, 1999, and
reported net cash used in operating and investing activities of $20.2 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:
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o the announcement or introduction of new or enhanced products or
services by our competitors;
o pricing changes by us or our competitors;
o the timing and frequency of new client engagements or cancellations;
and
o sales cycle fluctuations.
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. The market prices of the securities of Internet-related and
technology-related companies have been especially volatile. The closing price of
our Class A common stock, for example, has fluctuated between $5.62 and $25.37
since our initial public offering in October 1999. 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 1999, 1998 and 1997 for each of our clients that accounted for
more than 10% of our revenues and for our ten largest clients combined:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Phoenix Leasing (an affiliate) 24% 41% 48%
GE Capital Aviation Services/PIMC 9% 20% 23%
John Hancock Advisors 16% -- --
Total of ten largest clients combined: 77% 86% 97%
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 or
markets 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, Necho Systems
Corp., BroadVision, Inc. and Vitria Technology, Inc. If we were to lose the
right to use the software that we have licensed from Oracle, Necho, BroadVision,
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Vitria 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, is now offering a Web-enabled
version of its enterprise resource planning software that it markets 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 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 25% of our revenues from licensing our M.A.R.S.
software product during the year ended December 31, 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 any 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.
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The software applications that we license from Oracle, Necho, BroadVision,
Vitria 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, Navisite, Inc.,
PricewaterhouseCoopers LLP, and USInternetworking, Inc. Some of our 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:
o more quickly develop and expand their network infrastructures and
service offerings;
o better adapt to new or emerging technologies and changing customer
needs;
o negotiate more favorable licensing agreements with software application
vendors;
o more successfully recruit qualified information technology, accounting,
finance and transaction processing professionals;
o negotiate more favorable services agreements with software and systems
integrators;
o devote greater resources to the marketing and sale of their services;
and
o 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
Financial Outsourcing 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
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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 are likely to
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 recently began to expand very rapidly and managing our growth may be
difficult.
In mid-1999, we began 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:
o expand, train and manage our employee base effectively;
o enlarge our network and infrastructure to accommodate new clients;
o expand our infrastructure and systems to accommodate the growth of our
existing clients; and
o 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 recruit qualified
accounting, finance and transaction processing personnel, which are also in high
demand. During the second half of 1999, we opened eight new offices outside
northern California. In addition, we plan to open additional sales offices and a
data center outside of California. We have little 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 senior vice
president of operations, has worked for us and our predecessor business for more
than 13 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, financial condition and operating results
could be seriously harmed. We cannot be sure that their products will be
compatible with ours or that they will adequately address changing customer
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needs. We also cannot be sure what new industry standards will develop. We
cannot assure you that we will be able to conform to these new standards quickly
enough to stay competitive. In addition, we cannot assure you 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:
o developing relationships with particular software providers, including
Oracle, Necho, BroadVision and Vitria;
o investing to develop unique product features, including invoice
reporting and imaging functions; and
o 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 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, security
breaches 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 its 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
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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 operating results.
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 him to
five votes on most stockholder actions. As a result, Mr. Constantin controls
89.9% of the combined voting power of both classes of our common stock. Holders
of Class A common stock are entitled to one vote per share and in the aggregate
have 10.1% of the combined voting power of both classes of our common stock. As
a result of his stock ownership, Mr. Constantin can, without the approval of our
public stockholders, take corporate actions that could conflict with the
interests of our public stockholders, such as:
o amending our charter documents;
o approving or defeating mergers or takeover attempts;
o determining the amount and timing of dividends paid to himself and to
holders of Class A common stock;
o changing the size and composition of our board of directors and
committees of our board of directors; and
o otherwise controlling management and operations and the outcome of most
matters submitted for a stockholder vote.
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.
Item 2. Facilities
Our principal executive offices are located in San Rafael, California, in a
40,000 square-foot facility that is leased from an affiliate. The lease term
expires in July 2001 with five successive options to renew for one year terms.
We entered into a lease in 1999 for a 67,482 square foot facility located
in Alameda, California to accommodate expected growth in staff. The lease term
expires in December 2006. In addition, we lease sales offices in Austin, Texas;
Kirkland, Washington; Newton, Massachusetts; Sacramento, California; Schaumburg,
Illinois; Scottsdale, Arizona; Stamford, Connecticut; Upper Saddle River, New
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Jersey; Vienna, Virginia; and Westlake Village, California. These leases are
typically for executive suite type space with a term of less than one year with
options to renew for set periods. The aggregate lease expense for all facilities
in 1999 was approximately $651,000.
Item 3. Legal Proceedings
We are not currently involved in any material legal proceedings. We are not
aware of any legal proceedings threatened against us. We are, however, party to
various legal proceedings and claims from time to time arising in the ordinary
course of business. We do not expect that the results in any of these legal
proceedings will seriously harm our business or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's stockholders, through
the solicitation of proxies or otherwise, during the fourth quarter of fiscal
year 1999.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
Market Information
Our Class A common stock began trading on the Nasdaq National Market on
October 14, 1999 under the symbol "RPCX." The following table lists quarterly
price information based on the high and low closing prices for our Class A
common stock as reported by the Nasdaq National Market for the periods indicated
below. These prices do not include retail markups, markdowns or commissions.
High Low
---- ---
2000
First Quarter (through March 3, 2000) $25.38 $13.56
1999
Fourth Quarter (from October 14, 1999) 21.38 5.63
As of March 3, 2000, there were approximately 29 holders of record of our
Class A common stock although there are a larger number of beneficial holders
and one holder of record of our Class B common stock. On March 3, 2000, the
last reported sale price on the Nasdaq National Market for our Class A common
stock was $18.813.
Dividend Policy
On September 12, 1999, we paid a dividend of $1,000,000 in the form of a
secured note payable to our then sole stockholder. This note was repaid in
October 1999 from the proceeds of our initial public offering. Except for the
dividend described above, 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.
Use of Proceeds
On October 14, 1999 we commenced our initial public offering (the
"Offering"), which consisted of 4,000,000 shares of our Class A common stock at
$8.00 per share pursuant to a registration statement (No. 333-84589) declared
effective by the Securities and Exchange Commission on October 14, 1999. The
Offering has been terminated and all shares have been sold. The managing
underwriters for the Offering were BancBoston Robertson Stephens, Inc. and
Thomas Weisel Partners LLC. Aggregate proceeds from the Offering were $32
million.
We incurred approximately $3.2 million in total expenses in connection with
the Offering, comprised of approximately $2.2 million in underwriters'
commissions and $1.0 million in other expenses.
After deducting expenses of the Offering, the net offering proceeds to us
were $28.8 million. The approximate amount of net offering proceeds used through
December 31, 1999 was $6.6 million to repay outstanding promissory notes to our
majority stockholder, $4.2 million in capital additions and approximately $2.2
million for general corporate purposes, including working capital. The remaining
net proceeds have been invested in short-term cash instruments pending final
deployment. We currently estimate that the remaining net proceeds of the
offering will be used as follows:
o 15% to 25% for capital expenditures; and
o 55% to 65% for general corporate purposes, including working capital.
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<PAGE>
As of the date of this Form 10-K, we can only estimate the particular uses
for the net proceeds received from 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.
Item 6. 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 document. The consolidated statement of operations
data for the fiscal years ended December 31, 1996, 1997, 1998, and 1999 and the
consolidated balance sheet data at December 31, 1997, 1998 and 1999, are derived
from our consolidated financial statements which have been audited by Arthur
Andersen LLP, our independent public accountants, and, except for the
consolidated statement of operations as of December 31, 1996 and the
consolidated balance sheet dated December 31, 1997, are included elsewhere in
this document. The consolidated statement of operations data for the fiscal year
ended December 31, 1995, and the consolidated balance sheet data at December 31,
1995 and 1996 are derived from our unaudited consolidated financial statements.
Our unaudited consolidated financial statements have been prepared on a basis
consistent with our audited consolidated financial statements. 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 to be expected in the future.
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<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Contract service revenue $ 4,001 $ 2,465 $ 2,255 $ 1,175 $ 896
Contract service revenue - affiliate 2,772 2,182 3,085 - -
Software revenue 2,300 39 - - -
---------- ---------- ---------- ---------- ---------
Total revenue 9,073 4,686 5,340 1,175 896
---------- ---------- ---------- ---------- ---------
Operating Expenses:
Cost of providing services 5,859 4,304 3,052 570 442
Cost of providing software revenue 901 455 - - -
General and administrative 4,554 1,963 1,823 298 222
Research and development 3,185 2,181 566 - -
Client acquisition 5,278 1,144 547 418 347
Depreciation and amortization 943 307 133 12 8
Stock-related compensation 5,007 - - - -
---------- ---------- ---------- ---------- ---------
Total operating expenses 25,727 10,354 6,121 1,298 1,019
---------- ---------- ---------- ---------- ---------
Loss from Operations (16,654) (5,668) (781) (123) (123)
Other income 174 11 41 - -
---------- ---------- ---------- ---------- ---------
Net Loss $ (16,480) $ (5,657) $ (740) $ (123) $ (123)
========== ========== ========== ========== =========
Basic and diluted net loss per share $ (2.05) $ (0.79) $ (0.10) $ (0.02) $ (0.02)
Shares used in computing basic and
diluted net loss per share 8,055 7,200 7,200 7,200 7,200
CONSOLIDATED BALANCE SHEET DATA
(in thousands, except per share amounts)
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Cash and cash equivalents $ 15,780 $ 503 $ 106 $ - $ -
Accounts receivable 981 601 889 303 300
Property and equipment, net 6,287 694 686 256 250
Other assets 1,005 24 51 - -
Total assets 24,053 1,822 1,732 559 550
Accounts payable and accrued liabilities 3,110 1,195 874 361 369
Deferred revenue 994 627 - - -
Total liabilities 4,104 1,822 874 361 369
Stockholders' equity 19,949 - 858 198 181
</TABLE>
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<PAGE>
Item 7. 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 report. 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 report.
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 commercial lender and sponsor and syndicator of publicly-traded
limited partnerships. 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. 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 Financial Outsourcing, formerly
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 Financial Outsourcing service, we
perform a wide variety of accounting, finance, transaction processing and other
related services for our clients. Our original Financial Outsourcing and
S.T.A.R. 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
customer relationship management 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 Financial Outsourcing service and our hosted
M.A.R.S. service in November 1998 and August 1999, respectively. Our Web-enabled
Financial Outsourcing service is similar to our original Financial Outsourcing
service, except that clients can now access the service using conventional
Internet browser software. We successfully implemented the first hosted M.A.R.S.
client during the fourth quarter of 1999. With the hosted M.A.R.S. service
offerings, we install and maintain the M.A.R.S.
software in our data operations center for our clients.
Contract service revenue. We derive contract service revenue primarily from
fees to provide monthly information technology, accounting, finance and
transaction processing for services related to Financial Outsourcing and
S.T.A.R., including one-time installation fees, and fees for maintenance and
hosting services for M.A.R.S clients. We recognize monthly fees as these
services are performed and installation fees on a percentage of completion
basis, except those related to the sale of software.
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<PAGE>
Contract service revenue -- affiliate. We derive contract service revenue
from affiliates by providing our S.T.A.R. and Financial Outsourcing service to
certain affiliate companies. 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 revenue.
Software revenue. We derive software revenue from software license fees,
consulting services, and training 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 and related implementation and installation.
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. Historically, we 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 and
recorded as an element of contract service revenue. 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. In the fourth quarter of 1999, we completed the first
installation of M.A.R.S. services on a hosted basis. We expect that in the
future software revenue will decline as a percentage of total revenue as we
devote greater resources to our other outsourced business services
Components of costs and expenses. Cost of providing services includes
salaries and benefits for personnel in our Financial Outsourcing and S.T.A.R.
