<PAGE>
As filed with the Securities and Exchange Commission on June 27, 2000
Registration No. 333-32796
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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Evolve Software, Inc.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7372 94-3219745
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
615 Battery St., 4th Floor
San Francisco, CA 94111
(415) 439-4000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
John Bantleman
President & Chief Executive Officer
Evolve Software, Inc.
615 Battery St., 4th Floor
San Francisco, CA 94111
(415) 439-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
Barry E. Taylor, Esq. William H. Hinman, Jr., Esq.
Ramsey Hanna, Esq. Shearman & Sterling
Michael H. Domesick, Esq. 1550 El Camino Real, Suite 100
Wilson Sonsini Goodrich & Rosati Menlo Park, CA 94025
Professional Corporation (650) 330-2200
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
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 that 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.
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<PAGE>
EVOLVE SOFTWARE, INC.
CROSS-REFERENCE SHEET
Showing Location in Prospectus of Information
Required by Items of Form S-1
<TABLE>
<CAPTION>
Form S-1 Registration
Statement Heading Heading or Location in Prospectus
--------------------- ---------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Forepart of the Registration Statement;
Cover Page of Prospectus... Outside Front Cover Page of Prospectus
2. Inside Front and Outside
Back Cover Pages of Inside Front Cover Page; Outside Back Cover
Prospectus................. Page
3. Summary Information, Risk
Factors and Ratio of
Earnings to Fixed Charges.. Prospectus Summary; Risk Factors
4. Use of Proceeds............. Prospectus Summary; Use of Proceeds
5. Determination of Offering
Price...................... Underwriting
6. Dilution.................... Dilution
7. Selling Security Holders.... Not Applicable
8. Plan of Distribution........ Underwriting
9. Description of Securities to Outside Front Cover Page; Prospectus
be Registered.............. Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts
and Counsel................ Legal Matters
11. Information with Respect to Inside and Outside Cover Pages; Prospectus
the Registrant............. Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Dilution;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................ Not Applicable
</TABLE>
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 2000
5,000,000 Shares
[EVOLVE LOGO]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$8 and $10 per share. We have applied to list our common stock on The Nasdaq
Stock Market's National Market under the symbol "EVLV."
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on Page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Evolve
------------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful and complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston Deutsche Banc Alex. Brown
Wit SoundView
The date of this prospectus is , 2000.
<PAGE>
[Description of inside front cover graphic]
The title "Connecting the Service Chain" spans both pages of the front gatefold
cover. The top left corner of the left-hand page contains the Evolve logo in a
black circle further enclosed within a light square. Underneath the logo is a
sidebar containing the following text "Our solution combines the efficiency
gains of automating business processes with the benefits of inter-company
collaboration, creating an ePlatform for the professional services industry."
---------
In the center of the page are a set of overlapping colored circular lines. The
left-hand circle contains the words "ServiceSphere" and "Service Acquirer" at
its center. The right-hand circle contains the words "ServiceSphere" and
"Service Provider" at its center. The left-hand and right-hand circles
incorporate three smaller circles labeled "O", "R" and "D" with additional
overlapping colored circular lines connecting each one of the smaller circles.
The right-hand and the left-hand circles each intersect and overlap with the
center circle. Inside the intersection of the large circles is the word "sXML"
enclosed in an oval.
On the top perimeter of the center circle are the words "Collaborative
Commerce". On the bottom perimeter of the same circle are words "Collaborative
Commerce".
Below this graphic is a legend entitled "ePlatform": The first legend item is a
circle containing the letter "O" followed by the text "Opportunity Manager."
The second legend item is a circle containing the letter "R" followed by the
text "Resource Manager". The third legend item is a circle containing the
letter "D" followed by the text "Delivery Manager".
Under all the graphics is a text box listing all customers of Evolve who have
contracted to purchase products and services with a value in excess of $250,000
in alphabetical order. The box also contains the text "Over 40,000 Professionals
Managed."
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward- Looking Information...................... 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 34
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 48
Certain Relationships and Related Transactions............................. 59
Principal Stockholders..................................................... 62
Description of Capital Stock............................................... 64
Shares Eligible for Future Sale............................................ 67
Underwriting............................................................... 69
Notice to Canadian Residents............................................... 72
Legal Matters.............................................................. 73
Experts.................................................................... 73
Where You Can Find More Information........................................ 73
Index to Financial Statements.............................................. F-1
</TABLE>
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all the information you should consider before
buying shares in this offering. You should carefully read the entire prospectus
and the risk factors beginning on page 6 before evaluating an investment in our
stock.
Evolve Software, Inc.
We are a leading provider of Internet-based end-to-end solutions for
automating professional services organizations. Our ServiceSphere software
suite integrates and streamlines the core processes that are critical to
professional services organizations: managing project opportunities,
professional resources and service delivery. Our Services.com online
applications portal enables smaller professional services providers to rapidly
and cost-effectively access the benefits of our ServiceSphere technology to
manage their businesses. Our solution combines the efficiency gains of
automating business processes with the benefits of online inter-company
collaboration, creating an ePlatform for the professional services industry. We
have licensed our solution to 34 customers who have contracted to purchase more
than $250,000 in products and services from us, and who collectively license
our solution to manage over 40,000 services professionals. Our customers
include Cambridge Technology Partners, marchFIRST (formerly Whittman-Hart),
Novell, Xpedior and Zefer, who accounted for 13%, 21%, 17%, 5% and 7% of our
revenues for the nine months ended March 31, 2000. During the fiscal year ended
June 30, 1999 and the nine months ended March 31, 2000 we had revenues of
$517,000 and $5.6 million, and we had net losses of $11.5 million and $32.6
million.
The US professional services market is projected to generate $2.1 trillion
in revenues in 2000, according to Benchmarking Partners. This market includes
the information technology, management consulting, advertising, media, public
relations, architecture, construction, engineering, financial services, law,
tax, audit, and health care sectors. We believe that the unique nature of the
professional services industry has created an opportunity for an ePlatform to
operate and integrate the businesses of both providers and acquirers of
professional services. Unlike product-based businesses, professional services
organizations are inherently virtual, collaborative and people-centric. This
creates complex operational and management challenges for services
organizations both within their enterprise and in dealing with outside
providers and customers, which traditional enterprise software applications
have not addressed.
Our ePlatform solution consists of three business process components or
"modules" that integrate and automate the core processes that are critical to
the operational effectiveness of services organizations. Our Opportunity
Manager module assists in identifying, managing, and prioritizing project
opportunities across the entire services organization. Our Resource Manager
module allows businesses to more effectively match and allocate resources to
improve productivity and enhance employee retention. Our Delivery Manager
module provides flexible and integrated time and expense tracking, billing and
analysis to improve profitability and customer satisfaction. We are extending
the capabilities of these modules beyond the internal processes of service
organizations to enable automated workflow and collaborative commerce with
their customers and service partners.
Our objective is to become the leading ePlatform provider for the
professional services industry. The key elements of our strategy include:
. focusing on extending our market position among information technology
services organizations and into other markets;
. enhancing our technology leadership;
. capitalizing on network effects which are generated by our growing
customer base;
. expanding the licensing, deployment, and pricing options we offer to
customers;
. increasing the deployment of our solution throughout our customers'
organizations; and
. expanding into new geographic markets.
3
<PAGE>
We face a number of risks and uncertainties in executing our strategy. These
risks include the challenges inherent to acquiring and retaining new customers
and expanding into new market sectors and geographic markets, uncertainty about
the future growth of the market for business process automation solutions,
uncertain customer acceptance of any new products and services we may
introduce, and competition from other enterprise software providers. For a more
thorough discussion of the risks we face, please refer to "Risk Factors"
beginning on page 6.
We were incorporated in Delaware in February 1995. Our principal executive
offices are located at 615 Battery Street, 4th Floor, San Francisco, CA 94111,
and our telephone number is (415) 439-4000.
Evolve, "Evolve. Connect. Thrive.", ServiceSphere, Services.com, "Connecting
the Service Chain", sXML and the Evolve Logo are our trademarks. All other
trademarks or service marks appearing in this prospectus are trademarks or
service marks of the respective companies that own them.
The Offering
<TABLE>
<C> <S>
Common stock offered in this offering...... 5,000,000 shares
Common stock outstanding after this 34,273,602 shares
offering..................................
Use of proceeds from this offering......... For general corporate purposes,
including working capital, for
repayment of indebtedness and for
potential acquisitions. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol..... EVLV
</TABLE>
The number of shares of common stock outstanding after this offering is
based on the number of shares outstanding as of March 31, 2000 and gives effect
to the sale of 2,916,667 shares of our preferred stock at $6.00 per share in a
private placement in June 2000, and to the conversion of all shares of our
preferred stock into common stock upon the closing of this offering. This
number excludes:
. 1,613,630 shares of common stock that we may issue upon exercise of
options outstanding as of March 31, 2000 with a weighted average exercise
price of $3.04;
. 1,281,342 shares of common stock issuable under our active stock plans;
and
. 480,305 shares of common stock equivalents that we may issue upon
exercise of warrants outstanding as of March 31, 2000 at a weighted
average exercise price of $4.32 per share.
4
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following tables summarize our consolidated financial data. You should
read the summary consolidated financial data below in conjunction with our
consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
beginning on page 23. The pro forma balance sheet data reflect the sale of
2,916,667 shares of our preferred stock in June 2000 and the conversion of our
preferred stock to common stock. The pro forma as adjusted balance sheet data
reflect our sale of 5,000,000 shares of common stock in this offering at an
assumed initial public offering price of $9.00 per share, after deducting
estimated underwriting discounts, commissions and offering expenses.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30, March 31,
--------------------------- ------------------
1997 1998 1999 1999 2000
------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues...................... $ -- $ -- $ 517 $ 216 $ 5,596
Gross margin (loss)........... -- -- (118) (112) 2,706
Operating expenses............ 7,907 9,225 11,008 7,345 35,754
Loss from operations.......... (7,907) (9,225) (11,126) (7,457) (33,048)
Net loss...................... (8,093) (10,582) (11,471) (7,850) (32,562)
Net loss per common share--
basic and diluted............ $(12.12) $ (9.27) $ (7.21) $ (5.19) $ (13.56)
Shares used in net loss per
share calculation--basic and
diluted ..................... 668 1,141 1,591 1,513 2,402
Pro forma net loss per share--
basic and diluted ........... $ (1.52) $ (2.08)
Shares used in pro forma net
loss per share calculation--
basic and diluted............ 7,545 15,690
</TABLE>
--------
See Note 2 of Notes to Consolidated Financial Statements for explanation of
determination of number of shares used in computing per share data.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................... $ 12,626 $30,126 $ 66,891
Restricted cash.............................. 2,000 2,000 2,000
Working capital.............................. 9,600 27,100 67,750
Total assets................................. 60,065 77,565 114,330
Long-term debt and capital lease obligations,
net of current portion...................... 4,853 4,853 968
Redeemable convertible preferred stock....... 61,490 -- --
Total stockholders' equity (deficit)......... (21,990) 57,000 97,650
</TABLE>
Except as otherwise indicated, the information in this prospectus gives
effect to:
. the conversion of all outstanding shares of preferred stock into common
stock upon the closing of this offering and the presentation of preferred
stock on an as converted to common stock basis;
. the sale of 2,916,667 shares of our preferred stock in June 2000;
. a one for six reverse stock split of our stock effective upon the closing
of this offering; and
. no exercise of the underwriters' option to purchase additional shares
after the closing of the offering.
5
<PAGE>
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risks and all other information contained in
this prospectus before purchasing our common stock. Any of the following risks
could materially harm our business, financial condition or operating results,
and cause the trading price of our common stock to decline. As a result, you
could lose all or part of your investment.
Risks Related to Our Business
Our business is difficult to evaluate because our operating history is limited.
It is difficult to evaluate our business and our prospects because our
revenue and income potential are unproven. We did not begin selling our first
products until the fourth quarter of 1998 and commenced recognizing sales
revenues in the first quarter of 1999. Because of our limited operating
history, there may not be an adequate basis for forecasts of future operating
results, and we have only limited insight into the trends that may emerge in
our business and affect our financial performance.
We have incurred losses since inception, and we may not be able to achieve
profitability.
We have incurred net losses and losses from operations since our inception
in 1995, and we may not be able to achieve profitability in the future. As of
March 31, 2000, we had an accumulated deficit of approximately $67.6 million.
Since inception, we have funded our business primarily from the sale of our
stock and by borrowing funds, not from cash generated by our business. We
expect to continue to incur significant sales and marketing, research and
development, and general and administrative expenses. As a result, we expect to
experience continued losses and negative cash flows from operations. If we do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis in the future.
Our future operating results may not follow past trends due to many factors,
and any of these could cause our stock price to fall.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of future performance. Although our operating results
have generally improved from quarter to quarter in the recent past, our future
operating results may not follow past trends. It is likely that in some future
quarters our operating results may be below the expectations of public market
analysts and investors due to factors beyond our control, and as a result, the
price of our common stock may fall.
Factors that may cause our future operating results to be below expectations
and cause our stock price to fall include:
. the lack of demand for and acceptance of our products, product
enhancements and services; for instance, as we expand our target customer
focus beyond the information technology sector and into overseas markets,
we may encounter increased resistance to adoption of our business process
automation solutions;
. unexpected changes in the development, introduction, timing and
competitive pricing of our products and services or those of our
competitors; for instance, we anticipate the introduction of a number of
online applications portals in the future, some of which may compete with
our Services.com offering;
. any inability to expand our direct sales force and indirect marketing
channels both domestically and internationally;
. difficulties in recruiting and retaining key personnel in a highly
competitive recruiting environment;
. unforeseen reductions or reallocations of our customers' information
technology infrastructure budgets;
. our compensation policies that tend to compensate sales personnel for
exceeding annual quotas, typically in the latter half of the fiscal year,
which may result in higher costs associated with sales commissions; and
6
<PAGE>
. any delays or unforseen costs incurred in integrating technologies and
businesses we may acquire, including our recent acquisition of InfoWide,
Inc.
We plan to significantly increase our operating expenses to expand our
administration, information technology infrastructure, consulting and training,
maintenance and technical support, research and development and sales and
marketing groups. Our operating expenses are based on our expectations of
future revenues and are relatively fixed in the short term. If revenues fall
below our expectations in any quarter and we are not able to quickly reduce our
spending in response, our operating results for that quarter would be lower
than expected and our stock price may fall.
We may lose existing customers or be unable to attract new customers if we do
not develop new products or enhance our existing products.
If we are not able to maintain and improve our product line and develop new
products, we may lose existing customers or be unable to attract new customers.
We may not be successful in developing and marketing product enhancements or
new products on a timely or cost-effective basis. These products, if developed,
may not achieve market acceptance. As an example, we are currently adding
service delivery management functions to our ServiceSphere suite and we are
building enhanced delivery management functionality in part through integration
of the technology of InfoWide, Inc. However, this effort is still in its early
stages, and we cannot be certain that any of these enhancements that we achieve
will meet the needs or expectations of our customers.
We have commitments to some of our customers to develop product enhancements
that address their specific needs. For instance, we have made commitments to
customers to deliver enhanced time and expense management functions in future
releases of our software. If we fail to deliver these enhancements on a timely
basis, we risk damaging our relationship with these customers. We have
experienced delays in the past in releasing new products and product
enhancements and may experience similar delays in the future. These delays or
problems in the installation or implementation of our new releases may cause
customers to forego purchases of our products or to purchase those of our
competitors.
If the market for process automation solutions for professional services
organizations does not continue to grow, the growth of our business will not be
sustainable.
The future growth and success of our business is contingent on growing
acceptance of, and demand for, business process automation solutions for
professional services organizations. All of our historical revenues have been
attributable to the sale of automation solutions for professional services
organizations. This is a relatively new enterprise application solution
category, and it is uncertain whether major services organizations will choose
to adopt process automation systems. While we have devoted significant
resources to promoting market awareness of our products and the problems our
products address, we do not know whether these efforts will be sufficient to
support significant growth in the market for process automation products.
Accordingly, the market for our products may not continue to grow or, even if
the market does grow in the immediate term, that growth may not be sustainable.
There are no binding customer commitments to use Services.com, and the online
applications portal business model is unproven and may not achieve customer
acceptance.
Our Services.com online applications portal was launched in March 2000 and
is not yet fully operational. Market acceptance of Services.com will be a key
factor in our ability to extend our potential market to smaller professional
service providers. There are no binding customer commitments to use
Services.com, and we cannot be certain that any of our current or future
customers will choose to use Services.com, or that Services.com will contribute
to an expansion of our customer base. Moreover, we cannot predict whether
customers will support our economic model for Services.com. We currently
anticipate earning recurring monthly subscription fees for use of applications
offered on Services.com. In addition, without prior operating history, we
cannot be sure that our Services.com website infrastructure will be able to
adequately support large numbers of simultaneous users.
7
<PAGE>
If we fail to expand our relationships with third party resellers and
integrators, our ability to grow revenues could be harmed.
