<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
PARTICIPATE.COM, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 36-4321667
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
945 WEST GEORGE STREET, THIRD FLOOR
CHICAGO, ILLINOIS 60657-5007
(773) 665-0020
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
ALAN K. WARMS, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PARTICIPATE.COM, INC.
945 WEST GEORGE STREET, THIRD FLOOR
CHICAGO, ILLINOIS 60657-5007
(773) 665-0020
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN T. SHERIDAN THOMAS J. MURPHY
KATHLEEN B. BLOCH STACEY T. KERN
JOHN B. TURNER McDERMOTT, WILL & EMERY
MICHELLE D. GREGORY 227 West Monroe Street
WILSON SONSINI GOODRICH & ROSATI Chicago, IL 60606
Professional Corporation (312) 372-2000
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES TO AGGREGATE OFFERING AMOUNT OF
BE REGISTERED PRICE(1)(2) REGISTRATION FEE
<S> <C> <C>
Common stock, $0.001 par value.............................. $57,500,000 $15,180
</TABLE>
(1) Includes shares which the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 13, 2000
[LOGO]
SHARES
COMMON STOCK
Participate.com is offering shares of common stock. This is our
initial public offering and no public market currently exists for our shares. We
have applied for approval for listing of our common stock on the Nasdaq National
Market under the symbol "PRTP." We anticipate that the initial public offering
price will be between $ and $ per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Participate.com................................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Participate.com has granted the underwriters a 30-day option to purchase up
to an additional shares of common stock to cover over-allotments.
------------------------
ROBERTSON STEPHENS
CHASE H&Q
WILLIAM BLAIR & COMPANY
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
[Artwork consists of a series of 30 logos of companies in a circle under the
heading "Participate.com Clients and Strategic Alliances." Within the circle is
the phrase "Growing and managing online communities that redefine business
relationships." The logos shown are for the following clients and strategic
alliances: accenthealth.com, Ace Commercial and Industrial Supply, Ask Jeeves,
AT&T Worldnet-Registered Trademark- Services, Breakaway Solutions, Consumers
Carclub.com, Cisco Systems, Columbia TriStar Interactive, Diamond Technology
Partners Incorporated, EXPAT Exchange, Freedom Nation, MuniGroup.com, Kana
Communications, MachineWeb.com, Multex Investor Network, mySAP, NBC Internet,
net32.com, NuvoMedia, OurHouse.com, Parlo, Quote.com, RealHome.com, Reuters,
Salesguy.com, SalesLogix, SciQuest.com, SideTalk Corporation, Staples.com,
TAP Pharmaceuticals and Wrenchead.com.]
<PAGE>
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS, THE
"COMPANY," "PARTICIPATE.COM," "WE," "US" AND "OUR" REFER TO PARTICIPATE.COM,
INC., A DELAWARE CORPORATION.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN
ADDITION TO THE DEALERS' OBLIGATIONS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 5
Forward-Looking Statements; Market Data..................... 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 24
Management.................................................. 34
Certain Transactions........................................ 42
Principal Stockholders...................................... 45
Description of Capital Stock................................ 47
Shares Eligible for Future Sale............................. 51
Underwriting................................................ 53
Legal Matters............................................... 55
Experts..................................................... 56
Where You Can Find More Information......................... 56
Index to Financial Statements............................... F-1
</TABLE>
------------------------
Community Management System-TM- and Community Roadmap-TM- are trademarks of
our company. Other service marks, trademarks and trade names referred to in this
prospectus are the property of their respective owners.
<PAGE>
SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING RISK FACTORS AND
FINANCIAL STATEMENTS AND RELATED NOTES REGARDING OUR COMPANY AND THE COMMON
STOCK BEING SOLD IN THIS OFFERING.
PARTICIPATE.COM, INC.
OUR BUSINESS
We are a management service provider, or MSP, that enables successful
eBusiness strategies by offering an integrated management solution for online
communities. Online communities are groups of businesses, customers or employees
with common interests that interact via the Internet to share business
practices, provide feedback and build relationships. We receive recurring fees
to develop, manage and host successful online communities using our community
management expertise and proprietary service delivery platform, the Community
Management System, or CMS. Our full-service approach is designed to enable
eBusinesses to strengthen relationships, build loyalty, reduce their operating
and customer acquisition costs, and create new revenue opportunities. We provide
our services primarily to Global 1000 and leading Internet companies. Our
clients include Ace Hardware, Ask Jeeves, AT&T WorldNet-Registered Trademark-
Service, Columbia TriStar Interactive, Kodak, mySAP, NBC Internet, Reuters,
SciQuest.com and Staples.com. We expand our market opportunities through our
strategic channel relationships with a number of leading Internet professional
services firms and technology providers, including Breakaway Solutions, Cisco
Systems, Diamond Technology Partners Incorporated and Kana Communications.
OUR MARKET
The projected growth of the Internet over the next five years is dramatic,
particularly in the business-to-business market. The Gartner Group, an
independent research firm, projects that the volume of non-financial goods and
services sold through business-to-business eCommerce will grow from
$145.0 billion in 1999 to $7.3 trillion worldwide in 2004. To capitalize fully
on the new opportunities presented by the Internet, businesses demand both
solution DEVELOPMENT, which includes strategy, design, and implementation, and
solution MANAGEMENT, which includes ongoing active supervision, innovation,
strategic use of technology and hosting of applications. International Data
Corporation, an independent research firm, expects the worldwide market for
Internet services, including consulting, systems integration, management and
outsourcing services, to grow from $7.8 billion in 1998 to $78.5 billion in
2003.
We believe every enterprise will face significant ongoing challenges in the
management of its eBusiness initiatives, including the need to acquire and
retain customers, differentiate itself from competitors, scale its eBusiness and
build relationships with the most valuable business customers. Traditional
Internet services organizations presently provide development solutions,
technology and hosting services to build eBusiness initiatives. We believe that
these services providers lack the focus and expertise required to specifically
address the ongoing management challenges of eBusiness initiatives. We believe
that a professionally managed online community uniquely addresses these
recurring management challenges. As a result, we believe there is a significant
market opportunity for an MSP offering online community solutions.
OUR SOLUTION
We believe we are the only MSP to offer the full range of services needed to
manage our clients' online community needs. Our solution has the following key
elements:
1
<PAGE>
- INTEGRATED FULL-SERVICE APPROACH. We use our proprietary CMS methodology
to provide a completely outsourced, comprehensive community solution for
our clients. The CMS includes five key capabilities:
<TABLE>
<S> <C>
KEY CAPABILITY DESCRIPTION
- ----------------------- ----------------------------------------------------
<S> <C>
Strategy Design and develop integrated communities
Management Deliver a comprehensive approach to measure, analyze
and provide feedback on community participation
Research Conduct ongoing analysis of online community
evolution, metrics and best practices
Service Innovation Continually identify, develop and implement new
community service offerings
Application Hosting Rapidly implement a hosted community solution
</TABLE>
- SIGNIFICANT COMMUNITY MANAGEMENT EXPERTISE. Through our ongoing deployment
of a significant number of online community management programs, we have
developed extensive community knowledge that we disseminate across
multiple industries and clients.
- VALUE DRIVEN RESULTS. For each of our ongoing engagements, we generate and
analyze metrics that assess performance on several dimensions, including
return on investment, customer insight and community effectiveness.
- SPEED OF EXECUTION. Through our concentrated focus on online community
management, proprietary processes and dedicated resources, we believe that
our approach rapidly delivers continuously improving, comprehensive
management solutions to clients.
- SCALABLE SOLUTIONS. Our internal management practices and the architecture
of our solutions allow us to develop and expand programs and capabilities
as our clients' communities grow.
OUR STRATEGY
Our objective is to be the leading global MSP of online community solutions.
We intend to pursue this objective in the following ways:
- further penetrate an underserved market for management services;
- expand relationships with current clients;
- strengthen and expand strategic relationships;
- actively build the Participate.com brand within our target markets;
- continue to develop intellectual capital and proprietary methodologies;
and
- attract and retain high quality professionals.
OUR CORPORATE HEADQUARTERS
Our headquarters are located at 945 West George Street, Third Floor,
Chicago, Illinois 60657-5007 and our telephone number at that location is (773)
665-0020.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Participate.com..................... shares
Common stock to be outstanding after this offering.......... shares
Use of proceeds............................................. For general corporate and working
capital purposes, including increases
in our marketing initiatives, hiring
of additional personnel and
redemption of our Series A preferred
stock. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol...................... PRTP
</TABLE>
- ------------------------
Except as otherwise indicated, all information in this prospectus assumes:
- no exercise of the underwriters' over-allotment option; and
- a two-for-one stock split of our Series B preferred stock and common stock
effective in January 2000.
Except as otherwise indicated, the total number of shares to be outstanding
after the offering excludes:
- 2,062,604 shares issuable upon the exercise of stock options outstanding
at April 12, 2000 at a weighted average exercise price of $1.20 per share;
- 3,232,076 shares in aggregate available for future issuance under our 1999
Stock Plan, 2000 Stock Plan and 2000 Employee Stock Purchase Plan; and
- 525,000 shares issuable upon the exercise of outstanding warrants at a
weighted average exercise price equal to the price per share in this
offering.
3
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The summary financial information set forth below is derived from our
financial statements. You should read it in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the related notes included elsewhere in this
prospectus. The pro forma basic and diluted net loss per share attributable to
common stockholders gives effect to the assumed conversion of our Series B
preferred stock into shares of common stock, weighted for the period
outstanding, for the year ended December 31, 1999. The as adjusted balance sheet
data summarized below reflect the application of the net proceeds from the sale
of the shares of common stock in this offering at an assumed initial public
offering price of $ per share, after deducting the underwriting discounts and
commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 30
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1997 1998 1999
-------------- ---------- -----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.............................................. $ 6 $ 507 $ 1,885
Gross profit.......................................... 1 184 599
Operating loss........................................ (4) (93) (2,792)
Net loss attributable to common stockholders.......... (4) (98) (2,733)
========== ========== ===========
Basic and diluted net loss per share attributable to
common stockholders................................. $ 0.00 $ (0.02) $ (0.33)
========== ========== ===========
Shares used in computing basic and diluted net loss
per share attributable to common stockholders....... 5,752,050 6,368,178 8,200,621
========== ========== ===========
Pro forma basic and diluted net loss per share
attributable to common stockholders................. $ (0.26)
===========
Shares used in computing pro forma basic and diluted
net loss per share attributable to common
stockholders........................................ 10,703,930
===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $10,609
Working capital........................................... 10,249
Total assets.............................................. 11,896
Capital lease obligations, net of current portion......... 91
Redeemable preferred stock................................ 13,214
Accumulated deficit....................................... (1,824)
Total stockholders' equity (deficit)...................... (2,528)
</TABLE>
4
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, RESULTS OF OPERATIONS OR
FINANCIAL CONDITION WOULD LIKELY SUFFER. IN THIS CASE, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, THERE IS A LIMITED AMOUNT OF
INFORMATION ABOUT US WITH WHICH YOU CAN EVALUATE OUR BUSINESS AND POTENTIAL FOR
FUTURE SUCCESS.
We began operations in November 1997. Our limited operating history makes it
difficult to forecast our future operating results. Our revenue and income
potential is unproven. Because we do not have a long history upon which to base
forecasts of future operating results, any predictions about our future revenues
and expenses may not be as accurate as they would be if we had a longer business
history. You must also consider the risks and uncertainties frequently
encountered by early stage companies in new and rapidly changing markets, such
as uncertainties about the acceptance of the Internet as a business medium and
the market for Internet professional services. If we are unsuccessful in
addressing these risks and uncertainties, our ability to execute our business
plan would be materially and adversely affected and our stock price might
decline.
OUR RESULTS OF OPERATIONS MAY VARY FROM QUARTER-TO-QUARTER AND, AS A RESULT, WE
MAY NOT MEET THE EXPECTATIONS OF OUR INVESTORS AND ANALYSTS, WHICH COULD CAUSE
OUR STOCK PRICE TO FLUCTUATE OR DECLINE.
Our quarterly revenues, expenses and operating results have fluctuated in
the past and could fluctuate significantly in the future. As a result, we
believe that quarter-to-quarter comparisons of our operating results may not be
a good indication of our future performance, and you should not rely on them to
predict our future performance or the future performance of our stock price. A
substantial portion of our operating expense is related to personnel costs,
marketing programs and overhead, which we cannot adjust quickly. A significant
part of our current operating expenses are based on our expectations of future
revenues. As a result, a reduction in revenues in a quarter may harm our
operating results for that quarter. If our operating results in future quarters
fall below the expectations of market analysts and investors, the trading price
of our common stock could fall.
IF WE ARE UNABLE TO INCREASE OUR SERVICE REVENUES, OUR ABILITY TO BECOME
PROFITABLE WILL BE HARMED.
We derive our revenues from the sale of our services and we expect to
continue to rely on these service revenues in the future. If we do not continue
to develop our service revenues, our revenues may not meet our expectations or
may decline. Our growth and future success will depend on our ability to
increase the number of our clients, expand our service offerings, effectively
implement these services and increase the average revenue per project and per
client. Our ability to generate significant service revenues will also depend,
in part, on our ability to create new service offerings without diluting the
value of our existing programs. If we are unable to become profitable, our stock
price may decline.
WE HAVE HAD NET LOSSES SINCE INCEPTION OF $2.8 MILLION AS OF DECEMBER 31, 1999
AND OUR OPERATING LOSSES MAY CONTINUE AND EVEN INCREASE IN THE FUTURE.
As we grow our business, we expect to incur significant expenditures for
recruiting and hiring additional personnel and marketing. As a result, we expect
that our operating expenses will increase significantly in the near term and,
consequently, we expect to incur additional losses in the future. In addition,
if competition increases or our market grows more slowly than we anticipate, our
revenues
5
<PAGE>
may not grow at a desirable rate, or they may decline. We cannot be certain that
we will achieve profitability or that, if we do achieve profitability, we will
be able to sustain or increase our profitability.
WE HAVE GROWN VERY QUICKLY AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO
GENERATE NEW REVENUES AND ACHIEVE PROFITABILITY WOULD BE HARMED.
Since we began operations in November 1997, we have significantly increased
the size of our operations and our operating expenses. The number of our
employees has increased from eight as of December 31, 1998 to 63 as of
December 31, 1999. We expect to continue to hire new employees at a rapid pace.
For example, our work force has grown by 63 people between December 31, 1999 and
March 31, 2000. This recent growth has placed, and we expect that any future
growth we experience will continue to place, a significant strain on our
management, personnel, systems and other resources. To manage any future growth
effectively, we must improve and expand our financial and accounting systems,
controls, reporting systems and procedures, integrate new employees and manage
expanded operations. If we fail to manage growth effectively, the quality of our
services, our ability to respond to clients and retain key personnel, and our
business generally would suffer.
IF CURRENT OR POTENTIAL CLIENTS FAIL TO CONTINUE TO USE ONLINE COMMUNITIES OR IF
OUR SERVICES ARE NOT ACCEPTED, DEMAND FOR OUR SERVICES MAY NOT DEVELOP.
Online communities are a new and rapidly evolving business solution and our
business will be harmed if sufficient demand for our services does not develop.
Demand for our services may not materialize if businesses that have already
invested substantial resources in other eBusiness strategies are reluctant to
adopt new eBusiness initiatives.
Moreover, even if online communities continue to expand, businesses may not
perceive the services we offer to be valuable. If online community participation
does not grow as quickly or become as important to businesses as we anticipate,
or if businesses do not accept our services, our revenues will likely be
reduced.
WE MAY NOT SUCCESSFULLY MAINTAIN AND EXPAND OUR STRATEGIC ALLIANCES, WHICH COULD
HAMPER OUR ABILITY TO DELIVER SOLUTIONS NEEDED BY OUR CLIENTS AND LIMIT OUR
ABILITY TO INCREASE OR SUSTAIN OUR REVENUES AND ACHIEVE OR MAINTAIN
PROFITABILITY.
A key part of our strategy is expanding our strategic relationships. If we
are unable to maintain these relationships, the benefits that we derive from
these relationships, including the receipt of important sales leads,
cross-marketing opportunities, access to emerging technology and other benefits,
may be lost. Consequently, we may not be able to offer desired solutions to
clients, which would result in a loss of revenues and our inability to
effectively compete for clients.
WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL NECESSARY TO DEVELOP
OUR OPERATIONS, SALES, CONSULTING, PROFESSIONAL SERVICES AND SUPPORT
CAPABILITIES IN ORDER TO CONTINUE TO GROW, WHICH WOULD HARM OUR BUSINESS.
Our ability to grow will be adversely impacted if we do not attract
qualified operations, sales, consulting, professional services and support
personnel in the near future. Competition for these individuals is intense, and
we may not be able to attract, train or retain highly qualified personnel in the
future. Our failure to attract and retain highly trained personnel in these
areas may limit the rate at which we can develop, which would harm our business.
We expect to face greater difficulty attracting qualified personnel with equity
incentives as a public company than we did as a privately held company.
6
<PAGE>
IF WE DO NOT PROVIDE COMMUNITY MANAGEMENT SERVICES EFFECTIVELY AND ACCORDING TO
SCHEDULE, OUR REVENUES AND PROFITABILITY COULD BE HARMED.
If we fail to effectively provide high quality client services, or if we are
unable to expand our internal professional services organization as needed to
meet our clients' needs, our ability to compete successfully could be diminished
and our revenues could be harmed. Any defects or errors in these services or
failure to meet clients' specifications or expectations could result in:
- delayed or lost revenues due to adverse client reaction;
- requirements to provide additional services to a client at no charge or a
limited charge;
- refunds of fees for failure to meet obligations;
- negative publicity about us and our services; and
- claims for substantial damages against us.
WE HAVE A HIGH LEVEL OF CLIENT CONCENTRATION AND OUR BUSINESS COULD BE
MATERIALLY AND ADVERSELY AFFECTED IF WE WERE TO LOSE A MAJOR CLIENT.
Historically, a few of our clients have accounted for a substantial portion
of our revenues. AT&T WorldNet-Registered Trademark- Service and Quote.com
collectively generated 28% of our revenues in the year ended December 31, 1999.
If we lose one or more of these clients, if our clients reduce their use of our
services, or if we fail to successfully market our services to new clients, our
business would suffer.
OUR LACK OF LONG-TERM CONTRACTS WITH CLIENTS AND OUR CLIENTS' ABILITY TO
TERMINATE CONTRACTS WITH LITTLE NOTICE COULD REDUCE THE PREDICTABILITY OF OUR
REVENUES AND COULD INCREASE THE POTENTIAL VOLATILITY OF OUR STOCK PRICE.
Our current clients can generally cancel or reduce their use of our services
without penalty and with little notice. As a result, our revenues are difficult
to predict. Because we incur costs based on our expectations of future revenues,
if we fail to predict our revenues accurately our expenses may exceed our
revenues, which could cause us to incur increased operating losses and our stock
price could decline.
IF OUR EFFORTS TO BUILD OUR BRAND ARE NOT SUCCESSFUL, WE MAY NOT BE ABLE TO
INCREASE OUR REVENUES OR OFFSET ANY MARKETING COSTS THAT WE MAY INCUR.
Because the Internet professional service provider industry is expanding
rapidly, an element of our business strategy is to actively build our brand name
in our target markets. To build our brand, we may increase our marketing
activities. If our marketing activities are not successful, we may not obtain
increases in revenues to offset any increase in our marketing expenses, which
may cause our operating margins to decline. In addition, if we are unable to
further develop our brand, we may not attain the growth in revenues that we
seek.
LOSS OF ANY KEY PERSONNEL, INCLUDING OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER,
COULD HARM OUR ABILITY TO OBTAIN AND RETAIN CLIENT ENGAGEMENTS, MAINTAIN A
COHESIVE CULTURE OR COMPETE EFFECTIVELY.