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 updates. Prior to the quarter ended June 30, 1998,
these costs were recorded 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
overhead expenses. 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, miscellaneous costs
associated with M.A.R.S. development, and similar types of expenses engaged in
application development efforts related to our Financial Outsourcing service.
Client acquisition expense primarily includes salaries, benefits and commissions
paid to our sales and marketing and implementation personnel, travel expenses of
our sales and marketing and implementation personnel, certain advertising
expenses and fees paid to outside implementation consultants.
Stock-related compensation expense. As a result of stock options granted in
1999, we recognized stock-related compensation expense of $5.0 million in 1999.
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<PAGE>
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.
Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Consolidated Statements of Operations Data:
Revenue:
Contract service revenue................... 44.1% 52.6% 42.2%
Contract service revenue-- affiliate....... 30.6 46.6 57.8
Software revenue........................... 25.3 0.8 --
-------- -------- --------
Total Revenue........................ 100.0 100.0 100.0
-------- -------- --------
Operating expenses:...........................
Cost of providing services................. 64.6 91.9 57.2
Cost of providing software revenue......... 9.9 9.7 --
General and administrative................. 50.2 41.9 34.1
Research and development................... 35.1 46.5 10.6
Client acquisition......................... 58.2 24.4 10.2
Depreciation and amortization.............. 10.4 6.5 2.5
Stock-related compensation................. 55.2 -- --
-------- -------- --------
Total operating expenses............. 283.6 220.9 114.6
-------- -------- --------
Loss from operations.......................... (183.6) (120.9) (14.6)
Other income.................................. 1.9 0.2 0.7
-------- -------- --------
Net loss...................................... (181.7)% (120.7)% (13.9)%
======== ======== ========
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Total revenue increased 94% to $9.1 million in 1999 from $4.7
million in 1998, primarily due to growth in both our Financial Outsourcing
service for non-affiliate clients and sales of our M.A.R.S. product.
Contract service revenue. Contract service revenue increased 62% to $4.0
million in 1999 from $2.5 million in 1998. Financial Outsourcing revenue
increased 138% to $1.9 million in 1999 from $0.8 million in 1998. The revenue
increase was primarily due to the increase in the number of non-affiliated
Financial Outsourcing clients from 11 at December 31, 1998 to 23 at December 31,
1999. S.T.A.R. revenue increased 20% to $2.0 million in 1999 from $1.7 million
in 1998. The increase in S.T.A.R. revenue was attributed to the addition of one
new client in the year and increased activity for existing clients. The total
number of S.T.A.R. clients in 1999 was 14 compared to 13 in the prior year.
Contract service revenue -- affiliate. Contract service revenue from
affiliates increased 27% to $2.8 million in 1999 from $2.2 million in 1998. The
increase in contract service revenue from affiliates was primarily due to a
change in August 1999 from a fee based on allocated cost to a fee schedule that
was reflective of market rates for the services provided.
Software revenue. Software revenue increased to $2.3 million in 1999 from
$39,000 in 1998. This increase was primarily due to the introduction of our
current M.A.R.S. release in March 1999. The number of M.A.R.S. clients under
contract increased from six at December 31, 1998 to ten at December 31, 1999.
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<PAGE>
Cost of providing services. Cost of providing services increased 36% to
$5.9 million in 1999 from $4.3 million in 1998. The increase was primarily due
to the increase in the number of clients serviced, which required us to add
personnel in our operations group. Increased labor and related benefit expenses
accounted for 86% of the increase in our cost of providing services and
represented 88% of the total cost of providing services in 1999 and in 1998.
Cost of providing software revenue. Cost of providing software revenue
increased 98% to $0.9 million in 1999 from $0.5 million in 1998. The increase
was primarily due to the increase in M.A.R.S. contracts.
General and administrative expenses. General and administrative expenses
increased 132% to $4.6 million in 1999 from $2.0 million in 1998. 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 46% to $3.2 million in 1999 from $2.2 million in 1998. The increase
was due primarily to hiring additional full-time and contract personnel to
develop enhancements and new features to our M.A.R.S software product and
conduct application development work for our Financial Outsourcing services.
Client acquisition expenses. Client acquisition expenses increased 361% to
$5.3 million in 1999 from $1.1 million in 1998. The increase was due largely to
an incremental salaries and benefits expense of $1.9 million associated with
hiring additional sales and implementation personnel for our Financial
Outsourcing services and, to a lesser extent, M.A.R.S. Consultant expenses
incurred supporting new outsourcing client implementations and the transition of
existing clients to our Web-enabled Financial Outsourcing service, together with
increased advertising and promotional expenses, also contributed to higher costs
in 1999 compared to 1998.
Stock-related compensation expense. As a result of stock options granted in
1999, we recognized stock-related compensation expense of $5.0 million in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Total revenue decreased 12% 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% to $2.5
million in 1998 from $2.3 million in 1997. S.T.A.R. revenue increased 6% to $1.7
million in 1998 from $1.6 million in 1997. Financial Outsourcing revenue
increased 14% to $0.8 million in 1998 from $0.7 million in 1997. 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 non-affiliate Financial Outsourcing clients increased to
11 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% to $2.2 million in 1998 from $3.1 million in 1997. 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 $39,000
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 41% to
$4.3 million in 1998 from $3.1 million in 1997. The increase was primarily due
to the increase in the number of clients serviced, which required us to add
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<PAGE>
personnel in our operations group and resulted in additional salaries and
benefits of $1.2 million for these personnel.
Cost of providing software revenue. Cost of providing software revenue
increased to $0.5 million in 1998 from zero in 1997. The increase was due to the
increase in M.A.R.S. contracts.
General and administrative expenses. General and administrative expenses
were essentially unchanged at $2.0 million and $1.8 million in 1998 and 1997,
respectively.
Research and development expenses. Research and development expenses
increased 285% 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 109% 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 Financial
Outsourcing services as well as costs associated with hiring additional
implementation consultants to transition our existing Financial Outsourcing
clients to our Web-enabled service.
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<PAGE>
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
December 31, 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. Certain prior period amounts have
been reclassified to conform to the current period presentation. 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
------------------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
1999 1999 1999 1999 1998 1998 1998 1998
------------ ------------- -------- --------- ------------ ------------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Contract service revenue .... $ 1,262 $ 989 $ 937 $ 813 $ 645 $ 581 $ 575 $ 664
Contract service revenue -- . 1,059 800 435 478 559 589 481 553
affiliate
Software revenue ............ 281 521 1,408 90 0 0 39 --
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue ............. 2,602 2,310 2,780 1,381 1,204 1,170 1,095 1,217
Operating expense:
Cost of providing services .. 2,030 1,423 1,378 1,028 916 1,041 1,125 1,223
Cost of providing software .. 268 231 225 177 187 210 58 --
revenue
General and administrative .. 2,085 1,470 488 511 807 489 373 294
Research and development .... 812 1,022 695 656 956 588 363 274
Client acquisition .......... 2,805 1,384 613 476 528 262 176 177
Depreciation and amortization 464 251 137 91 86 80 73 68
Stock-related compensation .. 3,051 (3,335) 2,933 2,358 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses .. 11,515 2,446 6,469 5,297 3,480 2,670 2,168 2,036
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations ........... (8,913) (136) (3,689) (3,916) (2,276) (1,500) (1,073) (819)
Other income (expense) ......... 184 (27) 8 9 3 49 (21) (20)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss ....................... $ (8,729) $ (163) $ (3,681) $ (3,907) $ (2,273) $ (1,451) $ (1,094) $ (839)
======== ======== ======== ======== ======== ======== ======== ========
As a Percentage of Revenue
------------------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
1999 1999 1999 1999 1998 1998 1998 1998
------------ ------------- -------- --------- ------------ ------------- -------- ---------
(In Thousands)
STATEMENT OF OPERATIONS DATA:
Revenue:
Contract service revenue.... 48.5% 42.8% 33.7% 58.9% 53.6 49.7% 52.5% 54.6%
Contract service revenue -- 40.7 34.6 15.6 34.6 46.4 50.3 43.9 45.4
affiliate...................
Software revenue............ 10.8 22.6 50.7 6.5 -- -- 3.6 --
------- ------- ------- ------- ------- ------- ------- ------
Total revenue............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Operating expense:
Cost of providing services.. 78.0 61.6 49.6 74.4 76.1 89.0 102.7 100.5
Cost of providing software 10.3 10.0 8.1 12.8 15.5 17.9 5.3 --
revenue.....................
General and administrative.. 80.1 63.6 17.6 37.0 67.0 41.8 34.1 24.2
Research and development.... 31.2 44.2 25.0 47.5 79.4 50.3 33.1 22.5
Client acquisition.......... 107.8 60.0 22.0 34.5 43.9 22.4 16.1 14.5
Depreciation and amortization 17.8 10.9 4.9 6.6 7.1 6.8 6.7 5.6
Stock-related compensation.. 117.3 (144.4) 105.5 170.8 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------
Total operating expenses.. 442.5 105.9 232.7 383.6 289.0 228.2 198.0 167.3
------- ------- ------- ------- ------- ------- ------- ------
Loss from operations........... (342.5) (5.9) (132.7) (283.6) (189.0) (128.2) (97.9) (67.3)
------- ------- ------- ------- ------- ------- ------- ------
Other income (expense)......... 7.1 (1.2) 0.3 0.7 0.2 4.2 (1.9) (1.6)
Net loss....................... (335.5)% (7.1)% (132.4)% (282.9)% (188.8)% (124.0)% (99.9)% (68.9)%
======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
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<PAGE>
Revenue. Our total revenue has fluctuated over the last eight quarters
primarily as a result of increases in contract service revenue from affiliates,
the introduction of our M.A.R.S. software product in March 1999 and increases in
contract service revenue. The increasing revenue, particularly for the three
quarters ended December 31, 1999, was also due to the addition of sales and
marketing personnel beginning in October 1998.
Contract service revenue. Contract service revenue increased from $0.7
million for the quarter ended March 31, 1998 to $1.3 million for the quarter
ended December 31, 1999 primarily as a result of adding additional Financial
Outsourcing clients.
Contract service revenue--affiliate. Contract service revenue from
affiliates historically has fluctuated as a result of the disposition of
affiliated entities and more recently due to a change in the third quarter of
1999 from a fee based on allocated cost to fee schedule based on market rates.
Software revenue. The increase in software revenue was primarily due to the
introduction of our current M.A.R.S. release in March 1999 and the increase in
dedicated sales personnel. 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. 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. The number of M.A.R.S. clients under contract
increased from six at December 31, 1998 to ten at December 31, 1999.
Cost of providing services. Cost of providing services has generally
increased since December 31, 1997. These increases were primarily due to the
addition of additional personnel and infrastructure to service new clients and
prepare for anticipated growth. 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.
Cost of providing software revenue. Cost of providing software revenue has
generally increased over the eight quarters ended December 31, 1999. This
increase has been primarily 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 additional
personnel and related 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. The increase in
general and administrative expenses for the quarters ended September 30, 1999
and December 31, 1999 represents additional personnel and support costs
underlying current and anticipated client growth.
Research and development expenses. Research and development expenses have
fluctuated due to the hiring of an increased number of outside consultants to
complete the development of our M.A.R.S. software product. The increase in
research and development expenses for the quarter ended September 30, 1999 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 and conduct
application development work for our Financial Outsourcing services. Development
of our M.A.R.S. software product was substantially completed in the quarter
ended December 31, 1999. Accordingly, we reduced the number of consultants used
during this period, which reduced the amount of our research and development
expenses.
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<PAGE>
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 Financial Outsourcing service during
the quarter ended December 31, 1998 and the increases in client acquisition
expenses in 1999 reflects increased staff, the use of outside consultants
working in conjunction with our internal implementation group, and increased
advertising and promotional expenses.