In order to grow our business, we must establish, maintain and strengthen
relationships with third parties, such as information technology (IT)
consultants and systems integrators as implementation partners and hardware and
software vendors as marketing partners. If these parties do not provide
sufficient, high-quality service or integrate and support our software
correctly, our revenues may be harmed. In addition, these parties may offer
products of other companies, including products that compete with our products.
Our contracts with third parties may not require these parties to devote
resources to promoting, selling and supporting our solutions. Therefore we may
have little control over these third parties. We cannot assure you that we can
generate and maintain relationships that offset the significant time and effort
that are necessary to develop these relationships, or that, even if we are able
to develop such relationships, these parties will perform adequately.
Our services revenues have a substantially lower margin than our software
license revenues, and an increase in services revenues relative to license
revenues could harm our gross margins.
A significant shift in our revenue mix away from license revenues to service
revenues would adversely affect our gross margins. Revenues derived from
services we provide have substantially lower gross margins than revenues we
derive from licensing our software. The relative contribution of services we
provide to our overall revenues is subject to significant variation based on
the structure and pricing of arrangements we enter into with customers in the
future, and the extent to which our partners provide implementation,
integration, training and maintenance services required by our customers. An
increase in the percentage of total revenues generated by the services we
provide could adversely affect our overall gross margins.
Difficulties with third-party services and technologies could disrupt our
business, and many of our communication systems do not have backup systems.
Many of our communications and hosting systems do not have backup systems
capable of mitigating the effect of service disruptions. Our success in
attracting and retaining customers for our Services.com and ServiceSphere
application service provider (ASP) offerings and convincing them to increase
their reliance on these solutions depends on our ability to offer customers
reliable, secure and continuous service. This requires that we provide
continuous and error-free access to our systems and network infrastructure. We
rely on third parties to provide key components of our networks and systems.
For instance, we rely on third-party Internet service providers to host
applications for customers who purchase our solutions on a subscription basis.
We also rely on third-party communications services providers for the high-
speed connections that link our Web servers and office systems to the Internet.
Any Internet or communications systems failure or interruption could result in
disruption of our service or loss or compromise of customer orders and data.
These failures, especially if they are prolonged or repeated, would make our
services less attractive to customers and tarnish our reputation.
Our markets are highly competitive and competition could harm our ability to
sell products and services and reduce our market share.
Competition could seriously harm our ability to sell additional software
solutions and subscriptions on prices and terms favorable to us. The markets
for our products are intensely competitive and subject to rapidly changing
technology. We currently compete against providers of automation solutions for
professional services organizations, such as Changepoint and Niku. In addition,
we may in the future face competition from providers of enterprise application
software or electronic marketplaces. Companies in each of these areas may
expand their technologies or acquire companies to support greater professional
services automation functionality and capabilities. In addition, "in-house"
information technology departments of potential customers have developed or may
develop systems that substitute for some of the functionality of our ePlatform.
Some of our competitors' products may be more effective than our products at
performing particular functions or be more customized for particular customer
needs. Even if these functions are more limited than
8
<PAGE>
those provided by our products, our competitors' software products could
discourage potential customers from purchasing our products. A software product
that provides some of the functions of our software solutions, but also
performs other tasks may be appealing to these vendors' customers because it
would reduce the number of different types of software necessary to effectively
run their business. Further, many of our competitors may be able to respond
more quickly than we can to changes in customer requirements.
Some of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. Our competitors have made and may also continue to make strategic
acquisitions or establish cooperative relationships among themselves or with
other software vendors. They may also establish or strengthen cooperative
relationships with our current or future partners, limiting our ability to
promote our products through these partners and limiting the number of
consultants available to implement our software.
Our lengthy and unpredictable sales cycles for our products and resistance to
adoption of our software could cause our operating results to fall below
expectations.
Our operating results for future periods could be adversely affected because
of unpredictable increases in our sales cycles. Our products and services have
lengthy and unpredictable sales cycles varying from as little as three months
to as much as nine months, which could cause our operating results to be below
the expectations of analysts and investors. Since we are unable to control many
of the factors that will influence our customers' buying decisions, it is
difficult for us to forecast the timing and recognition of revenues from sales
of our solutions.
Customers in our target market often take an extended time evaluating our
products before purchasing them. Our products may have an even longer sales
cycle in international markets. During the evaluation period, a variety of
factors, including the introduction of new products or aggressive discounting
by competitors and changes in our customers' budgets and purchasing priorities,
may lead customers to not purchase or scale down orders for our products.
As we target industry sectors and types of organizations beyond our core
market of information technology (IT) services organizations, we may encounter
increased resistance to use of business process automation solutions, which may
further increase the length of our sales cycles, increase our marketing costs
and reduce our revenues. Because we are pioneering a new solution category, we
often must educate our prospective customers on the use and benefit of our
solutions, which may cause additional delays during the evaluation and
acceptance process. These companies may be reluctant to abandon investments
they have made in other systems in favor of our solution. In addition, IT
departments of potential customers may resist purchasing our solutions for a
variety of other reasons, particularly the potential displacement of their
historical role in creating and running software and concerns that packaged
software products are not sufficiently customizable for their enterprises.
Our revenues depend on orders from our top customers, and if we fail to
complete one or more orders, our revenues will be reduced.
To date, we have received a significant portion of our revenues from a small
number of large orders from our top customers. For the year ended June 30,
1999, our initial customers, Whittman-Hart (now marchFIRST), Netscape (now
iPlanet) and Becton Dickinson accounted for 58%, 32% and 10% of our total
revenues. For the nine months ended March 31, 2000, Whittman-Hart, Novell and
Cambridge Technology Partners accounted for 21%, 17%, and 13% of our total
revenues. Our operating results may be harmed if we are not able to complete
one or more substantial product sales in any future period or attract new
customers.
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We depend on the continued services of our executive officers, and the loss of
key personnel or any inability to attract and retain additional personnel could
affect our ability to successfully grow our business.
If we are unable to hire and retain a sufficient number of qualified
personnel, particularly in sales, marketing, research and development, service
and support, our ability to grow our business could be affected. Competition
for qualified personnel in high technology is intense, particularly in the San
Francisco Bay Area where our principal offices are located. The loss of the
services of our key engineering, sales, service or marketing personnel would
harm our operations. For instance, loss of sales and customer service
representatives could harm our relationship with the customers they serve, loss
of engineers and development personnel could impede the development of product
releases and enhancements and decrease our competitiveness, and departure of
senior management personnel could result in a loss of confidence in our company
by customers, suppliers and partners. None of our key personnel is bound by an
employment agreement, and we do not maintain key person insurance on any of our
employees. Because we, like many other technology companies, rely on stock
options as a component of our employee compensation, if the market price of our
common stock increases or decreases substantially, some current or potential
employees may perceive our equity incentives as less attractive. In that case,
our ability to attract and retain employees may be adversely affected.
Our future success depends upon the continued service of our executive
officers, who are listed in the section entitled "Management," particularly
John Bantleman, our President and Chief Executive Officer, who is critical to
determining our broad business strategy. None of our executive officers is
bound by an employment agreement for any specific term. Our business could be
harmed if we lost the services of one or more of our executive officers or key
employees, or if one or more of them decide to join a competitor or otherwise
compete directly or indirectly with us.
Our executive management team has limited experience working together, which
may make it difficult to conduct and grow our business.
Because many key members have been with us for only a short period of time,
there has been little or no opportunity to evaluate the effectiveness of our
executive management team as a combined unit. Recent additions to our
management team include:
. our Chief Operating Officer, our Vice President of Marketing and Business
Development and our Vice President, Marketplace Services, each of whom
have been employed with us since November 1999;
. our Vice President, Worldwide Customer Service, who has been with us
since December 1999;
. our Vice President, Strategy, who has been employed with us since March
2000; and
. our Chief Financial Officer, who joined us in April 2000.
The failure of executive management to function effectively as a team may have
an adverse effect on our ability to develop and market our products, maintain
customer relationships, present a cohesive culture and compete effectively.
Our acquisitions could be difficult to integrate, disrupt our business and
dilute stockholder value.
We intend to make investments in or acquire complementary companies,
products and technologies. For example, in March 2000, we completed our
acquisition of InfoWide, Inc. Our acquisition of InfoWide was our first
acquisition of a business. Accordingly, we have limited organizational
experience in acquiring and integrating businesses and will need to develop the
relevant skills if we are to be successful in realizing the benefits of the
InfoWide acquisition and future transactions. We could have difficulty in
assimilating the operations of InfoWide or any other company we may buy. In
addition, we may be unsuccessful in retaining the key personnel of any acquired
company. In particular, because all employees of InfoWide will continue to
10
<PAGE>
work in a separate office location, assimilating them into our corporate
culture and coordinating development operations across our geographically
dispersed offices could prove to be difficult and time consuming. Moreover, we
currently do not know and cannot predict the accounting treatment of any future
acquisition, in part because we cannot be certain what accounting regulations,
conventions or interpretations may prevail in the future. If we acquire
complementary technologies or products, we could experience difficulties
assimilating the acquired technology or products into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses. Furthermore, we may have to incur debt or
issue equity securities to pay for any future acquisitions, the issuance of
which could be dilutive to our existing stockholders.
If our products do not stay compatible with widely used software programs, our
revenues may be adversely affected.
Our ePlatform must work with widely used software programs. If these
software programs and operating environments do not remain widely used, or we
do not update our software to be compatible with newer versions of these
programs and systems, we may lose customers.
In order to operate our software, it must be installed on both a computer
server running the Microsoft Windows NT operating system and a computer server
running database software from Microsoft or Oracle. In order to increase the
flexibility of our solution and expand our client base, we must be able to
successfully adapt it to work with other applications and operating systems. In
particular, we are in the process of adapting our software to run on the Sun
Solaris operating system. Because this development effort is in its early
stages, we cannot be certain that we will avoid significant technical
difficulties which could delay or prevent completion of the development effort.
Our software connects to and uses data from a variety of our customers'
existing software systems, including systems from Oracle and SAP. If we fail to
enhance our software to connect to and use data from new systems of these
products, we may lose potential customers.
The cost and difficulties of implementing our products could significantly harm
our reputation with customers and harm our future sales.
If our customers encounter unforeseen difficulties or delays in deploying
our products and integrating them with their other systems, they may reverse
their decision to use our solutions, which would reduce our future revenues and
potentially damage our reputation. Factors which could delay or complicate the
process of deploying our solutions include:
. customers may need to modify significant elements of their existing IT
systems in order to effectively integrate them with our solutions;
. customers may need to purchase and deploy significant additional hardware
and software resources and may need to make significant investments in
consulting and training services; and
. customers may rely on third-party systems integrators to perform all or a
portion of the deployment and integration work, which reduces the control
we have over the implementation process and the quality of customer
service provided to the customer.
Our sales are concentrated in the IT services industry, and if our customers in
this industry decrease their infrastructure spending, or we fail to penetrate
other industries, our revenues may decline.
We expect to continue to direct our sales and marketing efforts primarily
toward companies in the IT services industry. Sales to customers in the IT
services industry accounted for substantially all of our revenues in fiscal
1999 and in the nine months ended March 31, 2000. Given the high degree of
competition and the rapidly changing environment in this industry, there is no
assurance that we will be able to continue sales in
11
<PAGE>
this industry at current levels. Declines in the stock prices of potential
customers in the IT services sector may also limit the ability of IT service
providers to invest in their infrastructure. In addition, we intend to market
our products to professional services organizations in other industries.
Customers in these new industries are likely to have different requirements and
may require us to change our product design or features, sales methods, support
capabilities or pricing policies. If we fail to successfully address the needs
of these customers, we may experience decreased sales in future periods.
If we lose key licenses, we may be required to develop or license alternatives
which may cause delays or reductions in sales or shipments.
We rely on software that we have licensed from third parties, including
Paradigm Software Technologies, Poet Software and Inprise/Borland, to perform
key functions of our ServiceSphere ePlatform, and we rely on these and other
third parties to support their products for our development and customer
support efforts. These companies could terminate our licenses if we breach our
agreements with them, or they could discontinue support of the products we
license from them. This could result in delays or reductions of sales or
shipments of our ePlatform until alternative software can be developed or
licensed.
If our products contain significant defects or our services are not perceived
as high quality, we could lose potential customers or be subject to damages.
Our products are complex and may contain currently unknown errors, defects
or failures, particularly since new versions are frequently released. In the
past we have discovered software errors in some of our products after
introduction. We may not be able to detect and correct errors before releasing
our products commercially. If our commercial products contain errors, we may:
. need to expend significant resources to locate and correct the errors;
. be required to delay introduction of new products or commercial shipment
of products; or
. experience reduced sales and harm to our reputation from dissatisfied
customers.
Our customers also may encounter system configuration problems that require
us to spend additional consulting or support resources to resolve these
problems.
Because our software products are used for critical operational and
decision-making processes by our customers, product defects may also give rise
to product liability claims. Although our license agreements with customers
typically contain provisions designed to limit our exposure, some courts may
not enforce all or part of these limitations. Although we have not experienced
any product liability claims to date, we may encounter these claims in the
future. Product liability claims, whether or not they have merit, could:
. divert the attention of our management and key personnel from our
business;
. be expensive to defend; and
. result in large damage awards.
We do not have product liability insurance, and even if we obtain product
liability insurance, it may not be adequate to cover all of the expenses
resulting from such a claim. In addition, if our customers do not find our
services to be of high quality, they may elect to use other training,
consulting and product integration firms rather than contract for our services.
If customers are dissatisfied with our services, we may lose revenues.
Our business may suffer if we are not able to protect our intellectual
property.
Our success is dependent on our ability to develop and protect our
proprietary technology and intellectual property rights. We seek to protect our
software, documentation and other written materials primarily through a
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<PAGE>
combination of patent, trade secret, trademark and copyright laws,
confidentiality procedures and contractual provisions. While we have attempted
to safeguard and maintain our proprietary rights, we do not know whether we
have been or will be completely successful in doing so. Further, our
competitors may independently develop or patent technologies that are
substantially equivalent or superior to ours.
We have two patent applications pending in the United States with respect to
the "team builder" functionality in our Resource Manager module, and the
enablement of dynamically configurable software systems by our ServiceSphere
ePlatform server. None of these patents has been issued, and there can be no
assurance that any patents will be issued pursuant to these applications or
that, if granted, a patent would survive a legal challenge to their validity or
provide significant protection to us. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use information that we regard as proprietary. Policing
unauthorized use of our products is difficult. While we are unable to determine
the extent to which piracy of our software products exists, software piracy can
be expected to be a persistent problem, particularly in foreign countries where
the laws may not protect proprietary rights as fully as in the United States.
We can offer no assurance that our means of protecting its proprietary rights
will be adequate or that our competitors will not reverse engineer or
independently develop similar technology.
If others claim that we are infringing their intellectual property, we could
incur significant expenses or be prevented from selling our products.
We cannot provide assurance that others will not claim that we are
infringing their intellectual property rights or that we do not in fact
infringe those intellectual property rights. We have not conducted a search for
existing intellectual property registrations, and we may be unaware of
intellectual property rights of others that may cover some of our technology.
Any litigation regarding intellectual property rights could be costly and
time-consuming and divert the attention of our management and key personnel
from our business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements.
We may not be able to obtain royalty or license agreements on terms
acceptable to us, or at all. We also may be subject to significant damages or
an injunction against use of our products. A successful claim of patent or
other intellectual property infringement against us would have an immediate
material adverse effect on our business and financial condition.
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.
We have grown significantly since our inception and will need to grow
quickly in the future. Any failure to manage this growth could impede our
ability to increase revenues and achieve profitability. Evolve has increased
its number of employees from 58 at December 31, 1998 to 310 employees as of May
31, 2000. In order to manage growth effectively, we must:
. hire, train and integrate new personnel;
. continue to augment our management information systems;
. manage our sales and services operations, which are in several locations;
and
. expand and improve our systems and facilities.
We intend to expand operations internationally, but we may encounter a number
of problems in doing so which could limit our future growth.
We may not be able to successfully market, sell, deliver and support our
products and services internationally. Any failure to build and manage
effective international operations could limit the future growth
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<PAGE>
of our business. Entry into international markets will require significant
management attention and financial resources to open international offices and
hire international sales and support personnel. Localizing our products is
difficult and may take longer than we anticipate due to difficulties in
translation and delays we may experience in recruiting and training
international staff. We currently have no experience in developing local
versions of our products, or marketing, selling and supporting our products and
services overseas. Doing business internationally involves greater expense and
many additional risks, particularly:
. unexpected changes in regulatory requirements, taxes, trade laws,
tariffs, intellectual property rights and labor regulations;
. changes in a specific country's or region's political or economic
conditions;
. greater difficulty in establishing, staffing and managing foreign
operations; and
. fluctuating exchange rates.
Security concerns, particularly related to the use of our software on the
Internet, may limit the effectiveness of and reduce the demand for our
products.
Despite our efforts to protect confidential and proprietary information of
our customers stored on Services.com or our ServiceSphere application service
provider (ASP) offering via virtual private networks and other security
devices, there is a risk that this information will be disclosed to unintended
third party recipients. To the extent our ability to implement secure private
networks on our Services.com site or for our ServiceSphere ASP service is
impaired by technical problems, or by improper or incomplete procedural
diligence by either ourselves or our customers, sensitive information could be
exposed to inappropriate third parties such as competitors of our customers,
which may in turn expose us to liability and detrimentally impact our
customers' confidence in Services.com or our ASP service.