Our success will depend in large part upon the continued service of our
executive officers, in particular our President and Chief Executive Officer,
Alan K. Warms. We do not have an employment contract with Mr. Warms. The loss of
Mr. Warms' services could harm us and cause investors to lose confidence in our
business, which could cause the trading price of our stock to decline. In
addition, if Mr. Warms resigns to join a competitor or to form a competing
company, the loss of Mr. Warms and any resulting loss of existing or potential
clients to any competitor could harm our business. If we lose Mr. Warms, we may
be unable to prevent the unauthorized disclosure or use by other companies of
our
7
<PAGE>
technical knowledge, practices, or procedures. In addition, due to the
substantial number of shares of our common stock owned by Mr. Warms, the loss of
Mr. Warms' services could cause investor or analyst concern that Mr. Warms may
sell a large portion of his shares, which could cause a rapid and substantial
decline in the trading price of our common stock.
CURRENT AND POTENTIAL COMPETITORS COULD DECREASE OUR MARKET SHARE, LIMIT OUR
GROWTH AND HARM OUR BUSINESS.
The market for our services is already competitive, and we expect
competition to increase in the future. In addition, there are a significant
number of potential competitors who could develop services similar to those we
offer. Our target market is rapidly evolving and is subject to continuous
technological change. Unanticipated changes may favor our competition, or our
competition may react more favorably to these changes, which could adversely
affect our business and stock price. Our existing or future competitors may
develop or offer management services that provide significant creative, price,
technological or other advantages over the services we offer. In addition,
existing businesses with greater financial resources or name recognition may
become our competitors in the future, which could limit our growth and harm our
business.
THE PRODUCTS WE USE ARE NEW, AND IF THEY ARE NOT PERCEIVED AS HIGH QUALITY OR IF
THEY CONTAIN DEFECTS, WE COULD LOSE POTENTIAL CLIENTS AND OUR BUSINESS MIGHT
SUFFER.
The products we use in providing our services are complex and may contain
errors, defects or failures, particularly because many of these products were
released recently. We may not be able to detect and correct errors before using
these products commercially. If these products contain errors, we may be
required to expend significant resources to locate and correct the error. In
addition, client dissatisfaction may harm our reputation. In addition, products
we develop or use could contain defects that introduce a breach of security to
our own or our clients' systems and proprietary information. A breach of
security could be exploited by third parties, which could harm our business.
WE INTEND TO EXPAND OUR OPERATIONS INTERNATIONALLY, WHICH COULD DIVERT
MANAGEMENT'S ATTENTION AND EXPOSE US TO ADDITIONAL RISKS, INCLUDING INCREASED
REGULATION AND PRIVACY PROTECTION LAWS.
We intend to develop our international operations in the future, which will
require substantial financial resources. We have very limited experience in
marketing and supporting our services abroad. If we are unable to grow our
international operations successfully and in a timely manner, our business and
operating results could be harmed. In addition, doing business internationally
involves substantial expense and many additional risks, particularly:
- longer sales cycles and slower collection of accounts receivable;
- unexpected changes in regulatory requirements, taxes, trade laws and
tariffs;
- reduced protection of intellectual property rights in some countries;
- differing labor regulations;
- changes in a country's or region's political or economic conditions;
- difficulty in staffing and managing foreign operations;
- increased financial accounting and reporting burdens and complexities; and
- fluctuating exchange rates.
Our international operations will increase our exposure to international
laws and regulations. If we cannot comply with foreign laws and regulations,
which are often complex and subject to variation and unexpected changes, we
could incur unexpected costs and face potential litigation. For example, the
8
<PAGE>
governments of foreign countries might attempt to regulate our services or levy
sales or other taxes relating to our activities. In addition, foreign countries
may impose tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers, any of which could make it more difficult to
conduct our business. The European Union recently enacted its own privacy
regulations that may result in limits on the collection and use of certain user
information, which, if applied to the sale of our services, could negatively
impact our results of operations. We cannot be certain that our investments in
establishing operations in other countries will produce desired revenues or
profitability.
TECHNICAL PROBLEMS WITH EITHER OUR INTERNAL OR OUR OUTSOURCED COMPUTER AND
COMMUNICATIONS SYSTEMS COULD INTERRUPT OUR SERVICES.
The success of our services depends on the efficient and uninterrupted
operation of our own and outsourced computer and communications hardware and
software systems. These systems and operations are vulnerable to damage or
interruption from human error, natural disasters, telecommunications failures,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
adverse events. We have entered into Internet-hosting agreements with various
companies to provide hosting for both us and our clients. Our operations depend
on the ability of outsourced service providers to protect their and our systems
in their data centers against damage or interruption. Our outsourced service
providers do not guarantee that our Internet access will be uninterrupted,
error-free or secure. We have no formal disaster recovery plan in the event of
damage or interruption. Furthermore, our insurance policies may not adequately
compensate us for any losses that we may incur. Any system failure that causes
an interruption in our service or a decrease in responsiveness could harm our
relationships with our clients and result in reduced revenues.
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE LIMITED, AND AS A RESULT WE COULD
LOSE COMPETITIVE ADVANTAGES THAT DIFFERENTIATE OUR CAPABILITIES.
We rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which may not be sufficient to protect our intellectual
property. We also rely on a combination of laws, such as copyright, trademark
and trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights.
Despite any precautions that we have taken:
- laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies;
- other companies may claim common law trademark rights based upon use of
marks that precede the registration of our marks;
- policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the extent
of this unauthorized use; and
- current federal laws that prohibit software copying provide only limited
protection from software "pirates," and effective trademark, copyright and
trade secret protection may be unavailable or limited in foreign
countries.
Also, the laws of other countries in which we market our products may offer
little or no effective protection for our proprietary technology. Through
reverse engineering, unauthorized copying or other misappropriation of our
proprietary technology, third parties could benefit from our technology without
paying us for it, which could significantly harm our business.
9
<PAGE>
WE MAY BECOME INVOLVED IN LITIGATION OVER PROPRIETARY RIGHTS, WHICH COULD BE
COSTLY AND TIME CONSUMING.
There is substantial litigation regarding intellectual property rights in
our industry. We expect that software, business processes and other property
rights in our industry may be increasingly subject to infringement claims as the
number of competitors grows and the functionality of products in different
industry segments overlaps. Other parties may currently have, or may eventually
be issued, patents that the proprietary rights we use infringe. Any of these
parties might make a claim of infringement against us. Any litigation brought by
us or others could cause us to spend significant financial resources and divert
management's time and efforts. In addition, from time to time, we may encounter
disputes over rights and obligations concerning intellectual property. We may
not prevail in intellectual property disputes regarding infringement,
misappropriation or other disputes. Litigation in which we are accused of
infringement or misappropriation might cause a delay in our ability to provide
new services, require us to develop non-infringing technology or require us to
enter into royalty or license agreements, which might not be available on
acceptable terms, or at all. If anyone brings a successful claim of infringement
and we cannot develop non-infringing technology or license the infringed or
similar technology on a timely and cost-effective basis, our business could be
significantly harmed.
IF WE MAKE UNPROFITABLE ACQUISITIONS OR ARE UNABLE TO SUCCESSFULLY INTEGRATE ANY
FUTURE ACQUISITIONS, OUR BUSINESS COULD SUFFER.
From time to time, we may acquire businesses, client lists, products or
technologies that complement or expand our existing business. Acquisitions of
this type involve a number of risks, including the possibility that an
acquisition will be unprofitable or that our management's attention will be
diverted from the day-to-day operation of our business. An unsuccessful
acquisition could harm our business. As a result of an acquisition we may issue
additional equity securities that are dilutive to our common stock, incur debt
and lose key employees. We cannot assure you that we will successfully complete
a proposed acquisition or that, if we complete one or more acquisitions, the
acquired businesses, client lists, products or technologies will generate
sufficient revenue to offset the associated costs or other adverse effects.
RISKS RELATED TO EBUSINESS AND THE INTERNET
WE MAY FACE CLAIMS FOR ACTIVITIES OF OUR CLIENTS, WHICH COULD HARM OUR BUSINESS.
Our services involve monitoring the transmission of information over the
Internet. Our clients' online communities could be used to transmit harmful
applications, negative messages, unauthorized reproductions of copyrighted
material, inaccurate data or computer viruses to end users. Any transmission of
this kind could damage our reputation or give rise to legal claims against us.
We could spend a significant amount of time and money defending against these
legal claims. In addition, our clients may not comply with federal, state and
local laws when promoting their products and services. We cannot predict whether
our role in facilitating these marketing activities would expose us to liability
under these laws. Active management of online communities may expose us to
additional liability. Any claims made against us could be costly and
time-consuming to defend. If we are exposed to this kind of liability, we could
be required to pay substantial fines or penalties, redesign our business
methods, discontinue some of our services or otherwise expend resources to avoid
liability.
10
<PAGE>
WE DEPEND ON THE INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ECOMMERCE.
IF THE USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS ANTICIPATED,
OUR BUSINESS WOULD BE HARMED.
Our future revenues depend upon the increased acceptance and use of the
Internet and other online services as a medium of commerce. Rapid growth in the
use of the Internet, the Web and online services is a recent phenomenon that may
not continue. Demand and market acceptance for recently-introduced services and
products over the Internet are subject to a high level of uncertainty and few
proven services and products exist.
The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons, including inadequate development of the
necessary network infrastructure or delayed
development of performance improvements. If the Internet continues to expand
significantly in the number of users, frequency of use or bandwidth
requirements, the infrastructure for the Internet may be unable to support the
demands placed upon it. In addition, the Internet could lose its viability as a
commercial medium due to delays in the development or adoption of new standards
and protocols required to handle increased levels of Internet activity, or due
to increased governmental regulation. Changes in, or insufficient availability
of, telecommunications services to support the Internet also could result in
slower response times and adversely affect the use of the Internet generally. If
for any of these reasons the Internet and electronic commerce do not continue to
grow, our business could be harmed and our stock price may fall.
TO SUCCEED WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND THE INTENSE
COMPETITION IN THE INTERNET INDUSTRY.
Our market is characterized by rapidly changing technologies, frequent new
service and product introductions and evolving industry standards. The recent
growth of the Internet and intense competition in our industry exacerbate these
market characteristics. To succeed, we will need to effectively integrate the
various software programs and tools required to enhance and improve our service
offerings and manage our business. Any enhancements or new services or features
must meet the requirements of our current and prospective clients. Our success
also will depend on our ability to adapt to changing technologies by continually
improving the performance features and reliability of our services. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. We could also incur
substantial costs if we need to modify our services or infrastructure to adapt
to these changes.
WE MIGHT BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws, including those governing intellectual property,
privacy, libel and taxation, apply to the Internet generally and to community
management in particular. Legislation could dampen the growth in the use of the
Internet generally and decrease the acceptance of the Internet as a
communications and commercial medium. If this happened, it could harm our
business and our stock price could fall.
The growing popularity of the Internet has burdened telecommunications
infrastructure. If Internet service providers and online service providers are
subject to higher costs, through fees or taxes levied to provide for additional
infrastructure development, the growth of the Internet may slow. Also, due to
the global nature of the Internet, state and local governments, the federal
government or foreign countries might attempt to regulate or tax our activities.
If this were to occur, it could harm our business.
11
<PAGE>
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MIGHT BE VOLATILE AND YOU MIGHT NOT BE ABLE TO RESELL YOUR
SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has been no public market for our common stock prior to this offering.
The initial public offering price for our common stock will be determined
through negotiations between the underwriters and us. You should read the
"Underwriting" section for a more complete discussion of the factors that were
considered in determining the initial public offering price of our common stock.
This initial public offering price may vary from the market price of our common
stock after the offering. If you purchase shares of common stock, you may not be
able to resell those shares at or above the initial public offering price. The
market price of our common stock may fluctuate significantly in response to
various factors, some of which are beyond our control, including the following:
- actual or anticipated fluctuations in our annual and quarterly operating
results;
- changes in market valuations of other technology companies;
- changes in financial estimates by securities analysts;
- variations in our operating results, which may cause us to fail to meet
analysts' or investors' expectations;
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- additions or departures of key personnel;
- future sale of equity or debt securities; and
- general economic, industry and market conditions.
In addition, the stock market in general, and the stock of Internet
companies in particular, have experienced extreme volatility that often has been
unrelated to the performance of these companies. These market fluctuations may
cause our stock price to fall regardless of our performance. In the past,
companies that have experienced volatility in the market price of their stock
have been the object of securities class action litigation. If we were involved
in securities class action litigation, we could incur substantial costs and
management's attention and resources could be diverted.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, AND IF WE ISSUE
ADDITIONAL EQUITY SECURITIES TO RAISE CAPITAL, OUR STOCKHOLDERS MAY EXPERIENCE
ADDITIONAL DILUTION.
We may be required to seek additional funding to meet our capital
requirements, particularly if we elect to acquire complementary businesses,
products or technologies. If we are required to raise additional funds, we may
not be able to do so on favorable terms, if at all. Further, if we issue new
equity securities, stockholders may experience dilution or the holders of new
equity securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we are unable to raise additional capital
on acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities, or respond to clients and competition.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could cause
our stock price to fall. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock. You should read
"Shares Eligible for Future Sale" for a full discussion of shares that may be
sold in the public market in the future.
12
<PAGE>
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The price for each share in the initial public offering is substantially
higher than the book value per share of our outstanding common stock immediately
after the offering. This is referred to as dilution. Accordingly, if you
purchase common stock in the offering, you will incur immediate dilution of
approximately in the book value of our common stock from the price
you pay for our common stock. For additional information on this calculation,
see "Dilution."
BECAUSE SOME EXISTING STOCKHOLDERS WILL TOGETHER OWN A MAJORITY OF OUR STOCK,
THE VOTING POWER OF OTHER STOCKHOLDERS, INCLUDING PURCHASERS IN THIS OFFERING,
MIGHT BE LIMITED.
After this offering, we anticipate that our officers, directors, and five
percent or greater stockholders will beneficially own or control, directly or
indirectly, % of our shares of common stock. As a result, if some of these
existing stockholders choose to act together, they will have the ability to
control certain matters submitted to our stockholders for approval, including
the election and removal of directors and the approval of any business
combinations. This may delay or prevent an acquisition or cause the market price
of our stock to decline. Some of these persons or entities may have interests
different from yours. For example, they may be more interested than other
investors in selling our company or pursuing different business strategies.
THE PROVISIONS OF OUR CHARTER DOCUMENTS MAY INHIBIT POTENTIAL ACQUISITION BIDS
THAT A STOCKHOLDER COULD BELIEVE ARE DESIRABLE, AND THE MARKET PRICE OF OUR
COMMON STOCK COULD BE LOWER AS A RESULT.
Upon completion of this offering, our board of directors will have the
authority to issue up to five million shares of preferred stock. Our board of
directors can fix the price, rights, powers, preferences, privileges and
restrictions of the preferred stock without any further vote or action by our
stockholders. The issuance of shares of preferred stock may delay or prevent a
change in control transaction. As a result, the market price of our common stock
and the voting and other rights of our stockholders may be adversely affected.
The issuance of preferred stock may result in the loss of voting control to
other stockholders. We have no current plans to issue any shares of preferred
stock. Our charter documents also contain other provisions which may discourage,
delay or prevent a merger, acquisition or other change in control, including:
- only one of the three classes of directors is elected each year;
- our stockholders have limited rights to remove directors without cause;
- our stockholders have no right to act by written consent;
- our stockholders have limited rights to call a special meeting of
stockholders; and
- our stockholders must comply with advance notice requirements to nominate
directors or submit proposals for consideration at stockholder meetings.
These provisions could also have the effect of discouraging others from
making tender offers for our common stock. As a result, these provisions may
prevent the market price of our common stock from increasing substantially in
response to actual or rumored takeover attempts. These provisions may also
prevent changes in our management.
WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS OF THIS OFFERING, AND WE
MIGHT NOT USE THESE PROCEEDS EFFECTIVELY.
Our management has broad discretion in the use of the net proceeds of this
offering and could spend the net proceeds in ways that do not yield a favorable
return or to which stockholders object. We may also use the proceeds to acquire
complementary businesses or technologies, although no such acquisitions are
currently planned. Until we need to use the proceeds of this offering, we plan
to invest the net proceeds in investment grade, interest-bearing securities.
13
<PAGE>
FORWARD-LOOKING STATEMENTS; MARKET DATA
Some of the assertions in this prospectus contain "forward-looking"
information as that term is defined by the federal securities laws. These
assertions include, among others, those found under "Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." Forward-looking assertions may be
identified by use of the terms "may," "will," "expect," "anticipate," "estimate"
and similar words, although some forward-looking assertions are expressed
differently. You should be aware that our actual results could differ materially
from those contained in the forward-looking assertions due to a number of
factors, some of which are beyond our control. Factors that could materially and
adversely affect our results and cause them to differ from those contained in
this prospectus include, but are not limited to:
- the competitive environment in which we operate;
- our ability to attract or retain qualified personnel and maintain good
employee relations; and
- any legal claims asserted against us.
You should also consider carefully the statements under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and other sections of this prospectus which address
additional factors that could cause our actual results to differ from those set
forth in this prospectus.
This prospectus contains market data related to our business and the
Internet professional services industry. These market data include projections
prepared by third parties that are based on a number of assumptions. If these
assumptions turn out to be incorrect, actual results may differ from the
projections based on these assumptions. As a result, our markets may not grow at
the rates projected by these data, or at all. The failure of these markets to
grow at these projected rates may have a material adverse effect on our
business, results of operations and financial condition, and the market price of
our common stock.
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made. We undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
14
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the shares of common stock we are offering
will be approximately $ million. If the underwriters fully exercise the
over-allotment option, the net proceeds of the shares sold by us will be
approximately $ million. "Net proceeds" is what we expect to receive after
paying underwriting discounts and commissions and estimated offering expenses.
Net proceeds are calculated using the estimated initial public offering price of
$ per share
We intend to use the proceeds for general corporate purposes, including
working capital, to expand our sales and marketing and professional services
organizations, to expand internationally and to redeem our Series A preferred
stock. We may also use some of the proceeds to acquire other companies,
technology or products that complement our business, although we are not
currently planning any of these transactions. Pending these uses, the net
proceeds of this offering will be invested in short-term, interest-bearing
securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently expect to retain our future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
Our capitalization is presented:
- On an actual basis.
- On a pro forma basis and pro forma as adjusted basis to reflect the filing
of an amendment to our certificate of incorporation to provide for
authorized capital stock consisting of 100,000,000 shares of common stock
and 5,000,000 shares of preferred stock; and the issuance of our Series C
preferred stock in March and April 2000.
- On a pro forma as adjusted basis to reflect:
- the sale of shares of common stock in this offering at an assumed
initial offering price of $ per share and our receipt of the
estimated net proceeds, after deducting underwriting discounts and
estimated offering expenses;
- the conversion of Series B and C preferred stock into common stock; and
- the redemption of our Series A preferred stock.
You should read this table in conjunction with our Financial Statements and
the accompanying Notes, Selected Financial Data, and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of capital lease obligations................ $ 90 $ 90 $
Long-term portion of capital lease obligations.............. 91 91
Redeemable preferred stock, $0.001 par value,
9,325,980 shares authorized actual, 13,169,604 pro forma
and none pro forma as adjusted, issuable in series:
Series A preferred stock: 624,000 shares authorized,
issued and outstanding, actual and pro forma and none
pro forma as adjusted................................... 588 588
Series B convertible stock: 8,701,980 shares authorized,
issued and outstanding, actual and pro forma and none
pro forma as adjusted................................... 12,626 12,626
Series C convertible stock: 3,843,624 shares authorized,
3,784,001 shares issued and outstanding, pro forma and
none pro forma as adjusted.............................. -- 20,234
Stockholders' equity (deficit):
Preferred stock: 5,000,000 shares authorized, none issued
and outstanding, pro forma and pro forma as adjusted.... -- --
Common stock, $0.001 par value: 24,000,000 shares
authorized, actual, 100,000,000 shares authorized, pro
forma and pro forma as adjusted, 8,331,226 shares issued
and outstanding, actual and pro forma and pro
forma as adjusted....................................... 8 8
Additional paid-in capital.................................. 244 244
Deferred stock compensation................................. (956) (956)
Accumulated deficit......................................... (1,824) (1,824)
------- ------- -------
Total stockholders' equity (deficit)........................ (2,528) (2,528)
------- ------- -------
Total capitalization...................................... $10,867 $31,101 $
======= ======= =======
</TABLE>
The foregoing table does not include stock options and warrants to purchase
common stock, which are more fully described in "Description of Capital Stock."