Stock-related compensation expense. Prior to the quarter ended December 31,
1999, stock-related compensation expenses represented expenses incurred in
connection with our phantom stock plan. Awards under this plan vested over four
years. The expense for the quarters ended June 30, 1999 and March 31, 1999 were
based on estimated share values of $26.09 and $23.48, respectively. In the
quarter ended September 30, 1999, the estimate of the share value was revised to
$8.00 per share based on the price at which shares were sold in our initial
public offering. As a result, compensation expense was reduced by $3.3 million.
Upon our initial public offering, our phantom stock plan was terminated and
replaced by our 1999 stock option plan. In the quarter ended December 31, 1999,
compensation expense of $2.0 million previously charged under the phantom plan
was reversed and compensation expense of $5.0 million, representing the
difference between the fair value of $8.00 per share and the exercise price of
$2.08, was charged.
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 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, are 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 the under-utilization 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 from quarter to quarter
as well as year to year.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through equity
contributions and loans from the Gus and Mary Jane Constantin 1978 Living Trust,
our sole stockholder prior to our initial public offering and from the net
proceeds of our initial public offering, which closed in October 1999.
At December 31, 1999, we had approximately $15.8 million of cash and cash
equivalents. Net cash used in operating activities in 1999, 1998 and 1997 was
$9.6 million, $4.1 million and $0.7 million, respectively. The cash used in
operating activities in 1999, 1998 and 1997 was primarily the result of net
losses.
Net cash used in investing activities was $5.1 million, $0.3 million and
$0.5 million in 1999, 1998 and 1997, 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 computer hardware and software, new office space,
furniture, equipment and fixtures to support the continued growth of our
operations. We expect that these expenditures will exceed amounts spent in 1999.
Net cash provided by financing activities was $29.9 million, $4.8 million
and $1.3 million in 1999, 1998 and 1997, respectively. Net cash provided by
financing activities in 1999 was primarily provided by the proceeds from our
initial public offering, which closed in October 1999, and capital contributions
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<PAGE>
from our then sole stockholder. Net cash provided by financing activities in
1998 and 1997 was primarily a result of equity investments by our then sole
stockholder.
In executing our business plan we will need to raise additional capital
during fiscal year 2000. We may sell additional debt or equity securities or
enter into new credit facilities to meet our cash needs. We cannot assure you
that we will be able to raise capital on favorable terms or at all. Any cash
raised may also be used to acquire or invest in complementary businesses or to
obtain the right to use complementary technologies, although we have no current
plans to do so.
Recent Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. We
are required to adopt this statement in fiscal 2001. Because we do not currently
use any derivative instruments, we do not anticipate that the adoption of the
new statement will have a significant effect on our business or operating
results.
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. We have adopted SOP 98-9. We do not
expect the adoption of SOP 97-2 to have a material effect on our operating
results or financial position.
Year 2000 Compliance
As of February 1, 2000, we had not incurred any material cost 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 issues to be material to our business, financial
condition and operating results.
As of February 1, 2000, we had not encountered any material year 2000
problems with the hardware and software systems used in our operations. In
addition, none of our critical vendors have reported any material year 2000
problems nor have we experienced any decline in service levels from such
vendors.
We expect to continue to monitor internal and external issues related to
year 2000. While no material problems have been discovered, we cannot assure you
that material problems will not materialize in the future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We do not hold derivative financial instruments, derivative commodity
investments or other financial investments or engage in foreign currency hedging
or other transactions that expose us to material market risk.
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Item 8. Financial Statements and Supplementary Data
RESOURCEPHOENIX.COM AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Arthur Andersen LLP, Independent Public Accountants 36
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 37
Consolidated Balance Sheets as of December 31, 1999 and 1998 38
Consolidated Statements of Changes In Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997 39
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 40
Notes to Consolidated Financial Statements 41
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of ReSourcePhoenix.com:
We have audited the accompanying consolidated balance sheets of
ReSourcePhoenix.com (a Delaware corporation) and subsidiary as of December 31,
1999 and 1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ReSourcePhoenix.com at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 31, 2000
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RESOURCEPHOENIX.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended
---------------------------------------
12/31/99 12/31/98 12/31/97
----------- ----------- -----------
Revenue:
Contract service revenue $ 4,001 $ 2,465 $ 2,255
Contract service revenue -
affiliate 2,772 2,182 3,085
Software revenue 2,300 39 --
----------- ----------- -----------
Total revenue 9,073 4,686 5,340
Operating expenses:
Cost of providing services 5,859 4,304 3,052
Cost of providing software
revenue 901 455 --
General and administrative 4,554 1,963 1,823
Research and development 3,185 2,181 566
Client acquisition costs 5,278 1,144 547
Depreciation and amortization 943 307 133
Stock-related compensation 5,007 -- --
----------- ----------- -----------
Total operating expenses 25,727 10,354 6,121
Loss from operations (16,654) (5,668) (781)
Other income 174 11 41
----------- ----------- -----------
Net loss $ (16,480) $ (5,657) $ (740)
=========== =========== ===========
Basic and diluted net loss per share $ (2.05) $ (0.79) $ (0.10)
Shares used in computing basic and
diluted net loss per share 8,055,000 7,200,000 7,200,000
The accompanying notes are an integral part of these statements.
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<PAGE>
RESOURCEPHOENIX.COM
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
Year Ended
-------------------
12/31/99 12/31/98
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,780 $ 503
Accounts receivable, net of allowance of $54 in 1999
and $8 in 1998 948 419
Receivable from affiliates 33 182
Prepaid expenses and other current assets 729 20
-------- --------
Total current assets 17,490 1,124
Property and equipment 7,669 1,133
Accumulated depreciation (1,382) (439)
-------- --------
Net property and equipment 6,287 694
Other assets 276 4
-------- --------
Total assets $ 24,053 $ 1,822
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,455 $ 269
Accrued liabilities 1,655 926
Deferred revenue 994 627
-------- --------
Total current liabilities 4,104 1,822
Commitments and contingencies -- --
Stockholders' Equity
Preferred Stock, $.001 par value; 5,000,000
shares authorized, none issued or outstanding -- --
Class A common stock, $.001 par value;
27,800,000 authorized, 4,028,000 and no
shares issued and outstanding at December 31,
1999 and 1998, respectively 32,869 --
Class B common stock, $.001 par value;
7,200,000 shares authorized, 7,172,000 and
7,200,000 shares issued and outstanding at
December 31, 1999 and 1998, respectively 9,957 6,397
Accumulated deficit (22,877) (6,397)
-------- --------
Total stockholders' equity 19,949 --
-------- --------
Total liabilities and stockholders' equity $ 24,053 $ 1,822
======== ========
The accompanying notes are an integral part of these statements.
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<PAGE>
RESOURCEPHOENIX.COM
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
COMMON STOCK COMMON STOCK STOCK-
ACCUM HOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 -- $ -- -- $ -- -- $ --
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 -- -- -- -- (16,480) (16,480)
Capital contribution from stockholder -- -- -- 3,603 -- 3,603
Cancellation of stock -- -- (1,000) -- -- --
Issuance of Class B common stock -- -- 7,200,000 -- -- --
Dividend -- (1,000) -- -- -- (1,000)
Compensation paid by issuing stock options -- 5,007 -- -- -- 5,007
Transfer of Class B common stock
and issuance of Class A
common stock 28,000 43 (28,000) (43) -- --
Issuance of Class A common stock 4,000,000 32,000 -- -- -- 32,000
Underwriter/broker commissions -- (2,240) -- -- -- (2,240)
Offering expenses -- (941) -- -- -- (941)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 4,028,000 $ 32,869 7,172,000 $ 9,957 $ (22,877) $ 19,949
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
RESOURCEPHOENIX.COM
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
------------------------------
Operating Activities 12/31/99 12/31/98 12/31/97
-------- -------- --------
<S> <C> <C> <C>
Net loss $(16,480) $ (5,657) $ (740)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 943 307 133
Stock-related compensation expense 5,007 -- --
Change in operating assets and liabilities:
Accounts receivable, net (529) 125 (544)
Receivable from (due to) affiliates 149 163 (345)
Prepaid expenses and other current assets (981) 27 (51)
Accounts payable 1,186 127 240
Accrued liabilities 729 194 634
Deferred revenue 367 627 --
-------- -------- --------
Net cash used in operating activities (9,609) (4,087) (673)
Investing activities
Purchase of equipment, furniture and fixtures (5,062) (315) (496)
-------- -------- --------
Net cash used in investing activities (5,062) (315) (496)
Financing activities
Proceeds from notes payable to stockholder 5,577 -- --
Repayment of notes to stockholder (5,577) -- --
Proceeds from capital contributions from stockholder 2,129 4,799 1,275
Payment of dividend (1,000) -- --
Proceeds from initial public offering, net 29,760 -- --
Expenses of offering (941) -- --
-------- -------- --------
Net cash provided by financing activities 29,948 4,799 1,275
-------- -------- --------
Net increase in cash and cash equivalents 15,277 397 106
Cash and cash equivalents, beginning of period 503 106 --
-------- -------- --------
Cash and cash equivalents, end of period $ 15,780 $ 503 $ 106
======== ======== ========
Supplemental disclosure of noncash financing activities
Contribution of property and equipment from affiliate $ 1,474
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 57
</TABLE>
The accompanying notes are an integral part of these statements.
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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 Incorporated ("PLI") in 1994. On January 1, 1997, the operations were
sold to the controlling shareholder of Phoenix American, Incorporated, 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.
The Company continues to be subject to certain risks common to companies in
similar states of development, including continued market acceptance of its
Internet-based software applications and service offerings, potential turnover
among its early stage and middle-market client base, difficulties in attracting
qualified professional personnel, the loss of a significant customer, and
disruptions with respect to third-party vendors and suppliers.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES
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.
Revenue Recognition
The Company's revenues are derived from two sources, contract services and
software.
Contract service revenue. Contract service revenue includes monthly
contractual payments for ongoing accounting, finance, data center operations,
software maintenance and hosting, and other functions in addition to up front
implementation fees. Contract service revenue is recognized as the services are
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provided. Contract services are also provided to affiliates and reported as
affiliate revenue. Maintenance revenue is recognized ratably over the term of
the agreement.
Software revenue. Software revenue consists principally of up front license
fees earned from the licensing of the Company's software, related consulting and
implementation services, and training. 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. 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, service agreements and up front implementation fees for
which the revenue earnings process has not been completed.
Operating Expenses
Cost of providing services includes salaries and benefits for personnel in
our S.T.A.R. and Financial Outsourcing operations, data center, and certain
other IT functions, 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 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. In addition, research and development
includes similar costs related to applications development that relate to
Financial Outsourcing services. Research and development costs are expensed as
incurred and consist primarily of software development costs. 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 existing products, the
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technological feasibility of the software is not established until substantially
all product development is complete, including the development of a working
model. Internal software development costs that were eligible for capitalization
were insignificant and were charged to research and development expense in the
accompanying consolidated statement of operations.
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.
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 three to ten years.
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 years ended December 31, 1999, 1998 and 1997, the following
customers accounted for 10% or more of the Company's net revenues:
1999 1998 1997
---- ---- ----
Phoenix Leasing Incorporated (Affiliate) 24% 41% 48%
John Hancock Advisors 16% - -
GE Capital Aviation/PIMC 9% 20% 23%
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
Prior to the completion of the Company's initial public offering, the
Company elected to be treated as a subchapter S corporation as defined by the
Internal Revenue Code of 1986, as amended (the "Code"). As such, the Company was
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.