Resistance to online use of personal information regarding employees and
consultants may hinder the effectiveness of and reduce demand for our products
and services.
Companies store information on the Services.com site, our application
services provider (ASP) offering and on online networks created by our
customers, which may include personal information of their employees, including
employee backgrounds, skills, and other details. These employees may object to
online compilation, transmission and storage of such information, or, despite
our efforts to keep such personal information secure, this information may be
delivered unintentionally to inappropriate third parties such as recruiters.
Enterprise applications like ServiceSphere have always run on secure company
intranets. The information contained in ServiceSphere databases will be exposed
to the unpredictable security of the Internet, which may create unforeseen
liabilities for us. Services.com and ServiceSphere are currently targeted to
the North American market, but to the extent that European companies and
customers will have access to it (given the global nature of the Internet), and
to the extent that our services are utilized by Europeans, legal action
grounded in European privacy laws could prevent Services.com and our ASP
service from succeeding in the European market.
Potential imposition of governmental regulation or taxation on electronic
commerce could limit our growth.
The adoption of new laws or the adaptation of existing laws to the Internet
may decrease the growth in the use of the Internet, which could in turn
decrease the demand for our solutions, increase our cost of doing business or
otherwise have a material adverse impact on our business. Few laws or
regulations currently directly apply to access to commerce on the Internet.
Federal, state, local and foreign governments are considering a number of
legislative and regulatory proposals relating to Internet commerce. As a
result, a number of laws or regulations may be adopted regarding Internet user
privacy, taxation, pricing, quality of products and services, and intellectual
property ownership. How existing laws will be applied to the Internet in areas
such as property ownership, copyright, trademark, trade secret and defamation
is uncertain. The recent growth of Internet commerce has been attributed by
some to the lack of sales and value-added taxes on interstate sales of goods
and services over the Internet. Numerous state and local authorities have
expressed a
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<PAGE>
desire to impose such taxes on sales to businesses in their jurisdictions. The
Internet Tax Freedom Act of 1998 prevents imposition of such taxes through
October 2001. If the federal moratorium on state and local taxes on Internet
sales is not renewed, or if it is terminated before its expiration, sales of
goods and services over the Internet could be subject to multiple overlapping
tax schemes, which could substantially hinder the growth of Internet-based
commerce, including use of our Services.com offering.
If we need additional financing to maintain and expand our business, financing
may not be available on favorable terms, if at all.
We expect to incur net losses before amortization charges for the
foreseeable future. We may need additional funds to expand or meet all of our
operating needs. If we need additional financing, we cannot be certain that it
will be available on favorable terms, if at all. Further, if we issue
additional shares of our capital stock, stockholders will experience additional
dilution, which may be substantial. If we need funds and cannot raise them on
acceptable terms, we may not be able to continue our operations at the current
level or at all.
Risks Associated with this Offering
Our securities have no prior market, and we cannot assure you that our stock
price will not decline after the offering.
Our common stock has never been sold in a public market. The initial public
offering price may not be indicative of the prices that will prevail in the
public market after the offering, and the market price of the common stock
could fall below the initial public offering price. The initial public offering
price will be determined through negotiations between representatives of the
underwriters and us and may not be representative of the price of our common
stock that will prevail after this offering. In addition, we cannot assure that
an active trading market for our common stock will develop or be sustained
following completion of the offering. If trading volumes for our common stock
are low, it may be difficult for investors holding large positions to sell
their securities, and the price of our common stock may experience a high
degree of volatility. Additional factors which could cause our common stock to
fluctuate significantly after this offering include the following:
. changes in financial estimates or investment recommendations by
securities analysts following our business;
. quarterly variations in our operating results falling below analysts' or
investors' expectations in any given period;
. general economic and information technology services market conditions;
. changes in economic and capital market conditions for Internet and other
information technology services companies;
. changes in market valuations of, or earnings and other announcements by,
providers of Internet and other information technology services;
. announcements by us or our competitors of new solutions, service
offerings, acquisitions or strategic relationships;
. changes in business or regulatory conditions; and
. trading volume of our common stock.
Our stock price may be adversely affected by developments in the Internet
sector or the securities markets over which we have no control.
Many companies' equity securities, including equity securities of Internet
and other technology companies, have experienced extreme price and volume
fluctuations in recent years. Often, these fluctuations are unrelated to the
companies' operating performance. Elevated levels in market prices for
securities, often reached following these companies' initial public offerings,
may not be sustainable and many not bear any relationship
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<PAGE>
to operating performance. Our common stock may not trade at the same levels as
other Internet stocks, and Internet stocks in general may not sustain their
current market prices. In the past, following periods of market volatility,
stockholders have instituted securities class action litigation. If we were
involved in securities litigation, it could have a substantial cost and divert
resources and the attention of executive management from our business.
We have broad discretion to use the offering proceeds and how we invest these
proceeds may not yield a favorable return.
We intend to use the proceeds from the offering for general corporate
purposes, including working capital and capital expenditures and may use a
portion of the proceeds to acquire other businesses, products or technologies.
Our management may spend the proceeds from the offering in ways with which the
stockholders may not agree. Pending any such uses, we plan to invest the net
proceeds of the offering in investment-grade, interest-bearing securities. We
cannot predict that such investments will yield a favorable return.
Shares eligible for future sale after the offering could cause our stock price
to fall.
If our stockholders sell substantial amounts of our common stock in the
public market following the offering, the market price of our common stock
could fall. Such sales also might make it more difficult for Evolve to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate.
Based upon the number of our shares outstanding as of May 31, 2000, and
after giving effect to the private placement of our preferred stock in June
2000, upon completion of the offering, we will have outstanding 34,476,696
shares of common stock, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants after May
31, 2000. Of these shares, the 5,000,000 shares sold in the offering will be
freely tradable. Approximately million shares of common stock will be
available for sale in the public 180 days after the date of this prospectus or
afterwards.
After the offering, the holders of 19,165,827 million shares of common stock
and warrants to purchase common stock, which represent 55.6% of our outstanding
stock after completion of the offering, will be entitled to have the resale of
their shares registered under the Securities Act of 1933. If these holders, by
exercising their registration rights, cause a large number of securities to be
registered and sold in the public market, such sales could materially and
adversely affect the market price for our common stock. In addition, if we were
to include in a registration statement shares held by these holders pursuant to
the exercise of their registration rights, such sales may impede our ability to
raise needed capital.
Our officers, directors and affiliated entities will have significant control
over us and may approve or reject matters contrary to your vote.
Our executive officers and directors, together with their affiliates, will
beneficially own an aggregate of approximately 37.7% of our outstanding common
stock following the completion of the offering. These stockholders, if acting
together, will be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or similar transactions even if other stockholders
disagree.
We have implemented anti-takeover provisions that could discourage or prevent a
takeover, even if an acquisition would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:
. establishment of a classified board of directors requiring that not all
members of the board may be elected at one time;
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. authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. prohibiting cumulative voting in the election of directors, that would
otherwise allow less than a majority of stockholders to elect director
candidates;
. limitation on the ability of stockholders to call special meetings of
stockholders;
. prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporations Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of our company.
New investors in our common stock will experience immediate and substantial
dilution.
If you purchase shares of our common stock, you will incur immediate and
substantial dilution in pro forma net tangible book value. You will pay a price
per share that substantially exceeds the value of our assets after subtracting
our liabilities. You will contribute 40.6% of the total amount paid to fund us
but will own only 14.6% of our outstanding shares. If the holders of
outstanding options or warrants exercise those options or warrants, you will
suffer further dilution.
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expect," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk Factors" beginning on page 6, that may cause our or our
industry's actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. Except as may be required by law, we are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform these statements to actual future results.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 5,000,000 shares of
common stock offered by us at an assumed initial public offering price of $9.00
per share will be approximately $40.6 million, after deducting estimated
underwriting discounts, commissions and offering expenses. If the underwriters
exercise in full their option to purchase an additional 750,000 shares of
common stock, we estimate that such net proceeds will be approximately $46.9
million.
The principal purposes of this offering are to obtain additional capital, to
create a public market for our common stock, to enhance our ability to acquire
other businesses, products or technologies and to facilitate future access to
public equity markets.
We intend to use the net proceeds of this offering, together with our cash
on hand and the approximately $17.5 million from our private placement of
preferred stock in June 2000 as follows:
. $3.9 million for repayment outstanding indebtedness;
. $16 million for sales and marketing, primarily to support increased
personnel and promotional activities;
. $15 million for customer services, primarily to support increased
personnel;
. $10 million for research and development activities, primarily to support
increased personnel for the enhancement of our core technologies; and
. $4.4 million for general and administrative expenses, primarily to
support increased personnel and expansion of our business infrastructure.
We expect to use the remainder of the net proceeds for working capital
purposes, including capital expenditures. The amounts actually expended for
such purposes may vary significantly and will depend on a number of factors,
including the amount of our future revenues and the other factors described
under "Risk Factors." Accordingly, we will retain broad discretion in the
allocation of the net proceeds of this offering. In addition, should we
determine to employ cash resources for the acquisition of complementary
businesses, products or technologies, the amounts available for the purposes
cited above may be significantly reduced. Although we regularly evaluate
potential acquisitions in the ordinary course of business, we have no specific
understandings, commitments or agreements with respect to any acquisition or
investment at this time. Pending the uses outlined above, we will invest the
net proceeds of this offering in interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never paid any cash dividends on our capital stock. We currently
intend to retain all of our earnings to finance our operations and do not
anticipate paying cash dividends on our capital stock in the foreseeable
future. We may incur indebtedness in the future that may prohibit or restrict
the payment of dividends.
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CAPITALIZATION
The table below sets forth the following information:
. our actual capitalization as of March 31, 2000;
. our pro forma capitalization after giving effect to (1) amendments to our
charter to increase the authorized number of shares of common stock; (2)
the conversion of all outstanding shares of our preferred stock into
shares of common stock; and (3) the sale of 2,916,667 shares of our
preferred stock in a private placement in June 2000; and
. our pro forma as adjusted capitalization after giving effect to the sale
by us of 5,000,000 shares of common stock being offered at an estimated
initial public offering price of $9.00 per share, less the estimated
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 2000
----------------------------
Pro
Pro Forma As
Actual Forma Adjusted
-------- -------- --------
(unaudited)
(in thousands, except per
share data)
<S> <C> <C> <C>
Long-term obligations............................ $ 4,853 $ 4,853 $ 968
-------- -------- --------
Redeemable convertible preferred stock........... $ 61,490 $ -- $ --
-------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value; shares
authorized: 100,000,000 actual, pro forma and
pro forma as adjusted; shares outstanding:
none actual, pro forma and pro forma as
adjusted...................................... -- -- --
Common stock: $.01 par value, shares
authorized: 25,000,000 actual, and 100,000,000
pro forma and pro forma as adjusted; shares
outstanding: 10,107,776 actual, 29,273,602 pro
forma and 34,273,602 pro forma as adjusted ... 102 293 343
Additional paid-in capital....................... 102,703 181,502 222,102
Notes receivable from stockholders............... (8,263) (8,263) (8,263)
Unearned stock-based compensation................ (48,961) (48,961) (48,961)
Accumulated deficit.............................. (67,571) (67,571) (67,571)
-------- -------- --------
Total stockholders' equity (deficit)........... (21,990) 57,000 97,650
-------- -------- --------
Total capitalization........................... $ 44,353 $ 61,853 $ 98,618
======== ======== ========
</TABLE>
This table excludes the following shares as of March 31, 2000:
. 1,613,630 shares that we may issue upon the exercise of options at a
weighted average exercise price of $3.04 per share;
. 1,281,342 shares available for issuance upon the exercise of options that
have been or may be granted under our active stock plans; and
. 480,305 shares of common stock equivalents that we may issue upon the
exercise of warrants outstanding at a weighted average exercise price of
$4.32 per share.
20
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted by the
difference between the public offering price per share of our common stock and
the pro forma as adjusted net tangible book value per share of our common stock
immediately after this offering. Our pro forma net tangible book value at March
31, 2000, was approximately $24.4 million, or $0.83 per share of common stock.
Pro forma net tangible book value per share represents total tangible assets
less total liabilities, divided by the pro forma number of shares of common
stock outstanding at March 31, 2000, and assumes the conversion of our
currently outstanding shares of preferred stock into 16,249,159 shares of
common stock upon the closing of this offering and the sale of 2,916,667 shares
of preferred stock in a private placement in June 2000. Assuming our sale of
5,000,000 shares of common stock at an assumed initial public offering price of
$9.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses, our pro forma as adjusted net
tangible book value at March 31, 2000, would have been $65.1 million, or $1.90
per share. This represents an immediate increase in pro forma net tangible book
value of $1.07 per share to existing stockholders and an immediate dilution of
$7.10 per share to new investors purchasing shares in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 9.00
Pro forma net tangible book value per share at March 31,
2000...................................................... $ 0.83
Increase per share attributable to new investors........... 1.07
------
Pro forma as adjusted net tangible book value per share after
the offering................................................ 1.90
------
Dilution per share to new investors.......................... $ 7.10
======
</TABLE>
The following table shows, on a pro forma as adjusted basis at March 31,
2000, the number of shares of common stock purchased from us, the total
consideration paid to us and the average price paid per share by existing
stockholders and by new investors purchasing common stock in this offering,
after adjustment for:
. the conversion of our currently outstanding shares of preferred stock
into common stock;
. our sale of 2,916,667 shares of preferred stock in a private placement in
June 2000; and
. our sale of 5,000,000 shares of common stock at an assumed initial public
offering price of $9.00 per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 29,273,602 85.4% $ 66,000,000 59.4% $2.25
New investors........... 5,000,000 14.6% 45,000,000 40.6% 9.00
---------- ----- ------------ ----- -----
Total................. 34,273,602 100.0% $111,000,000 100.0% $3.24
========== ===== ============ ===== =====
</TABLE>
This discussion assumes no exercise of any stock options or warrants
outstanding as of March 31, 2000. At that date, there were 1,613,360 shares
that we may issue upon the exercise of outstanding options at a weighted
average exercise price of $3.04 per share and 480,305 shares of common stock
that we may issue upon the exercise of outstanding warrants at a weighted
average exercise price of $4.32 per share. If holders exercise these
outstanding options or warrants, there will be further dilution to new
investors. Additionally, there were 1,281,342 shares available for issuance
upon the exercise of options that have been or may be granted under our active
stock plans after March 31, 2000, and in January 2000, our active stock plans
were amended to allow us to issue an additional 4,125,000 shares.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 23 and our consolidated financial statements and
related notes beginning on page F-1. The statement of operations data for the
years ended June 30, 1997, 1998 and 1999 and the balance sheet data at June
30, 1998 and 1999 are derived from the consolidated financial statements and
notes audited by PricewaterhouseCoopers LLP appearing elsewhere in this
prospectus. The statement of operations data for the period ended June 30,
1995 and the year ended June 30, 1996 are derived from audited financial
statements not appearing in this prospectus. Historical results are not
necessarily indicative of results that may be expected for any future period.
Our results of operations for the nine months ended March 31, 2000, are not
necessarily indicative of the results we may achieve for the entire year.
Selected consolidated financial data for the nine months ended March 31, 1999
and 2000 has been derived from our unaudited consolidated financial statements
for such periods included elsewhere in this prospectus. The unaudited
financial information includes adjustments consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of the
information in accordance with Generally Accepted Accounting Principles.