16
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999 was $(2.5) million, or
$(0.30) per share of common stock. Net tangible book value per share is
calculated by subtracting our total liabilities from our tangible assets, and
dividing the total by 8,331,226 shares of common stock outstanding as of
December 31, 1999. The pro forma book value per share before the offering gives
effect to the issuance of the Series C preferred stock and the conversion of the
Series B preferred stock and Series C preferred stock into common stock
immediately preceding our initial public offering.
Assuming the sale by us of shares of common stock in this offering at
an initial public offering price of $ per share and the application of the
estimated net proceeds from this offering, our net tangible book value as of
December 31, 1999 would have been $ million, or $ per share of common
stock. Assuming completion of this offering, there will be an immediate increase
in the net tangible book value of $ per share to existing stockholders and
an immediate dilution in pro forma net tangible book value of $ per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
Net tangible book value per share as of December 31,
1999.................................................... $(0.30)
Increase per share attributable to pro forma
adjustments............................................. 1.76
------
Pro forma book value per share before the offering.......... 1.46
Increase per share attributable to new investors..........
------
Pro forma net tangible book value per share after the
offering..................................................
------
Pro forma dilution per share to new investors............... $
======
</TABLE>
The following table summarizes the total number of shares of common stock
purchased from us, the total consideration paid to us and the average price per
share paid by the existing stockholders and by new investors. The average price
per share paid was based upon the number of shares of common stock outstanding
as of December 31, 1999 and assuming the issuance of the Series C preferred
stock and the conversion of the Series B preferred stock and Series C preferred
stock into common stock:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- -------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 20,817,207 % $ 33,286,074 % $ 1.60
New investors...............
-------------- ----- --------------- ------
Total....................... 100.0% $ 100.0%
============== ===== =============== ======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by existing shareholders will be reduced to
, or % of the total number of shares of common stock to be
outstanding after this offering, and will increase the number of shares of
common stock held by the new investors to shares, or % of the total
number of shares of common stock to be outstanding immediately after this
offering.
The tables and calculations above assume no exercise of outstanding options
and exclude a warrant to purchase 525,000 shares of common stock with an
exercise price of $ per share, which was issued on March 28, 2000. At
December 31, 1999, there were 1,114,318 shares of common stock reserved for
issuance upon exercise of outstanding options with a weighted average exercise
price of $0.25 per share. To the extent that this warrant or these options are
exercised, there will be further dilution to new investors.
17
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
You should read the following selected financial data in conjunction with
our financial statements and notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The statement of operations data for the period from October 30,
1997 (inception) to December 31, 1997 and the years ended December 31, 1998 and
1999 and the balance sheet data as of December 31, 1998 and 1999 are derived
from our financial statements that have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this prospectus.
The pro forma basic and diluted net loss per share attributable to common
stockholders gives effect to the assumed conversion of our Series B preferred
stock into shares of common stock, weighted for the period outstanding, for the
year ended December 31, 1999.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 30
(INCEPTION) TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------- --------------------------
1997 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 6 $ 507 $ 1,885
Cost of services..................................... 5 323 1,286
---------- ---------- ----------
Gross profit......................................... 1 184 599
Operating expenses:
Selling, general and administrative................ 5 277 3,104
Noncash compensation expense....................... -- -- 287
---------- ---------- ----------
Operating loss....................................... (4) (93) (2,792)
Other income, net.................................... -- -- 144
Interest expense..................................... -- (5) (14)
---------- ---------- ----------
Net loss............................................. $ (4) $ (98) $ (2,662)
========== ========== ==========
Net loss attributable to common stockholders......... $ (4) $ (98) $ (2,733)
========== ========== ==========
Basic and diluted net loss per share attributable to
common stockholders................................ $ 0.00 $ (0.02) $ (0.33)
========== ========== ==========
Number of shares used in computing basic and diluted
net loss per share................................. 5,752,050 6,368,178 8,200,621
========== ========== ==========
Pro forma basic and diluted net loss per share
attributable to common stockholders................ $ (0.26)
==========
Number of shares used in computing pro forma basic
and diluted net loss per share attributable to
common stockholders................................ 10,703,930
==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4 $10,609
Working capital (deficit)................................... (107) 10,249
Total assets................................................ 172 11,896
Capital lease obligations, net of current portion........... 13 91
Redeemable preferred stock.................................. -- 13,214
Accumulated deficit......................................... -- (1,824)
Total stockholders' deficit................................. (91) (2,528)
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING
THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are an MSP that enables successful eBusiness strategies by focusing on
offering an integrated management solution for online communities. We develop,
manage and host successful online communities using our community management
expertise and proprietary service delivery platform, the Community Management
System, or CMS. Our full-service approach is designed to enable eBusinesses to
strengthen relationships, build loyalty, reduce their operating and customer
acquisition costs, and create new revenue opportunities. We provide our services
primarily to Global 1000 and leading Internet companies. Our clients include Ace
Hardware, Ask Jeeves, AT&T WorldNet-Registered Trademark- Service, Columbia
TriStar Interactive, Kodak, mySAP, NBC Internet, Reuters, SciQuest.com and
Staples.com. We expand our market opportunities through our strategic channel
relationships with a number of leading Internet professional services firms and
technology providers, including Breakaway Solutions, Cisco Systems, Diamond
Technology Partners Incorporated and Kana Communications.
We derive our revenues primarily from the sale of community management
services. We recognize revenues generated from our community management services
as they are performed. The majority of our clients are billed on a monthly
basis.
Costs of our community management services consist primarily of salaries,
benefits, equipment costs and other related direct costs.
Selling, general and administrative expenses consist of compensation,
benefits, advertising, and professional service fees.
We expect to continue to invest heavily in sales, marketing and business
development personnel, advertising and general and administrative
infrastructure. We expect to incur losses in each of the four quarters of 2000.
We believe that our future revenue growth and profitability will depend on our
success in increasing sales of services. If we fail to increase revenues, our
business and results of operations would be significantly harmed. In view of our
limited operating experience, we believe that period to period comparisons of
our operating results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
RESULTS OF OPERATIONS
Since our company was founded during the fourth quarter of 1997, results
from the period of inception through December 31, 1997 are not comparable to
those for the year ended December 31, 1998 or 1999.
19
<PAGE>
The following table sets forth certain financial data for the periods
indicated expressed as a percentage of revenues:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues................................................... 100.0 % 100.0 %
Cost of services........................................... 63.7 68.2
----- ------
Gross margin............................................... 36.3 31.8
Operating expenses:
Selling, general and administrative...................... 54.6 164.7
Noncash compensation expense............................. -- 15.2
----- ------
Operating loss............................................. (18.3) (148.1)
Other income, net.......................................... -- 7.6
Interest expense........................................... (1.0) (0.7)
----- ------
Net loss................................................... (19.3)% (141.2)%
===== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased 272% to $1.9 million in 1999, from
approximately $507,000 in 1998. The increase was primarily due to an increase in
community management clients in 1999 compared to 1998, as well as an increase in
services provided to existing clients.
GROSS PROFIT. Gross profit increased to $599,000 in 1999 from $184,000 in
1998. Gross margin decreased to 31.8% in 1999, from 36.3% for 1998. This
decrease in gross margin was primarily due to increased investment in personnel
and technology resources to enable the scalable delivery of our services. We
expect the dollar amount of our investment in infrastructure and personnel costs
to continue to increase in future periods.
SELLING, GENERAL AND ADMINISTRATIVE. Total selling, general and
administrative expenses increased to approximately $3.1 million in 1999, from
$277,000 in 1998. The increase in selling, general and administrative expenses
was primarily attributable to increased costs of personnel, advertising, website
development and public relations associated with implementing our business plan.
We expect the dollar amount of selling, general and administrative expenses to
continue to increase as we hire additional personnel.
NONCASH COMPENSATION EXPENSE. In 1999, we recorded a noncash compensation
charge related to the issuance of stock options in 1999. We recorded deferred
compensation in the amount of $1.2 million in 1999. This deferred compensation
charge is being amortized to operations over the vesting period of the options.
Total noncash compensation expense in 1999 was approximately $287,000.
Amortization of this deferred compensation expense will be $320,000 in 2000,
$305,000 in 2001, $201,000 in 2002 and $130,000 in 2003.
OTHER INCOME, NET. Other income, net consists primarily of interest income
on our cash balances in 1999. Other income, net was $144,000 in 1999. We did not
have cash balances available for investment purposes in 1998.
INCOME TAXES. We have not generated taxable income during 1998 or 1999 and
therefore, we have not recorded a provision for income taxes. At December 31,
1999, we had a tax net operating loss carryforward of approximately
$1.5 million, which we may use to offset future taxable income. Due to the
uncertainty surrounding our prospective use of the tax benefit, we have
established a full valuation allowance against the income tax benefit of such
carryforwards.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the summary of our unaudited quarterly
operating results for each of the eight quarters in the period ended
December 31, 1999 and the percentage of our revenues represented by each item in
the respective quarters. This data has been derived from our unaudited interim
financial statements which, in our opinion, have been prepared on substantially
the same basis as the audited financial statements contained elsewhere in the
prospectus and include all recurring adjustments necessary for a fair
presentation of the financial information for the periods presented. You should
read these unaudited quarterly results in conjunction with our audited financial
statements and notes thereto included elsewhere in the prospectus. The operating
results for any quarter are not necessarily indicative of the results that may
be expected for a full year or in any future periods.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
STATEMENT OF OPERATIONS DATA: 1998 1998 1998 1998 1999 1999 1999 1999
- ----------------------------- --------- --------- ---------- --------- --------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $80 $108 $142 $177 $343 $ 278 $ 473 $ 791
Cost of services.............. 40 73 101 109 188 265 322 511
--- ---- ---- ---- ---- ----- ----- -------
Gross profit.................. 40 35 41 68 155 13 151 280
Operating expenses
Selling, general &
administrative............ 21 55 88 113 140 376 739 1,849
Noncash compensation
expense................... -- -- -- -- -- -- -- 287
--- ---- ---- ---- ---- ----- ----- -------
Operating profit (loss)....... 19 (20) (47) (45) 15 (363) (588) (1,856)
Interest expense.............. -- (3) (1) (1) (2) -- (5) (7)
Other income, net............. -- -- -- -- 1 1 13 129
--- ---- ---- ---- ---- ----- ----- -------
Net income (loss)............. $19 $(23) $(48) $(46) $ 14 $(362) $(580) $(1,734)
=== ==== ==== ==== ==== ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
AS A PERCENTAGE OF REVENUES: 1998 1998 1998 1998 1999 1999 1999 1999
- ---------------------------- --------- --------- ---------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of services.............. 50.6 67.6 71.0 61.3 54.7 95.7 68.0 64.6
----- ----- ----- ----- ----- ------ ------ ------
Gross profit.................. 49.4 32.4 29.0 38.7 45.3 4.3 32.0 35.4
Operating expenses
Selling, general &
administrative............ 26.0 50.7 62.2 64.1 40.9 135.3 156.1 233.6
Noncash compensation
expense................... -- -- -- -- -- -- -- 36.4
----- ----- ----- ----- ----- ------ ------ ------
Operating profit (loss)....... 23.4 (18.3) (33.2) (25.4) 4.4 (131.0) (124.1) (234.6)
Interest expense.............. (0.2) (2.3) (1.0) (0.7) (0.6) -- (1.0) (0.9)
Other income, net............. -- -- -- -- 0.2 0.6 2.5 16.3
----- ----- ----- ----- ----- ------ ------ ------
Net income (loss)............. 23.2 % (20.6)% (34.2)% (26.1)% 4.0 % (130.4)% (122.6)% (219.2)%
===== ===== ===== ===== ===== ====== ====== ======
</TABLE>
Quarterly revenues have increased in seven of the last eight quarters as a
result of increased community management service engagements. In the quarter
ended March 1999, we completed certain non-recurring community management
services that resulted in a revenue decrease in the second quarter of 1999 from
the level of revenues recognized in the first quarter of 1999. We expect
revenues to fluctuate from quarter to quarter and depend on the number and size
of community management engagements we perform and complete in any given
quarter. Factors that might cause fluctuations from
21
<PAGE>
quarter to quarter include the number, timing, scope and contractual terms of
client projects, delays incurred in the performance of such projects, accuracy
of estimates of resources and time required to complete ongoing projects, and
general economic conditions. Should these factors occur, a decrease from quarter
to quarter revenues may adversely impact the results of operation from that of
the prior quarter.
Cost of services has increased in each of the last eight quarters. These
increases have been a result of increased personnel and operating costs. The
decrease in gross margin in the second quarter of each of 1998 and 1999 compared
to the previous quarter is a result of increased personnel added in anticipation
of an increased number of community management engagements prior to the
beginning of the revenue producing activities. We anticipate continuing to add
management service personnel prior to the beginning of the revenue producing
activities. This may have an adverse impact on the comparison of quarter to
quarter gross margin and may cause gross margin to decrease from that of the
prior quarter, as personnel are added in anticipation of an increase in the
number and size of community management engagements.
Selling, general and administrative operating expenses have increased from
the prior quarter in each of the last eight fiscal quarters. These increases
reflect continued investment in infrastructure, personnel and selling and
marketing activities directed at revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through founder
loan financing and the private placement of preferred equity securities, through
which we have raised aggregate proceeds of approximately $33.8 million through
March 31, 2000. We raised $624,000 in a Series A preferred stock financing in
February 1999. We used these proceeds primarily to pay operating expenses. We
raised $12.8 million in a Series B preferred stock private financing in
September 1999 from new and existing stockholders. These proceeds were used to
provide working capital and to fund operations. In March and April 2000, we
raised $20.4 million in a Series C preferred stock private financing from new
and existing stockholders. These proceeds will also be used for working capital
and operating purposes.
As of December 31, 1999, we had approximately $10.6 million of cash and cash
equivalents. Net cash used in operating activities was $68,000 in 1998 and
$2.2 million in 1999. Cash used in operating activities in 1998 was primarily
the result of funding operations and an increase in accounts receivable which
were partially offset by increases in accounts payable and accrued expenses.
Cash used in operating activities in 1999 was primarily the result of funding
operations and increases in accounts receivable and prepaid expenses, which were
partially offset by noncash compensation charges related to the issuance of
stock options and increases in accounts payable and accrued expenses.
Cash used in investing activities was related to purchases of property and
equipment for the years ended 1998 and 1999. Net cash provided by financing
activities was $69,000 in 1998 related to loans from our founder, used to
finance operations and $13.1 million in 1999, resulting from the proceeds of our
Series A preferred stock and Series B preferred stock financings.
In 1999, we obtained a working capital line of credit from a financial
institution in the amount of $200,000 secured by our accounts receivable
balances. This line of credit is renewable annually and expires on June 30,
2000. Balances borrowed against this line bear interest at the prime rate of
interest plus one percent. At March 31, 2000, we had no amounts outstanding
under this available facility. In February 2000, we obtained an equipment line
of credit from another financial institution in the amount of $500,000 secured
by the leased equipment and cash balances for 50% of the equipment value. This
facility allows for various types of equipment leases and the lease rates are
set at the time the equipment is leased. At March 31, 2000, we had $143,000
outstanding under this facility and the effective rate of interest on these
borrowings is 11.5%.
22
<PAGE>
We have entered into a long-term lease commitment for office space in
March 2000, with annual minimum lease commitments of $1.2 million to
$1.3 million. In addition, we have entered into additional obligations to
purchase approximately $2.0 million dollars of furniture, network and
communications equipment and leasehold improvements. We anticipate that we will
continue to incur significant capital expenditures to provide for the
infrastructure needed to pursue stated business plan objectives. We also
anticipate that we will continue to experience significant growth in operating
expenses and that our operating expenses will be a material use of our cash
resources. We believe that the net proceeds of this offering, together with
existing cash, cash equivalents and available credit facilities, will be
sufficient to meet anticipated cash needs for working capital, selling, general
and administrative expenses and capital expenditures for at least the next
twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In December, 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financing Statements." SAB No. 101 provides specific
guidance on revenue recognition. We recognize revenues based upon the provisions
of SAB No. 101.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our revenues from inception to date have been made to U.S. customers and, as
a result, we have not had any exposure to factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. However,
in future periods, we expect to sell in foreign markets. As our revenues are
generated in U.S. dollars, a strengthening of the U.S. dollar could make our
products less competitive in foreign markets. At December 31, 1999, we did not
hold any short or long-term investments and, therefore, did not have any market
risk exposure related to changes in interest rates. Therefore, no quantitative
tabular disclosures are required. At December 31, 1999, our cash and cash
equivalents consisted primarily of money market funds held by large institutions
in the U.S.
23
<PAGE>
BUSINESS
OVERVIEW
We are a management service provider, or MSP, that enables successful
eBusiness strategies by offering an integrated online community management
solution. Online communities are groups of businesses, customers or employees
with common interests that interact via the Internet to share business
practices, provide feedback and build relationships. We receive recurring fees
to develop, manage and host successful online business communities using our
community management expertise and proprietary service delivery platform, the
Community Management System, or CMS. Our full-service approach is designed to
enable eBusinesses to strengthen relationships with their business customers,
build loyalty, reduce business customer acquisition costs and create new revenue
opportunities. We provide our services primarily to Global 1000 and leading
Internet companies. Our clients include Ace Hardware, Ask Jeeves, AT&T
WorldNet-Registered Trademark- Service, Columbia TriStar Interactive, Kodak,
mySAP, NBC Internet, Reuters, SciQuest.com and Staples.com.
We believe we are the only MSP to offer the full range of services needed to
completely manage our clients' online community needs. We use our proprietary
CMS methodology to provide our clients with a completely outsourced,
comprehensive community solution. Our CMS solution is designed to provide our
clients with the expertise, innovation capability, scalable delivery platform
and speed of execution required for successful communities. We have successfully
applied our CMS methodology across business-to-business, business-to-consumer
and employee-to-employee markets.
We expand our market opportunities through our strategic channel
relationships with a number of leading Internet professional services firms and
technology providers, including Breakaway Solutions, Cisco Systems, Diamond
Technology Partners Incorporated and Kana Communications. We believe these
relationships provide us with many benefits, including cross-marketing and sales
opportunities and access to new markets, innovative technology and additional
clients.
INDUSTRY BACKGROUND
THE GROWTH OF THE INTERNET
Businesses today are using the Internet to create revenue opportunities by
enhancing their interactions with new and existing business customers and
consumers. Businesses are also using the Internet to increase efficiency in
their operations through improved communications, both internally and with
suppliers and other business partners. This emerging business use of the
Internet encompasses business-to-business, business-to-consumer and
employee-to-employee communications and transactions. The projected growth of
these markets over the next five years is dramatic, particularly in the
business-to-business market. The Gartner Group, an independent research firm,
projects that the volume of non-financial goods and services sold through
business-to-business eCommerce will grow from $145.0 billion in 1999 to $7.3
trillion worldwide by 2004.
To capitalize fully on the new opportunities presented by the Internet,
businesses demand both eBusiness solution DEVELOPMENT, which includes strategy,
design and implementation, and eBusiness solution MANAGEMENT, which includes
ongoing active supervision, innovation, strategic use of technology and hosting
of applications. International Data Corporation, or IDC, an independent research
firm, defines Internet services as the consulting, design, systems integration,
support, management and outsourcing services associated with the development,
deployment and management of Internet sites. IDC expects the worldwide market
for these services to grow at a five year compounded annual growth rate of 59%
from $7.8 billion in 1998 to $78.5 billion in 2003.
24
<PAGE>
ONGOING CHALLENGES FOR MANAGING EBUSINESSES
Many large Internet professional services organizations, or eIntegrators,
currently provide development solutions to build eBusiness initiatives
worldwide. However, enterprises continue to face significant challenges in the
ongoing management of their Internet solutions. These challenges include:
- the need to efficiently acquire and retain business customers and
consumers in an era of heightened competition;
- the need to develop comprehensive expertise in managing all phases of an
eBusiness to differentiate their Internet solution;
- the need to scale management capabilities and expertise as the business
grows;
- the need to build strong, collaborative relationships with their most
valuable business customers and consumers--those that drive the majority
of volume and profitability;
- the need to continuously identify, assess and quickly implement new and
rapidly changing solutions; and
- the need to maintain significant technological infrastructure to support
eBusiness applications 24 hours a day, seven days a week.