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Accordingly, no liability or provision for such taxes was recorded on the
Company's consolidated financial statements. Upon the completion of the
Company's initial public offering, the Company terminated its election to be
taxed as a subchapter S corporation. The Company now accounts for income taxes
in accordance with the Statement of Accounting Standards No. 109, "Accounting
for Income Taxes," under which the liability method is used to account for
deferred income taxes. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial reporting and tax
basis of the assets and liabilities and are measured using enacted tax rates and
laws. The Company has experienced operating losses since inception. Since the
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 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. Management does not expect the
adoption to have a material effect on its results of consolidated operations or
consolidated financial position.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
Basic and Diluted Net Loss per Share
Shares used in computing basic and diluted net loss per share are based on
the weighted average shares outstanding in each period. Basic net loss per share
excludes any dilutive effects of stock options. Diluted net loss per share
includes the dilutive effect of the assumed exercise of stock options using the
treasury stock method. However, the effect of outstanding stock options has been
excluded from the calculation of diluted net loss per share as their inclusion
would be antidilutive.
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NOTE 3. PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows (in thousands):
December 31, December 31,
1999 1998
------------ ------------
Furniture, fixtures and leasehold improvements $ 838 $ 270
Computer hardware and equipment 4,668 542
Software 2,163 321
------- -------
7,669 1,133
Less accumulated depreciation and amortization (1,382) (439)
------- -------
Net property and equipment $ 6,287 $ 694
======= =======
Equipment and furniture are carried at cost. The Company provides for
depreciation using the straight-line method for financial reporting purposes
over estimated useful lives ranging from three to ten years.
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. INCOME TAXES
Prior to the completion of the Company's initial public offering, the
Company elected to be treated as a subchapter S corporation as defined by the
Code. As such, the Company was 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 were recorded on the Company's consolidated financial statements prior to
October 13, 1999.
As of December 31, 1999, the Company had a federal net operating loss
carryforward of approximately $5.6 million, which will expire in the years 2003
through 2020 for state and federal reporting purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
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<PAGE>
December 31,
1999
------------
Deferred tax assets:
Net operating loss carryforward $ 2,258
Accounts receivable 35
Stock-related compensation expense 2,003
-------
Gross deferred tax assets 4,296
Less valuation allowance 3,953
-------
Deferred tax assets 343
-------
Deferred tax liabilities:
Equipment, furniture and fixtures (343)
-------
Gross deferred tax liabilities (343)
-------
Net deferred taxes $ 0
=======
A valuation allowance has been established, and accordingly, no benefit has
been recognized for the Company's net operating loss and net deferred tax
assets. The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of net losses since its inception
and expected near-term future losses. The Company will continue to assess the
realizability of the deferred tax assets based on actual and forecasted
operating results.
NOTE 5. LEASE OBLIGATIONS
The Company leases its office space under non-cancelable operating leases,
which expire at various dates through 2006. The facility leases generally
require the Company to pay operating costs, including property taxes, insurance
and maintenance, and contain renewal options and provisions adjusting the lease
payments based upon changes in operating costs or in fixed increments. Rent
expense is reflected on a straight-line basis over the terms of the related
leases. The future minimum lease payments under operating leases subsequent to
December 31, 1999 are summarized as follows (in thousands):
Year ending December 31,
2000 ............................... $ 1,783
2001 ............................... 1,629
2002 ............................... 1,263
2003 ............................... 1,417
2004 ............................... 1,460
Thereafter............................. 3,050
-------
Total minimum lease payments........... $10,602
=======
NOTE 6. STOCKHOLDER'S EQUITY
On October 14, 1999, the Company commenced an initial public offering of
its Class A common stock. The offering consisted of 4,000,000 shares of Class A
common stock issued to the public at $8.00 per share. On October 19, 1999 the
Company closed its initial public offering, which resulted in net proceeds to
the Company, after expenses, of approximately $28,819,000.
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
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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.
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.
Page 47 of 57
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<PAGE>
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 7. STOCK BASED INCENTIVE PLANS
Prior Phantom Plan
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 were required to provide to
the Company an amount equal to $2.08 per share. The rights granted under the
Phantom Plan vested ratably over four years.
On August 4, 1999, the Company terminated the Phantom Plan, subject to the
effectiveness of the Company's proposed initial public offering at the
completion of the initial public offering. All outstanding awards under the
Phantom Plan were terminated and replaced by option grants under the Stock
Option Plan (defined below).
Stock Option Plan
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. Under the Stock Option Plan, the
Company can grant either incentive stock options or non-qualified stock options.
The Board of Directors granted options to purchase an aggregate of 836,210
shares of Class A common stock at an exercise price of $2.08 per share, subject
to the closing of the Company's initial public offering. These grants vested
fully upon the closing of the Company's initial public offering. Compensation
expense of $1,956,000 previously charged under the Phantom Plan was reversed and
compensation expense of $5,007,000 representing the difference between the fair
value of $8.00 per share and the exercise price of $2.08 was charged.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") requires use of
option valuation models that were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable
and not for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense was
recognized for all options granted subsequent to the Company's initial public
offering.
A summary of the activity under the Stock Option Plan through December 31,
1999 is set forth below:
Page 48 of 57
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<PAGE>
Number of Weighted Average
Allocations Shares Granted Exercise Price per Share
----------- -------------- ------------------------
August 4, 1999 1,260,000
Grants (1,014,560) 1,014,560 $ 3.37
Cancelled 200 (200) 15.69
---------- ---------- ---------
December 31, 1999 245,640 1,014,360 $ 3.37
========== ========== =========
The maximum term of a 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.
The Company's directors are granted options periodically in lieu of
director's fees. Such options are issued at the current market price and are
100% vested upon grant.
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.
Under the Company's Stock Option Plan 845,160 options were exercisable at
December 31, 1999, at exercise prices ranging from $2.08 to $17.25. The
contractual life at December 31, 1999 was ten years, with a weighted average
contractual life of 9.8 years.
The following is a summary of fixed stock options outstanding and
exercisable by price range at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ------------------------------------
Actual Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- -------------------- ------------- ----------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 2.08 - 2.08 836,210 9.8 $ 2.08 836,210 $ 2.08
$ 6.50 - 8.00 145,700 9.8 $ 7.86 2,700 $ 8.00
$ 14.00 -17.25 29,450 9.9 $ 15.91 6,250 $ 17.25
$ 21.38 -21.38 3,000 10.0 $ 21.38 - -
- -------------------- ------------- ----------------- ------------------ --------------- -----------------
$ 2.08 -21.38 1,014,360 9.8 $ 3.37 845,160 $ 2.21
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and is determined as if the Company had accounted for
Page 49 of 57
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<PAGE>
its employee stock options under the fair value method of SFAS No. 123. The fair
value of each option grant under the fixed price option plan was estimated at
the date of grant using a Black-Scholes option-pricing model. The dividend yield
was assumed to be zero for the period below. The weighted average of all other
significant assumptions and the weighted average fair value of grants made
during the year ended December 31, 1999 are as follows:
Volatility 100%
Risk-free interest rate 5.67%
Expected lives 4 yrs.
Fair value of grants $6.97
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net loss and loss per share, basic and diluted, would have been
($17,478,000) or ($2.17) for the fiscal year 1999.
Employee Stock Purchase Plan
Concurrently with the offering, the Company established an Employee Stock
Purchase Plan ("the Purchase Plan") under which a total of 360,000 shares of
Class A common stock were 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, and is
administered by the Compensation Committee appointed by the Company's Board of
Directors. 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 was declared effective by the Securities
and Exchange Commission, October 19, 1999, 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. Total contributions as of December 31, 1999 were approximately
$181,000. Under APB 25, this is a noncompensatory plan.
NOTE 8. DEFINED CONTRIBUTION PENSION PLAN
The Company maintains a tax deferred savings plan under section 401(k) of
the Code (the "Plan") for the benefit of certain qualified employees. Employees
may elect to contribute to the Plan, through payroll deductions of up to 15% of
their compensation, subject to annual limits. Employee contributions to the Plan
are subject to statutory limitations regarding maximum contributions. The
Company reserves the right to amend the Plan at any time. The Company, at its
discretion, may make additional contributions. The Company did not make any
contributions to the Plan in fiscal 1999, 1998 or 1997.
Page 50 of 57
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<PAGE>
NOTE 9. PROFIT SHARING
The Company has a profit sharing plan covering substantially all employees
who meet certain service requirements. Contributions to the plan by the Company
are made at the discretion of the Board of Directors. The profit sharing expense
was $210,000, $133,000, and $213,000 for the years ended December 31, 1999,
1998, and 1997, respectively.
NOTE 10. NET LOSS PER SHARE
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128. This statement requires the
presentation of basic and diluted net loss per share. Basic and diluted net loss
per share is computed using the weighted average number of common shares
outstanding during the period. During the two years ended December 31, 1998,
there were no common share equivalents.
The calculation of basic and diluted net loss per share follows (in
thousands except per share information):
1999 1998 1997
-------- -------- --------
Historical:
Net loss ...................................... $(16,480) $ (5,657) $ (740)
Weighted average shares of common
stock outstanding used in computing
basic and diluted net loss per share ..... 8,055 7,200 7,200
Basic and diluted net loss per share .......... $ (2.05) $ (0.79) $ (0.10)
If the Company had reported net income, the calculation of diluted earnings
per share would have included the shares used in the computation of net loss per
share as well as an additional 137,000 common equivalent shares (determined
using the treasury stock method) related to outstanding stock options not
included above for fiscal 1999.
NOTE 11. 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.
NOTE 12. RELATED PARTY TRANSACTIONS
The Company provides accounting, investor administration and information
technology services to certain affiliates, wholly owned by the Company's
majority stockholder. For the twelve months ended December 31, 1999, 1998, and
1997 the Company recorded revenue of $2,772,000, $2,182,000, and $3,085,000,
respectively, for the provision of these services. Through July 31, 1999 these
services were charged at the fully allocated cost to provide such services.
Effective August 1, 1999, the Company increased its fees to affiliates to
reflect a market rate.
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. Effective August 1,
1999, these functions were transferred back to the Company.
Page 51 of 57
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<PAGE>
Beginning August 1, 1999, the Company leased its office space under a
noncancellable operating lease with an affiliate. Prior to August 1999 the
Company was charged rent and certain other expenses by the affiliate on an
allocated cost basis.
The Company has amounts due from affiliates for services of $33,000 and
$182,000 as of December 31, 1999 and 1998 respectively.
On August 26, 1999, the Company issued two secured notes payable to its
majority shareholder for $1,245,000 and $1,005,000 (which 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 majority stockholder. On September 30, 1999 the Company issued a
secured note payable to its majority shareholder for $1,927,000. Also on
September 30, 1999, the Company issued a secured note payable to its majority
shareholder for $549,000. This note was used by the majority shareholder to
essentially offset amounts owed to the Company for fees by affiliates which are
wholly owned by the majority shareholder. On October 6 and October 13, 1999, the
Company issued two secure notes payable to its majority shareholder for $700,000
each. All four notes bear interest at a rate of 9% per annum. The Company repaid
the notes totaling $6,577,000 and interest of $57,032 using proceeds from the
initial public offering. The net proceeds of the notes were used to fund the
operations of the Company.
NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarters end on March 31, June 30, September 30 and December
31. Selected quarterly financial data for 1999 and 1998 are summarized as
follows (in thousands except per share amounts).
Quarterly Data
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Year Ended December 31, 1999:
Total revenue $ 1,381 $ 2,780 $ 2,310 $ 2,602
Net loss $ (3,907) $ (3,681) $ (163) $ (8,729)
Basic and diluted net loss per share $ (0.54) $ (0.51) $ (0.02) $ (0.82)
Basic and diluted shares outstanding 7,200 7,200 7,200 10,629
Year Ended December 31, 1998:
Total revenue $ 1,217 $ 1,095 $ 1,170 $ 1,204
Net loss $ (839) $ (1,094) $ (1,451) $ (2,273)
Basic and diluted net loss per share $ (0.12) $ (0.15) $ (0.20) $ (0.32)
Basic and diluted shares outstanding 7,200 7,200 7,200 7,200
Page 52 of 57
The Index to Exhibits is located at Page 55
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Page 53 of 57
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to our directors and executive officers is
incorporated by reference to the information under the captions: "Election of
Directors--Nominees," "Section 16(a) Beneficial Ownership Reporting Compliance"
and "Executive Officers" in our definitive Proxy Statement for our annual
meeting of stockholders to be held on May 18, 2000 (the "Proxy Statement").