<TABLE>
<CAPTION>
Inception Nine Months
through Year Ended June 30, Ended March 31,
June 30, ------------------------------------ -----------------
1995 1996 1997 1998 1999 1999 2000
--------- ------- ------- -------- -------- ------- --------
(in thousands except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Solutions.............. $ -- $ -- $ -- $ -- $ 150 $ 37 $ 3,748
Subscriptions.......... -- -- -- -- 367 179 1,848
----- ------- ------- -------- -------- ------- --------
Total revenues....... -- -- -- -- 517 216 5,596
Cost of revenues:
Solutions (excludes
stock-based charges
of $6, $2 and $715)... -- -- -- -- 245 139 1,633
Subscriptions.......... -- -- -- -- 390 189 1,257
----- ------- ------- -------- -------- ------- --------
Total cost of
revenues............ -- -- -- -- 635 328 2,890
----- ------- ------- -------- -------- ------- --------
Gross margin (loss).. -- -- -- -- (118) (112) 2,706
Operating expenses:
Research and
development (excludes
stock-based charges
of $58, $26 and
$1,902)............... 219 2,354 4,341 6,138 5,057 3,530 6,248
Sales and marketing
(excludes stock-based
charges of $94, $23
and $2,830)........... 1 628 1,194 1,253 3,876 2,422 12,082
General and
administrative
(excludes stock-based
charges of $60, $24
and $5,598)........... 224 1,445 2,372 1,834 1,857 1,318 3,253
In-process technology
write off............. -- -- -- -- -- -- 3,126
Stock-based charges.... -- -- -- -- 218 75 11,045
----- ------- ------- -------- -------- ------- --------
Total operating
expenses............ 444 4,427 7,907 9,225 11,008 7,345 35,754
----- ------- ------- -------- -------- ------- --------
Operating loss.......... (444) (4,427) (7,907) (9,225) (11,126) (7,457) (33,048)
Other income (expense),
net.................... 4 3 (186) (1,357) (345) (393) 486
----- ------- ------- -------- -------- ------- --------
Net loss................ $(440) $(4,424) $(8,093) $(10,582) $(11,471) $(7,850) $(32,562)
===== ======= ======= ======== ======== ======= ========
Basic and diluted net
loss per common share.. $ -- $(38.81) $(12.12) $ (9.27) $ (7.21) $ (5.19) $ (13.56)
Shares used in computing
basic and diluted net
loss per common share.. -- 114 668 1,141 1,591 1,513 2,402
Pro forma basic and
diluted net loss per
common share........... $ (1.52) $ (2.08)
Shares used in computing
pro forma basic and
diluted net loss per
common share........... 7,545 15,690
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
----- ------- -------- -------- -------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 294 $ 5,881 $ 10,702 $ 2,076 $ 2,840 $ 12,626
Restricted cash......... -- -- -- -- -- 2,000
Working capital......... 119 5,022 9,997 1,180 1,000 9,600
Total assets............ 472 7,175 12,673 3,075 4,087 60,065
Long-term debt and
capital lease
obligations, net of
current portion........ -- 547 13,384 14,235 3,899 4,853
Redeemable convertible
preferred stock........ 708 10,522 11,393 11,393 31,579 61,490
Total stockholders'
(deficit) equity....... (440) (4,853) (12,919) (23,587) (34,734) (21,990)
</TABLE>
-------
See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing basic and
diluted net loss per common share data.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our financial statements and
related notes. This discussion and analysis 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 certain factors, including but not limited to those discussed in
"Risk Factors" starting on page 6 and elsewhere in this prospectus.
Overview
We are a leading provider of Internet-based end-to-end solutions for
automating professional service organizations. We license ServiceSphere, our
ePlatform solution, directly to services organizations and provide related
implementation, integration, training, maintenance and hosting services.
Evolve was founded in February 1995. From our inception through December
1998 our activities, funded by the capital we raised, consisted primarily of
building our business infrastructure, recruiting personnel and developing our
software and service offerings. Our ServiceSphere ePlatform was first made
commercially available in March 1999. We recognized our first revenues from our
ServiceSphere ePlatform during the quarter ended March 31, 1999. Our revenues
increased during each sequential quarter for the remainder of 1999 and in the
quarter ended March 31, 2000. We have incurred substantial losses since
inception and we anticipate that we will continue to incur operating losses as
we make the investments necessary to expand our business. Our accumulated
deficit at March 31, 2000, was $67.6 million.
Our headcount increased from 58 employees at January 1, 1999, to 310
employees at May 31, 2000, as we continued to invest in developing our
technology and building a direct sales force, a marketing group and a
professional services organization. Specifically, in the seven months ended May
31, 2000, we expanded the depth of our management team with the addition of a
Chief Operating Officer, a Chief Financial Officer, a Vice President of
Marketing and Business Development, a Vice President of Marketplace Services, a
Vice President of Worldwide Customer Service, and a Vice President of Strategy.
Our infrastructure expenditures also increased significantly in 1999, as we
expanded our facilities and enhanced our information systems.
Sources of Revenue and Revenue Recognition
We generate revenues primarily from the sale of our ServiceSphere ePlatform
solutions and subscriptions. We began recognizing revenues from sales of our
ePlatform during the quarter ended March 31, 1999. Through March 31, 2000, all
of our ePlatform revenues were derived from sales within the United States
through our direct sales force. We classify our ePlatform revenues as either
"Solutions revenues" or "Subscriptions revenues" to reflect the way in which we
operate our business and the way in which we position our software and services
to our customers.
Solutions revenues consist of fees for licensing our ServiceSphere ePlatform
and for providing the implementation, integration, training and consulting
services associated with the initial deployment of the ePlatform. Customers pay
a one-time license fee for our software based on the number of software modules
licensed and the number of professional "resources" (typically employees or
contractors of the customer) managed. Customers are charged additional license
fees to increase the number of professional resources managed on our ePlatform
or to purchase additional software modules. Implementation services included in
our Solutions revenues typically consist of evaluating our customers' business
practices and organizational structure, converting and integrating legacy
databases and information systems, installing the software systems and training
our customers' staff. Some customers also request consulting services to
develop and install interfaces between our ePlatform and legacy third party
enterprise software applications. These services have typically been performed
by our internal professional services organization on primarily a fixed fee
basis. We intend to extend our service partnerships by encouraging certain
customers to purchase some of these services
23
<PAGE>
from other professional services organizations with which we have business
relationships. We believe this trend will have a positive impact on our gross
margins by decreasing the percentage of our professional services revenues
compared to our software license revenues.
Subscriptions revenues consist of fees derived from:
. Maintenance agreements that entitle customers to software upgrades and
technical support over a stated term, generally twelve months. In many
cases, maintenance services for an initial term of twelve months or more
have been bundled together with fees classified as Solutions revenues. In
subsequent years, customers pay separately for maintenance, normally at
the beginning of the maintenance period.
. Application service provider (ASP) agreements, under which we host our
ePlatform solutions on behalf of customers on servers we own and
maintain. We offer access to the customer via the Internet and charge a
monthly fee for this service. We began selling ASP-based services in the
quarter ended December 31, 1999, and added more ASP-based services
through our acquisition of InfoWide and subsequent launch of the
Services.com Delivery Manager. We expect to derive an increasing
proportion of our revenues from our ASP offering in the future.
. Software subscription agreements that involve commitments to deliver
additional software releases and enhancements to the customer over the
life of the agreement. Revenues generated by software subscription
agreements are recognized ratably over the term of each agreement.
We recognize revenues in accordance with the provisions of American
Institute of Certified Public Accounts (AICPA) Statement of Position (SOP) 97-
2, "Software Revenue Recognition." This was amended by SOP 98-4, "Deferral of
the Effective Date of Certain Provisions of SOP 97-2" and SOP 98-9,
"Modification of SOP 97-2 With Respect to Certain Transactions." Under SOP 97-2
as amended, we recognize revenues when all of the following conditions are met:
. we have signed a non-cancelable agreement with the customer;
. we have delivered the software product to the customer or made it
available to the customer on our ASP hosting facilities;
. the amount of fees to be paid by the customer is fixed or determinable;
and
. we believe that collection of these fees is probable.
We do not have vendor specific objective evidence of fair value for the
implementation, integration and training services included in our typical
customer license agreements, as these services to date have never been sold
separately. Accordingly, our Solutions revenues, including implementation,
integration and training services and license fees, are recognized ratably on a
straight line basis over the period during which the services are provided,
which is generally between six and nine months.
We have vendor specific objective evidence of fair value for the maintenance
services we provide based on the renewal rates for maintenance in future years
as specified in most of our customer contracts. As a result, we defer the
maintenance revenues at the outset of the customer arrangement and recognize
them ratably over the period during which the maintenance is to be provided,
which normally commences on the date the software is delivered.
For application service provider (ASP) software arrangements we do not have
vendor specific objective evidence of fair value for the elements of the
contracts. Accordingly, fees from such arrangements will be recognized on a
monthly basis as the hosting service is provided.
We account for software subscription arrangements where, as part of the
contract with the customer, we agree to deliver to the customer additional
software releases in the future, as subscriptions for no extra charge. All
software revenues from these customers are recognized ratably over the term of
the contract. Additionally,
24
<PAGE>
in software arrangements where the amount of fees to be paid by the customer is
deemed not to be fixed or determinable, due to extended payment terms, we
recognize revenues when the fees become due and payable by the customer.
Cost of Revenues and Operating Expenses
Cost of Revenues
Our cost of revenues includes the costs associated with our Solutions and
Subscriptions revenues. The cost of our Solutions revenues consists principally
of payroll related costs for employees and consultants involved in providing
services for implementation, training and consulting. The cost of our Solutions
revenues also includes royalties due to third parties for integrated
technology, printing costs of product documentation, duplication costs for
software media and shipping costs. The cost of our Subscriptions revenues
consists primarily of the payroll related costs for employees involved in
providing support services to customers under maintenance contracts as well as
payroll costs for employees and consultants involved in providing services for
implementation, training and consulting for customers under subscription. The
gross margin associated with our Solutions revenues may fluctuate based on the
ratio of the license fees to service fees in our software arrangements with
customers.
Operating Expenses
Our operating expenses consist of three general categories: research and
development, sales and marketing and general and administrative. In addition,
our operating expenses include two non-cash categories: stock-based charges and
amortization of goodwill and other intangible assets. We classify all charges
to these operating expense categories based on the nature of the expenditures.
Although each of these categories includes expenses that are unique to the
category type, there are expenditures that are typically included in each of
these categories, such as salaries, employee benefits, travel and entertainment
expenses and third party professional fees. In addition, certain common costs
such as communication, rent, depreciation for office furniture and equipment
and facilities costs are allocated to each of the functional areas based on
headcount. The sales and marketing category includes expenditures specific to
that category such as sales commissions, public relations and advertising,
trade shows and marketing collateral materials. Software development costs
incurred prior to the establishment of technological feasibility are included
in research and development costs as incurred. We expect that all three
categories of operating expenses will continue to increase in future quarters
as we hire additional employees and make the investments necessary to expand
our business
In connection with the granting of stock options and the sales of restricted
stock to our employees and the granting of equity instruments to non-employees
for services rendered, we recorded deferred stock-based charges totaling
approximately $59.6 million as of March 31, 2000. This amount represents the
difference between the exercise or purchase price at which the stock options
were granted or the restricted stock was issued, and the deemed fair value of
our common stock for accounting purposes on the date of grant or issuance. This
amount is included as a component of stockholders' equity and, in accordance
with the method described in Financial Accounting Standards Board
Interpretation No. 28, is being amortized on an accelerated basis by charges to
operations over the vesting period of the options and restricted stock, which
is generally four years. This resulted in an expense of $218,000 for the year
ended June 30, 1999, and an expense of $10.4 million for the nine months ended
March 31, 2000. We expect the remaining unamortized and unearned stock-based
compensation at March 31, 2000 will be amortized as follows: $8.7 million for
the three months ending June 30, 2000; $25.2 million for the year ending June
30, 2001; $10.3 million for the year ending June 30, 2002; $4.3 million for the
year ending June 30, 2003; and $503,000 for the year ending June 30, 2004.
In April and May 2000, we granted options to purchase an additional 771,000
shares of our common stock to employees at prices below the deemed fair market
value. We expect that these option grants will give rise to an additional
stock-based charge of $1.3 million to be recognized over the vesting period of
the options.
25
<PAGE>
Acquisition of InfoWide, Inc.
On March 31, 2000, we acquired InfoWide, Inc., a private software company
that has developed an Internet-based solution for recording and billing time
and expenses. We issued 1.8 million shares of our common stock to the
stockholders of InfoWide as purchase consideration valued at $33.0 million. The
acquisition was accounted for as a purchase. We recorded approximately $35.3
million in goodwill, purchased technology, in-process technology and other
intangible assets upon this acquisition. The amount allocated to the in-process
technology of $3.1 million was determined based on an appraisal completed by an
independent third party using established valuation techniques and was expensed
upon acquisition, because technological feasibility had not been established
and no future alternative uses existed.
Quarterly Results of Operations
The following table sets forth, for the periods presented, certain quarterly
financial results for the six quarters ended March 31, 2000. The information
for each of these quarters is unaudited and has been prepared on the same basis
as our audited financial statements appearing elsewhere in this prospectus. In
the opinion of management, all necessary adjustments, consisting only of normal
nonrecurring adjustments, have been included to present fairly the unaudited
quarterly results when read in conjunction with our financial statements and
related notes included elsewhere in this prospectus. We have experienced and
expect to continue to experience fluctuations in operating results from quarter
to quarter. Historical operating results are not necessarily indicative of the
results that may be expected for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
Dec. Mar. June Sept. Dec.
31, 31, 30, 30, 31, Mar. 31,
1998 1999 1999 1999 1999 2000
------- ------- ------- ------- ------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data
Revenues
Solutions............. $ -- $ 37 $ 113 $ 338 $ 1,079 $ 2,331
Subscriptions......... -- 179 188 195 475 1,178
------- ------- ------- ------- ------- --------
Total............... -- 216 301 533 1,554 3,509
Cost of revenues
Solutions............. -- 140 105 185 459 989
Subscriptions......... -- 188 202 461 261 535
------- ------- ------- ------- ------- --------
Total............... -- 328 307 646 720 1,524
Gross margin
(loss)............. -- (112) (6) (113) 834 1,985
Operating expenses:
Research and
development.......... 1,098 1,347 1,527 1,649 1,898 2,701
Sales and marketing... 741 1,169 1,454 1,959 2,766 7,357
General and
administrative....... 518 501 539 667 990 1,596
In-process technology
write-off............ -- -- -- -- -- 3,126
Stock-based charges... -- 75 143 816 3,056 7,173
------- ------- ------- ------- ------- --------
Total operating
expenses........... 2,357 3,092 3,663 5,091 8,710 21,953
------- ------- ------- ------- ------- --------
Operating loss.......... (2,357) (3,204) (3,669) (5,204) (7,876) (19,968)
Other income
(expense), net....... (360) 42 48 (49) 268 267
------- ------- ------- ------- ------- --------
Net loss............ $(2,717) $(3,162) $(3,621) $(5,253) $(7,608) $(19,701)
======= ======= ======= ======= ======= ========
</TABLE>
Revenues
Our total quarterly revenues increased from $216,000 for the quarter ended
March 31, 1999 to $3.5 million for the quarter ended March 31, 2000. This
revenue growth is attributable to increased sales of our Solutions offerings.
Our initial customer, marchFIRST (formerly Whittman-Hart), accounted for 69%,
50%, 28%, 15% and 23% of total revenues during the quarters ended March 31,
1999, June 30, 1999, September 30, 1999,
26
<PAGE>
December 31, 1999 and March 31, 2000. We did not recognize any revenues in the
quarter ended December 31, 1998 because our solution was first made
commercially available during the quarter ended March 31, 1999.
Cost of Revenues
Our total cost of revenues will fluctuate quarter to quarter depending on
the number of customer implementations underway, which affects the amount of
service and consulting resources assigned to our customers. We began
implementing our first customer solutions during the quarter ended March 31,
1999. Cost of Solutions revenues consists primarily of payroll related costs
for employees and consultants involved in providing services for
implementation, training and consulting and, to a lesser extent, licenses fees
paid to third parties under technology license arrangements. The improvement in
Solutions gross profit over the course of 1999 and the first quarter of 2000
was the result of a greater number of customer sales being recognized ratably
in each quarter. We expect future costs of Solutions revenues to fluctuate as
we continue to aggressively invest in building our professional services
organization.
Cost of Subscriptions revenues consists primarily of payroll related costs
for employees involved in providing support services to customers under
maintenance contracts as well as payroll-related costs for employees and
consultants involved in providing services for implementation, training and
consulting for customers under software subscription agreements. The costs of
Subscriptions revenues increased significantly during the quarter ended
September 30, 1999, due to the use of third party resources in assisting in
their implementation.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and related costs associated with our product
development efforts including fees paid to third parties for consulting
services. Research and development expenses increased sequentially on a
quarterly basis from $1.1 million for the quarter ended December 31, 1998 to
$2.7 million for the quarter ended March 31, 2000. The increase in research and
development expenses is attributable to an increase in the number of research
and development personnel from 34 at December 31, 1998 to 63 at March 31, 2000,
consulting expenses associated with the implementation of several engineering
projects and the use of contractors to supplement our staff. We believe that
investments in product development are essential to our future success and
expect that the absolute dollar amount of research and development expenses
will increase in future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits and commissions, and the costs of advertising,
website development, trade shows, seminars, promotional materials and other
sales and marketing programs. Sales and marketing expenses increased in each
quarter from $741,000 for the quarter ended December 31, 1998 to $7.4 million
for the quarter ended March 31, 2000. The increase in sales and marketing
expenses was primarily attributable to our building an internal direct sales
team and a corresponding sales infrastructure and a significant investment in
branding and advertising. Our first commercial solution was released during the
quarter ended March 31, 1999, and our personnel in sales and marketing
increased from 12 employees as of December 31, 1998 to 46 as of March 31, 2000.
We expect that the absolute dollar amount of sales and marketing expenses will
continue to increase due to the planned growth of our sales force, including
the establishment of additional domestic and international sales offices and
due to expected additional increases in marketing programs including
advertising, public relations, website development and other brand and
promotional activities.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and related expenses for executive, finance and
administrative personnel including information systems and recruiters. General
and administrative expenses increased from $518,000 in the quarter ended
December 31, 1998 to $1.6 million in the quarter ended March 31, 2000. The
increase in general and administrative expenses was primarily attributable to
an increase in the number of executive, finance and administrative employees
from 11 as of December 31, 1998 to 33 as of March 31, 2000 as well as
investment in our information technology infrastructure. We expect general and
administrative expenses to increase in absolute dollars in future periods.