OUR OPPORTUNITY
We believe a solution that uniquely addresses these ongoing challenges is a
professionally managed online community. Online communities promote
member-to-member interaction of the most valuable business customers, which
increases loyalty and retention, drives insight into member preferences, lowers
operating and customer acquisition costs and builds lasting relationships. A
professionally managed online community solution adapts quickly to member needs,
is scalable and quickly migrates to innovative technologies.
eIntegrators provide services to assist businesses in using information
technology. Their service offerings focus primarily on developing eBusiness
solutions, including the strategy, design and implementation of Internet
solutions. These service providers generally operate by deploying large numbers
of personnel to the client's site for a project-based development engagement. We
believe this approach does not address the need for ongoing community management
services.
Application service providers, or ASPs, partially address ongoing eBusiness
challenges by providing technology infrastructure and hosting services. However,
they do not provide ongoing management services. We believe their
technology-centric approach does not fully meet the ongoing challenges of
managing an eBusiness.
We maintain that neither eIntegrators nor ASPs have the requisite focus and
expertise to address the complex issues surrounding online community management.
The consequences for companies that fail to find solutions to these ongoing
management challenges can be severe and include loss of valuable business
customers and a deterioration of their competitive position. As a result of this
unmet market need, we believe a significant opportunity exists for an MSP that
can offer substantial expertise in the ongoing management of online community
solutions.
25
<PAGE>
OUR SOLUTION
We believe we are the only MSP to offer the full range of services needed to
completely manage all of our clients' online community needs. Our solution has
the following key elements:
INTEGRATED FULL-SERVICE APPROACH
We use our proprietary CMS methodology to provide a completely outsourced,
comprehensive community solution for our clients. The CMS includes five key
capabilities:
<TABLE>
<CAPTION>
Key Capability Description
- -------------- -----------
<S> <C>
Strategy Design and develop integrated community initiatives
Management Deliver a comprehensive approach to measure, analyze
and provide feedback on community participation
Research Conduct ongoing analysis of online community
evolution, metrics and best practices in a rapidly
changing technical market
Service Innovation Continually identify, develop and implement new
community service offerings
Application Hosting Rapidly implement a hosted community solution
</TABLE>
SIGNIFICANT COMMUNITY MANAGEMENT EXPERTISE
We strive to continue to provide our clients with the most current online
community management methodologies and technologies through our internal
knowledge-sharing process. Through our ongoing deployment of a significant
number of online community management programs, we have developed extensive
community knowledge that we disseminate across multiple industries and clients.
Our expertise in community services is further strengthened by our significant
investment in researching and defining the latest community management
techniques.
VALUE DRIVEN RESULTS
We create quantifiable business value for our clients through active
community management. For each of our ongoing engagements, we generate and
analyze metrics that assess performance on several dimensions including return
on investment, customer insight and community effectiveness. We provide ongoing
reporting of this data on a weekly, monthly and quarterly basis to our clients.
SPEED OF EXECUTION
Time to market is a critical factor contributing to the success of an
eBusiness initiative. Through our concentrated focus on online community
management, proprietary processes and dedicated resources, we believe that our
approach rapidly delivers comprehensive management solutions to clients. Our
research and innovation capabilities also enable us to continuously improve
community solutions once they have been implemented.
SCALABLE SOLUTIONS
Scalability is important to our clients because they can experience a
significant and rapid increase in community activity as they develop and expand
their community initiatives. Our internal management practices are designed to
develop our service engagements as the scope of our client's community needs
expands. The architecture of our solutions allows us to implement new programs
and capabilities as our clients' communities grow.
26
<PAGE>
OUR STRATEGY
Our objective is to be the leading global MSP of online community management
solutions. We intend to pursue this objective in the following ways:
FURTHER PENETRATE AN UNDERSERVED MARKET
We believe the market for management solutions is underserved and is
expanding rapidly. We believe neither eIntegrators nor ASPs effectively address
this market. We focus on this market as an MSP of community management and
strategy solutions. To grow our new client base, we plan to continue to
aggressively expand both our sales force and our strategic alliance network.
EXPAND RELATIONSHIPS WITH CURRENT CLIENTS
We intend to grow our business by pursuing additional opportunities with our
existing clients. By continuing to focus on providing high quality client
service, we intend to further establish strong long-term relationships. We plan
to enhance our service offering by including additional community building,
customer insight and data analysis applications while cross-selling our service
expertise to additional divisions within our clients' organizations. By
providing additional services to our existing client base, we intend to
capitalize on the rapidly growing demand for community management services.
STRENGTHEN AND EXPAND STRATEGIC RELATIONSHIPS
We currently maintain strategic alliances with companies such as Breakaway
Solutions, Cisco Systems, Diamond Technology Partners Incorporated and Kana
Communications. Benefits from these alliances can include new sales leads,
co-marketing and co-branding opportunities and preferred pricing discounts on
training, product support and technology developed by the companies with which
we have alliances. We intend to expand our relationships with these and other
companies to create increased visibility and sales opportunities. We have
aggressively grown our business development organization to formulate a joint
business plan with each partner, outlining marketing efforts, education and
training programs, as well as lead sharing processes.
ACTIVELY BUILD THE PARTICIPATE.COM BRAND WITHIN OUR TARGET MARKETS
To support our direct selling efforts and reach our target market
effectively, we believe it is important to build awareness of the
Participate.com brand. To build our brand, we intend to expand our targeted
corporate marketing efforts, including direct mail and seminars, with the
specific objective of targeting senior executives of large and growing
enterprises. Our goal is to create international recognition of Participate.com
as the leading MSP of community management solutions. We believe that our
success in expanding awareness of our brand will enhance our already visible
presence in the marketplace with potential strategic alliances and further
improve our recruiting efforts.
CONTINUED DEVELOPMENT OF INTELLECTUAL CAPITAL AND PROPRIETARY METHODOLOGIES
We intend to continue to expand our understanding of community management
dynamics and best practices to provide effective online community management
services tailored to the specific needs of our clients. We are able to derive
valuable knowledge from our client engagements to improve the performance of the
communities we manage. We have implemented proprietary processes to capture best
practices and disseminate them across our organization so that all departments
are continually improving their level of service to our clients. We continue to
publish original research reflecting the depth of our knowledge.
27
<PAGE>
ATTRACT AND RETAIN HIGH QUALITY PROFESSIONALS
As an MSP, we believe that attracting, developing and retaining outstanding
professional talent is essential to our growth. Due to our aggressive recruiting
and development goals, we will continue to devote significant resources toward
providing challenging career paths for all of our employees. Our goal is to
create an environment that nurtures and rewards overwhelming client service,
respect for every individual, innovation and teamwork.
OUR SERVICES AND METHODOLOGY
We use our CMS methodology to deliver our services and leverage our
proprietary processes and technology to enable clients to improve their
eBusiness initiatives. This approach is designed to provide our clients with the
expertise, innovation capability, scalable delivery platform and speed of
execution required to succeed on an ongoing basis. We have successfully applied
our CMS methodology across business-to-business, business-to-consumer and
employee-to-employee market segments. Our CMS methodology uses five distinct
service processes:
[Three concentric circles. The outer circle contains the words "Create,"
"Implement," "Manage," "Analyze," and "Optimize." The middle circle contains the
words "Community Strategy," "Community Management," "Community Research,"
"Community Service Innovation," "Community Hosting." The center circle contains
the words "Client Value."]
COMMUNITY STRATEGY SERVICES
We provide and deliver a detailed, strategic process for building and
maintaining a successful community for our clients. This plan, the Community
Roadmap, includes the following components:
- UNDERSTAND KEY ELEMENTS OF OUR CLIENT'S BUSINESS. The areas of focus
include business strategy and objectives, community member segmentation
and competitive analysis.
- DELIVER A COMPREHENSIVE RECOMMENDATION FOR ALL COMMUNITY TYPES, INCLUDING
BUSINESS-TO-BUSINESS, BUSINESS-TO-CONSUMER AND EMPLOYEE-TO-EMPLOYEE. The
Community Roadmap deliverable combines the analysis of our clients'
business environment with our expertise in order to define the necessary
community elements including: program definitions, technology
requirements, project timeline, metrics and management tasks.
COMMUNITY MANAGEMENT SERVICES
Within our Community Management Center, or CMC, full-time, trained
professionals actively manage our clients' communities using our proprietary
technology and processes. Through our CMC services, we provide rigorous analysis
of community metrics and continually implement innovative programs that maintain
an active community and refine the community strategy in accordance with our
clients' needs. Our CMC services include:
- ACTIVE LISTENING. Our internal processes allow us to aggregate and analyze
the valuable qualitative information generated by community interaction.
- MEASUREMENT AND REPORTING. We capture and analyze the quantitative data
from community interaction to uncover emerging trends and benchmark the
data against proprietary community metrics. We review our findings with
client management and recommend new program initiatives.
- CORE MANAGEMENT. We implement multiple community initiatives including
outreach marketing to new and potential members, event promotion and
execution, management of member-generated content and support of
member-to-member interaction. We use the information we derive from active
listening and data measurement to continually improve the community
solutions.
28
<PAGE>
COMMUNITY RESEARCH
Our Community Research Group, or CRG, conducts original research to
discover, define and introduce new community techniques and processes. The
findings are integrated into our services and business practices to ensure that
we are continually providing value for our clients. The CRG publishes white
papers that advance our understanding of the most effective community management
practices. To date we have published the following research:
- AFTER IMPLEMENTATION: HOW OUTSOURCED MANAGEMENT SERVICES ARE REMAKING
E-BUSINESS
- BUSINESS COMMUNITIES: COMMUNICATIONS, COLLABORATION AND COMMERCE IN THE
NEW ECONOMY
- HYPERAFFILIATION: CUSTOMER LOYALTY IN THE INTERNET AGE
COMMUNITY SERVICE INNOVATION GROUP
We have a team comprised of senior professionals that develops and deploys
intellectual capital throughout the organization and across client engagements.
The Service Innovation Group, or SIG, monitors all of our client projects as
well as industry trends on an ongoing basis to identify best practices and
innovative solutions that address our client needs. This team collects and
refines this knowledge, then disseminates it to our clients in the form of new
service offerings.
29
<PAGE>
COMMUNITY HOSTING SERVICES
We offer application hosting services for the ongoing management of our
clients' eBusiness community solutions. We have established relationships with
leading technology and systems integration companies that enable us to provide a
complete hosted solution quickly and cost effectively. Our hosting services
include monitoring and support 24 hours a day, seven days a week.
CLIENTS
Our diverse client base includes Global 1000 and leading Internet companies.
Our clients include:
accenthealth.com
Ace Hardware Corporation
Ask Jeeves
AT&T WorldNet-Registered Trademark- Service
Career Path
Columbia TriStar Interactive
Consumers Car Club
EXPAT Exchange
Freedom Nation
Kodak
MachineWeb.com
Multex Investor Network
MuniGroup.com
mySAP
NBC Internet
net32.com
NuvoMedia
OurHouse.com
Parlo
Quote.com
RealHome.com
Reuters
Salesguy.com
SalesLogix
SciQuest.com
SideTalk Corporation
Staples.com
TAP Pharmaceuticals
Wrenchead.com
CLIENT CASE STUDY
The following sets forth a case study that we believe reflects the range of
services that we provide:
ACE HARDWARE CORPORATION
BUSINESS OPPORTUNITY: Ace has a network of 300 commercial and
industrial dealers that sell a wide range of building supplies to
municipalities and contractors throughout the United States. Ace
identified a need to create an efficient and effective way to facilitate
communication with and among its commercial and industrial dealers. Ace
expected this interaction to increase revenue by enabling the sharing of
collective professional experiences and sales leads.
PARTICIPATE.COM SOLUTION: Working with the Ace management team, we
created a comprehensive online community solution that included expert
seminars, newsletters, lead-sharing procedures, customizable marketing
materials and message boards. After the community strategy engagement
was completed, Ace outsourced the ongoing management of its online
community to Participate.com. Through the CMC, we continue to provide
active listening, measurement and reporting and core management services
to drive interaction among Ace dealers.
RESULTS: Within six months, Ace reported a greater than 500% return on
investment, driven primarily by revenue growth. Dealers also report
being more responsive to customers as their community inquiries are
answered more quickly and thoroughly. Currently, more than 30% of Ace's
commercial and industrial dealers visit the site weekly; a number that
far exceeded Ace's expectations.
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STRATEGIC RELATIONSHIPS
Our goal is to develop and maintain strategic alliances with a number of
companies that provide complementary marketing or technology services. These
enterprises have significant eBusiness capabilities and are in an advantageous
position to recommend and/or subcontract our community management services. Our
relationships consist of both channel and technology partners.
CHANNEL PARTNERS
Our channel partners bundle our community management services with their
eBusiness solutions. Our relationships with our channel partners typically
include co-branding, co-sales and lead sharing. Our significant channel
alliances include Breakaway Solutions, Cisco Systems, Diamond Technology
Partners Incorporated and Kana Communications.
TECHNOLOGY PARTNERS
We maintain relationships with a number of technology leaders and industry
specialists. Through these alliances, we incorporate their technologies into the
solutions that we provide to our clients. Our relationships with technology
providers enable us to employ leading edge technology solutions. Our technology
partners include BuzzCompany, Cisco Systems, Kana Communications, Prospero, QUIQ
and webfair AG.
SALES AND MARKETING
We sell our services through multiple avenues, including our internal sales
force, channel partners and technology partners. We also generate business by
providing additional services to our existing clients and by expanding our
existing services as our clients' businesses grow. We have recently expanded our
sales team to meet the needs of a rapidly growing national organization. We have
also expanded our sales force geographically throughout the United States and
intend to continue to add regional sales teams domestically and internationally.
We supplement our sales effort with marketing activities designed to build
our brand name and promote lead generation. We employ traditional marketing
programs, including magazine and online advertising, public relations efforts
and targeted mailings. We also participate in trade shows and industry
gatherings. Additionally, white papers and research reports on topics that are
of interest to our potential clients are published on a regular basis.
COMPETITION
Although the market for eBusiness management solutions is relatively new, it
is already intensely competitive and we expect competition to intensify in the
future. Our current and potential competition may come from several sources:
- in-house organizations that perform online community management functions;
- similar services on the Internet for customized communities and many small
companies that provide online market research and event services;
- eIntegrators who may begin to provide ongoing management services;
- ASPs who market community technology and may begin to provide ongoing
management services; and
- similar solutions by non-online methods, such as customer relations firms,
market research firms and similar entities.
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Our industry has low barriers to entry and we expect the number of
competitors to expand in the future. In addition to Internet based competitors,
traditional business have recently made significant acquisitions of, or
investments in, Internet companies. We believe that the principal competitive
factors in our market include:
- the ability to create a scalable delivery platform;
- community management expertise and innovation;
- quality of services and deliverables;
- speed of development and implementation; and
- the ability to attract, train and retain professionals.
OUR PEOPLE AND CULTURE
As of March 31, 2000, we had 126 full-time employees. We believe that our
relationship with our employees is good. None of our employees is currently
represented by a labor union.
Our corporate culture is critically important to attracting and retaining
professionals. We believe we have developed and seek to maintain a culture that
promotes professional growth and retention, rapid learning, creativity,
innovation, and sharing of knowledge. We believe that this culture allows us to
maintain a consistent quality of services and the ability to quickly anticipate
and adapt to emerging technologies and business needs.
INTELLECTUAL PROPERTY RIGHTS
We have developed proprietary methodologies, tools, processes and software
in connection with delivering our services. We rely on a combination of trade
secret, nondisclosure and other contractual agreements, and copyright and
trademark laws, to protect our proprietary rights. Trade secret and copyright
laws afford us only limited protection. We typically enter into confidentiality
and non-disclosure agreements with our employees and generally require that our
clients enter into similar agreements. These agreements are intended to limit
access to and distribution of our proprietary information. In addition, we have
entered into non-competition agreements with certain of our key employees.
We cannot be certain that the steps we have taken in this regard will be
adequate to deter misappropriation of our proprietary information or that we
will be able to detect unauthorized use and take appropriate steps to enforce
our intellectual property rights. In addition, an adverse change in the laws
protecting intellectual property could harm our business. We sometimes enter
into agreements with our clients that provide for sole ownership by our clients
of our developments with no or limited rights retained by us to utilize these
developments in other client engagements.
UNITED STATES AND FOREIGN GOVERNMENT REGULATION
Congress has recently passed legislation that regulates certain aspects of
the Internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities, and
jurisdiction. In addition, federal, state, local and foreign governmental
organizations also are considering, and may consider in the future, other
legislative and regulatory proposals that would regulate the Internet. Areas of
potential regulation include taxation, libel, pricing, quality of products and
services, and intellectual property ownership.
The European Union also has recently enacted several directives relating to
the Internet. To safeguard against the spread of certain illegal or socially
disfavored materials on the Internet, the European Commission has drafted the
"Action Plan on Promoting the Safe Use of the Internet." Other
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European Commission directives address the regulation of privacy, eBusiness,
security, commercial piracy, consumer protection and taxation of transactions
completed over the Internet. We do not know how courts will interpret existing
and new laws. New laws or the application of existing laws may affect our
business. In addition, our clients being subject to such legislation may
indirectly affect our business. Increased regulation of the Internet may
decrease the growth in the use of the Internet, decreasing the demand for our
services, increasing our cost of doing business, or otherwise having a material
adverse effect on our business, results of operations, and financial results.
FACILITIES
Our headquarters and principal facilities are located in leased facilities
in Chicago, Illinois consisting of approximately 9,000 square feet. The leases
for these facilities expire on various dates between May 31, 2000 and March 1,
2004. We have entered into a new lease for approximately 40,000 square feet of
space in a building in downtown Chicago, which expires on April 15, 2010. This
new facility will serve as our worldwide headquarters. In addition, we have a
commitment to lease 2,500 square feet of office space in Kansas City, Kansas
through May 31, 2003.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings. We are
involved from time-to-time in routine legal proceedings incidental to the
conduct of our business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each of our
executive officers and directors, including their ages as of April 10, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- -------- ------------------------------------------------------------
<S> <C> <C>
Alan K. Warms.................. 33 Chairman of the Board, President and Chief Executive Officer
Stephen J. Hawrysz............. 41 Chief Financial Officer
David A. Greer................. 34 Vice President of Operations
Robert A. Sands................ 41 Vice President of Worldwide Sales
Todd A. Duthie................. 33 Vice President of Consulting
Joseph P. Cothrel.............. 42 Vice President of Research
Kenneth A. Metcalf............. 31 Chief Information Officer
Stephen C. Bowsher............. 31 Director
James J. Collis................ 37 Director
Mark J. DeNino................. 46 Director
Guy Hoffman.................... 37 Director
</TABLE>
ALAN K. WARMS founded our company in November 1997 and serves as our
Chairman of the Board, President and Chief Executive Officer. From February 1997
to October 1997, Mr. Warms served as the Vice President of Strategic Business
Development for eShare Technologies, a provider of community technologies. From
February 1996 to January 1997, Mr. Warms served as Vice President of Business
Development for FreeLoader, an Internet company. From 1992 to January 1996,
Mr. Warms worked for The Boston Consulting Group. Mr. Warms received a B.S.
degree in electrical engineering from the Rensselaer Polytechnic Institute and
an M.M. degree from the J.L. Kellogg School of Management at Northwestern
University.
STEPHEN J. HAWRYSZ has served as our Chief Financial Officer since
November 1999. From August 1990 to May 1999, Mr. Hawrysz was Vice President,
Chief Financial Officer, Secretary and Treasurer for Westell Technologies, a
public global telecommunications holding company. A certified public accountant,
Mr. Hawrysz served in the audit division of Arthur Andersen LLP, a public
accounting firm, from 1980 to 1989. Mr. Hawrysz received a B.A. in business
administration from the University of Illinois, Chicago.