Item 11. Executive Compensation
Incorporated by reference to the information under the caption: "Executive
Compensation and Other Matters" and "Election of Directors, Certain
Relationships and Related Transactions" in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the information under the caption: "Election
of Directors -- Security Ownership of Management" in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the information under the caption: "Election
of Directors -- Certain Relationships and Related Transactions" in our Proxy
Statement.
Page 54 of 57
The Index to Exhibits is located at Page 55
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements, see Item 8 above.
(2) Financial Statement Schedules - None.
(3) Exhibits.
Exhibit No. Description
- ----------- -----------
2.1 Contribution Agreement, dated August 4, 1999, between Gus
Constantin, as trustee for the Gus and Mary Constantin 1978
Living Trust, and Registrant (incorporated by reference to
exhibit 2.1 to the Registrant's registration statement on Form
S-1 (File No. 333-84589)).
3.1 Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to exhibit 3.1 to the
Registrant's registration statement on Form S-1 (File No.
333-84589)).
3.2 Bylaws of Registrant (incorporated by reference to exhibit 3.2
to the Registrant's registration statement on Form S-1 (File
No. 333-84589)).
4.1 Form of Registrant's Class A common stock certificate
(incorporated by reference to exhibit 4.1 to the Registrant's
registration statement on Form S-1 (File No. 333-84589)).
4.2 Form of Registrant's Class B common stock certificate
(incorporated by reference to exhibit 4.2 to the Registrant's
registration statement on Form S-1 (File No. 333-84589)).
10.1 Form of Indemnification Agreement (incorporated by reference
to exhibit 10.1 to the Registrant's registration statement on
Form S-1 (File No. 333-84589)).
10.2 Letter of Understanding and Summary of Discussion, dated June
1, 1998, between Bryant Tong and Registrant (incorporated by
reference to exhibit 10.2 to the Registrant's registration
statement on Form S-1 (File No. 333-84589)).
10.3 Amendment to Letter of Understanding, dated August 4, 1999,
between Bryant Tong and Registrant (incorporated by reference
to exhibit 10.3 to the Registrant's registration statement on
Form S-1 (File No. 333-84589)).
10.4 Restated 1999 Stock Plan (incorporated by reference to exhibit
10.4 to the Registrant's registration statement on Form S-1
(File No. 333-84589)).
10.5 Restated 1999 Employee Stock Purchase Plan (incorporated by
reference to exhibit 10.5 to the Registrant's registration
statement on Form S-1 (File No. 333-84589)).
10.6 Administrative Services Agreement, dated August 1, 1999,
between Phoenix Cable Incorporated and Registrant
(incorporated by reference to exhibit 10.6 to the Registrant's
registration statement on Form S-1 (File No. 333-84589)).
10.7 Administrative Services Agreement, dated August 1, 1999,
between Phoenix Precision Graphics, Inc. and Registrant
(incorporated by reference to exhibit 10.7 to the Registrant's
registration statement on Form S-1 (File No. 333-84589)).
10.8 Administrative Services Agreement, dated August 1, 1999,
between Phoenix Leasing Incorporated and Registrant
(incorporated by reference to exhibit 10.8 to the Registrant's
registration statement on Form S-1 (File No. 333-84589)).
10.9# Business Alliance Program Agreement, dated May 15, 1997,
between Oracle Corporation and Registrant (incorporated by
reference to exhibit 10.9 to the Registrant's registration
statement on Form S-1 (File No. 333-84589)).
10.10 Amendment One to Business Alliance Agreement, dated Mary 15,
1997, between Oracle Corporation and Registrant (incorporated
by reference to exhibit 10.10 to the Registrant's registration
statement on Form S-1 (File No. 333-84589)).
Page 55 of 57
The Index to Exhibits is located at Page 55
<PAGE>
10.11# Software License and Services Agreement, dated November 14,
1997, between Oracle Corporation and Registrant (incorporated
by reference to exhibit 10.11 to the Registrant's registration
statement on Form S-1 (File No. 333-84589)).
10.12 Amendment One to Software License and Services Agreement,
dated November 14, 1997, between Oracle Corporation and
Registrant (incorporated by reference to exhibit 10.12 to the
Registrant's registration statement on Form S-1 (File No.
333-84589)).
10.13# Software License, Support and Professional Services Agreement,
dated June 29, 1999 between Necho Systems Corp. and Registrant
(incorporated by reference to exhibit 10.13 to the
Registrant's registration statement on Form S-1 (File No.
333-84589)).
10.14 Lease, dated August 1, 1999, between Phoenix American
Incorporated and Registrant (incorporated by reference to
exhibit 10.14 to the Registrant's registration statement on
Form S-1 (File No. 333-84589)).
10.15 Sublease dated August 31, 1999 between ReSource/Phoenix, Inc.
and PeopleSoft USA Inc. (incorporated by reference to exhibit
10.15 to the Registrant's registration statement on Form S-1
(File No. 333-84589)).
10.16## Software License and Services Agreement dated November 11,
1999 between BroadVision, Inc. and Registrant.
21.1 List of subsidiaries (incorporated by reference to exhibit
21.1 to the Registrant's registration statement on Form S-1
(File No. 333-84589)).
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule.
# Confidential treatment granted for portions of this exhibit.
## Confidential treatment requested for portions of this exhibit.
(b) Reports on Form 8-K
We did not file any Current Reports on Form 8-K during the quarter ended
December 31, 1999.
Page 56 of 57
The Index to Exhibits is located at Page 55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RESOURCEPHOENIX.COM
By: /s/ BRYANT TONG
--------------------------------------
Bryant Tong
President and Chief Operating Operator
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Bryant Tong and Gregory Thornton, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes may do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- ---------------------------------- ------------------
/s/ GUS CONSTANTIN Chairman of the Board and ___________, 2000
- ---------------------- Chief Executive Officer
Gus Constantin (Principal Executive Officer)
/s/ BRYANT TONG President, Chief Operating Officer ___________, 2000
- ---------------------- and Director
Bryant Tong
/s/ GREGORY THORNTON Chief Financial Officer ___________, 2000
- ---------------------- (Principal Financial and
Gregory Thornton Accounting Officer)
/s/ JAMES BARRINGTON Director ___________, 2000
- ----------------------
James Barrington
/s/ GLEN MCLAUGHLIN Director ___________, 2000
- ----------------------
Glen McLaughlin
/s/ ROGER SMITH Director ___________, 2000
- ----------------------
Roger Smith
Page 57 of 57
The Index to Exhibits is located at Page 55
EXHIBIT 10.16
SOFTWARE LICENSE AND SERVICES AGREEMENT
This Software License and Services Agreement ("Agreement") is made and entered
into as of this 11th day of November, 1999, between BroadVision, Inc.
("BroadVision") and
Company ReSourcePhoenix.com
("Customer")
Address 2401 Kerner Blvd.
San Rafael, CA 94901-5529
In consideration of the mutual covenants and conditions contained in this
Agreement, the parties agree as stated herein. The following attachments,
required when applicable, are also part of this Agreement:
A. Current Licensing Practices
B. Required Provisions of Sublicenses
C. Professional Services Terms and Conditions
D. Business Terms
1. LICENSE.
A. BroadVision hereby grants to Customer a perpetual (unless terminated
as set forth herein), nonexclusive, and nontransferable (except in
accordance with the provisions of Section 11.B) license, subject to
the terms and conditions of this Agreement, to use the object code for
the Software. For the purpose of this Agreement, "Software" shall mean
all versions, including current, previous, and subsequent versions, of
all software products, together with operating instructions, user
manuals, training material, and other documentation as may, in
BroadVision's sole discretion, be supplied to Customer.
B. Customer may use the Software in accordance with BroadVision's
published licensing practices in force at the time of delivery of the
applicable Software products. BroadVision's current licensing
practices are as set forth in Attachment A. If BroadVision changes its
licensing practices, BroadVision will give Customer advance written
notice of such changes and such changes will be applicable to
subsequent purchases of Software licenses by Customer hereunder;
provided that, unless otherwise agreed by the parties, such changes
will not be effective with respect to future purchases of Software
licenses of the type previously purchased by Customer for a period of
six (6) months from the date BroadVision gives Customer notice of such
changes. Notwithstanding anything to the contrary contained herein or
in any other order forms, attachments, quotes or other documentation,
Customer may purchase at any time any BroadVision products or services
generally available to any BroadVision customers. Such purchase shall
be subject to discount rates set forth in any agreements or
attachments provided by BroadVision with respect to such purchase or
otherwise at prices agreed by the parties.
C. Customer may not (a) rent, lease, or loan the Software; (b)
electronically transmit the Software over a network except as
necessary for Customer's licensed use of the Software; (c) use
run-time versions of third-party products supplied by BroadVision
embedded in the Software, if any, for any use other than the intended
use of the Software; (d) modify, disassemble, decompile, or reverse
engineer the Software; (e) transfer possession of any copy of the
Software to another party, except as expressly permitted herein; or
(f) use the Software in any way not expressly provided for in this
Agreement. There are no implied licenses. Customer agrees not to
exceed the scope of the licenses granted herein.
D. BroadVision also grants to Customer the right to grant nontransferable
sublicenses to portions of the Software, where such grants are
explicitly permitted by BroadVision's licensing practices. Customer
shall require each such sublicensee, before it may use or install the
sublicensed Software, to execute a written license agreement
containing, at a minimum, the required provisions specified in
Attachment B. Customer shall indemnify BroadVision for all losses,
costs, damages, expenses, and liabilities caused by a sublicensee's
failure to honor the terms of such sublicense, or by Customer's
failure to include required terms in its sublicense agreements with
its sublicensees.
Page 1 of 6
<PAGE>
2. PAYMENT PRICES.
A. Invoices shall be issued upon delivery of the products or services,
unless specified herein to the contrary, and shall be due and payable
in United States currency upon receipt by Customer. Payment shall be
overdue thirty (30) days after the delivery date specified on the
invoice. Overdue payments shall be subject to a finance charge of one
and one-half percent (1 1/2%) for each month or fraction thereof that
the invoice is overdue, or the highest interest rate permitted by
applicable law, whichever is lower. BroadVision shall also be
reimbursed for its collection costs in the event of late payments,
including reasonable attorney's fees.
B. Software will be shipped FOB BroadVision's facility in Redwood City,
California, U.S.A., by commercial surface transportation.
Transportation charges in excess of such rates will be billed to
Customer. Software shall be deemed accepted upon delivery.
C. The prices stated in BroadVision quotations are exclusive of any
federal, state, municipal, value-added, foreign withholding or other
governmental taxes, duties, fees, excises, or tariffs now or hereafter
imposed on the production, storage, licensing, sale, transportation,
import, export, or use of the Software or any improvements,
alterations, or amendments to the Software. Customer shall be
responsible for, and if necessary reimburse, BroadVision for all such
taxes, duties, fees, excises, or tariffs, except for governmental or
local taxes imposed on BroadVision's corporate net income.