27
<PAGE>
Stock-Based Charges. Stock-based charges consist of amortization of deferred
non-cash charges in connection with stock option grants and sales of restricted
stock to our employees at exercise or sales prices below the deemed accounting
fair market value of our common stock and compensation related to equity
instruments issued to non-employees for services rendered. We have recorded
stock-based compensation charges of $75,000 in the quarter ended March 31,
1999, $143,000 in the quarter ended June 30, 1999, $816,000 in the quarter
ended September 30, 1999, $3.1 million in the quarter ended December 31, 1999
and $7.2 million in the quarter ended March 31, 2000. Included in the stock-
based charges for the quarter ended September 30, 1999, was $651,000 related to
the issuance of warrants to a related party.
Interest Income and Interest Expense
Interest income fluctuated during the five quarters shown primarily as a
result of changes in our average cash balances. We closed significant preferred
financing rounds during the quarters ended December 31, 1998 and September 30,
1999. This resulted in higher average cash balances in the following quarters.
Interest expense for the five quarters ended March 31, 2000 is primarily
attributable to interest on equipment leases and nonconvertible notes.
Fluctuations in Quarterly Operating Results
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of future performance. Although our operating results
have generally improved from quarter to quarter in the recent past, our future
operating results may not follow past trends. It is likely that in some future
quarters our operating results may be below the expectation of public market
analysts and investors due to factors beyond our control, and as a result, the
price of our common stock may fall. Factors that may cause our future operating
results to be below expectations and cause our stock price to fall include:
. the demand for and acceptance of our products, product enhancements and
services;
. unexpected changes in the development, introduction, timing and
competitive pricing of our products and services and those of our
competitors;
. any inability to expand our direct sales force and indirect marketing
channels both domestically and internationally;
. any failure to attract and retain key personnel, particularly in our
development, sales, services and support groups;
. the budgeting cycles of our customers;
. our compensation policies that tend to compensate sales personnel more
for achieving annual quotas, typically in the latter half of the fiscal
year; and
. the timing and integration of and costs related to technologies and
businesses we may acquire in the future.
Results of Operations
Nine Months Ended March 31, 1999 and 2000
Revenues
Total revenues were $5.6 million for the nine months ended March 31, 2000 as
compared to total revenues of $216,000 for the nine months ended March 31,
1999. This growth in revenues reflects the beginning of commercial sales of our
ePlatform in the first quarter of 1999, and the subsequent growth of our sales.
For the nine months ended March 31, 2000, marchFIRST (formerly Whittman-Hart),
Novell and Cambridge Technology Partners accounted for 21%, 17%, and 13%, of
our total revenues. For the nine months ended March 31, 1999, marchFIRST,
iPlanet (formerly Netscape) and Becton Dickinson accounted for 69%, 19%, and
12%, of our total revenues.
28
<PAGE>
Solutions revenues, which comprise fees for licenses and related services,
were $3.7 million, or 67% and $37,500 or 17% of total revenues for the nine
months ended March 31, 2000 and 1999. Subscriptions revenues, which comprise
fees for maintenance and software subscriptions, were $1.8 million, or 33% and
$179,000 or 83% of total revenues for the nine months ended March 31, 2000 and
1999.
Cost of Revenues
Total cost of revenues was $2.9 million and $328,000 for the nine months
ended March 31, 2000 and 1999. Cost of Solutions revenues was $1.6 million and
$139,000 for the nine months ended March 31, 2000 and 1999. The cost of
Subscriptions revenues was $1.3 million and $189,000 for the nine months ended
March 31, 2000 and 1999. The increase in total cost of revenues was due
primarily to increased payroll related costs for employees and third-party
consultants involved in providing support services to customers under
maintenance contracts and software subscription contracts.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and related costs associated with our product
development efforts including fees paid to third parties for consulting
services. Research and development expenses increased to $6.2 million for the
nine months ended March 31, 2000, from $3.5 million for the nine months ended
March 31, 1999. The increase was due to an increase in the number of employees
engaged in research and development from 34 employees as of March 31, 1999, to
63 employees as of March 31, 2000, along with an increase of $1.3 million for
fees paid to third parties for consulting services. We believe that investments
in product development are essential to our future success and expect that the
absolute dollar amount of research and development expenses will increase in
future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits and commissions, and the costs of advertising,
public relations, website development, trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expenses
increased to $12.1 million for the nine months ended March 31, 2000, from $2.4
million for the nine months ended March 31, 1999. The increase in sales and
marketing expenses was attributable to an increase in the number of direct
sales, pre-sales support and marketing employees from 18 as of March 31, 1999
to 46 as of March 31, 2000. We also spent $3.7 in marketing programs, including
rebranding, during the nine months ended March 31, 2000 versus a nominal amount
in the comparable period from 1999. We expect that the absolute dollar amount
of sales and marketing expenses will continue to increase due to the planned
growth of our sales force, including the establishment of sales offices in
additional domestic and international locations.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and related expenses for executive, finance and
administrative personnel. General and administrative expenses increased to $3.3
million for the nine months ended March 31, 2000, from $1.3 million for the
nine months ended March 31, 1999. The increase in general and administrative
expenses was primarily attributable to an increase in the number of executive,
finance and administrative employees from 10 as of March 31, 1999 to 33 as of
March 31, 2000. We expect general and administrative expenses to increase in
absolute dollars in future periods.
Stock-Based Charges. Stock-based charges consist of amortization of deferred
compensation in connection with stock option grants and sales of restricted
stock to our employees at exercise or sales prices below the deemed fair market
value of our common stock, and compensation related to equity instruments
issued to non-employees for services rendered. We recorded stock-based
compensation expense of $10.5 million for the nine months ended March 31, 2000
compared to $75,000 for the nine months ended March 31, 1999. We issued
warrants to a related party that resulted in a charge of $651,000 in the
quarter ended September 30, 1999.
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Other Income (Expense), Net
Interest income for the nine months ended March 31, 2000, was $768,000
compared to $169,000 for the same period in the prior year. The increase was
attributable primarily to the completion of a private equity funding round in
September 1999. Interest expense for the nine months ended March 31, 2000, was
$280,000 compared to $598,000 for the same period in the prior year. This was
largely a result of the conversion of certain convertible debt instruments to
preferred stock during the nine months ended March 31, 1999.
Income Taxes
From inception through March 31, 2000, we incurred net losses for federal
and state tax purposes and have not recognized any tax provision or benefit. As
of March 31, 2000, we had approximately $44.8 million of federal and $26.1
million of state net operating loss carry-forwards to offset future taxable
income. The federal net operating loss carry-forwards begin to expire on
varying dates through 2019 and the state net operating loss carry-forwards
begin to expire on varying dates through 2004. Given our limited operating
history, our losses incurred to date and the difficulty in accurately
forecasting our future results, we do not believe that the realization of the
related deferred income tax asset meets the criteria required by generally
accepted accounting principles. Therefore, we have recorded a 100% valuation
allowance against the deferred income tax asset.
Years Ended June 30, 1998 and 1999
Revenues
Our total revenues were $517,000 for the year ended June 30, 1999, generated
by the first commercial sales of our ServiceSphere ePlatform solution. Revenues
comprised $150,000 of Solutions revenues and $367,000 of Subscriptions revenues
for the year ended June 30, 1999. For the year ended June 30, 1999, Solutions
revenues and Subscriptions revenues accounted for 29% and 71% of total
revenues. marchFIRST (formerly Whittman-Hart), iPlanet (formerly Netscape) and
Becton Dickinson, at 58%, 32% and 10% of total revenues, accounted for all our
revenues during the period. We did not recognize any revenues in the year ended
June 30, 1998.
Cost of Revenues
Cost of revenues was $635,000 for the year ended June 30, 1999. Cost of
Solutions revenues was $245,000 and the cost of Subscriptions revenues was
$390,000 for the year ended June 30, 1999. We did not have any cost of revenues
in the year ended June 30, 1998.
Operating Expenses
Research and Development. Research and development expenses decreased to
$5.1 million for the year ended June 30, 1999, from $6.1 million for the year
ended June 30, 1998. The decrease in research and development expenses was
related primarily to a restructuring in our engineering efforts as we
discontinued the development a client-server based software architecture and
concentrated our efforts on developing our Internet-based ePlatform.
Sales and Marketing. Sales and marketing expenses increased to $3.9 million
for the year ended June 30, 1999 from $1.3 million for the year ended June 30,
1998. The increase in sales and marketing expenses resulted primarily from
building our direct sales force and investing in our sales and marketing
infrastructure, which involved significant personnel-related expenses,
including compensation, recruiting fees, travel expenses and related facility
and equipment costs.
General and Administrative. General and administrative expenses increased to
$1.9 million for the year ended June 30, 1999 from $1.8 million for the year
ended June 30, 1998. The increase in general and administrative expenses
resulted primarily from the addition of executive, finance and administrative
personnel to support the growth of our business.
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Stock-Based Charges. We recorded stock-based charges of $218,000 for the
year ended June 30, 1999, related to stock transactions with employees. We did
not have stock-based charges in the year ended June 30, 1998.
Other Income (Expense), Net
Interest income decreased to $277,000 for the year ended June 30, 1999, from
$420,000 for the year ended June 30, 1998 as a result of the decline in our
average cash position. We had cash and cash equivalents balances of $2.8
million as of June 30, 1999, compared to $2.1 million as of June 30, 1998.
Interest expense decreased to $697,000 for the year ended June 30, 1999, from
$1.8 million for the year-ended June 30, 1998. This was largely a result of the
conversion of all of the convertible debt instruments we had previously issued
to preferred stock during the year ended June 30, 1999.
Years Ended June 30, 1997 and 1998
Revenues and Cost of Revenues
We do not have any revenues or cost of revenues, for the years ended June
30, 1997 and 1998 as we did not commence selling our solutions until the first
quarter of 1999.
Operating Expenses
Research and development expenses were $6.1 million and $4.3 million for the
years ended June 30, 1998 and 1997. The increase in this expense category was
due to an increase in personnel costs associated with our engineering efforts.
Sales and marketing expenses increased to $1.3 million for the year ended June
30, 1998 from $1.2 million for the year ended June 30, 1997. General and
administrative expenses were $1.8 million and $2.4 million for the years ended
June 30, 1998 and 1997 as our headcount decreased from 14 to 8 persons.
Other Income (Expense), Net
Interest income increased from $310,000 for the year ended June 30, 1997 to
$420,000 for the year ended June 30, 1998. Interest expense increased from
$495,000 in the year ended June 30, 1997 to $1.8 million for the year ended
June 30, 1998, due primarily to the issuance of $12.7 million in convertible
debt instruments during the year ended June 30, 1998.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of common and preferred stock, with net proceeds totaling approximately
$56.8 million. We have also raised $12.7 million in funding through the
issuance of convertible debt instruments, of which $3.5 million in principal
remains outstanding as debt and is now non-convertible. As of March 31, 2000,
we had $12.6 million in cash and cash equivalents, which excludes a $2.0
million certificate of deposit held as security for our operating lease
commitments which may not be used for any other corporate purpose. We currently
have no available credit facilities.
Net cash used in operating activities totaled $15.3 million for the nine
months ended March 31, 2000. Net cash used in operating activities for the
three years in the period ended June 30, 1999, 1998 and 1997 was $8.3 million,
$8.3 million and $7.2 million. Cash used in operating activities for each
period resulted primarily from net losses in those periods and, to a lesser
extent, decreases in working capital offset by an increase in deferred revenues
at June 30, 1999 and March 31, 2000, of approximately $2.0 million and
$5.0 million.
Net cash used in investing activities since our inception in February 1995
through March 31, 2000, has totaled approximately $6.1 million, of which $6.0
million occurred in the nine months ended March 31, 2000. Investing activities
in the nine months ended March 31, 2000, consist primarily of the purchase of
short-term
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investments of $1.3 million, the purchase of property and equipment of $2.4
million, and a restricted certificate of deposit for $2.0 million used to
secure a stand-by letter of credit for our new corporate headquarters. The
stand-by letter of credit has not been drawn down, and therefore involves no
interest expense.
Net cash provided by financing activities totaled $30.8 million for the nine
months ended March 31, 2000. Net cash provided by financing activities for the
years ended June 30, 1999 and 1997 was $9.1 million and $12.2 million. Net cash
generated from financing activities consists primarily of net proceeds from our
sales of preferred stock or the proceeds from the issuance of convertible debt.
For the year ended June 30, 1998, net cash used in financing activities was
$307,000, that primarily represented the payments of our capital lease
obligations.
We also have a $1.9 million equipment lease line with Phoenix Growth
Capital. Under the equipment lease line, we are entitled to lease equipment
with payment terms extending over 36 months. The ability to lease new equipment
expired on March 15, 2000, and our current borrowings of $694,000 bear interest
rates in the range of 10% to 16%. We intend to seek additional equipment lease
financings in the future.
We signed a lease for new headquarters facilities in November 1999. Lease
payments under the agreement are expected to commence in August 2000 and
continue for seven years, resulting in aggregate lease expenses of
approximately $338,000 per quarter. We also expect to incur commitments for
capital expenditures in 2000 of approximately $4.0 million related to the
build-out of this facility.
We anticipate a substantial increase in our capital expenditures and lease
commitments consistent with anticipated growth in operations, infrastructure
and personnel, including possible acquisitions. We believe that our current
cash and cash equivalents, together with the proceeds of this offering, will be
sufficient to meet our anticipated liquidity needs for working capital and
capital expenditures for at least 12 months. If we require additional capital
resources to grow our business internally or to acquire complementary
technologies and businesses at any time in the future, we may seek to sell
additional equity or debt securities or secure a bank credit line. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. We may not be able to obtain financing
arrangements in amounts or on terms acceptable to us in the future. In the
event that we are unable to obtain additional funding when needed, we may be
compelled to substantially curtail our development and marketing, which could
adversely affect our market position and competitiveness, and we may not be
able to maintain our other operations at the current level, or at all.
Qualitative and Quantitative Disclosure about Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the risk factors section of this
prospectus.
Foreign Currency Exchange Rate Risk
To date, all of our recognized revenues have been denominated in U.S.
dollars and from customers in the United States, and we have had no exposure to
foreign currency exchange rate changes. We expect, however, that future
Solutions and Subscriptions revenues may also be derived from international
markets and may be denominated in the currency of the applicable market. As a
result, our operating results may become subject to significant fluctuations
based upon changes in the exchange rates of foreign currencies in relation to
the U.S. dollar. Furthermore, to the extent that we engage in international
sales denominated in U.S. dollars, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products less competitive in
international markets. Although we intend to monitor our exposure to currency
fluctuations, and, when appropriate, may use financial hedging techniques in
the future to minimize the effect of these fluctuations, we cannot assure you
that exchange rate fluctuations will not adversely affect our financial results
in the future.
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Interest Rate Risk
As of March 31, 2000, we had $15.9 million of cash and highly liquid short-
term investments. Declines of interest rates over time would reduce our
interest income from our short-term investments. As of March 31, 2000, we had
total short term and long term debt outstanding of $640,000 and $4.9 million,
which accrued interest at the prime rate. Therefore, we are subject to exposure
to interest rate risk for these borrowings based on fluctuations in the prime
rate.
Equity Risk
We do not own any marketable equity securities. Therefore, we are not
subject to any direct equity price risk.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," that requires companies to
record derivative financial instruments on their balance sheets as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative instrument and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," that amends SFAS No. 133 to be effective for all fiscal
quarters or all fiscal years beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We believe
that the impact of SAB 101 will not have a material effect on our financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for the definition of employee for purposes of
applying Opinion 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 will
become effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. We believe that
FIN 44 will not have a material effect on our financial position or results of
operations.
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BUSINESS
Overview
We are a leading provider of Internet-based end-to-end solutions for
automating professional services organizations. Our ServiceSphere software
suite integrates and streamlines the core processes that are critical to
professional services organizations: managing project opportunities,
professional resources and service delivery. Our Services.com online
applications portal enables smaller professional services providers to rapidly
and cost-effectively access the benefits of our ServiceSphere technology to
manage their businesses. Our solution combines the efficiency gains of
automating core business processes with the benefits of online inter-company
collaboration, creating an ePlatform for the professional services industry. We
have licensed our solution to 34 customers who have contracted to purchase more
than $250,000 in products and services from us, and who collectively license
our solution to manage over 40,000 services professionals. Our customers
include Cambridge Technology Partners, Novell, marchFIRST (Whittman-Hart),
Xpedior and Zefer.
Industry Background
Growth of the Internet as a Business Communication, Collaboration and
Transactional Medium
The Internet has emerged as the fastest-growing communications,
collaboration, and transactional medium in history. Its rapid and broad
acceptance is enabling new opportunities to streamline complex business
processes and to conduct transactions more efficiently. Forrester Research
estimates that 93% of firms will conduct business on the Internet by 2002 and
that business-to-business eCommerce will grow from $406 billion in 2000 to $2.7
trillion in 2004.
Businesses worldwide invest heavily in information technology to manage and
streamline their operations. A number of business process automation solutions
have been developed that incorporate limited Internet functionality to
facilitate communications and data entry and retrieval from remote locations.