DAVID A. GREER has served as our Vice President of Operations since October
1998. From August 1995 to October 1998, Mr. Greer worked for The Boston
Consulting Group, managing a variety of corporate strategy projects for
Fortune 1000 companies. From 1988 to 1993, Mr. Greer served as a U.S. naval
officer. Mr. Greer received a B.S. in mechanical engineering from the U.S. Naval
Academy and an M.M. from the J.L. Kellogg School of Management at Northwestern
University.
ROBERT A. SANDS has served as our Vice President of Worldwide Sales since
January 2000. From December 1996 to January 2000, Mr. Sands served as Midwest
Sales Director for Cisco Systems. From May 1995 to December 1996, Mr. Sands
served as a sales director for Vanstar, a systems integrator. Mr. Sands received
a B.S. in economics from Villanova University.
TODD A. DUTHIE has served as our Vice President of Consulting since February
1999. From August 1995 to February 1999, Mr. Duthie worked for Deloitte
Consulting where he managed client assignments accross a variety of industries
including retail, insurance and pharmaceuticals. From 1990 to 1993, Mr. Duthie
was a consultant for KPMG Peat Marwick. Mr. Duthie received a B.A. from
Princeton University and an M.M. from the J.L. Kellogg School of Management at
Northwestern University.
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<PAGE>
JOSEPH P. COTHREL has served as our Vice President of Research since August
1999. From May 1996 to August 1999, Mr. Cothrel served as a research director
for Arthur Andersen's Next Generation Research Group. From January 1994 to May
1996, Mr. Cothrel served as a senior researcher in Arthur Andersen's Global Best
Practices Group. Mr. Cothrel received a B.A. from University of Toledo and an
M.A. from the University of Michigan.
KENNETH A. METCALF has served as our Chief Information Officer since March
2000. From April 1997 to December 1999, Mr. Metcalf served as the Chief
Information Officer at TMP Worldwide's executive search and selection divisions.
From December 1994 to April 1997, Mr. Metcalf served as a consultant for Arthur
Andersen. Mr. Metcalf earned a B.S. from Florida State University.
STEPHEN C. BOWSHER has served on our board of directors since September
1999. Since January 1999, Mr. Bowsher has been a venture partner at InterWest
Partners. From August 1997 to January 1999, Mr. Bowsher was a lead product
manager for the E*Trade Group, an Internet securities trading firm. From April
1996 to June 1997, Mr. Bowsher served as Director of Business Development at
Freeloader, an Internet company. From September 1994 to March 1996, Mr. Bowsher
served as Business Development Manager for Catapult Entertainment, an online
game network company. Mr. Bowsher has a B.A. from Harvard University and an
M.B.A. from Stanford University.
JAMES J. COLLIS has served as a director since September 1999. Since April
2000, Mr. Collis has served as an Executive Vice President of Seaport
Capital, LLC, a private equity investment firm. From February 1997 to March
2000, Mr. Collis served as an Executive Vice President of CEA Management, LLC, a
private equity investment firm. From June 1991 to February 1997, Mr. Collis
worked for Chase Manhattan Bank and held the positions of Associate, Vice
President and Principal. Mr. Collis also serves as a director for Acme
Communications and JATO Communications. Mr. Collis earned a B.S. in electrical
engineering from Rensselaer Polytechnic Institute and an M.B.A. from Columbia
Business School.
MARK J. DENINO has served on our board of directors since September 1999.
Mr. DeNino has served as a managing director of TL Ventures, a venture capital
firm since 1994. From 1990 to 1994, Mr. DeNino was President of Crossroads
Capital, an investment firm. From 1986 to 1990, Mr. DeNino held various
positions including Head of Investment Banking at Fidelity Bank and was
President of its Venture Capital Small Business Investment Company Group.
Mr. DeNino also serves as a director of Blaze Software, Vuent, Coastal Security
Systems, Cruise411.com, IPNetwork.com, Pac-West Telecom, and Traffic.com.
Mr. DeNino received a B.A. in finance and accounting from Boston College and an
M.B.A. from Harvard Graduate School of Business Administration.
GUY HOFFMAN has served on our board of directors since September 1999. From
March 2000 to present, Mr. Hoffman has been a venture partner in TL Ventures.
From April 1999 to February 2000, Mr. Hoffman was Chairman and Chief Executive
Officer of iSong.com, an Internet destination for musicians. From January 1999
to April 1999, Mr. Hoffman served as an entrepeneur with Austin Ventures, a
venture capital firm. From September 1997 to December 1998, Mr. Hoffman served
as the President and Chief Executive Officer of Deja News, a
business-to-consumer Internet information provider company. From April 1996 to
September 1997, Mr. Hoffman served as Executive Vice President and Chief
Operating Officer of OpenConnect Systems, a provider of Web-based application
integrating legacy systems. From August 1987 to March 1996, Mr. Hoffman served
as Vice President of Worldwide Marketing for Eicon Technology Corporation, an
enterprise data communications company. Mr. Hoffman earned a B.A. from the
University of Michigan.
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<PAGE>
BOARD COMMITTEES
Our board of directors has established an audit committee and a compensation
committee. The functions of the audit committee are to:
- recommend annually to our board of directors the appointment of our
independent public accountants;
- discuss and review in advance the scope and the fees of our annual audit
and review the results thereof with our independent auditors;
- review and approve non-audit services of our independent auditors;
- review compliance with our existing major accounting and financial
reporting policies;
- review the adequacy of major accounting and financial reporting policies;
and
- review our management's procedures and policies relating to the adequacy
of our internal accounting controls and compliance with applicable laws
relating to accounting practices.
The audit committee is to consist solely of directors who are not employed
by us or otherwise retained to provide services to us and who are not
representatives of our significant stockholders upon completion of this
offering, provided that one non-independent director who is not employed by our
company may be appointed to the audit committee under some circumstances.
Mark J. DeNino and James J. Collis are the current members of our audit
committee.
The functions of the compensation committee are to review and approve annual
salaries, bonuses, and grants of stock options under our 1999 Stock Plan and
2000 Stock Plan, as well as to approve the terms and conditions of all employee
benefit plans and any changes to these plans. The compensation committee is to
consist of at least two directors who are not employed by our company or
otherwise retained to provide services to us upon completion of this offering.
Guy Hoffman and Stephen C. Bowsher are the members of our compensation
committee.
BOARD COMPOSITION
Our board of directors currently consists of five directors, but may be
increased to up to nine members. Our certificate of incorporation and bylaws
that become effective upon the completion of this offering provide that our
board of directors will be divided into three classes, Class I, Class II and
Class III, with each class serving staggered three-year terms. The term of the
Class I director, Alan K. Warms, will expire in 2001. The terms of the Class II
directors, Stephen C. Bowsher and Guy Hoffman, will expire in 2002. The terms of
the Class III directors, Mark J. DeNino and James J. Collis, will expire in
2003. Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This staggered
classification of the board of directors may have the effect of delaying or
preventing changes in control or management.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Historically, our board of directors made all compensation decisions,
without the involvement of our compensation committee, which was formed in April
2000. None of the members of our compensation committee was, at any time since
our formation, an officer or employee of our company. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of our
board of directors or compensation committee.
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<PAGE>
DIRECTOR COMPENSATION
We do not currently pay any cash compensation to our directors for their
services as members of the board of directors, although we reimburse them for
certain expenses in connection with attending our board and committee meetings.
Mr. Bowsher received options to purchase an aggregate of 50,000 shares of common
stock at an exercise price per share of $4.00. Seaport Capital, LLC, an entity
with which Mr. Collis is affiliated, received options to purchase an aggregate
of 50,000 shares of common stock at an exercise price of $4.00. Mr. DeNino
received options to purchase an aggregate of 50,000 shares of common stock at an
exercise price per share of $4.00. Mr. Hoffman received options to purchase an
aggregate of 54,500 shares of common stock at a weighted average exercise price
per share of $0.77. These options are subject to a two year vesting schedule. We
do not provide compensation for committee participation or special assignments
of the board of directors.
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed.
Mr. Sands and Mr. Greer are brothers-in-law. Otherwise, there are no family
relationships among any of our directors, officers or key employees.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us during the year
ended December 31, 1999, to our Chief Executive Officer and to our four other
most highly compensated executive officers. This prospectus refers to these
executives as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY $ BONUS $ OPTIONS COMPENSATION
- --------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Alan K. Warms........................................ $130,000 $ -- -- $ --
President and Chief Executive Officer
David A. Greer....................................... $116,667 -- 30,000 --
Vice President Operations
Todd A. Duthie(1).................................... $86,667 -- 86,200 --
Vice President Consulting
Joseph P. Cothrel(2)................................. $42,628 -- 86,000 --
Vice President Research
Stephen J. Hawrysz(3)................................ $20,718 -- 236,750 --
Chief Financial Officer
</TABLE>
- --------------------------
(1) Mr. Duthie began employment with us on February 18, 1999.
(2) Mr. Cothrel began employment with us on August 30, 1999.
(3) Mr. Hawrysz began employment with us on November 15, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
in 1999 to the Named Executive Officers. The values set forth in the last two
columns of the table represent the gain that the executives would realize
assuming that (1) options granted are exercised at the end of their respective
terms and (2) the value of a share of our common stock increases annually by a
rate of 0%, 5% and
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10% during the term of the option. These assumed growth rates are prescribed by
the rules of the Securities and Exchange Commission. By including these values
in this prospectus, we do not intend to forecast the possible appreciation of
our common stock or to establish a present value of these options. The
executives may not necessarily achieve the gain amounts reflected in the table.
There was no public market for our common stock as of December 31, 1999.
Accordingly, the fair market value per share of our common stock on
December 31, 1999 was determined by our board of directors. The board based its
determination on the prices paid for shares of our preferred stock by
institutional investors, which prices were reached through arms length
negotiations. All such options were awarded under our 1999 Stock Plan and
generally vest over four years from the date of grant.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------
NUMBER OF PERCENT OF FAIR
SECURITIES TOTAL OPTIONS EXERCISE OR MARKET VALUE EXPIRATION
UNDERLYING GRANTED BASE PRICE PER SHARE ON DATE DATE
NAME OPTIONS GRANTED IN 1999(1) (PER SHARE) OF GRANT(2) (MM/YY)
- ---- --------------- ------------- ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Alan K. Warms........ -- --% $ -- $ -- --
David A. Greer....... 30,000 2.6 0.25 1.33 11/09
Todd A. Duthie....... 86,200 7.6 0.25 1.33 2/09
Joseph P. Cothrel.... 86,000 7.6 0.25 1.33 8/09
Stephen J. Hawrysz... 236,750 20.8 0.25 1.33 11/09
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM
------------------------------
NAME 0% 5% 10%
- ---- -------- -------- --------
<S> <C> <C> <C>
Alan K. Warms........ $ -- $ -- $ --
David A. Greer....... 32,400 57,493 95,990
Todd A. Duthie....... 93,096 165,196 275,812
Joseph P. Cothrel.... 92,880 164,813 275,172
Stephen J. Hawrysz... 255,690 453,715 757,524
</TABLE>
- --------------------------
(1) Based on an aggregate of 1,136,608 options granted by us in the year ended
December 31, 1999 to our employees, directors and consultants, including the
Named Executive Officers.
(2) Stock options granted during 1999 were granted with an exercise price equal
to the then fair value of the underlying common stock on the grant date as
determined by the board of directors. For financial reporting purposes, the
common stock options were deemed to have an exercise price below the fair
market value based upon accounting guidelines related to equity issued
within a year of an initial public offering.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information for each of the Named Executive
Officers concerning option exercises for the year ended December 31, 1999, and
exercisable and unexercisable options held at December 31, 1999.
The "Value of Unexercised In-the-Money Options at December 31, 1999" is
based on a value of $1.33 per share of our common stock, which is based upon the
offering price of the Series B preferred stock, which was sold on September 17,
1999, less the per share exercise price, multiplied by the number of shares
issuable upon exercise of the option. All options were granted under our 1999
Stock Plan. None of the Named Executive Officers exercised options in 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alan K. Warms....................................... -- -- $ -- $ --
David A. Greer...................................... -- 30,000 -- 32,400
Todd A. Duthie...................................... -- 86,200 -- 93,096
Joseph P. Cothrel................................... -- 86,000 -- 92,880
Stephen J. Hawrysz.................................. -- 236,750 -- 255,690
</TABLE>
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<PAGE>
EMPLOYEE BENEFIT PLANS
2000 STOCK PLAN
Our board of directors adopted our 2000 Stock Plan in April 2000. A total of
2,000,000 shares of common stock were reserved for issuance under the 2000 Stock
Plan, plus any unissued shares under our 1999 Stock Plan as of the effective
date of this offering and any shares returned to the 1999 Stock Plan. The number
of shares available for issuance increases annually on the first day of each new
year beginning with the year 2001. The increase is equal to the lesser of 5% of
the outstanding shares of common stock on the first day of the year, 2,000,000
shares or an amount as the board may determine. Employees, directors and
consultants may be granted nonstatutory stock options and stock purchase rights,
or SPRs.
PLAN. Our board of directors or a committee of the board will administer the
2000 Stock Plan. The stock plan administrator has the power to determine the
terms of the options or SPRs granted, including the exercise price, the number
of shares subject to each option or SPR, the exercisability of the options and
the form of consideration payable upon exercise.
OPTIONS. The exercise price of all incentive stock options granted under
the 2000 Stock Plan must be at least equal to the fair market value of the
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the 2000 Stock Plan may not exceed 10 years.
If the optionee ceases to be an employee, director or consultant of our
company, the optionee generally must exercise an option granted under the 2000
Stock Plan at the time set forth in the optionee's option agreement. If the
option terminates because of death or disability, the optionee must exercise an
option within 12 months of such termination. In no event may an optionee
exercise an option after the expiration of the option's term.
SPRS. The administrator determines the exercise price of SPRs granted under
the 2000 Stock Plan. Unless the administrator determines otherwise, the
restricted stock purchase agreement entered into, in connection with the
exercise of the SPR, shall grant us a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's service with us for any
reason, including death or disability. The purchase price for shares we
repurchase is the original price paid by the purchaser. The price may be paid by
cancellation of any indebtedness of the purchaser to us. The repurchase option
lapses at a rate that the administrator determines.
OUTSIDE DIRECTOR OPTIONS. The 2000 Stock Plan provides for an initial
automatic grant of an option to purchase 30,000 shares of common stock to a
director who first becomes an outside director after our initial public
offering. The plan defines an outside director as a director who is not an
employee. 50% of the shares subject to this option vest twelve months after the
date of grant and 1/24 of the shares subject to the option vest each month
thereafter.
Each outside director is automatically granted an option to purchase up to
10,000 shares following each annual meeting of our stockholders beginning after
the end of our fiscal year 2000, if immediately after such meeting, he or she
shall continue to serve on the board and has served on the board for at least
the preceding six months. 50% of the shares subject to this option vest twelve
months after the date of grant and 1/24 of the shares subject to the option vest
each month thereafter.
The exercise price of options granted to outside directors is 100% of the
fair market value of our common stock on the date of grant.
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<PAGE>
2000 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 2000 Employee Stock Purchase Plan, or the
Purchase Plan, in April 2000.
A total of 600,000 shares of common stock has been reserved for issuance
under the Purchase Plan. In addition, the Purchase Plan provides for annual
increases in the number of shares available for issuance under the Purchase Plan
on the first day of each fiscal year, beginning in 2001, equal to the lesser of
2% of the outstanding shares of common stock on the first day of the fiscal
year, 700,000 shares or an amount as the board may determine.
The board of directors or a committee appointed by the board administers the
Purchase Plan. The board or its committee has full and exclusive authority to
interpret the terms of the Purchase Plan and determine eligibility.
Employees are eligible to participate if they are customarily employed by
us, or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the Purchase Plan if such an employee:
- immediately after the grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains six month offering periods. The offering periods
generally start on the first trading day on or after September 1 and March 1,
except for the first offering period which will start on the first trading day
on or after the effective date of this offering and will end on the last trading
day on or before August 31, 2002.
The Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's compensation. Compensation
is defined as the participant's base straight time gross earnings and
commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period or end of the
offering period. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us. The
maximum number of shares a participant may purchase during a single offering
period is 25,000 shares
The Purchase Plan will terminate in 2010. However, the board of directors
has the authority to amend or terminate the Purchase Plan at any time, except
that, subject to certain exceptions described in the Purchase Plan, no such
action may adversely affect any outstanding rights to purchase stock under the
Purchase Plan.
1999 STOCK PLAN
Our 1999 Stock Plan was adopted by our board of directors in November 1999
and subsequently approved by consent of a majority of our stockholders. Our 1999
Stock Plan provides for the grant of incentive stock options, nonstatutory stock
options, or stock purchase rights to employees, directors and consultants. A
total of 2,871,100 shares of common stock have been reserved for issuance under
the 1999 Stock Plan.
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Upon completion of this offering, the 1999 Stock Plan will terminate, no
further option grants will be made under the 1999 Stock Plan, and any shares
reserved but not yet issued under the 1999 Stock Plan will be available for
grant under the 2000 Stock Plan.
In the event we are acquired in a merger or asset purchase, each outstanding
option and stock purchase right granted under the 1999 Stock Plan will be
assumed or substituted for by the successor corporation. In the event that the
successor corporation refuses to assume or issue an equivalent option for each
outstanding option, these options and SPRs shall become fully vested and
exercisable.
EMPLOYMENT AGREEMENTS
We do not have employment agreements with any of our Named Executive
Officers except Mr. Greer.
Mr. Greer's salary is $150,000. He may also receive discretionary bonuses
pursuant to any executive bonus program that we offer. Mr. Greer may also
participate in our benefit plans.
We may terminate Mr. Greer's employment with or without cause by delivering
written notice to him. Mr. Greer may terminate his employment with or without
good reason by delivering written notice to us. If Mr. Greer's employment is
terminated by us or if Mr. Greer terminates his employment, he will receive such
compensation as has actually been earned by him prior to the date of
termination. The agreement with Mr. Greer expires on January 1, 2003.
Mr. Greer received an initial grant of 556,650 shares of our common stock
that is subject to a four year vesting schedule. If Mr. Greer's employment with
us terminates for any reason prior to October 19, 2002, Mr. Greer shall forfeit
a portion of his unvested shares. If Mr. Greer's employment is terminated by us
for cause, all of Mr. Greer's shares shall be forfeited. Upon a sale of all or
substantially all of our company's assets or a merger of our company that
results in a change in ownership of a majority of our voting securities,
Mr. Greer's shares will vest in full. As part of his employment agreement,
Mr. Greer also received stock options to purchase 30,000 shares of our common
stock at $0.25 per share. The options are subject to a four year vesting
schedule and are contingent upon Mr. Greer's continued employment with the
company.
Mr. Greer has agreed not to solicit our clients or employees during the term
of his employment with us and for one year thereafter. Mr. Greer has also agreed
not to reveal our confidential or proprietary information during the term of his
employment or at any time thereafter.
INDEMNIFICATION MATTERS
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by us arising out of such person's services as our director or executive
officer, any of our subsidiaries or any other company or enterprise to which the
person provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
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CERTAIN TRANSACTIONS
OUR FORMATION
We were initially formed as Extranet Solutions LLC in October 1997. In
July 1999, we changed our name to Participate.com LLC. In September 1999, we
were incorporated as Participate.com, Inc. In connection with this
incorporation, all of the membership units in Participate.com LLC were exchanged
for common stock and Series A preferred stock of Participate.com, Inc.
PREFERRED STOCK FINANCINGS
In February 1999, we issued to various investors an aggregate of 624,000
Series A redeemable preferred units as well as 1,248,000 common units of
Extranet Solutions LLC. In September 1999, the holders of these equity interests
were issued 1,248,000 shares of common stock and a total of 624,000 shares of
Series A preferred stock in exchange for their equity ownership in
Participate.com LLC. In September 1999, we issued to various investors a total
of 8,701,980 shares of Series B preferred stock at a purchase price of $1.475
per share. In March and April 2000, we issued to various investors a total of
3,784,001 shares of Series C preferred stock at a purchase price of $5.40 per
share. Each share of Series B preferred stock and Series C preferred stock will
convert into common stock prior to the closing of this public offering.