3. SOFTWARE MAINTENANCE.
A. BroadVision agrees to provide Customer with software maintenance
subject to the following provisions and conditions:
i. At Customer's request, BroadVision shall provide software
maintenance at prices to be quoted to Customer. Software
maintenance shall include (i) telephone and electronic mail
support provided during BroadVision's normal working hours, and
(ii) standard releases containing improvements or modifications
to the Software, where such improvements or modifications are not
priced as separate new products or options ("Standard Release").
ii. BroadVision shall provide software maintenance for any Standard
Release until one year after shipment of the subsequent Standard
Release.
iii. Customer shall designate four or, with BroadVision's prior
written approval, more than four, Support Contact Persons, who
shall be responsible for communicating support issues to
BroadVision. Each Support Contact Person will be technically
competent with respect to the Software and knowledgeable about
the Customer's environment on which the Software is used.
Customer agrees to provide BroadVision with timely written
notification containing all details of software problems
necessary for BroadVision to diagnose such problems. Customer
agrees to cooperate fully in providing BroadVision with
Customer's source code, in machine-readable form, and other
materials necessary to reproduce a reported software problem.
Subject to Customer's security requirements, Customer agrees to
provide BroadVision reasonable direct or remote access and test
time on Customer's BroadVision system, for the purpose of
diagnosing reported software problems. If BroadVision provides
on-site services at Customer's request in connection with
software maintenance, Customer shall reimburse BroadVision for
all travel and other reasonable out-of-pocket expenses incurred
with respect to such services.
iv. Software maintenance may also include any patch releases ("Patch
Releases") that BroadVision, in its sole discretion and expense,
makes available. Patch Releases are intended to address material
deviations between the Software and its published specifications
until a Standard Release can be made available. Customer may
install Patch Releases at its option.
v. BroadVision shall not be responsible for maintaining Software
that fails to comply with its published specifications if such
non-compliance is the result of modification of the Software by
Customer or third parties. If BroadVision expends its time on a
noncompliance found to be the result of any of the preceding,
Customer shall pay BroadVision for such time at BroadVision's
then-current hourly consulting rate.
B. BroadVision will provide at least 60 days written notice of each
annual renewal (including the amount of the annual maintenance fee),
and Customer may renew software maintenance may for a one-year period
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<PAGE>
at BroadVision's then-current prices for software maintenance by
delivering BroadVision a purchase order for such renewal on or before
the renewal date. In no event will the Software maintenance fee,
expressed as a percentage of list price for the Software, increase by
more than the greater of five percent (5%) or the increase in the US
Consumer Price Index over the amount charged the previous year
(subject to adjustments resulting from Software being added to
maintenance coverage during the prior maintenance period or as of the
start of the renewal period). In the event of termination for
Customer's breach or Customer's convenience, all maintenance fees
shall be immediately due and payable without notice; in the event of
termination for any other reason, Customer shall be entitled to a
refund of maintenance fees already paid, prorated for the unused
portion of such fees.
C. Annual software maintenance fees are due and payable in advance; in
all other respects payments are subject to the terms and conditions of
the Agreement. Subject to adjustment for Software license purchases
made during an annual maintenance period, annual maintenance fees as a
percent of list price for the Software to which the maintenance fee
applies will not increase by more than five percent (5%) per year.
D. If Customer initially declines software maintenance and then
subsequently elects to commence maintenance, or if maintenance for an
item of Software is discontinued at Customer's request and then
subsequently renewed, Customer shall pay the maintenance fees that
would have been due for the period during which maintenance was not
provided.
4. TITLE TO SOFTWARE.
A. Customer shall include BroadVision's copyright or proprietary rights
notice on any copies of the Software or associated documentation,
including copyright or proprietary rights notices of third parties
that are included on media or in documentation provided by
BroadVision. Customer acknowledges that the Software is the property
of BroadVision or its licensors.
B. Unless otherwise requested by BroadVision, Customer shall ensure that
the phrase, "Personalized by BroadVision One-To-One" shall appear
prominently on the logon screen, splash screen, or other first view of
the Customer's application seen by consumers or other end-users when
they enter such application. The above phrase shall be a hypertext
link to a URL specified by BroadVision. Customer's use of the phrase
shall be in accordance with BroadVision's guidelines for use of the
mark.
5. WARRANTY.
BroadVision warrants that the Software will conform in all material
respects to its written specifications when installed and for 90 days
thereafter. For purposes of this Agreement, the sole source of such
specifications shall be BroadVision's written user documentation. Customer
will notify BroadVision within 10 days after the expiration of the warranty
period of any nonconformity. Where a material nonconformity exists within
the warranty period, and proper notice has been given to BroadVision,
BroadVision will, as its sole and exclusive liability to Customer, use due
diligence to correct the nonconformity and provide Customer with one copy
of any such corrected version of the Software, or, if BroadVision is unable
to correct such nonconformances within a reasonable period of time, refund
all license fees paid to it for the Software, or the most recent software
maintenance fee paid for the Software, if the nonconformity relates to a
Standard Release delivered pursuant to Section 3 herein. THIS WARRANTY IS
IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS, EXPRESSED OR IMPLIED, AND
BROADVISION EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, TITLE, OR NONINFRINGEMENT.
Page 3 of 6
<PAGE>
6. LIMITATION OF LIABILITY.
Except for BroadVision's liability to Customer under Section 7 of this
Agreement, BroadVision's liability to Customer under this Agreement or for
any other reason relating to the products and services provided under this
Agreement, including claims for contribution or indemnity, shall be limited
to the amount paid to BroadVision under this Agreement. NOTWITHSTANDING THE
FAILURE OF ESSENTIAL PURPOSE OF ANY REMEDY UNDER THIS AGREEMENT, CUSTOMER
AGREES THAT IN NO EVENT SHALL BROADVISION BE LIABLE FOR SPECIAL,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS OR LOSS OF
USE.
7. INTELLECTUAL PROPERTY RIGHTS INDEMNITY.
This Section 7 sets forth BroadVision's sole and exclusive liability to
Customer and Customer's sole and exclusive rights against BroadVision, with
respect to any claim relating to any alleged or actual infringement or
misappropriation by BroadVision of any third party intellectual property
right. BroadVision will defend any action against Customer claiming that
the Software constitutes infringement of a duly issued patent existing or
issued prior to the initial delivery date of the applicable Software,
copyright, trademark, or trade secret. BroadVision shall indemnify Customer
for any reasonable expense incurred by Customer in connection with the
foregoing. BroadVision's obligations under this section are conditioned
upon BroadVision having sole control of any such action, and upon Customer
notifying BroadVision immediately in writing of the claim and giving
authority, information, and assistance necessary to settle or defend such
claim. If the use of the Software infringes or is enjoined, or BroadVision
believes it is likely to infringe or be enjoined, BroadVision may, at its
sole option, (i) procure for Customer the right to continue use of the
licensed Software as furnished; (ii) replace the licensed Software; (iii)
modify the licensed Software to make it non-infringing, provided that the
Software still substantially conforms to the applicable specifications; or
(iv) if BroadVision, after using all commercially reasonable efforts, is
unable to accomplish the foregoing remedies, terminate the license and
refund the license fee for the Software, less a proportional adjustment for
the time the Software was used by Customer, equal to the ratio of the time
elapsed since the delivery date to five (5) years. The indemnity provided
herein shall not apply if the alleged infringement arises from: (a) the use
of other than a currently supported, unaltered release of the licensed
Software; (b) the use of Software that has been modified or merged with
other programs by Customer; or (c) the use of the licensed Software in
combination with software or hardware not provided under this Agreement
(other than software and hardware described in BroadVision's specifications
or documentation for the Software as capable of being used with the
Software or as otherwise agreed in writing by BroadVision). The foregoing
states BroadVision's sole and exclusive liability for patent, copyright, or
other proprietary rights infringement.
8. CONFIDENTIALITY OF SOFTWARE AND DOCUMENTS.
A. Customer shall not reproduce, duplicate, copy, sell, or otherwise
disclose, or disseminate the Software, including operating
instructions, user manuals, and training materials, in any medium
except as authorized herein. Customer may make copies of the Software,
in machine readable form, only as is reasonably necessary for archival
and backup purposes.
B. Customer expressly undertakes, using reasonable efforts not less than
it exercises for its own confidential materials, to retain in
confidence, and to require its employees or consultants to retain the
Software in confidence, and will make no use of such information,
except under the terms and during the existence of this Agreement, and
only to the extent that such use is necessary to Customer's employees
or consultants in the course of their employment.
C. The provisions of this section shall survive the termination of this
Agreement for a period of five (5) years.
D. Customer shall not release the results of any benchmark of the
Software, or of any third party products embedded in the Software,
without BroadVision's prior written approval.
9. AUDIT RIGHTS.
At BroadVision's request, but in no event more than twice annually,
Customer shall provide BroadVision with a report detailing its use of the
Software. No more than once annually, BroadVision may audit Customer's
pertinent records to ensure that license and other fees have been properly
paid in compliance with this Agreement. BroadVision will give Customer at
least three business days notice of its intention to perform such an audit.
Any such audit will be conducted during regular business hours at
Customer's offices and shall not interfere unreasonably with Customer's
business activities. If an audit reveals that Customer has underpaid its
total fees by more than five percent (5%), then Customer shall pay
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<PAGE>
BroadVision's reasonable costs of conducting the audit, in addition to the
underpaid amount; provided, that if Customer reasonably disputes the
findings of such an audit and Customer and BroadVision are unable to
resolve the dispute, Customer and BroadVision will select a mutually
agreeable an independent auditor to review the audit work performed by
BroadVision. If the independent audit reveals that Customer has underpaid
its total fees by more than five percent (5%), Customer will pay the
reasonable costs of conducting both BroadVision's and the independent
auditor's audits. If the independent audit reveals that Customer has
underpaid its total fees by five percent (5%) or less, BroadVision will pay
the reasonable costs of conducting both BroadVision's and the independent
auditor's audits.
10. TERM/TERMINATION.
This Agreement is effective on the earlier of (i) the date of shipment of
the Software or (ii) the date set forth above, and continues until
terminated as provided herein, or by agreement of both parties. BroadVision
may terminate this Agreement upon: (a) any material breach of this
Agreement by Customer that is not cured within 10 business days following
written notice thereof; or (b) failure by Customer to pay license fees for
Software under the payment terms specified in this Agreement or as stated
on BroadVision's invoice for such Software. Upon termination of this
Agreement for any of the above reasons, all licenses granted hereunder
terminate and Customer will immediately destroy the Software and all copies
in any form. Upon termination for any other reason, Customer may continue
to use the Software, provided that Sections 1, 2 (to the extent that any
amounts as owed to BroadVision as of the termination date), 4, 6, 7, 8, 9,
and 11 shall survive the termination of this Agreement, and BroadVision may
terminate Customer's use of the Software upon a material breach of any of
the surviving sections.
11. GENERAL.
A. WAIVER/AMENDMENT. No waiver, amendment, or modification of any
provision of this Agreement shall be effective unless in writing and
signed by the party against whom such waiver, amendment, or
modification is sought to be enforced. No failure or delay by either
party in exercising any right, power or remedy under this Agreement,
except as specifically provided herein, shall be deemed as a waiver of
any such right, power, or remedy.
B. ASSIGNMENT. Either party may assign this Agreement to an entity
acquiring substantially all of its assets or merging with it, provided
that such assignee agree in writing to assume all obligations under
this Agreement. Except as set forth above, neither party may assign any
of its rights or delegate any of its obligations under this Agreement
to any third party without the express written consent of the other.
Any attempted assignment in violation of the foregoing shall be void
and of no effect. Subject to the above, this Agreement shall be binding
upon and inure to the benefit of the successors and assigns of the
parties hereto.
C. DISPUTES. The rights of the parties hereunder shall be governed by the
laws of the State of California without giving effect to principles of
conflicts of laws. Any suits brought hereunder may be brought in the
federal or state courts in Santa Clara County, California, and Customer
submits to the jurisdiction thereof. The parties expressly exclude the
application of the 1980 United Nations Convention on Contracts for the
International Sale of Goods, if applicable. Customer acknowledges that
the Software contains trade secrets, the disclosure of which would
cause substantial harm to BroadVision that could not be remedied by the
payment of damages alone. Accordingly, BroadVision will be entitled to
preliminary and permanent injunctive relief and other equitable relief
for any breach of BroadVision's intellectual property rights in the
Software.