These business process automation solutions have typically focused on
automating relatively simple, linear, product-based processes such as
manufacturing and sales force management. Businesses also look to Internet-
based systems to facilitate external communications and transactions with
suppliers, customers and partners. More recently, Internet-based networks have
emerged that are designed to allow companies to more effectively interact and
collaborate with their customers, suppliers and partners. For relatively simple
product procurement transactions, these software networks have allowed
companies to realize efficiency gains by supporting inter-company collaboration
and by reducing the administrative costs of transacting with customers,
suppliers and partners.
A new breed of end-to-end Internet-based business platforms, or ePlatforms,
is now beginning to emerge, combining the efficiency gains of business process
automation solutions with the capabilities of online collaborative networks.
Because they integrate disparate and disconnected processes both within and
between businesses, these ePlatforms solutions are well positioned to address
the challenges of industries with highly customized product and service
requirements, complex business processes, collaborative design, production and
fulfillment workflows, and significant dependence on information exchange.
The Global Services Market
The professional services industry, which according to Benchmarking Partners
is projected to generate revenues of over $2.1 trillion in the United States in
2000, represents one of the largest segments of the global economy. This market
includes the information technology, management consulting, advertising, media,
public relations, architecture, construction, engineering, financial services,
law, tax, audit, and health care sectors. In addition, major manufacturing and
product companies often have large internal service organizations.
We believe that professional services firms and the companies they serve are
under increasing competitive and operational pressure due to the following
trends:
. emergence of the Internet as a vehicle for service delivery;
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. growing complexity of professional services projects;
. increasingly sophisticated, more demanding services acquirers;
. increasingly competitive market for skilled services professionals;
. increased acceptance of project outsourcing; and
. economic globalization.
We believe the professional services industry is unique in a number of ways.
Unlike product-oriented industries producing homogeneous products using
standard components and processes, professional services organizations create
information-based deliverables using human resources with unique knowledge,
skills, abilities and availability. The process of providing professional
services requires extensive collaboration between services providers and
clients in the definition of project needs and in the sourcing, delivery and
acceptance of services. Perhaps most importantly, professional services firms
are increasingly "virtual" organizations, delivering services through a
complex, dynamic network of resources and providers.
Professional Services Organizations are Not Optimally Managed
Services organizations have invested in enterprise software applications to
automate back-office business processes such as benefits management, payroll
administration and general ledger accounting. However, they have found that
traditional enterprise applications are difficult to adapt to the specific
requirements of services organizations, and cannot capture the unique and
changing characteristics of the professionals that are a services
organization's core resource. Traditional applications can manage and execute
simple purchase and sale transactions, but cannot support the inherently
collaborative nature of service project definition and delivery. Moreover,
traditional applications have not been architected to address the complex and
distributed processes that connect managers, employees and contractors within
today's services organizations.
As a result, these basic processes generally continue to be performed
manually, with spreadsheets, phones and email being the principal tools used.
Some professional services organizations have attempted to internally develop
systems to manage the complexities of their operations. While providing modest
efficiency gains, these nonintegrated, function-specific systems have often
failed to meet the challenges of large and growing organizations with diverse,
dynamic, and distributed business process needs. These systems are often
cumbersome and inflexible and are only capable of managing isolated processes.
The lack of effective process automation solutions often results in
misallocated resources, high overhead costs, missed revenue opportunities and
dissatisfaction among clients, partners and employees.
The Opportunity for an ePlatform to Automate and Connect the Service Chain
We believe that the unique nature of the professional services industry has
created an opportunity for the creation and delivery of ePlatforms that are
specifically designed to serve all members of the service chain: services
acquirers, providers and professionals. According to Forrester Research,
service-related business-to-business electronic commerce will grow from
approximately $22 billion in 1999 to approximately $220 billion in 2003,
representing a compounded annual growth rate of 78%. By automating and
connecting the business processes of services organizations and their
customers, ePlatforms can enable real-time collaboration and transactions
across the service chain, resulting in significant improvement in operating
margins. According to Benchmarking Partners, an integrated end-to-end solution
for managing the service chain can yield over a $20 million benefit (in net
present value) over three years for a firm of 1,000 professionals through
improved staffing efficiencies, increased resource utilization, reduced
employee attrition and reduced cost of sales.
The professional services market is especially suited for ePlatform
solutions because services providers and services acquirers share many
identical core business processes for managing service opportunities, resources
and delivery. Internal services organizations such as information technology
departments find that the challenges of balancing project demand against
resource availability, managing internal and external services
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resources, and accurately assessing the financial impact of projects are the
same as those faced by large professional services firms. In an attempt to
address these challenges, many services acquirers are beginning to be required
by their "customers"--other departments within the organization--to implement
the same business practices as leading services providers. We believe the
similarity in the processes of both acquirers and providers creates a
significant opportunity for a single ePlatform solution to automate the entire
service chain and successfully meet the needs of all market participants.
We believe that an effective ePlatform for the professional services
industry must provide:
. an architecture that is designed to capture the inherently virtual,
collaborative, and people-centric characteristics of the service chain;
. a set of application modules integrating core service business processes;
. an ability to rapidly deploy the solution across the enterprise;
. integration with existing back-office information systems;
. analysis of key performance indicators and industry benchmarks for
professional services providers;
. ability for a highly distributed and mobile workforce to access the
ePlatform locally or remotely through multiple Internet access devices;
. online inter-company collaboration capabilities that facilitate efficient
interaction across the service chain;
. the ability to deploy in either self-hosted or remotely hosted
application service provider (ASP) models; and
. a collaborative and integrated online environment that connects the
service chains of multiple participants.
The Evolve Solution
We are a leading provider of Internet-based end-to-end solutions for
automating professional services organizations. Our ePlatform solution,
ServiceSphere, integrates and streamlines the core processes that are critical
to professional services organizations: managing project opportunities,
professional resources and service delivery. By integrating these processes,
ServiceSphere provides enhanced visibility of business performance throughout
the enterprise, allowing businesses to more effectively identify and pursue
revenue opportunities, increase their operational efficiency and improve the
productivity of their professionals. Through Services.com, we provide online
application services that extend our reach to small professional services
firms, and we intend to extend the capabilities of our ePlatform to integrate
the internal business processes of service providers, partners and acquirers in
an efficient, collaborative environment.
We believe our ServiceSphere ePlatform provides the following benefits to
businesses across the service chain:
Increased Operational Efficiency. ServiceSphere is designed to allow our
customers to achieve significant cost savings and productivity enhancements by
offering the ability to view and manage all of the core processes involved in
providing services across their entire organization. Our solution is accessible
to professionals and managers throughout a services organization, allowing them
to communicate and collaborate throughout a project. Using our solution,
services providers can rapidly match service professionals with projects to
balance supply and demand for personnel resources within the extended
enterprise. Our ServiceSphere technology also automates and improves workflow
processes and monitors key project parameters, allowing business managers to
analyze and improve performance throughout their enterprise.
Real-time Communication and Collaboration Across the Service Chain. Our
solution allows for the real-time, collaborative sale, management, and delivery
of services through a dynamic and complex network of
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resources and providers. By connecting not only service professionals within an
organization but also the entire external service chain, we allow our customers
to employ the Internet to communicate in real-time about changes in project
requirements and timing, as well as resource characteristics and availability.
Improved Retention of Service Professionals. By enabling professionals to
access and revise their skill profiles, staffing preferences and assignments
schedules in real time, we believe ServiceSphere helps close the gap between
professional development and project staffing needs, improving service
professionals' levels of satisfaction and retention. Improving retention of
service professionals reduces recruitment and training expenses, protects key
knowledge assets and can have a significant impact on operating results of
services providers.
Expanded Qualified Revenue Opportunities. We believe our ePlatform enables
service providers to expand their revenue opportunities by enhancing the
visibility of demand for their services and allowing them to match their
available resources to project opportunities. Our ePlatform provides tools that
significantly reduce the complexity inherent in assessing and matching resource
capabilities and available revenue opportunities.
Enhanced Client Satisfaction. Our solution improves client satisfaction by
more effectively matching client needs with the most knowledgeable and
experienced available resources for their project. In addition, ServiceSphere
facilitates timely completion of projects by enabling project managers to
collaborate with the service provider team and the client and make better
decisions more quickly. We believe that collaborative management is essential
to increasing client satisfaction and generating repeat business.
The Evolve Strategy
Our objective is to become the leading ePlatform provider for automating the
service chain. We intend to achieve our goal by gaining broad market acceptance
for our ePlatform and by enabling our customers to build collaborative online
professional services networks.
Key elements of our strategy include:
Extend Market Position Among IT Services Organizations and Leverage
Leadership into Other Markets. We currently target our solution primarily at
professional services organizations specializing in IT consulting. We chose to
initially target the IT services market because of its large size and because
IT services professionals face particularly complex collaboration and
transactional processes in selling, managing, and delivering their services. We
intend to use our growing portfolio of customer references to further penetrate
the IT services sector. Building on our experience and understanding of
professional services organizations and our core technologies, we also intend
to expand into other professional services sectors such as management
consulting and advertising.
Capitalize on Technology Leadership and Expand Product Offerings. We have
acquired substantial domain expertise in developing solutions addressing the
core business process automation needs of the professional services industry.
We have implemented a technical architecture that meets the needs of
professional services organizations for flexible solutions that can rapidly be
configured to meet their individual requirements and can be expanded or
"scaled" as their organizations grow. The ServiceSphere architecture is
designed for rapid and cost-effective implementation and configuration without
requiring modifications to the application's source code. We will continue to
enhance our technology and expand our service offerings to meet the evolving
needs of our customers and promote broad market adoption and increased usage of
our ePlatform solution. We expect to devote significant resources to building,
expanding and continuing to tightly integrate our ePlatform functionality, as
well as enhancing integration with complementary systems. For example, we are
currently extending the resource management capabilities of our ServiceSphere
suite to allow customers to access information about resource availability
throughout their partner and provider networks, and allocate service projects
accordingly.
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Allow Customers to Capitalize on Network Effects by Connecting their Service
Chain. We believe that our ePlatform solution creates significant network
efficiencies, leading to increased benefits to each service chain participant
as a network grows. We expect that our customers will use our ePlatform to
create networks joining their partners and customers to enhance collaboration
and transaction efficiency. We believe that the benefits of joining a service
network will become increasingly compelling as the number of organizations
connected to the network increases.
Encourage Continued Adoption of Our ePlatform Through Expanded Acquisition,
Deployment and Pricing Options. We make our platform accessible to a broad
range of businesses by providing a range of acquisition and deployment options,
all based on the same technology platform and using our value-based pricing
model which charges customers based on the number of resources managed with our
software. In addition to our self-hosted, licensed acquisition and deployment
model, we promote use of our ServiceSphere solution on an application service
provider (ASP) subscription basis, whereby we manage and maintain the systems
hosting the application on behalf of the customer, and make the ePlatform
available to the customer via the Internet. We believe that this market
strategy will enhance our ability to build the largest Internet-based network
of professional services organizations.
Take Advantage of Our Installed Base to Increase Sales of Complementary
Services and Increase Penetration of Customer Organizations. We intend to
capitalize on the success of existing deployments to encourage adoption of
ServiceSphere across additional workgroups and divisions within our customers'
organizations, many of which are experiencing rapid growth. We also will
continue to encourage customers to deploy additional software modules and
extend their use of ServiceSphere to connect with partners and customers in
private collaborative online networks.
Expand Globally. We believe that our existing domain knowledge and
technologies can be applied to professional service markets worldwide. We
intend to capitalize on our domain expertise and on our experience in assisting
our customers with overseas implementations of our solutions to aggressively
expand internationally. We plan to establish additional sales offices, create
an international sales force, and form strategic international partnerships.
Products and Services
Our ePlatform solution helps professional services organizations improve the
effectiveness of their internal operations and connects them to their clients,
partners and suppliers. Our ePlatform captures the inherently virtual,
collaborative, and people-centric characteristics of the service chain by
employing the universal accessibility of the Internet, an intuitive interface,
and applications functionality encapsulating our extensive domain expertise.
Our highly configurable rules engine allows the platform to be deployed by a
wide variety of customers supporting different business practices with no
source code changes. This enables us to address the different needs of a
diverse base of customers ranging from small emerging service firms to large
complex global services organizations across a variety of markets.
ServiceSphere
ServiceSphere, our flagship product suite, is an enterprise software
application system that is deployed by professional services organizations on a
distributed basis across their computer networks or accessed remotely on an
application service provider (ASP) basis. ServiceSphere is a proven end-to-end
solution that can expand to address the needs of rapidly growing organizations.
ServiceSphere automates and integrates the key processes that are critical to
the operational effectiveness of a services organization. ServiceSphere also
enables collaboration with outside organizations in the areas of project
management, external sourcing of staff and invoicing. The ServiceSphere product
suite consists of three applications components or "modules", which can be
deployed individually, or can be used together to form a comprehensive business
process automation solution.
38
<PAGE>
<TABLE>
<CAPTION>
Module Feature Benefits
------------------------------------------------------------------------------------
<S> <C> <C>
Opportunity Manager . Track opportunity from . Reduces the time to
[This is a small graphic qualification through identify and close a
depicting three small service engagement qualified opportunity
circles with the letters
O, D and R appearing in . Model project . Leverages experience
the respective circles, specifications and create base to rapidly create,
symbolizing the pricing proposals price and configure
ServiceSphere projects
Opportunity Manager, . Review and manage
Delivery Manager, and opportunity pipelines . Improves managerial
Resource Manager visibility, enabling
modules. The three . Incorporate internal and strategic enterprise-wide
circles are connected by competitive benchmarks decision making
arrows pointing into the project
counterclockwise which selection process . Focuses sales activities
form a larger circle, on highly probable
symbolizing the engagements
interaction between the
ServiceSphere modules.
The "O" circle is
highlighted.]
------------------------------------------------------------------------------------
Resource Manager . Match resource profiles . Enables collaborative
[This is a small graphic and availability with team building, building
depicting three small project requirements dynamic teams that adapt
circles with the letters to changing customer
O, D and R appearing in . Monitor and review requirements
the respective circles, organization wide
symbolizing the capacity plan . Optimizes resource
ServiceSphere utilization
Opportunity Manager, . Share and evaluate
Delivery Manager, and partner resources and . Optimizes resource
Resource Manager projects allocation across a
modules. The three network of service
circles are connected by . Develop, manage and providers
arrows pointing evaluate resource skills,
counterclockwise which qualifications and . Facilitates personal
form a larger circle, preferences development, increasing
symbolizing the job satisfaction
interaction between the improving resource
ServiceSphere modules. retention
The "R" circle is
highlighted.]
------------------------------------------------------------------------------------
Delivery Manager . Capture, review and . Improves accuracy and
[This is a small graphic approve time and expenses reduces cost of tracking
depicting three small projects
circles with the letters . Monitor and review
O, D and R appearing in projects with customers . Facilitates improved
the respective circles, and partners customer interaction and
symbolizing the satisfaction
ServiceSphere . Generate invoices using
Opportunity Manager, multiple billing methods . Increases billing
Delivery Manager, and accuracy and payment
Resource Manager . Provide sophisticated efficiency
modules. The three financial analysis and
circles are connected by reporting across the . Optimizes financial
arrows pointing service chain performance
counterclockwise which
form a larger circle,
symbolizing the
interaction between the
ServiceSphere modules.
The "D" circle is
highlighted.]
------------------------------------------------------------------------------------
</TABLE>
Services.com
Services.com, which we introduced in February 2000, significantly extends
the reach of our product line. The primary function of Services.com is to
provide online application services to smaller professional services
organizations. The Services.com Delivery Manager, a version of our ePlatform
tuned for the special needs of service firms with fewer than 100 service
professionals, was launched in May 2000.
Smaller firms have a particularly acute need for a solution to manage time
and expense tracking, project accounting, and billing processes. Smaller firms
also benefit from applications delivered over the Internet, which do not
require dedicated in-house computing hardware and software. In addition, these
firms require a system that can be rapidly implemented and is easy to use. Our
Services.com Delivery Manager provides an easy-to-use online application
designed to meet these requirements.
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As an online applications portal for small professional services businesses,
Services.com extends the reach of our product line to a larger number of
potential customers than our direct sales force would otherwise be able to
reach. We market our Services.com Delivery Manager in collaboration with
Intuit, the provider of QuickBooks financial management software, to the over
27,000 small service firms that are QuickBooks customers. We also market the
Services.com Delivery Manager directly from the Services.com and Evolve.com web
sites, as well as through other direct marketing and sales activities. In the
future, we plan to provide other application services through Services.com.
Professional Services
As of May 31, 2000, our professional services organization consisted of 118
employees. We provide implementation consulting, technical support, end-user
training, and change management to ensure our customers receive the guidance
and support they need to implement and operate our ePlatform solutions. Our
professional services organization has developed implementation methodologies
that allow our customers to rapidly configure and deploy our ePlatform to
support their unique business practices.
In addition to professional services, we offer product maintenance to our
customers. Maintenance services are typically subject to an annual, renewable
contract and are typically priced as a percentage of product license fees. We
bundle maintenance services with our application service provider (ASP)
offering in a single monthly subscription fee. Customers receiving maintenance
services also receive product upgrades as they are released throughout the life
of the maintenance contracts.