In connection with our issuance of Series B preferred stock, we entered into
an Investor Rights Agreement with several holders of our common stock and our
Series A and B preferred stock. The purchasers of our Series C preferred stock
were added to this agreement in conjunction with our Series C preferred stock
financing. Under this Investor Rights Agreement, as long as it or its affiliates
hold any shares of Series B preferred stock, InterWest Partners VII, L.P., TL
Ventures and CEA Capital Partners are each entitled to nominate one member to
the board of directors. As long as it or its affiliates holds any shares of
Series C preferred stock, Diamond Technology Partners Incorporated is entitled
to nominate a director to the board, provided that this nominee must be
acceptable to our Chief Executive Officer. In addition, Mr. Warms is entitled to
nominate three members to the board of directors. If Mr. Warms dies or is
incapacitated, our common stockholders shall assume this right. Each of the
parties to the Investors Rights Agreement are obligated to vote for these
nominees. These rights to nominate directors will terminate upon the closing of
this offering.
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Listed below are the directors, executive officers and stockholders who
beneficially own 5% or more of any class of our preferred securities who
participated in these financings.
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------
PREFERRED STOCKHOLDER SERIES A SERIES B SERIES C
- --------------------- -------- -------- --------
<S> <C> <C> <C>
HOLDERS OF MORE THAN 5%:
William K. Luby(1)(2)................................... 20.0% -- --
Jon G. Warms(3)......................................... 10.3% -- --
Frank Ingari............................................ 8.0% -- --
Mark Pincus............................................. 6.4% -- --
InterWest Partners(4)................................... -- 39.0% 18.6%
TL Ventures(5).......................................... -- 27.3% 13.0%
CEA Capital Partners(6)................................. -- 27.3% 13.0%
Diamond Technology Partners Incorporated(7)............. -- 39.2%
DIRECTORS:
Alan K. Warms........................................... 4.0% 0.4% --
James J. Collis(8)...................................... 4.0% -- 0.3%
OFFICERS:
David A. Greer.......................................... 3.2% 0.4% 0.5%
Robert A. Sands......................................... 3.2% 0.4% 1.0%
Joseph P. Cothrel....................................... -- -- 0.2%
Todd A. Duthie.......................................... -- -- 0.5%
Stephen J. Hawrysz(9)................................... -- -- 2.2%
</TABLE>
- ------------------------
(1) William K. Luby is the President of Seaport Capital, LLC, an entity formed
to manage CEA Capital Partners. Mr. Luby disclaims beneficial ownership of
the securities held by CEA Capital Partners except for his proportional
interest in the entity.
(2) Includes 100,000 shares of Series A preferred stock owned by ES Two
River L.L.C. Mr. Luby disclaims beneficial ownership of the securities held
by ES Two River L.L.C., except for his proportional interest in the entity.
(3) Jon G. Warms is the father of Alan K. Warms, the founder of the Company.
(4) Includes 3,242,874 shares of Series B preferred stock and 670,691 shares of
Series C preferred stock owned by InterWest Partners VII, LP and 147,126
shares of Series B preferred stock and 32,118 shares of Series C preferred
stock owned by InterWest Investors VII, LP. Stephen C. Bowsher, a member of
our board of directors, is a venture partner of InterWest Partners, an
entity affiliated with InterWest Investors VII, LP and InterWest Partners
VII, LP. Stephen Bowsher disclaims beneficial ownership of the securities
held by InterWest Partners, except for his proportional interest in the
entity.
(5) Includes 2,311,905 shares of Series B preferred stock and 479,300 shares of
Series C preferred stock owned by TL Ventures IV LP and 61,095 shares of
Series B preferred stock and 12,666 shares of Series C preferred stock owned
by TL Ventures IV InterFund LP. Mark J. DeNino, a member of our board of
directors, is a general partner of TL Ventures an entity affiliated with
TL Ventures IV LP and TL Ventures IV Interfund LP. Mr. DeNino disclaims
beneficial ownership of the securities held by TL Ventures, except for his
proportional interest in the entity.
(6) Includes 1,813,684 shares of Series B preferred stock and 376,010 shares of
Series C preferred stock owned by CEA Capital Partners, USA LP and
559,316 shares of Series B preferred stock and 115,956 shares of Series C
preferred stock owned by CEA Capital Partners USA CI, LP.
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<PAGE>
(7) Includes 740,741 shares of Series C preferred owned by Diamond Technology
Partners Incorporated and 740,741 shares of Series C preferred owned by DTP
Ventures, LLC.
(8) James J. Collis is an Executive Vice President of Seaport Capital, LLC, an
entity formed to manage CEA Capital Partners. Mr. Collis disclaims
beneficial ownership of the securities held by CEA Captial Partners except
for his proportional interest in the entity.
(9) Includes 9,260 shares of Series C preferred stock owned by the Hawrysz
Family 1994 Trust. Mr. Hawrysz disclaims any beneficial ownership of the
securities held by the Hawrysz Family 1994 Trust.
OTHER TRANSACTIONS
In 1998 and 1999, Alan K. Warms and Jon G. Warms funded our activities
through advances bearing interest at 9% per annum. In connection with the
issuance of the Series A redeemable preferred units in February, 1999, $89,000
of stockholder advances were converted to Series A redeemable preferred units,
at fair value.
In 1999, James J. Collis and William K. Luby provided consulting services to
our company in connection with developing our business plan. In exchange for
their services, Mr. Collis was granted 86,200 fully vested options and Mr. Luby
was granted 86,200 fully vested options. These options have an exercise price of
$0.25. Mr. Collis and Mr. Luby were reimbursed for the option exercise price and
the associated taxes.
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<PAGE>
PRINCIPAL STOCKHOLDERS
This table sets forth information regarding the beneficial ownership of our
common stock as of April 12, 2000, by the following individuals or groups:
- each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
- each of our executive officers named in the Summary Compensation Table
above;
- each of our directors; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o Participate.com, Inc., 945 West George Street, Third Floor, Chicago,
Illinois 60657-5007. Except as otherwise noted, and subject to applicable
community property laws, to the best of our knowledge, the persons named in this
table have sole voting and investing power with respect to all of the shares of
common stock held by them.
This table lists applicable percentage ownership based on 20,993,627 shares
of common stock outstanding as of April 12, 2000 as adjusted to reflect the
conversion of all outstanding shares of the Series B preferred stock and the
Series C preferred stock upon the closing of this offering, and also lists
applicable percentage ownership based on shares of common stock
outstanding after completion of this offering. Options and warrants to purchase
shares of our common stock that are exercisable within sixty days of ,
2000 are deemed to be beneficially owned by the persons holding these options or
warrants for the purpose of computing percentage ownership of that person, but
are not treated as outstanding for the purpose of computing any other person's
ownership percentage.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------------
PERCENT BEFORE PERCENT AFTER
NUMBER OFFERING OFFERING
--------- -------------- -------------
<S> <C> <C> <C>
InterWest Partners(1).................................... 4,092,809 19.5%
TL Ventures(2)........................................... 2,864,966 13.6%
CEA Capital Partners(3).................................. 2,864,966 13.6%
Diamond Technology Partners Incorporated(4).............. 1,481,482 7.1%
Alan K. Warms(5)......................................... 7,134,798 34.0%
James J. Collis(6)....................................... 146,466 *
David A. Greer(7)........................................ 648,429 3.1%
Joseph P. Cothrel........................................ 9,260 *
Todd A. Duthie........................................... 9,260 *
Stephen J. Hawrysz(8).................................... 83,335 *
All directors and executive officers as a group.......... 6,852,347 32.6%
</TABLE>
- ------------------------
* less than one percent
(1) Includes 3,913,565 shares owned by InterWest Partners VII, LP and 179,244
shares owned by InterWest Investors VII, LP.
(2) Includes 2,791,205 shares owned by TL Ventures IV LP and 73,761 shares owned
by TL Ventures IV Interfund LP.
(3) Includes 2,189,694 shares owned by CEA Capital Partners USA, LP and 675,272
shares owned by CEA Capital Partners USA CI, LP.
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<PAGE>
(4) Includes 740,741 shares owned by Diamond Technology Partners, Incorporated
and 740,741 shares owned by DTP Ventures, LLC.
(5) Includes 556,650 shares owned by David A. Greer and 742,200 shares owned by
Erika Kerekes, an employee of our company, which Mr. Warms has the power
vote pursuant to voting agreements. Mr. Warms disclaims any beneficial
ownership of these securities.
(6) James J. Collis, a director of the Company, is an Executive Vice President
of Seaport Capital, LLC an entity formed to manage CEA Capital Partners.
Mr. Collis disclaims beneficial ownership of the securities held by CEA
Capital Partners except for his proportional interest in the entity.
(7) 556,650 of the shares held by David A. Greer are subject to a four year
vesting schedule. As of April 12, 2000, 31.25% of his shares are vested. If
Mr. Greer is terminated for cause by us, these shares will be forfeited.
(8) Includes 9,260 shares owned by the Hawrysz Family 1994 Trust. Mr. Hawrysz
disclaims beneficial ownership of these securities.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 100,000,000 shares of common
stock, $0.001 par value, and authorizes the issuance of 5,000,000 shares of
undesignated preferred stock, $0.001 par value. From time to time, our board of
directors may establish the rights and preferences of the preferred stock. As of
April 12, 2000, 8,507,646 shares of common stock and 13,109,981 shares of
preferred stock were issued and outstanding and held by 47 stockholders. Upon
the closing of this offering, all outstanding shares of Series B preferred stock
and Series C preferred stock will convert into an aggregate of 12,485,981 shares
of common stock. The following description of our capital stock is, by
necessity, not complete. We encourage you to refer to our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and applicable provisions of
Delaware law for a more complete description.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably
dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share in our assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by, the rights of the holders of shares of any series
of preferred stock which we may designate in the future.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series, to establish the number of shares to be included in each series, and to
fix or alter the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. Nonetheless, the effects
might include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of Participate.com without
further action by the stockholders.
Upon the closing of this offering, 624,000 shares of Series A preferred
stock will be outstanding, and we have no plans to issue any additional shares
of preferred stock. We intend to redeem all outstanding shares of Series A
preferred stock with the proceeds of this offering.
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<PAGE>
WARRANTS AND OTHER OBLIGATIONS TO ISSUE CAPITAL STOCK
As of March 28, 2000, there were outstanding warrants to purchase an
aggregate of 525,000 shares of our common stock with a weighted average exercise
price equal to the price of shares sold in this offering. These warrants will
only become exercisable if certain performance criteria is met prior to
March 31, 2002.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, holders of 12,485,981 shares of common stock or
warrants to purchase common stock or their transferees will have rights to
register those shares under the Securities Act of 1933. These rights are
provided under the terms of an agreement between us and the holders of the
registrable securities. Subject to limitations in the agreement, beginning on
September 17, 2002, the holders of at least 50% of the registrable securities
may require, on two occasions, that we use our best efforts to register the
registrable securities for public resale. We are obligated to register these
shares only if the outstanding registrable securities have an anticipated
aggregate public offering price of at least $5,000,000, after underwriting
discounts and commissions. Also, holders of the registrable securities may
require, no more than once per year, that we register their shares for public
resale on Form S-3 or similar short-form registration if the anticipated
aggregate public offering price of the shares to be registered would exceed
$500,000. Furthermore, in the event we elect to register any of our shares of
common stock for purposes of effecting any public offering, the holders of
registrable securities are entitled to include their shares of common stock in
the registration, but the number of shares proposed to be registered may be
reduced in view of market conditions. We will bear all expenses in connection
with any registration, other than underwriting discounts and commissions. All
registration rights will terminate five years following the consummation of this
offering. These registration rights will also terminate with respect to each
holder of registrable securities, at such time as the holder is entitled to sell
all of its shares in any 90-day period under Rule 144 of the Securities Act,
provided we have completed this offering and we are subject to the reporting
requirements of the Exchange Act and our common stock is traded on a national
exchange or NASDAQ.
DELAWARE ANTI-TAKEOVER LAW AND RESTRICTIVE PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make the following more difficult:
- our acquisition by means of a tender offer;
- our acquisition by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure Participate.com
outweigh the disadvantages of discouraging such proposals because negotiation of
such proposals could result in an improvement of their terms.
DELAWARE ANTI-TAKEOVER LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. Subject to several exemptions, the
statute precludes an interested stockholder, generally a holder of 15% of our
common stock, from engaging in a merger, asset sale, or other
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<PAGE>
business combination with us for a period of three years after the date of the
transaction in which the person became an interested stockholder. An exemption
may be applied if:
- prior to the time the stockholder became an interested stockholder, the
board of directors approved either the business combination or the
transaction which resulted in the person becoming an interested
stockholder;
- the stockholder owned at least 85% of the outstanding voting stock of the
corporation, excluding shares held by directors who were also officers or
held in certain employee stock plans, upon consummation of the transaction
which resulted in a stockholder becoming an interested stockholder; or
- the business combination was approved by the board of directors and by
two-thirds of the outstanding voting stock of the corporation, excluding
shares held by the interested stockholder.
The existence of this provision may have an anti-takeover effect with
respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
ELECTION AND REMOVAL OF DIRECTORS
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with our stockholders electing one class
each year. See "Management--Board Composition." This system of electing and
removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us, because it generally
makes it more difficult for stockholders to replace a majority of the directors.
STOCKHOLDER MEETINGS
Under our bylaws, only the board of directors, the chairman of the board,
the president and the holders of a majority of the outstanding capital stock may
call special meetings of stockholders.
REQUIREMENTS FOR ADVANCED NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS
Our bylaws establish advance notice procedures for stockholder proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a committee of the
board.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT
Our certificate of incorporation eliminates the right of stockholders to act
by written consent without a meeting.
NO CUMULATIVE VOTING
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors.
UNDESIGNATED PREFERRED STOCK
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
us. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of us.
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<PAGE>
AMENDMENT OF CHARTER PROVISIONS
The amendment of many of the provisions described above would require
approval by holders of at least 66 2/3% of the outstanding common stock.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
Our certificate of incorporation provides that our directors shall not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- payments of dividends or stock purchases or redemptions in violation of
Section 174 of the Delaware General Corporation Law; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation also provides for indemnification of our
officers and directors to the fullest extent permitted by the Delaware General
Corporation Law, including some instances in which indemnification is otherwise
discretionary under the law. We will also enter into contractual indemnity
arrangements with our directors and executive officers upon the closing of this
offering. We believe that these indemnification and liability provisions are
essential to attracting and retaining qualified persons as directors and
officers.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought. In addition, we are not
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is LaSalle National
Bank.
NASDAQ NATIONAL MARKET LISTING
We will apply to list our common stock on the Nasdaq Stock Market's National
Market under the symbol "PRTP."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock, including shares issued upon exercise of outstanding options
and warrants, in the public market following this offering could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through sale of our equity securities. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
We will have shares of common stock outstanding after the
completion of this offering (shares if the underwriters' overallotment
is exercised in full.) Of those shares, the shares of common stock
sold in the offering (shares if the underwriters' over-allotment
option is exercised in full) will be freely transferable without restriction,
unless purchased by persons deemed to be our "affiliates" as that term is
defined in Rule 144 under the Securities Act). Any shares purchased by an
affiliate may not be resold except pursuant to an effective registration
statement or an applicable exemption from registration, including an exemption
under Rule 144. The remaining shares of common stock to be outstanding
immediately following the completion of this offering are "restricted" which
means they were originally sold in certain types of offerings that were not
subject to a registration statement filed with the Securities and Exchange
Commission. These restricted shares may only be sold through registration under
the Securities Act or under an available exemption from registration, such as
provided through Rule 144 promulgated under the Securities Act. The holders of
over % of our shares of common stock, options, and warrants have agreed to a
180-day "lock-up" with respect to these securities. This generally means they
cannot sell these shares during the 180 days following the date of this
prospectus without the consent of our underwriters. After the 180-day lock-up
period, these shares may be sold in accordance with Rule 144. See "Underwriting"
for additional details.
After the offering, the holders of shares of our common stock
(including shares issuable upon exercise of outstanding warrants) will
be entitled to registration rights. For more information on these registration
rights, see "Description of Capital Stock--Registration Rights."
RULE 144
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares of our common stock for one year or more, may sell in the open market
within any three-month period a number of shares that does not exceed the
greater of:
- one percent of the then outstanding shares of our common stock
(approximately shares immediately after the offering); or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain limitations on the manner
of sale, notice requirements, and the availability of our current public
information. A person (or persons whose shares are aggregated) who is deemed not
to have been our affiliate at any time during the 90 days preceding a sale by
him and who has beneficially owned his shares for at least two years, may sell
the shares in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, notice requirements, or the availability
of current public information we refer to above. Subject to the lock-up
agreements, the shares of our common stock that were outstanding on
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<PAGE>
December 31, 1999 that will become eligible for sale without registration
pusuant to Rule 144 or Rule 701 under the Securities Act are as follows:
- shares will be eligible for sale under Rule 144 or Rule 701
beginning 90 days after the date of this prospectus, subject to volume,
manner of sale, and other limitations under those rules; and
- the remaining shares of common stock will become eligible for sale
from time to time after the date of this prospectus under Rule 144 upon
expiration of their respective holding periods.
After this offering, we intend to file a registration statement on Form S-8
registering shares of common stock subject to outstanding options or reserved
for future issuance under our stock plans. As of April 12, 2000, options to
purchase a total of 2,062,604 shares were outstanding and 3,232,076 shares were
reserved for future issuance under our stock plans. Common stock issued upon
exercise of outstanding vested options or issued pursuant to our employee stock
purchase plan, other than common stock issued to our affiliates is available for
immediate resale in the open market.
Also beginning on September 17, 2002, holders of 12,485,981 restricted
shares will be entitled to certain rights with respect to registration of such
shares for sale in the public market. See "Description of Capital
Stock--Registration Rights." Registration of such shares under the Securities
Act would result in such shares becoming freely tradable without restriction
under the Securities Act, except for shares purchased by affiliates, immediately
upon the effectiveness of such registration.
STOCK OPTIONS
We have reserved an aggregate of 2,632,076 shares of common stock for
issuance under our 1999 Stock Plan and 2000 Stock Plan and have outstanding
options to purchase 2,062,604 shares. We intend to register the shares subject
to the plans and the options on a Form S-8 Registration Statement following the
offering. Subject to the lock-up agreements, the restrictions imposed under the
plans, and the related option agreements, shares of common stock issued under
the plans after the effective date of any Registration Statement on Form S-8
will be available for sale in the public market without restriction to the
extent that they are held by persons who are not our affiliates under Rule 144.
No public trading market for the common stock existed prior to the offering.
No prediction can be made as to the effect, if any, that future sales of shares
under Rule 144 or otherwise will have on the market price prevailing from time
to time. Sales of substantial amounts of common stock into the public market
following the offering, or the perception that such sales could occur, could
adversely affect the then prevailing market price.
52
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc. and William Blair &
Company, L.L.C., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth below opposite their respective names. The
underwriters are committed to purchase and pay for all shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
Chase Securities Inc........................................
William Blair & Company, L.L.C..............................
Total...................................................
=======
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be reallowed to
other dealers. After this offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No such reduction
shall change the amount of proceeds to be received by us as set forth on the
cover page of this prospectus. The common stock is offered by the underwriters
as stated herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to additional
shares of common stock to cover over-allotments, if any, at the public offering
price less the underwriting discount set forth on the cover page of this
prospectus. If the underwriters exercise their over-allotment option to purchase
any of the additional shares of common stock, the underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof as the number of shares to be purchased by each of them
bears to the total number of shares of common stock offered in this offering. If
purchased, these additional shares will be sold by the underwriters on the same
terms as those on which the shares offered hereby are being sold. We will be
obligated, pursuant to the over-allotment option, to sell shares to the
underwriters to the extent the over-allotment option is exercised. The
underwriters may exercise the over-allotment option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering.
The following table summarizes the compensation to be paid to the
underwriters by our company:
<TABLE>
<CAPTION>
TOTAL
-------------------------------------------
WITH WITHOUT
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us........... $ $ $
Underwriting discounts and commissions payable by us........