D. SEVERABILITY. If any provision of this Agreement shall be held by a
court of competent jurisdiction to be contrary to law, the remaining
provisions of this Agreement shall remain in full force and effect.
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<PAGE>
E. EXPORT. Customer acknowledges that the laws and regulations of the
United States restrict the export of the Software. Customer agrees that
it will not export or re-export the Software in any form without first
obtaining the appropriate United States and foreign government
approvals.
F. NOTICE. Any notice, consent, or other communication hereunder shall be
in writing, and shall be given personally, by confirmed fax or express
delivery to either party at their respective addresses:
(i) to BroadVision at:
BroadVision, Inc.
585 Broadway
Redwood City, CA 94063, USA
Attn: Chief Financial Officer
(ii) to Customer at:
2401 Kerner Blvd.
San Rafael, CA 94901-5529
Attn: Legal Department
or such other address as may be designated by written notice of either
party. Notices shall be deemed given when delivered or transmitted, or
seven days after deposit in the mail.
G. INDEPENDENT CONTRACTORS. The parties' relationship shall be solely that
of independent contractor and nothing contained in this Agreement shall
be construed to make either party an agent, partner, joint venturer, or
representative of the other for any purpose.
H. FORCE MAJEURE. If the performance of this Agreement, or any obligation
hereunder, except the making of payments, is prevented, restricted, or
interfered with by reason of any act or condition beyond the reasonable
control of the affected party, the party so affected will be excused
from performance to the extent of such prevention, restriction, or
interference.
I. ENTIRE AGREEMENT. This Agreement, including all Attachments hereto,
constitutes the complete and exclusive agreement between the parties
with respect to the subject matter hereof and supersedes all proposals,
oral, or written, all previous negotiations, and all other
communications between the parties with respect to the subject matter
hereof. The terms of this Agreement shall prevail notwithstanding any
different, conflicting, or additional terms that may appear in any
purchase order or other Customer document; provided, however, that the
provisions of Attachment D shall govern in the event of any conflict
between the provisions of this Software License and Services Agreement
and Attachment D with respect to the Software initially ordered
hereunder. All products and services delivered by BroadVision to
Customer are subject to the terms of this Agreement, unless
specifically addressed in a separate agreement.
Agreed to by: BroadVision, Inc.
/S/ RANDALL BOLTEN
------------------------------------------------------
Signature
Randall Bolten
------------------------------------------------------
Printed Name
CFO
------------------------------------------------------
Title
CUSTOMER: ReSourcePhoenix.com
/S/ BRYANT TONG
------------------------------------------------------
Signature
Bryant Tong
------------------------------------------------------
Printed Name
President
------------------------------------------------------
Title
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<PAGE>
ATTACHMENT A TO
SOFTWARE LICENSE AND SERVICES AGREEMENT
BROADVISION LICENSING PRACTICES
BroadVision's current standard licensing practices are as follows for the
products listed below. These practices are in effect as of June 15, 1999.
- ONE-TO-ONE DEVELOPMENT SYSTEM -- licensed on a per-user basis. In
other words, each individual who will use the One-To-One Development
System to develop BroadVision One-To-One applications must be
separately licensed. Customer may reassign One-To-One Development
System licenses within reason, for example as employees terminate
employment or transfer to other departments. One-To-One Development
System products include:
- ENTERPRISE DEVELOPMENT SYSTEM -- the basic BroadVision
development system
- APPLICATION DEVELOPMENT SYSTEM -- includes the
Enterprise Development System and the objects and other
products necessary to develop ONE of the BroadVision
Applications (Retail Commerce, Financial, or Knowledge)
- TWO APPLICATION DEVELOPMENT SYSTEM -- same as the
Application Development System, but for TWO of the
BroadVision Applications (NOTE: Business Commerce by
itself is counted as a Two Application Development
System)
- THREE APPLICATION DEVELOPMENT SYSTEM -- same as the
Application Development System, but for THREE of the
BroadVision Applications
- ONE-TWO-ONE DEPLOYMENT SYSTEM -- licensing is based on the maximum
number of Profiled Users permitted to be tracked by BroadVision
One-To-One applications. A Profiled User corresponds to a record in
the BroadVision user profile database. The record maintains
information about the user's profile and may refer to external
sources for additional profile information. The number of Profiled
Users represents the number of one-to-one relationships that
Customer wants to maintain with its users. By licensing a number of
profiled users the customer is paying for the right to keep that
many records in the BroadVision user profile database at any point
in time. Examples of Profiled Users include, but are not limited to
customers, partners and employees.
- ONE-TO-ONE TOOLS -- licensed on a per-user basis, similar to the
One-To-One Development System products. One-To-One Tools include:
- ONE-TO-ONE COMMAND CENTER, formerly known as the Dynamic
Command Center, or DCC
- ONE-TO-ONE PUBLISHING CENTER, formerly known as the
Content Management Center, or CMC
- ONE-TO-ONE INSTANT PUBLISHER
- ONE-TO-ONE DESIGN CENTER, formerly known as the Visual
Design Center, or VDC
[NOTE: The One-To-One Command Center, the One-To-One Publishing
Center, and the One-To-One Instant Publisher may be sublicensed to
third parties using Customer's application software in accordance
with the terms of this Agreement.]
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<PAGE>
ATTACHMENT B TO
SOFTWARE LICENSE AND SERVICES AGREEMENT
REQUIRED PROVISIONS OF SUBLICENSE AGREEMENTS
Each agreement sublicensing the Software entered into between Customer and
Customer's end-users ("End-Users", "end-User License") shall, at a minimum,
state the following:
a. End-Users shall have the right to duplicate the Software only
for backup or archival purposes and to transfer the Software to
a backup computer in the event of computer malfunction.
End-Users shall not make the Software available on any
timesharing or other rental arrangements. End-Users may not
transfer their rights under the End-User License agreement
without BroadVision's permission.
b. End-Users shall not cause or permit the reverse engineering,
disassembly, or decompilation of the Software.
c. Title shall not pass to the End-User.
d. The End-User License agreement shall not include warranties,
express or implied, made on behalf of BroadVision.
e. BroadVision shall not be liable for any damages, whether direct,
indirect, incidental, or consequential, arising from the use of
the Software.
f. At the termination of the End-User License, the End-User shall
discontinue use and shall destroy or return the Software to
BroadVision, including all archival or other copies.
g. The End-User License shall state that BroadVision is a
third-party beneficiary of the End-User License.
h. The End-User shall not publish any result of benchmark tests on
the Software.
i. The End-User shall comply fully with all relevant regulations of
the United States Department of Commerce and with the U.S.
Export Administration to assure that the Software is not
exported in violation of the code and regulations.
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ATTACHMENT C TO
SOFTWARE LICENSE AND SERVICES AGREEMENT
PROFESSIONAL SERVICES TERMS AND CONDITIONS
This Attachment C is incorporated into the Software License and Services
Agreement (the "Agreement") dated the ____ day of October, 1999 between
BroadVision, Inc. ("BroadVision") and ReSource/Phoenix, Inc. ("Customer"). The
terms and conditions contained herein are subject in all respects to the terms
and conditions of that Agreement, except that in the event of a conflict between
the terms of this Attachment C and the Agreement, the terms of this Attachment C
shall govern.
1. SCOPE OF WORK; CONSIDERATION.
BroadVision will perform such services as set forth in an exhibit to this
Attachment C, or in a purchase order prepared by Customer and accepted by
BroadVision, or in any other written form agreed to by the parties (the
"Statement of Work"). Unless otherwise set forth in the Statement of Work,
in consideration of BroadVision's performance as herein set forth, Customer
agrees to pay BroadVision the actual charges for the services performed and
expenses incurred, and Customer will be invoiced once each month for all
charges incurred in the previous period(s). The services or other
deliverables provided under each Statement of Work shall be deemed accepted
on delivery, unless otherwise specified in the Statement of Work. In the
event of a conflict between the terms of any Statement of Work and this
Attachment C, the terms of the Statement of Work shall govern with respect
to the services specified in that Statement of Work.
2. LIMITATION OF CHARGES.
No liability shall be incurred by Customer in excess of the amount, if any,
set forth in the Statement of Work unless and until such Statement of Work
is amended in writing by both parties. Such amount normally includes
professional services, but not materials and out-of-pocket expenses
reasonably required for contract performance. BroadVision is not required to
continue performance beyond the funding limitation set forth therein unless
and until Customer shall have notified BroadVision in writing that such
funding limitation has been increased and shall have specified in such
notice a revised estimated charge. When and to the extent that the funding
limitation set forth has been increased, any charges incurred by BroadVision
in excess of the funding limitation prior to the increase shall be
allowable, due and payable to the same extent as if such charges were
incurred after such increase in the estimated charge and funding limitation.
3. CHANGES.
Changes shall be made in writing and signed by authorized representatives of
Customer and BroadVision. All such changes shall specify the changes
ordered, any increases in the estimated charges for performance, adjustment
to the schedule of performance, and any changes to other terms and
conditions as may be effected thereby.
4. TITLE.
BroadVision shall have title to the software, systems design, and
documentation arising out of performance or delivery to Customer under a
Statement of Work. The parties acknowledge that performance thereunder may
result in the development of new concepts, software, methods, techniques,
processes, adaptations, and ideas, in addition to BroadVision's prior
technology which may be incorporated in BroadVision's performance. The
parties agree that the same shall belong to BroadVision exclusively without
regard to the origin thereof. With respect to all such software, system
design information and documentation delivered to or disclosed to Customer
pursuant to the Statement of Work ("Application Software"), BroadVision
hereby grants to Customer, as of the time that any such Application Software
is disclosed to Customer by or on behalf of BroadVision, a license in
respect of the software so disclosed. Unless otherwise agreed to in writing
by the parties, each such license shall be a perpetual, irrevocable,
non-exclusive, non-transferable, royalty-free license to use the Application
Software in conjunction with the Software and for any use of the Software
permitted by this Agreement; provided, that for purposes of the foregoing,
the term "use" shall include the right for Customer to create derivative
works from the Application Software for use in conjunction with the
Software.
5. LIMITATION OF LIABILITY.
BROADVISION'S LIABILITY TO CUSTOMER UNDER THIS ATTACHMENT C, INCLUDING
CLAIMS FOR CONTRIBUTION OR INDEMNITY, SHALL BE LIMITED TO THE AMOUNTS PAID
BY CUSTOMER FOR THE SERVICES PROVIDED HEREUNDER.
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<PAGE>
6. DISCLAIMER OF WARRANTY.
THE SERVICES PROVIDED UNDER THIS ATTACHMENT C AND THE APPLICATION SOFTWARE
ARE OFFERED EXCLUSIVE OF ANY WARRANTY, INCLUDING, WITHOUT LIMITATION, ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR ANY
OTHER WARRANTY, WHETHER EXPRESSED OR IMPLIED.
7. ON-SITE PERSONNEL.
The parties acknowledge that it may be necessary for the employees of each
to be present at the facilities of the other for extended periods of time.
The parties agree to provide the employees of the other with all reasonable
facilities and services to assure that their services may be properly
performed. Each party will instruct their employees to conform with the
internal regulations and procedures of the other party while on such party's
premises.
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<PAGE>
Attachment D
ATTACHMENT D TO
SOFTWARE LICENSE AND SERVICES AGREEMENT
BUSINESS TERMS
*
- -----------------------------------------
Private and Confidential
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment, and have been filed separately with the Commission.