Customers
Our current customers include both eBusiness consultants and the services
organizations of traditional software and hardware companies. As of May 31,
2000, we had licensed our solution to 34 customers who have contracted to
purchase more than $250,000 in products and services and who have collectively
licensed our solutions to manage over 40,000 professionals:
<TABLE>
<C> <S>
Akili Systems marchFIRST (formerly Whittman-Hart &
USWeb/CKS)
Becton Dickinson netdecisions
Benchmarking Partners Novell
Business Objects Novo Media Group
BroadVision Portal Software
Clarify (a Nortel company) Plumtree Software
DMR Consulting Group Razorfish
Eclipse Networks Rare Medium
ePresence (formerly Banyan Systems) Scient
Ericsson Siemens
Exodus Communications ThoughtWorks
Groundswell Xcelerate
Hitachi Data Systems XOR
iPlanet (the Sun/Netscape alliance) Xpedior
Lante Xqsite
Magnet Interactive Group Xuma Technologies
Mainspring Communications Zefer
</TABLE>
The following are case studies of a sample of Evolve customers who have
deployed our ePlatform to automate their service chain:
Exodus Communications
Exodus is a leading provider of complex Internet hosting solutions for
enterprises with mission-critical Internet operations. Exodus was looking for a
solution to help manage its professional services organization as
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<PAGE>
well as its relationships with its outside services provider partners. Our
Opportunity Manager and Resource Manager modules were selected because the
applications can be hosted remotely and because the ePlatform offers more
extensive features and functionality than competing offerings. Exodus
represents a growing trend of organizations which are choosing to purchase our
solutions on a remotely hosted subscriptions basis. By using our ePlatform,
Exodus expects to be able to manage its workforce more effectively and
streamline and optimize interactions with its services provider partners.
Novell
Novell is a leading worldwide provider of Net services software that is
rapidly expanding its professional services organization to provide customers
with comprehensive education, consulting and technical support programs. Novell
is a leading example of a product company which is placing increased emphasis
on services as part of a total solution. ServiceSphere was evaluated to help
achieve Novell's strategic goal to grow its global services resources by 500%
in 2000. Novell has licensed all three modules of our ePlatform. This ensures
that it has the tools to keep up with the challenges of building, scaling and
integrating a large professional services organization within a traditionally
product-oriented enterprise. The first two modules were implemented around the
world in less than three months. Plans are underway to deploy the third module
worldwide in 2000.
Scient
Scient is leading a new category of professional services called systems
innovation and is focused on building highly flexible and innovative eBusiness
systems that help companies go to market rapidly and build competitive
differentiation. Scient selected Evolve to provide a solution to support the
growth of its professional services organization. Scient is using our Resource
Manager, including connectors to its PeopleSoft human resource system and other
systems, to assist in its efforts to build project teams efficiently and to
streamline operations in its dynamic environment. Scient is typical of the new
generation of information technology-focused consulting firms that account for
a significant portion of our customer base.
marchFIRST (formerly Whittman-Hart & USWeb/CKS)
marchFIRST (formerly Whittman-Hart & USWeb/CKS) is a leading global Internet
professional services firm that helps clients perform and strengthen the
integration of their business models, brands, systems and processes. marchFIRST
has more than 9,000 employees in 14 countries worldwide and is a leading
example of a large organization using Evolve's solutions to manage a
geographically diverse team of service professionals. marchFIRST chose our
ePlatform because they believed our solution could scale to address the
mission-critical processes of a $1 billion services firm. marchFIRST also
needed a solution that would integrate effectively with its other enterprise
applications that were simultaneously deployed--human resources, financial,
knowledge management and recruiting. Today, Evolve is used to manage more than
3,300 professionals at marchFIRST.
Novell, Scient and marchFIRST accounted for 17%, 4% and 21% of our revenues
for the nine months ended March 31, 2000. As of March 31, 2000, we had not yet
commenced recognizing revenues from our agreement with Exodus Communications.
Each of the companies continues to be an active customer of ours.
Technology
[Description of diagram]
This graphic is entitled "Evolve ePlatform Architecture". Under the title is
a long rectangular box with the text "Presentation Interface" in the middle.
Directly below and connected to the left of the rectangle is a large square
containing three circles labeled "O", "R" and "D" with curved arrows connecting
each one running counter-clockwise forming another circle with the word
"ServiceSphere" in the center. Underneath this circle are the words "ePlatform
Server". Directly to the right and connected to this square is a vertical
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<PAGE>
rectangle with the word "sXML" in the center. To the right of this rectangle is
another square with a circle with the Services.com logo inside of it. On the
top diameter of this circle is a curved arrow running from right to left around
one-third of the diameter with the text "Collaborative Commerce" above. On the
bottom of the circle there is an arrow running from left to right with the
label "Collaborative Commerce" below. Under the two squares and the vertical
rectangle is a rectangle connected to the border of each of them with the text
"Analytics Engine". Under this is another rectangle, of the same shape and
size, directly connected to it with the text "Application Connectors". Under
this is another rectangle directly connected to it, of the same shape and size,
with the text "Business rules repository". Under this is another rectangle, of
the same shape and size, directly connected to it with the text "Security
Controller". Under this is another rectangle, of the same shape and size,
directly connected to it with the text "Collaboration and Workflow Manager".
At the core of our ePlatform solution is a highly adaptable, expandable
(scalable), multi-tier, distributed, Internet-based architecture. Our ePlatform
architecture provides a common foundation on which all Evolve products and
services are built, including the various components of our ServiceSphere
application suite and our Services.com online applications portal. Our
architecture includes the following components:
ePlatform Server
Our Java-based ePlatform application server includes the Opportunity
Manager, Resource Manager and Delivery Manager modules that employ extensive
professional services domain knowledge. When deployed together, these modules
provide a fully integrated, end-to-end service chain automation solution.
Alternatively, companies can deploy these modules individually on an as-needed
basis. Some of these key features of the server include:
. the option of running multiple application servers to provide scalability
for large sophisticated organizations;
. patent-pending resource matching algorithms that reduce the time required
to staff projects;
. a flexible object-based design allowing rapid incorporation of new
features and functionality; and
. java-based portability which provides flexibility to support multiple
operating environments.
Presentation Interface
We have the flexibility to provide access to a broad set of users by
employing different presentation interfaces:
. Internet Browser-an ease-of-use interface that allows services
organizations to manage and share information through a secure intranet
or Internet connection;
. Java Client-a more functionally sophisticated interface for power-users
needing to work quickly with complex queries and data manipulations; and
. Handheld Devices-an interface for mobile access to time and expense entry
through popular personal digital assistants such as Palm devices.
Our architecture is designed to allow us to quickly develop and introduce new
presentation interfaces that leverage new and emerging access technologies.
sXML
Our ePlatform employs XML (eXtensible Mark-up Language), a common
information exchange standard for electronic commerce. We are in the process of
developing Services XML (sXML), an advanced version of the XML standard
optimized for exchanging information on service opportunities, resources and
delivery.
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Analytics Engine
We have the ability to report on key data through a sophisticated analytics
engine. These reports are available through our browser-based report center,
which provides views of the entire service chain, such as opportunity and
revenue pipelines, utilization and profitability analysis, and resource supply
and demand planning.
Application Connectors
Our system provides connectors that support common industry standards and
technologies such as JDBC (Java DataBase Connectivity), ODBC (Open DataBase
Connectivity), SQL (Structured Query Language) and Java. These connectors allow
for integration with:
. external databases;
. third party reporting tools that complement our built-in browser-based
report center capabilities; and
. other enterprise applications such as financial, human resource and sales
force automation systems.
Business Rules Repository
Our ePlatform is designed to capture and store business information, rules
and standards in a single, centralized repository that can be accessed by all
functional modules. This centralized information structure allows for rapid
initial deployment and also facilitates adaptation to changes in the customer's
organization and processes without source code modifications. We also believe
this architecture will allow us to more easily extend our solution to other
industries beyond information technology services.
Security Controller
Our integrated security and administration features store profiles and
access rules within a centralized repository. Customers can specify individual
access rules for employees based on their position within their organization,
as well as for customers, partners and other external parties. Our systems
supports the Lightweight Directory Access Protocol (LDAP) security standard for
universal sign-on and authentication functions.
Collaboration and Workflow Manager
Our platform provides sophisticated management of structured knowledge by
capturing organizational processes and data in a notification-driven workflow
management system. Our platform incorporates an integrated messaging system
that notifies users when actions, information or approvals are required. This
system helps to streamline approval processes, use knowledge, monitor resources
and facilitate collaboration among project team participants.
Research and Development
We believe that our introduction of new and enhanced products will be a key
factor for our future success. As part of our efforts to generate ideas for
enhancing our existing products and for developing new ones, we maintain an
ongoing dialogue with our customers who are facing new professional services
automation challenges. We have devoted and expect to continue to devote
significant resources to developing new and enhanced products, including new
releases of our ServiceSphere ePlatform and our Services.com offering.
Our research and development expenses were $5.1 million and $6.2 million in
fiscal 1999 and the nine months ended March 31, 2000. We expect that research
and development expenses will increase in absolute dollars and may increase as
a percentage of revenues in future periods as we hire additional research and
development personnel to develop our products and services. We expect that we
will have to respond quickly to rapid technological change, changing customer
needs, frequent product introductions and evolving industry
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<PAGE>
standards that may render existing products and services obsolete. We currently
have a number of product development initiatives underway, but we cannot be
certain that any enhanced or new products will be embraced by existing or new
customers.
Sales and Marketing
We sell our solutions through our direct sales organization which includes
personnel in the metropolitan areas of Atlanta, Boston, Chicago, Dallas,
London, Los Angeles, New York, San Francisco and Washington, D.C. In the
future, we intend to enhance our market presence through alliances with systems
integrators and service partners.
In selling our products, we typically approach both business users and
information technology professionals with an integrated team from our sales and
professional services organizations. Initial sales activities typically include
a demonstration of our product capabilities followed by one or more detailed
technical reviews. Our sales process requires that we work closely with
targeted customers to identify short-term professional services automation
needs and long-term goals. Our sales team, which includes both sales and
technical professionals, then works with the customer to develop a proposal to
address these needs. In many cases, we collaborate with our customers' senior
management team, including the chief executive officer, chief information
officer, chief operating officer and chief financial officer. The level of
customer analysis and financial commitment required for many of our product
implementations has caused our sales cycle to range from two to nine months.
We use a variety of marketing programs to build market awareness of our
company, our brand name and our products, as well as to attract potential
customers. These programs include advertising, market research, product and
strategy updates with industry analysts, public relations activities, direct
mail programs, telemarketing and telesales, seminars, trade shows, speaking
engagements and Web-based marketing. Our marketing organization also produces
marketing materials in support of sales to prospective customers that include
brochures, data sheets, white papers, presentations and demonstrations. We plan
to continue to expand our marketing organization and marketing budget to
broaden our market presence.
We also seek to establish relationships and alliances with major industry
vendors that will add value to our products and enhance our market presence.
The goal of our efforts is to form alliances with partners who can help
introduce our solutions to their customer base, and to be able to offer to our
own customers additional software applications and consulting and support
services that they are likely to benefit from.
Intellectual Property and Proprietary Rights
Our success is dependent on our ability to develop and protect our
proprietary technology and intellectual property rights. We seek to protect our
software, documentation and other written materials primarily through a
combination of patent, trade secret, trademark and copyright laws,
confidentiality procedures and contractual provisions. For example, we license
rather than sell our software and require licensees to enter into license
agreements that impose restrictions on the licensees' ability to use the
software. Our license agreement grants to our customers the right to use our
software for their internal use only, and not for third-party training,
commercial time-sharing, rental or service bureau use. Furthermore, our
licensees are prohibited from reverse engineering, decompiling or disassembling
our software. Finally, the majority of our licensees agree not to develop,
market, license or sell any software product substantially similar in design,
features or functionality to our software. In addition, we seek to avoid
disclosure of our trade secrets by, among other things, requiring persons with
access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code.
We have two patent applications pending in the United States with respect to
the "team builder" functionality in our Resource Manager module, and technology
to enable the development of dynamically configurable software systems. Neither
of these patents has been issued, and there can be no assurance that any
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<PAGE>
patents will be issued pursuant to these applications or that, if granted, any
patent would survive a legal challenge to its validity or provide significant
protection to us. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. Policing unauthorized use of our
products is difficult. While we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem, particularly in foreign countries where the laws may not
protect proprietary rights as fully as in the United States. We can offer no
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors will not independently develop similar technology.
It is also possible that third parties will claim that we have infringed
their current or future products or technologies. We expect that enterprise
applications software developers will increasingly be subject to infringement
claims as the number of products in different industry segments overlap. Any
claims, with or without merit, could be time-consuming, result in costly
litigation, prevent product shipment, cause delays, or require us to enter into
royalty or licensing agreements, any of which could harm our business. Patent
litigation in particular has complex technical issues and inherent
uncertainties. In the event an infringement claim against us was successful and
we could not obtain a license on acceptable terms or license a substitute
technology or redesign to avoid infringement, our business could be harmed.
We rely on software that we have licensed from Paradigm Software
Technologies, Poet Software and Inprise/Borland to perform key functions of our
ServiceSphere ePlatform. These companies could discontinue their support of
these products, or they could terminate our licenses if we breach our
agreements with them. This could result in delays or reductions of sales or
shipments of our ePlatform until alternative software could be developed or
licensed.
We indemnify some of our customers against claims that our products infringe
upon the intellectual property rights of others. We could incur substantial
costs in defending our company and our customers against infringement claims.
In the event of a claim of infringement, we or our customers may be required to
obtain one or more licenses from third parties. We cannot assure you that such
licenses could be obtained from third parties at a reasonable cost, or at all.
Defense of any lawsuit or failure to obtain any such required license could
have a material adverse effect on our business.
Competition
Competition could seriously harm our ability to sell additional software
solutions and subscriptions on prices and terms favorable to us. The markets
for our products are intensely competitive and subject to rapidly changing
technology. We currently compete against other providers of automation
solutions for professional services organizations such as Changepoint and Niku.
In addition, we may in the future face competition from providers of enterprise
application software or electronic marketplaces. Companies in each of these
areas may expand their technologies or acquire companies to support greater
professional service automation functionality and capability. In addition, "in
house" information technology departments of potential customers have developed
or may develop systems that substitute for some of the functionality of our
ePlatform.
Some of our competitors' products may be more effective than our products at
performing particular functions or be more customized for particular needs.
Even if these functions are more limited than those provided by our products,
our competitors' software products could discourage potential customers from
purchasing our products. A software product that provides some of the functions
of our solutions, but also performs other tasks, may be appealing to some
customers because it would reduce the number of different types of software
necessary to effectively run their businesses. Further, our competitors may be
able to respond more quickly than we can to changes in customer requirements.
Some of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. Our
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competitors have made and may also continue to make strategic acquisitions or
establish cooperative relationships among themselves or with other software
vendors. They may also establish or strengthen cooperative relationships with
our current or future partners, thereby limiting our ability to promote our
products through these partners and limiting the number of consultants
available to implement our software.
We believe that the primary competitive factors in our market include:
. a critical mass of prominent customers that have successfully implemented
the solutions;
. an underlying software infrastructure that fully encapsulates the
virtual, collaborative, and people-centric characteristics of the service
chain;
. inter-company collaboration capabilities that facilitate efficient
business processes among service chain participants;
. product quality, performance, features, functionality, and usability;
. customer service and support; and
. ease of integration with customers' business processes.
We believe our current products compete favorably with respect to these
factors, although our market is relatively new and evolving rapidly. We may not
be able to maintain our competitiveness in the face of significant competition.
Employees
As of May 31, 2000, we had a total of 310 employees. Of these employees:
. 83 were engaged in sales and marketing;
. 72 were in research and development;
. 118 were in professional services and customer support; and
. 37 in finance, administration, recruiting, information technology and
corporate operations.
In addition, as of May 31, 2000, we also employed an additional 15 full-time
consultants in our research and development organization.
Our future performance depends in significant part on our continuing ability
to attract, train and retain highly qualified technical, sales, service,
marketing, managerial and administrative personnel. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
Facilities
We currently lease approximately 25,000 square feet of office space for our
headquarters in one building in San Francisco, California under a lease
expiring in November 2000. In November 1999, we entered into a lease for a new
50,000 square foot corporate headquarters facility in Emeryville, California,
which we began occupying in May 2000. In connection with the relocation of our
corporate headquarters, we expect to incur capital expenditures of
approximately $4 million in the fourth quarter of fiscal 2000 and the first
quarter of fiscal 2001. We also lease sales offices near Atlanta, Boston,
Chicago, Dallas, London, Los Angeles, New York and Washington, D.C., as well as
a development facility in Santa Clara, California. We believe that our
facilities are adequate for our current needs. We may need to locate additional
space to meet our needs in the future.