</TABLE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $ .
53
<PAGE>
INDEMNITY
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS
Each of our executive officers and directors and substantially all of our
other shareholders have agreed, subject to specified exceptions, not to offer to
sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock or any options or warrants to
purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or thereafter acquired directly by those holders or with respect to which they
have the power of disposition, without the prior written consent of FleetBoston
Robertson Stephens Inc. This restriction terminates after the close of trading
of the shares on the 180th day of (and including) the day the shares commenced
trading on the Nasdaq National Market. However, FleetBoston Robertson
Stephens Inc. may, in its sole discretion and at any time or from time to time
before the termination of the 180-day period, without notice, release all or any
portion of the securities subject to lock-up agreements. There are no existing
agreements between the representatives and any of our stockholders who have
executed a lock-up agreement providing consent to the sale of shares prior to
the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to certain exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options or
warrants, and the issuance of options under existing stock option and incentive
plans provided that those options do not vest prior to the expiration of the
lock-up period. See "Shares Eligible for Future Sale."
LISTING
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PRTP."
NO PRIOR PUBLIC MARKET
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus has been determined through negotiations among the
representatives and us. Among the factors considered in such negotiations were
prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the representatives believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
INTERNET DISTRIBUTION
E*TRADE will make the preliminary prospectus available on its website when
it becomes available. E*TRADE will not solicit conditional offers until two
business days before the expected effective date of the offering. If the
effective date of the offering is delayed beyond two business days, E*TRADE
would allow any conditional offer received from a customer to remain valid for
up to seven days from the date it was originally submitted.
54
<PAGE>
E*TRADE will provide customers a period after notice of effectiveness during
which they will continue to have the right to cancel their conditional offers.
This period will be until 8 p.m. EST (but in no event less than two hours after
E*TRADE notifies its customers of effectiveness) in the usual situation where
the offering becomes effective after the close of trading. If the offering
becomes effective prior to or during the trading day, the period will be one
hour after E*TRADE notifies its customers of effectiveness.
If an offering prices outside the expected price range indicated in the
preliminary prospectus or the price range for an offering changes, E*TRADE will
either (i) cancel its existing book of conditional offers and resolicit new
conditional offers or (ii) require customers to reconfirm their existing
conditional offers as a condition to participating in the offering.
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under the
Securities Act of 1933, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of shares of common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is the bid for or purchase of common stock on behalf of
the underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by such underwriter or syndicate member was purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
representatives have advised us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
DIRECTED SHARE PROGRAM
At our request, certain of the underwriters have reserved up to 7.5% of the
shares of common stock (the "Directed Shares") for sale at the initial public
offering price to persons who are our directors, officers or employees, or who
are otherwise associated with us and our affiliates, and who have advised us of
their desire to purchase such shares. The number of shares of common stock
available for sale to the general public will be reduced to the extent of sales
of the Directed Shares to any of the persons for whom they have been reserved.
Any shares not so purchased will be offered by the underwriters on the same
basis as all other shares of common stock offered hereby. We have agreed to
indemnify those certain underwriters against certain liabilities and expenses,
including liabilities under the Securities Act, in connection with the sales of
directed shares.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by McDermott, Will & Emery, Chicago, Illinois.
As of the date of this prospectus, Wilson Sonsini Goodrich & Rosati and its
members beneficially owned an aggregate of 15,402 shares of Series B preferred
stock.
55
<PAGE>
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement or the
exhibits and schedules which are part of the Registration Statement. The rules
and regulations of the Securities and Exchange Commission allow us to omit
certain information included in the Registration Statement from this prospectus.
Accordingly, any statements made in this prospectus as to the contents of any
contract, agreement, or other document are not necessarily complete. With
respect to each such contract, agreement, or other document filed as an exhibit
to the Registration Statement, we refer you to the exhibit for a more complete
description of the matter involved, and each statement in this prospectus shall
be deemed qualified in its entirety by this reference. You may read and copy all
or any portion of the Registration Statement or any reports, statements, or
other information in the files at the following public reference facilities of
the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
WASHINGTON, D.C. NEW YORK, NEW YORK CHICAGO, ILLINOIS
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You can request copies of these documents upon payment of a duplicating fee
by writing to the Securities and Exchange Commission. You may call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of its public reference rooms. Our filings, including the
Registration Statement, will also be available to you on the Internet website
maintained by the Securities and Exchange Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing audited
financial statements, and make available to our stockholders quarterly reports
for the first three quarters of each year containing unaudited interim financial
information.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1998 and 1999............. F-3
Statements of Operations for the two month period ended
December 31, 1997, and the years ended December 31, 1998
and 1999.................................................. F-4
Statements of Stockholders' Equity (Deficit) for the two
month period ended December 31, 1997, and the years ended
December 31, 1998 and 1999................................ F-5
Statements of Cash Flows for the two month period ended
December 31, 1997, and the years ended December 31, 1998
and 1999.................................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Participate.com, Inc:
We have audited the accompanying balance sheets of PARTICIPATE.COM, INC. (a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
two month period ended December 31, 1997, and the years ended December 31, 1998
and 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Participate.com, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the two month period ended December 31, 1997, and the years ended
December 31, 1998 and 1999, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
January 27, 2000
(except with respect to the matters discussed in
Note 14, as to which the date is April 11, 2000)
F-2
<PAGE>
PARTICIPATE.COM, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4 $10,609
Accounts receivable, less allowance for doubtful accounts
of $0 and $31
in 1998 and 1999, respectively.......................... 133 522
Prepaids and other........................................ 6 237
------- -------
Total current assets.................................... 143 11,368
------- -------
PROPERTY AND EQUIPMENT, NET................................. 24 471
OTHER ASSETS................................................ 5 57
------- -------
Total assets............................................ $ 172 $11,896
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 34 $ 379
Accrued expenses.......................................... 136 556
Note payable--stockholder................................. 72 8
Dividend payable.......................................... -- 52
Capital lease obligations--current........................ 8 90
Deferred revenue.......................................... -- 34
------- -------
Total current liabilities............................... 250 1,119
------- -------
CAPITAL LEASE OBLIGATIONS--long term........................ 13 91
------- -------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Series A, 10% cumulative dividend, $.001 par value;
624,000 shares authorized, issued and outstanding at
December 31, 1999, and none authorized in 1998.......... -- 588
Series B, convertible preferred stock, 8.14% noncumulative
dividend, $.001 par value; 8,701,980 shares authorized;
8,701,980 shares issued and outstanding at December 31,
1999, and none authorized in 1998....................... -- 12,626
------- -------
Total redeemable preferred stock........................ -- 13,214
------- -------
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value; 24,000,000 shares
authorized; 8,331,226 shares issued and outstanding at
December 31, 1999, and none authorized in 1998.......... -- 8
Additional paid in capital................................ -- 244
Deferred compensation expense related to stock options.... -- (956)
Accumulated deficit....................................... -- (1,824)
Members' capital.......................................... (91) --
------- -------
Total stockholders' deficit............................. (91) (2,528)
------- -------
Total liabilities and stockholders' deficit............. $ 172 $11,896
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
PARTICIPATE.COM, INC.
STATEMENTS OF OPERATIONS
FOR THE TWO MONTH PERIOD ENDED DECEMBER 31, 1997, AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES................................................. $ 6 $ 507 $ 1,885
COST OF SERVICES......................................... 5 323 1,286
---------- ---------- ----------
Gross profit......................................... 1 184 599
OPERATING EXPENSES:
Selling, general and administrative.................... 5 277 3,104
Noncash compensation expense........................... -- -- 287
---------- ---------- ----------
Operating loss....................................... (4) (93) (2,792)
OTHER INCOME (EXPENSE), NET:
Other income, net...................................... -- -- 144
Interest expense....................................... -- (5) (14)
---------- ---------- ----------
NET LOSS................................................. (4) (98) (2,662)
DIVIDENDS AND ACCRETION TO REDEMPTION VALUE OF PREFERRED
STOCK.................................................. -- -- (71)
---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS............. $ (4) $ (98) $ (2,733)
========== ========== ==========
PER SHARE DATA:
Basic and diluted net loss per share attributable to
common stockholders.................................. $ 0.00 $ (0.02) $ (0.33)
========== ========== ==========
Basic and diluted weighted average shares
outstanding.......................................... 5,572,050 6,368,178 8,200,621
========== ========== ==========
PRO FORMA (UNAUDITED):
Pro forma basic and diluted net loss per share
attributable to
common stockholders.................................. $ (0.26)
==========
Pro forma basic and diluted weighted average shares
outstanding.......................................... 10,703,930
==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-4
<PAGE>
PARTICIPATE.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWO MONTH PERIOD ENDED DECEMBER 31, 1997, AND FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK,
$.001 PAR VALUE; DEFERRED
COMMON UNITS 24,000,000 SHARES COMPENSATION
IN LLC AUTHORIZED ADDITIONAL EXPENSE RELATED
--------------------- --------------------- PAID-IN TO STOCK RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS DEFICIT TOTAL
---------- -------- --------- --------- ---------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, at inception........ -- $ -- -- $ -- $ -- $ -- $ -- $ --
Sale of common units....... 5,752,050 10 -- -- -- -- -- 10
Net loss................... -- (4) -- -- -- -- -- (4)
---------- ----- --------- --------- ------ ------- ------- -------
BALANCE, December 31, 1997... 5,752,050 6 -- -- -- -- -- 6
---------- ----- --------- --------- ------ ------- ------- -------
Units granted.............. 742,200 1 -- -- -- -- -- 1
Net loss................... -- (98) -- -- -- -- -- (98)
---------- ----- --------- --------- ------ ------- ------- -------
BALANCE, December 31, 1998... 6,494,250 (91) -- -- -- -- -- (91)
---------- ----- --------- --------- ------ ------- ------- -------
Issuance of common units in
connection with the sale
of preferred units....... 1,248,000 6 -- -- -- -- -- 6
Units granted.............. 556,650 2 -- -- -- -- -- 2
Sale of common units....... 32,326 1 -- -- -- -- -- 1
Net loss attributable to
LLC common units......... -- (258) -- -- -- -- -- (258)
Accretion of preferred
units.................... -- (580) -- -- -- -- -- (580)
C Corporation conversion... (8,331,226) 920 8,331,226 8 (928) -- -- --
Preferred stock
dividends................ -- -- -- -- (52) -- -- (52)
Preferred stock
accretion................ -- -- -- -- (19) -- -- (19)
Deferred compensation
expense related to the
issuance of stock
options.................. -- -- -- -- 1,243 (1,243) -- --
Compensation expense
related to the issuance
of stock options......... -- -- -- -- -- 287 -- 287
Net loss attributable to C
Corporation.............. -- -- -- -- -- -- (1,824) (1,824)
---------- ----- --------- --------- ------ ------- ------- -------
BALANCE, December 31, 1999... -- $ -- 8,331,226 $ 8 $ 244 $ (956) $(1,824) $(2,528)
========== ===== ========= ========= ====== ======= ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
PARTICIPATE.COM, INC.
STATEMENTS OF CASH FLOWS
FOR THE TWO MONTH PERIOD ENDED DECEMBER 31, 1997, AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (4) $ (98) $(2,662)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................... 1 1 81
Stock grant............................................. -- 1 2
Noncash compensation expense related to the issuance of
stock options.......................................... -- -- 287
Changes in operating assets and liabilities--
Accounts receivable................................... -- (133) (389)
Prepaids and other.................................... -- (6) (231)
Other assets.......................................... (2) (3) (52)
Accounts payable...................................... -- 34 345
Accrued expenses...................................... -- 136 420
Deferred revenue...................................... -- -- 34
------- ------- -------
Net cash used in operating activities............... (5) (68) (2,165)
------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment........................ (3) (2) (330)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations..................... -- -- (38)
Proceeds from issuance of common units.................... 10 -- 7
Proceeds from issuance of preferred units/stock, net of
issuance costs.......................................... -- -- 13,195
Related-party borrowings (payments), net.................. 3 69 (64)
------- ------- -------
Net cash provided by financing activities........... 13 69 13,100
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 5 (1) 10,605
CASH AND CASH EQUIVALENTS, beginning of period.............. -- 5 4
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 5 $ 4 $10,609
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest................................................ $ -- $ 5 $ 14
======= ======= =======
NONCASH TRANSACTIONS:
Dividend accrued on preferred stock....................... $ -- $ -- $ 52
Accretion to redemption value of preferred stock.......... -- -- 19
Capital lease financing................................... -- 21 198
======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-6
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. ORGANIZATION AND OPERATIONS
Participate.com, Inc. (the "Company") is a management service provider that
enables successful eBusiness strategies by offering an integrated management
solution for online communities. The Company's service delivery platform, the
Community Management System, is a full-service approach that includes
developing, managing and hosting online business communities.
Prior to September 17, 1999, the Company operated as a limited liability
corporation ("LLC"). On September 17, 1999, the LLC converted to a
C Corporation incorporated in Delaware under the name Participate.com, Inc. On
this date, all LLC common units were converted, at a one-to-one ratio, into
shares of common stock and all preferred units in the LLC were converted, at a
one-to-one ratio, into Series A preferred stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue as services are provided.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight line
basis over their estimated useful lives. Expenditures for major additions are
capitalized, and the cost of repairs and maintenance is expensed as incurred.
The cost basis and useful lives of equipment at December 31, 1998 and 1999, are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999 LIFE
-------- -------- --------
<S> <C> <C> <C> <C>
Computer equipment.................................. $ -- $393 3 years
Computer software................................... 26 101 3 years
Office equipment.................................... -- 42 5 years
Leasehold improvements.............................. -- 18 5 years
---- ---- =======
26 554
Less--accumulated depreciation...................... 2 83
---- ----
$ 24 $471
==== ====
</TABLE>
F-7
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
At December 31, 1998 and 1999, the cost basis of the capitalized leases was
$21,000 and $219,000, respectively. The related accumulated depreciation of
equipment under capitalized leases was $0 and $38,000, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock options issued to employees in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company has adopted the disclosure-only provision of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," for options and warrants issued to employees and
directors. Expense associated with stock options and warrants issued to
nonemployees/nondirectors is recorded in accordance with SFAS No. 123.
ACCRETION TO REDEMPTION VALUE OF PREFERRED STOCK
Accretion to redemption value of redeemable preferred stock represents the
change in the redemption value of outstanding preferred stock in each period.
Preferred stock is being accreted to its redemption value over the earliest
period redemption can occur using the effective interest method. The redemption
values are based on the face value of the stock.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss for the period
by the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of common and common equivalent shares
outstanding during the period, if dilutive. Common equivalent shares at
December 31, 1998 and 1999, were 0 and 2,603,059, which include 0 and 2,503,309
shares, respectively, issuable upon the conversion of Series B preferred stock,
weighted for the periods outstanding, as if such conversion occurred on the date
of issuance. These shares have been excluded from diluted loss per share, as
their impact would be antidilutive.
UNAUDITED PRO FORMA LOSS PER SHARE ATTIBUTABLE TO COMMON STOCKHOLDERS
Unaudited pro forma loss per share attibutable to common stockholders is
based on the weighted average number of shares of common stock outstanding
assuming that the Series B preferred stock was converted into common stock on
the date of issuance. Common equivalent shares have been excluded from pro forma
diluted loss per share, as their impact would be anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December, 1999, the SEC issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides
specific guidance on revenue recognition. The Company recognizes revenue based
upon the provisions of SAB No. 101.
3. STOCKHOLDERS' EQUITY
In January, 2000, the Board of Directors of the Company authorized a
two-for-one stock split for common stock and Series B preferred stock. The
effect of the stock split has been retroactively reflected for all periods
presented in the accompanying financial statements.
F-8
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
MEMBERS UNITS
Prior to the Company converting to a C corporation, members' equity
consisted of redeemable preferred units and common units in a limited liability
corporation. Based upon the members' agreement, net losses for any fiscal year
shall be first allocated to the members who have a positive capital account
balance, until such balances have been reduced to zero. Secondly, remaining
losses are then allocated to the holder of common units. Net losses have been
allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Common units......................................... $ (4) $ (98) $ (258)
Preferred units...................................... -- -- (580)
----- ----- -------
Total net loss attributable to the LLC........... (4) (98) (838)
Net loss attributable to the C Corporation........... -- -- (1,824)
----- ----- -------
Net loss......................................... $ (4) $ (98) $(2,662)
===== ===== =======
</TABLE>
COMMON STOCK
During 1998 and 1999, the Company granted 742,200 and 556,650 common units
in the LLC (subsequently, common stock of the C Corporation) to two individuals
upon employment with the Company. The stock grants vest over a two- and
four-year period, respectively. The value of the grants was based upon estimated
fair market value at the time of grant using arm's length transactions to
determine such value. The grant value is being amortized over the related
vesting periods as compensation expense. The compensation expense for these
grants recognized in December 31, 1998 and 1999, was $1,000 and $2,000,
respectively.
In July, 1999, the Company sold to an investor 32,326 shares of common units
at $0.025 per share.
RIGHTS, PREFERENCES AND PRIVILEGES
The rights, preferences and privileges of the common stock are listed below.
DIVIDENDS
No dividend may be paid with respect to the holders of common stock until
equivalent dividends have been declared and paid on all outstanding shares of
Series A and B preferred stock.
VOTING RIGHTS
The holders of common stock are entitled to one vote per share.
4. REDEEMABLE PREFERRED STOCK
SERIES A
In a private placement transaction in February, 1999, the Company issued
624,000 redeemable preferred units in the LLC (subsequently, redeemable
preferred stock of the C Corporation). For purchasing 1,000 preferred units for
$1,000, each investor was also given 2,000 common units. The net proceeds of
$586,000 were allocated between Series A preferred units and common units based
upon
F-9
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
their relative fair values. The rights, preferences and privileges of the
Series A preferred stock, which was issued in exchange for the LLC units, are
listed below.
DIVIDENDS
The holders of the Series A preferred stock are entitled to receive a
cumulative dividend of 10% per annum. If the stock is not redeemed by September,
2004, the stockholder will be entitled to a cumulative dividend of 20%. No
dividend shall be paid on Series B preferred stock and common stock prior to
payment on any accumulation of Series A preferred stock dividends. To date, the
Company has accrued, but not paid, any dividends.
REDEMPTION
The Series A preferred stock is redeemable by the Company on or before
September, 2004, at an amount of $1.00 per share, adjusted for any
recapitalizations, plus accrued but unpaid dividends. In the event that the
Company is unable to redeem all Series A preferred shares by September, 2004,
the Company must use all legally available funds to redeem as many shares as
possible and as additional funds become available, such funds must be used to
redeem the remaining shares.
LIQUIDATION PREFERENCE
Series A preferred stockholders will be entitled to receive, prior to and in
preference to, any distribution of any of the assets or surplus funds of the
Company to the holders of the common stock and PARI PASSU with Series B
preferred stockholders upon liquidation. Series A preferred stockholders will be
entitled to receive $1.00 per share adjusted for any recapitalizations, and any
accrued but unpaid dividends.
SERIES B
In a private placement transaction in September, 1999, the Company issued
8,701,980 shares of Series B preferred stock at $1.475 per share resulting in
net proceeds to the Company of approximately $12.6 million. The rights,
preferences and privileges of the Series B preferred stock are listed below.
DIVIDENDS
The holders of the Series B preferred stock are entitled to receive
noncumulative dividends of 8.14% per annum, when and if declared by the Board of
Directors. Such dividend shall not be paid until the cumulative dividend for
Series A preferred stock has been paid.
LIQUIDATION PREFERENCE
Series B preferred stockholders will be entitled to receive, prior to and in
preference to, any distribution of any of the assets or surplus funds of the
Company to the holders of the common stock and PARI PASSU with Series A
preferred stockholders upon liquidation. Series B preferred stockholders will be
entitled to receive $1.48 per share, adjusted for any recapitalizations, and any
unpaid declared dividends.
F-10
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
REDEMPTION
At any time after September, 2004, upon receipt by the Company of a written
request from a majority of the outstanding Series B preferred stockholders, the
shares will be redeemed. Series B preferred stock will be redeemed at $1.48 per
share, as adjusted for any recapitalizations, payable in three annual
installments.