Page 1 of 1
<PAGE>
Attachment E
ATTACHMENT E TO
SOFTWARE LICENSE AND SERVICES AGREEMENT
SUPPORT POLICIES
BROADVISION SUPPORT POLICY
BroadVision endeavors to provide a high level of support, and offers a number of
support packages designed to meet the needs of its diverse customer base. This
document outlines BroadVision "Basic Support."
The Basic Support package uses a case tracking procedure to track
customer-reported problems. Using this system, BroadVision support engineers
open cases in the order in which they are received. Cases have different
priorities and will be treated accordingly. Standard support is provided from
9am to 6pm PT in America, and 9am to 6pm GMT in Europe. If a case hasn't been
opened after 1 day, the Support manager will be notified. After 2 days the
Support Director will be notified.
CASE ESCALATION AND 'HOT SITE' STATUS
The support engineer opening a case will set case priority. A customer may
request that a case be escalated at any time by contacting the Support engineer
or the Support Manager.
Unusually important site problems will be considered 'hot sites'. This includes
such issues as serious reliability problems or significant performance problems
on production systems. To escalate a case, the customer may notify their Support
engineer or the Support Manager. A 'hot site' will gain Executive level
attention and all necessary resources to resolve the issue as quickly as
possible.
A hot site will have a dedicated Support engineer until it is resolved. The
customer is expected to provide technical resources, remote access and
reproducible cases as necessary. BroadVision will manage a list of issues to be
resolved in the escalation to be communicated daily by the assigned Support
engineer. Once all the issues are resolved, the escalation to 'hot site' will be
closed.
PRIORITY 1
The highest level is reserved for site-down type failures. Once BroadVision
support is notified that a site is down they will start work to restore the site
as soon as possible. If a site is not restored after 4 hrs of work the Support
engineer will move the site to 'hot site' status. The WPSO engineer who worked
on the site will be contacted and Support Director notified of escalation. After
1 day of escalation VP WPSO and VP Engineering will be notified. The VPs will
identify additional resources to work on the problem. After 2 days of escalation
the CEO will be notified.
PRIORITY 2
Level 2 is for serious problems on a site not causing total failure, BroadVision
Support will start work on the site as soon as they are aware of the problem. If
a workaround has not been developed after 1 day of work by Support then the
Support Director will be notified. After 3 days of work VP WPSO and VP
Engineering will be notified.
PRIORITY 3
The third level is for general issues on a site not causing serious problems. If
a case isn't resolved after 2 days the Support Manager will be notified. After 3
days the Support Director will be notified.
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<PAGE>
Attachment E
PRIORITY 4
The lowest level is for questions or issues on a site not requiring immediate
action. If a case isn't resolved after 3 days the Support Manager will be
notified. After 5 days the Support Director will be notified.
AFTER-HOURS SUPPORT
An optional support package (not included with the Customer's initial package)
is available to provide support 7 days a week, 24 hrs a day for assistance with
serious problems on live-sites. It will not support development
questions/issues. Customers with this support will be provided with a single
pager number to contact the on-call Support person in the case of a priority 1
support call. It is preferred that the customer must provide BroadVision dialup
access to the site in order to for support to able to provide assistance in the
recovery process. The Support engineer on call will have a laptop so that he/she
can then dial into the website and help effect system recovery.
DOCUMENTING KNOWN PROBLEMS
BroadVision has a policy of sharing bug lists with customers. The intent is to
pro-actively let the customers know about known problems and document
workarounds. BroadVision Support, Engineering and Product Management will decide
which problems to report.
Today we publish some of this information in the Known Problems section of the
Release Notes. The following is our policy of enhancing this information as well
as updating the known bugs every month and making it available through the
support section of the BroadVision web site.
1. Currently we provide the following information in the Known Problems section
of the Release Notes. The Release Notes will be updated upon every release.
Bug Information: problem ID, brief description, any known workaround
2. Starting with version 4.1 Technical Support will update the Known Bugs
section to include known bugs reported since the last release. This will be
updated once a month. Since the updates will be written by Technical
Support, it will be directed to an engineering audience. At product release
time, Tech Pubs will roll them into the formal Release Notes.
3. We will also make the following patch information available on our Tech
support site:
Patch Number:
Date released: [can also list those in preparation, with a planned release
date]
Required previous patches: [patch numbers or 'none']
Resolved problems: [list of problem numbers]
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Attachment E
PRODUCT ENHANCEMENT REQUEST PROCEDURE
To submit an enhancement request:
Log in to Broadvision.com\login.html. Select Support, and then click "Submit a
new ticket". Include the text "Enhancement" in the description before submitting
the request, and the product you wish to submit an enhancement request for.
PM will review enhancements on a weekly basis and respond to you, the submitter,
with the status
Getting enhancements into an upcoming product release:
At the start of each Project Product Manager will go through the enhancement
list with ISG and engineering to determine which should be included in the next
release. If there are specific features that need to be included to satisfy a
project need, please include that information in the ER when submitted, and
email the appropriate Product Manager.
COMPATIBILITY POLICY
This section clarifies BroadVision's policy on compatibility between production
releases. BV will provide a migration path between the objects, templates, and
scripts, components and content that customers have created with a production
release of One-To-One to the next production release of One-To-One. Addressing
these in turn:
1. BroadVision Standard objects - if we change the tag syntax of BV standard
objects we will provide tools and procedures needed to migrate those objects
from one release to the next. This will provide migration path for templates
using BV standard objects.
2. BroadVision Standard components - if we change the signature of BV standard
components we will provide tools and procedures needed to migrate scripts
from one release to the next. This will provide migration path for scripts
using BV standard components.
3. BroadVision APIs - we will in general maintain backward compatibility
between BroadVision APIs. In cases, where this is not possible or desirable
we will provide tools and procedures to migrate the APIs. This will provide
migration path for custom dynamic objects that use our APIs.
4. Database - when we make schema changes we will provide migration tools to
update the older schema and content from one production release of
One-To-One to the next.
Please note that we do not guarantee compatibility between Beta and FCS versions
of any given release. However, we will strive to not have major API, tag-syntax
or schema changes between Beta and FCS releases.
If you have any questions or suggestions please send email to
[email protected].
Page 3 of 3
<PAGE>
BROADVISION PRODUCTS
YEAR 2000 COMPLIANCE
STATEMENT OF YEAR 2000 COMPLIANCE
BroadVision One-To-one Version 4 products are year 2000 compliant. BroadVision
One-To-One Version 3.0 products with the applicable year 2000 patches are year
2000 compliant. Both versions require year 2000 compliant hardware, operating
systems, databases, compilers and other related components. Versions prior to
3.0 have not been tested for year 2000 compliance.
This representation is with respect to BroadVision's products only and is not a
representation or warranty that software applications developed using these
products are or will be year 2000 compliant. Since there are many interrelated
dependencies in complex systems, it is the licensee's responsibility to ensure
that their applications, including those built using BroadVision's products,
have undergone the level of testing and certification that is appropriate to
ensure year 2000 compliance.
DEFINITION OF YEAR 2000 COMPLIANCE
Year 2000 compliant means accurately processing date/time data, including, but
not limited to, calculating, comparing, and sequencing, from, into, and between
the twentieth and twenty-first centuries, and between the years 1999 and 2000,
including recognizing the year 2000 as a leap year. Year 2000 compliance
requires that all interfacing applications and systems provide and receive
date/time data in a consistent format.
CONFORMANCE TO BSI DEFINITION
BroadVision products adhere to the definition set forth in DISC PD2000-1, A
Definition of Year 2000 Conformity Requirements, by British Standards
Institution Committee. The definition states:
RULE 1. No value for current date will cause any interruption in
operation.
RULE 2. Date-based functionality must behave consistently for dates prior
to, during and after year 2000.
RULE 3. In all interfaces and data storage, the century in any date must
be specified either explicitly or by unambiguous algorithms or
inferencing rule
RULE 4. Year 2000 must be recognized as a leap year.
Version Details
<TABLE>
<CAPTION>
PRODUCT VERSION YEAR 2000 STATUS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
One-To-One, all products 4 Year 2000 compliant
- ----------------------------------------------------------------------------------------------
One-To-One application system 3.0 Year 2000 compliant with Y2K patch which:
One-To-One Dynamic Command - Corrects problem with payment object not
Center (DCC) handling 2 digit years correctly
One-To-One Visual Development - Provides user-defined window for adding
Center (VDC) century to 2 digit years
- ----------------------------------------------------------------------------------------------
One-To-One Financial 3.0 Year 2000 compliant
- ----------------------------------------------------------------------------------------------
One-To-One Knowledge 3.0 Year 2000 compliant
- ----------------------------------------------------------------------------------------------
One-To-One Commerce 3.0 Year 2000 compliant with Y2K patch which:
- Corrects problem with purchase receive
object not handling 2 digit years correctly
- ----------------------------------------------------------------------------------------------
One-To-One Content 3.0 Year 2000 compliant with Y2K patch which:
Management Center (CMC)
- Corrects problem with Java 2 digit year
sliding date convention
</TABLE>
Page 1 of 2
<PAGE>
BROADVISION PRODUCTS
YEAR 2000 COMPLIANCE
Software Requirements for Year 2000 Compliance
BROADVISION ONE-TO-ONE VERSION 4 PRODUCTS
OPERATING SYSTEMS
- Sun Solaris 2.6 or Solaris 2.5.1 with Y2K patches - Hewlett-Packard
HP-UX 10.20 with Y2K patches - Microsoft Windows NT 4.0 with SP4
DATABASES
- Oracle 8.0.x or 7.3.x - Sybase 11.0.3.2 & Open Client 11.1.1 - Informix
7.22.UC - Microsoft SQL Server 7.0
WEB SERVERS
- Netscape Enterprise Server 3.5.1
- Microsoft Internet Information Server 4.0
ORB
- Iona Orbix 2.2
ROGUE WAVE
- Tools.h++ 7.0.2
- DBTools.h++ 2.1.1
- Money.h++ 1.4.1
BROADVISION ONE-TO-ONE VERSION 3.0 PRODUCTS
OPERATING SYSTEMS
- Sun Solaris 2.5.1 with Y2K patches - Hewlett-Packard HP-UX 10.20 with
Y2K patches - Microsoft Windows NT 4.0 with SP4
DATABASES
- Oracle 7.3
- Sybase 11.0.3.2 & Open Client 11.1.1 - Informix 7.22.UC - Microsoft SQL
Server 6.5 SP5
WEB SERVER
- Netscape Enterprise Server 2.0.1 or 3.0
- Microsoft Internet Information Server 4.0
ORB
- Iona Orbix 2.2
ROGUE WAVE
- Tools.h++ 7.0.2
- DBTools.h++ 2.1.1
- Money.h++ 1.4.1
BROADVISION, INC. /s/ RANDALL BOLTEN
----------------------------------------
Signature
Randall Bolten, CFO
----------------------------------------
Printed Name and Title
----------------------------------------
Date
Page 2 of 2
Exhibit 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-94469.
/s/ARTHUR ANDERSEN LLP
----------------------
San Francisco, California
March __, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,780
<SECURITIES> 0
<RECEIVABLES> 1,035
<ALLOWANCES> 54,000
<INVENTORY> 0
<CURRENT-ASSETS> 17,490
<PP&E> 7,669
<DEPRECIATION> 1,382
<TOTAL-ASSETS> 24,053
<CURRENT-LIABILITIES> 4,104
<BONDS> 0
0
0
<COMMON> 42,826
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,053
<SALES> 0
<TOTAL-REVENUES> 9,073
<CGS> 0
<TOTAL-COSTS> 25,727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> (16,478)
<INCOME-TAX> 2
<INCOME-CONTINUING> (16,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,480)
<EPS-BASIC> (2.05)
<EPS-DILUTED> (2.05)
</TABLE>