VOTING RIGHTS
The holders of Series B preferred stock have voting rights equal to the
number of shares of common stock into which the shares of Series B preferred
stock could be converted at the record date.
CONVERSION
Each share of Series B preferred stock is convertible, at the option of the
holder, at any time after the date of issuance of such share into one share of
common stock, subject to certain adjustments as defined. In the event of
redemption, the shareholder will not have the ability to convert to common
shares for the five-day period prior to the redemption date. In addition, all
shares of Series B preferred stock shall automatically be converted into shares
of common stock upon the closing of an underwritten public offering in which the
price per share to the public is no less than $7.375 per share and with
aggregate gross proceeds to the Company of not less than $15 million.
5. STOCK OPTIONS
During 1999, the Company adopted the 1999 Stock Plan (the "Plan"), as
amended. The Plan provides for the issuance of incentive and nonstatutory common
stock options to employees, directors and consultants of the Company. The Board
of Directors reserved 1,871,100 shares of common stock to be issued in
conjunction with the Plan. The term of the options shall be no more than
10 years from the date of grant. Options granted under the Plan during 1999
generally vest in periods between two and four years, as determined by the Board
of Directors, although certain grants have vested immediately upon issuance.
All incentive stock options granted during 1999 were granted with an
exercise price equal to the then fair value of the underlying common stock on
the grant date as determined by the board of directors. For financial reporting
purposes, the common stock options were deemed to have an exercise price below
market value based upon accounting guidelines related to equity instruments
issued within a year of an initial public offering. In accordance with APB
No. 25, the Company has recorded the difference between the exercise price and
the deemed fair value of the common stock on the date of grant as deferred
compensation and is amortizing such deferred compensation over the vesting
periods of the options. Noncash compensation expense related to these options
and other options issued for consulting services recognized during the year
ended December 31, 1999 totaled $287,000.
F-11
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
The Company's stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE
OPTIONS PRICE
----------- --------
<S> <C> <C>
Outstanding at December 31, 1998........................ -- $ --
Granted............................................... 1,136,608 0.25
Forfeited............................................. (22,290) 0.25
--------- -----
Outstanding at December 31, 1999........................ 1,114,318 $0.25
========= =====
</TABLE>
The following table summarizes information about all stock options
outstanding for the Company as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
- ------------------------------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.25 1,114,318 9.88 years $0.25 176,710 $0.25
===== ========= ========== ===== ======= =====
</TABLE>
Under SFAS No. 123, the fair value of each option is estimated on the date
of grant based on the Black-Scholes option pricing model assuming, among other
things, a risk-free interest rate of 5.98%, no dividend yield, expected
volatility of 0% (as the Company was privately held at the date of grant) and an
expected life of five years. The weighted average fair value of the options
granted during the year ended December 31, 1999, was $1.142 per share.
Had the Company accounted for its stock options in accordance with SFAS
No. 123, pro forma net loss and pro forma net loss per share for the years ended
December 31, 1997, 1998 and 1999, would have been as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss attributable to common stockholders...... $ -- $ -- $(2,737)
Pro forma net loss per share attributable to common
stockholders.............................................. -- -- (0.33)
===== ===== =======
</TABLE>
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest over
several years; pro forma compensation expense is recognized as the options vest
and additional awards may also be granted.
6. CAPITAL LEASE OBLIGATIONS
Capital lease obligations of the Company at December 31, 1998 and 1999,
consist of various leases maturing over a three-year period, at a weighted
average interest rate of 9.5%.
F-12
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
Future maturities of capital lease obligations at December 31, 1999, are as
follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $95
2001........................................................ 82
2002........................................................ 19
---
Total................................................... 196
Less--Amount representing interest.......................... 15
---
Total................................................... 181
Less--Current portion....................................... 90
---
$91
===
</TABLE>
7. REVOLVING PROMISSORY NOTE
As of December 31, 1999, the Company had secured a revolving promissory note
with a bank which enables the Company to borrow up to $200,000. The note is due
on demand, expires in June, 2000, and bears interest at the bank's prime rate
plus 1% (9.5% at December 31, 1999). The Company had no borrowings outstanding
under the revolving promissory note as of December 31, 1999.
8. INCOME TAXES
During the period in which the Company was an LLC, federal and state taxes
were the responsibility of the unitholders rather than the Company. Effective
September 17, 1999, the Company became a C corporation for income tax purposes.
Pursuant to this election, such taxes will be the responsibility of the Company
rather than stockholders. The Company provides for deferred income taxes under
the asset and liability method of accounting which requires the recognition of
deferred income taxes based upon the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between financial statement carrying amounts and the tax basis of
existing assets and liabilities.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon generation of future taxable income during the periods in which
those temporary differences become deductible. A determination as to this
limitation will be made at a future date as the net operating losses are
utilized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax-planning strategies in
making this assessment. Based upon the level of historical losses and changes in
capitalization which may limit utilization of net operating loss carryforwards
in future periods, management is unable to predict whether these net deferred
tax assets will be utilized prior to expiration. As such, the Company has
recorded a full valuation allowance.
F-13
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
At December 31, 1999, deferred income taxes consisted of the following (in
thousands):
<TABLE>
<S> <C>
Net operating loss carryforward............................. $ 568
Change in tax accounting method (cash to accrual)........... 93
Stock-based compensation.................................... 81
Accrued expenses............................................ 15
Reserves.................................................... 12
-----
Total................................................... 769
Less--Valuation allowance................................... (769)
-----
Net deferred tax assets................................. $ --
=====
</TABLE>
A reconciliation between the statutory federal income tax rate (34.0%) and
the effective rate of income tax expense for the year ended December 31, 1999,
is as follows:
<TABLE>
<S> <C>
Statutory federal income tax rate........................... (34.0)%
State taxes................................................. (7.0)
Stock-based compensation.................................... 1.5
Other....................................................... (0.1)
Valuation allowance......................................... 39.4
-----
Effective income tax rate............................... 0.0 %
=====
</TABLE>
Since September 17, 1999, the Company has generated approximately
$1.5 million of tax net operating loss carryforwards, which expire in 2014.
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into various long-term lease agreements for its
office facility, certain operating equipment and an auto lease under
noncancelable lease terms which expire at various dates through May, 2004.
Rental expense for the two-month period ended December 31, 1997, and for the
years ended December 31, 1998 and 1999, for the office facility totaled $0,
$16,000 and $115,000, respectively.
Minimum future lease payments under these operating leases as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 276
2001........................................................ 369
2002........................................................ 431
2003........................................................ 287
2004........................................................ 11
------
Total future minimum lease payments..................... $1,374
======
</TABLE>
F-14
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
10. CONCENTRATION OF CREDIT RISK
For the years ended December 31, 1998 and 1999, five customers accounted for
approximately 69% of revenues and two customers accounted for approximately 28%
of revenues, respectively.
11. RELATED-PARTY TRANSACTIONS
During 1998 and 1999, the Company's founder and an additional investor
funded the Company's activities through advances bearing interest at 9% per
annum. In conjunction with the issuance of the Series A preferred units in
February, 1999, $89,000 of stockholder advances were converted to Series A
preferred units, at fair value. The remaining balance is reflected on the
accompanying balance sheets as note payable--stockholder.
During 1999, two Series A preferred stockholders provided consulting
services to the Company in connection with developing the Company's business
plan. In exchange for their services, these stockholders were granted 172,400
fully vested options with a strike price of $0.25 per share. In addition, the
stockholders were reimbursed for the option exercise price and the associated
taxes. The Company has recorded noncash compensation expense totaling $197,000
during 1999, based upon the fair value of these options at the date of grant.
During 1999, the Company issued 86,200 options, vesting over a two-year
period, with an exercise price of $0.25 per share, to a Series A preferred
stockholder that acted as an advisor to the Company. The Company has recorded
noncash compensation expense totaling $6,000 during 1999, based upon the fair
value of the options at the date of grant.
12. BARTER TRANSACTIONS
During 1999, the Company has recognized $30,000 of barter transaction
revenue related to community consulting services provided and $30,000 of barter
transaction expense related to Company advertising services received. These
transactions were valued based upon the value of the services provided and the
value of the services received.
13. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses at December 31, 1998 and 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Salaries and taxes.......................................... $123 $ 76
Advertising and promotions.................................. -- 289
Other....................................................... 13 191
---- ----
$136 $556
==== ====
</TABLE>
F-15
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
Valuation and qualifying account activity for the year ended December 31,
1999, is as follows (in thousands):
<TABLE>
<CAPTION>
NET CHANGES TO
BALANCE AT OPERATING BALANCE AT
BEGINNING OF PERIOD EXPENSES DEDUCTION END OF PERIOD
------------------- -------------- --------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts activity for
the year ended
December 31, 1999..... $ -- $31 $ -- $31
</TABLE>
14. SUBSEQUENT EVENTS
1999 STOCK PLAN
In January, 2000, the Company increased the number of shares available for
issuance under the 1999 Stock Plan from 1,871,100 to 2,871,100.
OFFICE LEASE
In February, 2000, the Company entered into a long-term commitment to lease
41,334 square feet of office space from a third party for a 10-year period,
resulting in an annual future minimum lease commitment ranging from
$1.2 million to $1.3 million. The terms of the agreement allow the Company, to
lease an additional 20,667 square feet under the same terms through July 1,
2000.
Relating to the building lease, the Company also entered into a letter of
credit in the amount of approximately $2.1 million secured by the cash deposits
of the Company. This letter of credit reduces to zero over the term of the
lease.
In connection with the newly leased space, the Company entered into
additional obligations to purchase approximately $2 million of furniture,
network equipment, communications and leasehold improvements.
LINE OF CREDIT
In February 2000, the Company obtained an equipment line of credit from a
financial institution in the amount of $500,000 secured by the leased equipment
and cash balances of 50% of the equipment value. This facility allows for
various types of equipment leases and the lease rates are set at the time the
equipment is leased based upon the financial institution's cost of funds.
SERIES C PREFERRED STOCK
On March 28, 2000, the Company entered into an investment agreement with
several investors in which the Company issued 3,784,001 shares of Series C
preferred stock, with a par value of $0.001 per share, and warrants to acquire
525,000 shares of common stock, subject to adjustment and at a price to be
determined in the future, for total net proceeds of $20.2 million. Series C
preferred stock has similar rights, preferences and privileges to Series B
preferred stock.
F-16
<PAGE>
PARTICIPATE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
2000 STOCK PLAN
On April 11, 2000, the Board of Directors adopted the 2000 Stock Plan
(subject to stockholder approval), which provides for the issuance of stock
options for employees, directors and consultants. A total of 2,000,000 shares
were reserved for issuance under the 2000 Stock Plan, plus all unissued shares
under the 1999 Stock Plan. The number of shares available for issuance increases
annually on January 1.
2000 EMPLOYEE STOCK PURCHASE PLAN
On April 11, 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan, which permits eligible employees to purchase common stock through
payroll deductions at 85% of the fair value of the stock, as defined. 600,000
shares of common stock have been reserved for issuance under this plan as of
April 11, 2000. Effectiveness of this Plan will be subject to completion of an
initial public offering.
COMPANY CAPITALIZATION
On April 11, 2000, the Board of Directors approved an amendment to the
Certificate of Incorporation to increase the authorized common shares to
100 million and to authorize five million shares of preferred stock. The
increases in authorized common and preferred stock are subject to completion of
an initial public offering.
F-17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses payable by
Participate.com in connection with the registration of the common stock
hereunder. All of the amounts shown are estimates except for the SEC
registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
SEC Registration Fee........................................ $ 15,180
NASD Filing Fee............................................. $ 6,250
Nasdaq National Market Listing Fee.......................... *
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Transfer Agent and Registrar Fees and Expenses.............. *
Miscellaneous Expenses...................................... *
---------
Total..................................................... $ *
</TABLE>
- ------------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General Corporation
Law. We have also entered into agreements with our directors and executive
officers that require Participate.com among other things to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors and executive officers to the fullest extent permitted by Delaware
law. We have also purchased directors and officers liability insurance, which
provides coverage against certain liabilities including liabilities under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since October 1997, we have issued and sold the following unregistered
securities:
(1) In September 1999, we issued 8,331,226 shares of common stock to 29
investors in exchange for all of the equity of Participate.com LLC.
(2) In September 1999, we issued 624,000 shares of Series A preferred stock
to 26 investors in exchange for all of their equity ownership in Participate.com
LLC.
(3) In September 1999, we issued and sold 8,701,980 shares of Series B
preferred stock to 26 investors for aggregate consideration of $12,835,421.
(4) In March and April 2000, we issued and sold 3,784,001 shares of
Series C preferred stock to investors for aggregate consideration of
$20,433,605.
(5) In March 2000, we issued a warrant to purchase 525,000 shares of
Series C preferred stock at a purchase price per share equal to the per share
price in this offering.
II-1
<PAGE>
(6) From October 1997 through April 10, 2000, we have granted options and
stock purchase rights to purchase 2,336,398 shares of common stock to employees,
directors and consultants under our 1999 Stock Plan at exercise prices ranging
from $0.25 to $4.00 per share. Of the 2,336,398 shares granted, 2,061,604 remain
outstanding, 176,420 shares of common stock have been purchased pursuant to
exercises of stock options and 98,374 shares have been canceled and returned to
the 1999 Stock Plan.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder, or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving any public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with Participate.com,
to information about us.
(b) There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 15(a).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of
registrant to be filed upon the closing of the offering made
under the registration statement.
3.3* Bylaws of the registrant.
4.1* Form of registrant's common stock certificate.
4.2* Amended and Restated Investors Rights Agreement, dated
March 28, 2000, between the registrant and the parties named
therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement entered into by registrant
with each of its directors and executive officers.
10.2* 1999 Stock Plan and forms of agreements thereunder.
10.3* 2000 Stock Plan and forms of agreements thereunder.
10.4* 2000 Employee Stock Purchase Plan.
10.5* Amended and Restated Employment Agreement dated November
1999 between Participate.com, Inc. and David A. Greer.
10.6* Founder's Stock Vesting Agreement dated September 17, 1999
between Participate.com, Inc. and Alan K. Warms.
10.7* Agreement and Understanding dated September 16, 1999 between
Participate.com, Inc. and Alan K. Warms.
10.8* Agreement and Understanding dated September 16, 1999 between
Participate.com, Inc. and Erika Kerekes.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<S> <C>
10.9* Agreement and Understanding dated September 17, 1999 between
Participate.com, Inc. and David A. Greer.
10.10* Series B Preferred Stock Purchase Agreement dated September
17, 1999 between Participate.com, Inc. and the purchasers
listed therein.
10.11* Series C Preferred Stock Purchase Agreement dated March 28,
2000 between Participate.com, Inc. and the purchasers listed
therein.
10.12* Amended and Restated Shareholder Rights Agreement dated
March 28, 2000 between Participate.com, Inc. and the
Shareholders listed therein.
10.13* Warrant dated March 28, 2000 issued by Participate.com, Inc.
in favor of Diamond Technology Incorporated.
10.14* Sheffield Square Professional Center Office Lease dated
November 3, 1998 between Sheffield Square L.L.C. and
ExtraNet Solutions.
10.15* Union Tower Investors II L.L.C. Office Lease dated February
9, 2000 between Union Towers Investors II, L.L.C. and
Participate.com, Inc.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in exhibit 5.1).
23.2 Consent of Arthur Andersen LLP, independent public
accountants.
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission, the information for which
is included in the financial statements or are not required under the related
instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification by Participate.com for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of Participate.com, we have been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by Participate.com of expenses incurred or paid by a director,
officer or controlling person of Participate.com in the successful defense of
any action, suit or proceeding) is asserted by a director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by Participate.com is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by Participate.com pursuant to Rule 424(b)(1) or (4) or
II-3
<PAGE>
497(h) under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Participate.com has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Chicago, State of Illinois, on the 13th day of April, 2000.
<TABLE>
<S> <C> <C>
PARTICIPATE.COM, INC.
By: /s/ ALAN K. WARMS
----------------------------------------
Alan K. Warms
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alan K. Warms and Stephen J. Hawrysz and each of
them, his attorneys-in-fact, each with the power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same Offering covered by this
Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto in all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALAN K. WARMS
------------------------------- Chief Executive Officer, President and April 13, 2000
Alan K. Warms Director (Principal Executive Officer)
Vice President of Finance and
/s/ STEPHEN J. HAWRYSZ Operations
------------------------------- (Principal Financial and Accounting April 13, 2000
Stephen J. Hawrysz Officer)
/s/ STEPHEN C. BOWSHER
------------------------------- Director April 13, 2000
Stephen C. Bowsher
/s/ JAMES J. COLLIS
------------------------------- Director April 13, 2000
James J. Collis
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK J. DENINO
------------------------------- Director April 13, 2000
Mark J. DeNino
/s/ GUY HOFFMAN
------------------------------- Director April 13, 2000
Guy Hoffman
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of
registrant to be filed upon the closing of the offering made
under the registration statement.
3.3* Bylaws of the registrant.
4.1* Form of registrant's common stock certificate.
4.2* Amended and Restated Investors Rights Agreement, dated
March 28, 2000, between the registrant and the parties named
therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement entered into by registrant
with each of its directors and executive officers.
10.2 1999 Stock Plan and forms of agreements thereunder.
10.3* 2000 Stock Plan and forms of agreements thereunder.
10.4* 2000 Employee Stock Purchase Plan.
10.5* Amended and Restated Employment Agreement dated November
1999 between Participate.com, Inc. and David A. Greer.
10.6* Founder's Stock Vesting Agreement dated September 17, 1999
between Participate.com, Inc. and Alan K. Warms.
10.7* Agreement and Understanding dated September 16, 1999 between
Participate.com, Inc. and Alan K. Warms.
10.8* Agreement and Understanding dated September 16, 1999 between
Participate.com, Inc. and Erika Kerekes.
10.9* Agreement and Understanding dated September 17, 1999 between
Participate.com, Inc. and David A. Greer.
10.10* Series B Preferred Stock Purchase Agreement dated September
17, 1999 between Participate.com, Inc. and the purchasers
listed therein.
10.11* Series C Preferred Stock Purchase Agreement dated March 28,
2000 between Participate.com, Inc. and the purchasers listed
therein.
10.12* Amended and Restated Shareholder Rights Agreement dated
March 28, 2000 between Participate.com, Inc. and the
Shareholders listed therein.
10.13* Warrant dated March 28, 2000 issued by Participate.com, Inc.
in favor of Diamond Technology Incorporated.
10.14* Sheffield Square Professional Center Office Lease dated
November 3, 1998 between Sheffield Square L.L.C. and
ExtraNet Solutions.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<S> <C>
10.15* Union Tower Investors II L.L.C. Office Lease dated February
9, 2000 between Union Towers Investors II, L.L.C. and
Participate.com, Inc.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in exhibit 5.1).
23.2 Consent of Arthur Andersen LLP, independent public
accountants.
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
II-8
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
[SIGNATURE]
Arthur Andersen LLP
April 12, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<EXCHANGE-RATE> 1 1
<CASH> 4 10,609
<SECURITIES> 0 0
<RECEIVABLES> 133 553
<ALLOWANCES> 0 (31)
<INVENTORY> 0 0
<CURRENT-ASSETS> 143 11,368
<PP&E> 26 554
<DEPRECIATION> (2) (83)
<TOTAL-ASSETS> 172 11,896
<CURRENT-LIABILITIES> 250 1,119
<BONDS> 0 0
0 588
0 12,626
<COMMON> 0 8
<OTHER-SE> (91) (2,536)
<TOTAL-LIABILITY-AND-EQUITY> 172 11,896
<SALES> 507 1,885
<TOTAL-REVENUES> 507 1,885
<CGS> 0 0
<TOTAL-COSTS> 323 1,286
<OTHER-EXPENSES> 0 144
<LOSS-PROVISION> 0 31
<INTEREST-EXPENSE> (5) (14)
<INCOME-PRETAX> (98) (2,662)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (98) (2,662)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (98) (2,662)
<EPS-BASIC> (.02) (.33)
<EPS-DILUTED> (.02) (.33)
</TABLE>