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Legal Proceedings
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. In January 2000, PeopleSoft, Inc.
filed an action in the California Superior Court alleging claims arising out of
our employment of former employees of PeopleSoft, and seeking an injunction to
preclude additional hiring of PeopleSoft employees. PeopleSoft's claims include
inducing breach of contract and unfair competition. PeopleSoft has also
requested a temporary restraining order and preliminary and permanent
injunctions enjoining us from recruiting additional PeopleSoft employees or
disclosing any PeopleSoft trade secrets. We believe PeopleSoft's claims are
without merit, and we are in the process of contesting these claims. This
litigation, whether or not determined or settled in our favor, may be costly
and may divert the efforts and attention of our management from normal business
operations. We believe that there are no other claims or actions pending or
threatened against us, the ultimate disposition of which would have a material
adverse effect on us.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages as of May 31, 2000 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John P. Bantleman....... 40 President, Chief Executive Officer and Director
James J. Bozzini........ 33 Chief Operating Officer
Douglas S. Sinclair..... 46 Chief Financial Officer, Corporate Secretary and Treasurer
Marc C. Ferrie.......... 36 Senior Vice President, Engineering
Mark L. Davis........... 38 Vice President, Marketing and Business Development
J. Russell DeLeon....... 34 Vice President, International
Kurt M. Heikkinen....... 32 Vice President, Worldwide Customer Service
Jeff A. McClure......... 35 Vice President, Marketplace Services
Anil K. Gupta........... 39 Vice President, Strategy
John R. Oltman(1)(2).... 55 Chairman of the Board
Jeffrey M.
Drazan(1)(2)........... 41 Director
Judith H. Hamilton(1)... 55 Director
</TABLE>
--------
(1) Member of Audit Committee
(2) Member of Compensation Committee
John P. Bantleman has served as President since October 1997, and as Chief
Executive Officer and as Director since November 1998. Prior to joining Evolve,
Mr. Bantleman served as Executive Vice President of Marketing and Product
Management at Logic Works from October 1996 to May 1997, a provider of
development tools for enterprise-wide client-server and data warehouse
applications. From 1982 to 1996, he was employed by LBMS, a provider of process
management applications, where he served as President and Chief Executive
Officer after serving in various other management positions. Mr. Bantleman
holds a B.S. degree in Computer Science from City University, London, England.
James J. Bozzini has served as Chief Operating Officer since November 1999.
From 1991 to 1999, Mr. Bozzini held various executive positions at PeopleSoft,
an applications software vendor, including Senior Vice President of Worldwide
Services Operations from January 1998 to July 1999, Vice President, Customer
Services from December 1995 until December 1997 and Vice President of
Professional Services and Director of European Operations from 1991 to 1995.
From 1988 to 1991, Mr. Bozzini also held various positions at Andersen
Consulting, an international management and technology consulting organization.
Mr. Bozzini holds a B.S. in Business from California State University, Chico.
Douglas S. Sinclair has served as Chief Financial Officer, Corporate
Secretary and Treasurer since April 2000. Prior to joining Evolve, Mr. Sinclair
served as Chief Financial Officer of SoftNet Systems, an Internet services
provider, from November 1998 to April 2000. Prior to joining SoftNet Systems,
Mr. Sinclair served as: Chief Financial Officer of Silicon Valley Networks,
Inc., a provider of test management software to telecommunications and
networking companies, from April 1998 to November 1998; Chief Financial Officer
of International Wireless Communications, Inc., an international cellular
business operator, from 1995 to April 1998; Chief Financial Officer of
Pittencrieff Communications Inc., then a provider of trunked radio services,
from 1993 to 1995; and Chief Financial Officer of Pittencrieff plc., an oil and
gas company based in the United Kingdom, from 1990 to 1993. International
Wireless Communications, Inc. filed for protection under the bankruptcy laws of
the United States in September 1998, subsequent to Mr. Sinclair's departure.
Mr. Sinclair holds a B.Sc. in Electrical and Electronic Engineering from the
University of Glasgow and an M.B.A. from the Harvard Graduate School of
Business Administration.
Marc C. Ferrie has served as Senior Vice President, Engineering since
January 1998. Prior to joining Evolve, Mr. Ferrie served from July 1997 to
December 1997 as President and Vice President of Engineering of
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Omnis Software, a developer of cross-platform rapid application development
tools. From 1988 to 1997, he was employed at Ingres Corporation, a developer of
database applications, where he held various positions including Vice President
of Engineering from January 1995 to June 1997, Vice President of Product
Management from 1993 to 1995, and Vice President of Customer Services for
France from 1990 to 1993. Mr. Ferrie holds an M.S. degree in Computer Science
and Artificial Intelligence from the University of Rene Descartes Paris V, and
an M.S. degree in Sociology from the University La Sorbonne, Paris, France.
Mark L. Davis has served as Vice President, Marketing and Business
Development since November 1999. Prior to joining Evolve, Mr. Davis served as
Vice President of Marketing, Alliances, and Customer Service at ConvergeNet
Technologies, Inc., a storage networking company, from January 1999 through the
company's acquisition by Dell Computer in November 1999. From January 1998 to
January 1999, he was a Vice President of Marketing at Storage Technology
Corporation, an enterprise storage company. From 1991 to 1998, Mr. Davis held
various management positions at Sun Microsystems, Inc., a worldwide provider of
computer systems, software and services, including Group Manager, Outbound
Marketing and Acting Director of Marketing from May 1997 to January 1998;
Manager, Marketing Strategy and Programs from January 1996 to May 1997; and
Product Line Manager from February 1995 to January 1996. Mr. Davis holds an
M.B.A., with honors, from Dartmouth College's Amos Tuck School of Business, and
B.S. and B.A. degrees, with honors, in Computer Science and Business
Administration from Trinity University.
J. Russell DeLeon joined Evolve as Vice President, General Counsel and
Corporate Secretary in May 1995, and was appointed Treasurer in October 1997,
and Vice President, Finance and Administration in November 1998. In April 2000,
Mr. DeLeon was appointed Vice President, International, and he resigned as Vice
President, Finance and Administration, General Counsel, Corporate Secretary and
Treasurer. Prior to joining Evolve, Mr. DeLeon worked as an associate in the
business, corporate finance and intellectual property groups at Morrison &
Foerster, an international law firm. Mr. DeLeon, a member of the State Bar of
California, holds a B.A. degree in Philosophy from UC Berkeley and a J.D. from
Harvard Law School.
Kurt M. Heikkinen has served as Vice President, Worldwide Customer Service
since December 1999. Prior to joining Evolve, Mr. Heikkinen held various
positions at PeopleSoft. From August 1999 to November 1999, he served as
General Manager of the Human Resource Management Solutions ("HRMS") product
division; from October 1997 until August 1999 he served as Vice President,
Global Support Services; from July 1996 until October 1997 he served as
Development Manager, Asia Pacific HRMS; and from March 1994 until July 1996 he
was a Senior Account Manager. Mr. Heikkinen holds a B.S. degree from the
University of Wisconsin, Milwaukee.
Jeff A. McClure has served as Vice President, Marketplace Services since
February 2000. He joined Evolve as Director of ASP operations in November 1999.
From 1996 to 1999, Mr. McClure served in executive positions at PeopleSoft.
From April 1999 until November 1999, he was Vice President, Advantage Programs
and Services. From June 1998 until April 1999, he was Vice President, Product
Knowledge Services, and from October 1996 through June 1999, he was Director,
Service Alliances. Before PeopleSoft, Mr. McClure served as a principal in a
financial systems consultancy, and before that he served in various roles at
Apple Computer, Inc., a provider of personal computing and communicating
solutions, including Business Solutions Evangelist. Mr. McClure holds a B.S. in
Business Administration from California State University, Chico.
Anil K. Gupta joined Evolve as Vice President, Strategy in March 2000. Mr.
Gupta served as Vice President, Marketing of Broadbase Software, Inc., a
provider of customer relationship software, from August 1999 to March 2000.
From January 1999 to August 1999, Mr. Gupta served as Vice President of
Marketing at Niku Corporation, a provider of professional management software
products. From May 1995 to December 1998, Mr. Gupta held various marketing
positions at Baan N.V., a provider of enterprise business software, including
Vice President of Marketing for the Baan Supply Chain Solutions. From June 1993
to May 1995, Mr. Gupta served as Director of Industry Marketing at Oracle
Corporation, a supplier of software for information management systems. Mr.
Gupta holds a B.S. degree in Electrical Engineering from The Birla Institute of
Technology and Science in Pilani, India and an M.B.A. degree from Santa Clara
University.
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John R. Oltman has served on our Board of Directors since August 1999, and
has served as Chairman of the Board of Directors since November 1999. Mr.
Oltman has been President of JRO Consulting, Inc. since 1995, in which role he
serves as director, advisor and investor in leading technology companies and
investment firms. Mr. Oltman also currently serves as the Vice-Chairman of
Lante Corporation and Chairman of XOR, Inc. Mr. Oltman also serves as a
director for Exult, Inc., Alysis Technologies, Inc., InaCom Corp. and Premier
Systems Integrators, Inc. From February 1996 through August 1997, Mr. Oltman
served as Chairman and senior member of the Executive Committee of TSW
International, a global leader in asset care software and services. From July
1991 to November 1995, Mr. Oltman served as the Chairman and Chief Executive
Officer of SHL Systemhouse, a large provider of client/server systems
integration and technology outsourcing. Before joining SHL Systemhouse, Mr.
Oltman was a worldwide managing partner responsible for systems integration and
outsourcing services at Andersen Consulting. Mr. Oltman holds a B.S. degree
from the University of Illinois and an M.B.A. degree from Northwestern
University's Kellogg School of Management.
Jeffrey M. Drazan has served on our Board of Directors since November 1998.
Mr. Drazan has been a General Partner of Sierra Ventures, a venture capital
financing organization, since 1984. Prior to joining Sierra Ventures, Mr.
Drazan was employed by AT&T, a telecommunications company, where he held
various management positions within the operating divisions of AT&T Long Lines,
AT&T Information Systems, and Bell Laboratories. He currently serves on the
Board of Directors of Vertel Corporation, a telecommunications software vendor,
Fairmarket, an auction services company and other private companies. Mr. Drazan
holds an M.B.A. from New York University's Graduate School of Business
Administration and a B.S. Degree in Engineering from Princeton University.
Judith H. Hamilton has served on our Board of Directors since March 1999.
Ms. Hamilton has served as President and Chief Executive Officer of Classroom
Connect, an Internet company focusing on K-12 education, since January 1999.
Prior to this, she served as President and Chief Executive Officer of First
Floor, Inc., an Internet marketing enterprise from April 1996 to July 1998. Ms.
Hamilton also served as President and Chief Executive Officer of Dataquest,
Inc., a technology market intelligence firm, from July 1992 to March 1996. She
currently serves on the Board of Directors of R.R. Donnelley & Sons Company, a
financial printing services company, Software.com, Inc., an Internet messaging
software developer, and Lante Corporation, a consulting firm. Ms. Hamilton
holds a B.A. Degree in History and Political Science from Indiana University
and has engaged in post-graduate studies in International Relations at Boston
University in Heidelberg, Germany as well as studies in Executive Management at
the UCLA Graduate School of Management.
Board of Directors
Our Board of Directors currently consists of four members. Each director
holds office until his or her term expires or until his or her successor is
duly elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws will provide for a classified
Board of Directors. In accordance with the terms of our certificate, our Board
of Directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following
directors:
. Class I consists of Jeffrey M. Drazan, who will serve until the annual
meeting of stockholders to be held in 2001;
. Class II consists of John R. Oltman, who will serve until the annual
meeting of stockholders to be held in 2002; and
. Class III consists of John P. Bantleman and Judith H. Hamilton, who will
serve until the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. 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 an equal number of directors.
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Committees of the Board of Directors
Audit Committee
The audit committee consists of Jeffrey M. Drazan, John R. Oltman and Judith
H. Hamilton. The audit committee reviews our internal accounting procedures,
consults with and reviews the services provided by our independent accountants
and makes recommendations to the Board of Directors regarding the selection of
independent accountants.
Compensation Committee
The compensation committee consists of Jeffrey M. Drazan and John R. Oltman.
The compensation committee reviews and recommends to the Board of Directors the
salaries, incentive compensation and benefits of our officers and employees and
administers our stock plans and employee benefit plans.
The Board of Directors selects the directors who will serve as members of
these committees and may reduce or enlarge the size of the committees or change
the scope of their responsibilities. The Board of Directors has no current
plans to take any of these actions. The rules of The Nasdaq Stock Market's
National Market, on which our common stock is listed, require us to maintain an
audit committee consisting of at least two directors who are not employees of
Evolve.
Compensation Committee Interlocks and Insider Participation
Our Board of Directors established the compensation committee in December
1998. Prior to establishing the compensation committee, our Board of Directors
as a whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served 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. Since the formation of the compensation committee, none
of its members has been our officer or employee.
Employee directors, which currently include only John P. Bantleman, are
eligible to participate in our 2000 Employee Stock Purchase Plan.
Director Compensation
Our Board of Directors will be reimbursed for expenses incurred in attending
any meeting of the Board of Directors or any committee thereof. We have adopted
a policy whereby each new non-employee director will receive a grant of a stock
option to purchase 83,333 shares of our common stock on the date on which such
person becomes a director. The options will vest over four years. Twenty-five
percent of the shares subject to such options will vest on the first
anniversary of the date on which the person becomes a director, and 1/48th of
the total number of shares vesting each month thereafter. Our directors may
also be given the opportunity from time to time to purchase shares of our
common stock pursuant to restricted stock purchase agreements.
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<PAGE>
Executive Compensation
The following Summary Compensation Table sets forth all compensation paid or
accrued during our fiscal year ended June 30, 1999, to our President and Chief
Executive Officer, and each of our other most highly compensated officers whose
compensation exceeded $100,000 for the period. In accordance with the rules of
the SEC, the compensation described in this table does not include perquisites
and other personal benefits received by the executive officers named in the
table below that do not exceed the lesser of $50,000 or 10% of the total salary
and bonus reported for these officers. Since the end of our 1999 fiscal year,
we have added several additional executive officers. For a list of our current
executive officers and other members of our senior management, see "--Executive
Officers and Directors" above.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------- ------------
Restricted
Stock All Other
Name and Principal Position Salary ($) Bonus ($) Awards ($) Compensation
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
John P. Bantleman............... 187,500 135,520 0(1) --
President, Chief Executive
Officer
Marc C. Ferrie.................. 162,500 35,363 0(2) --
Senior Vice President,
Engineering
J. Russell DeLeon............... 105,000 25,613 0(3) --
Vice President, International
</TABLE>
--------
(1) As of June 30, 1999, Mr. Bantleman had purchased, in aggregate, 833,333
shares of restricted stock that had a value of $250,000 (based on a value
of $0.30 per share, the fair market value of our common stock at the end of
fiscal 1999 as determined in good faith by our Board of Directors). On
February 1, 1999, Mr. Bantleman purchased 683,333 shares of restricted
stock for $205,000, which shares are scheduled to vest over a four-year
period in equal amounts on the 15th day of each month commencing December
15, 1998. On January 31,1998, Mr. Bantleman purchased 150,000 shares of
restricted stock for $270,000. Dividends were not paid on any of the
restricted stock during fiscal 1999.
(2) As of June 30, 1999, Mr. Ferrie had purchased, in aggregate, 316,667 shares
of restricted stock that had a value of $95,000 (based on a value of $0.30
per share, the fair market value of our common stock at the end of fiscal
1999 as determined in good faith by our Board of Directors), which shares
were purchased on February 1, 1999, and are scheduled to vest over a four-
year period in equal amounts on the 15th day of each month commencing
December 15, 1998. Dividends were not paid on any of the restricted stock
during fiscal 1999.
(3) As of June 30, 1999, Mr. DeLeon had purchased, in aggregate, 123,000 shares
of restricted stock that had a value of $36,900 (based on a value of $0.30
per share, the fair market value of our common stock at the end of fiscal
1999, as determined in good faith by our Board of Directors). On February
1, 1999, Mr. DeLeon purchased 91,750 shares of restricted stock for
$27,525, which shares are scheduled to vest over a four-year period in
equal amounts on the 15th day of each month commencing December 15, 1998.
On May 15, 1995, Mr. DeLeon purchased 31,250 shares of restricted stock for
$9,375. Dividends were not paid on any of the restricted stock during
fiscal 1999.
Stock Option Grants in Fiscal 1999
No stock options were granted to the executive officers named in the table
above during the fiscal year ended June 30, 1999.
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<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth for the named executive officers exercisable
and unexercisable options held by them as of June 30, 1999. The named executive
officers did not exercise any options during the fiscal year ended June 30,
1999. All options granted to these executive officers in the last fiscal year
were granted under the 1995 Stock Option Plan, as amended. All options were
granted at a fair market value as determined by our Board of Directors on the
date of grant.
The "Current Value of Unexercised In-the-Money Options Outstanding as of
June 30, 1999" is based on a value of $9.00 per share, the assumed offering
price of our common stock, less the per share exercise price, multiplied by the
number of shares issued upon exercise of the option.
<TABLE>
<CAPTION>
Number of Securities Current Value of
Underlying Unexercised Unexercised In-the-Money
Shares Options at June 30, 1999 Options Outstanding as of
Acquired on (#) June 30, 1999 ($)
Exercise Value -------------------------- -------------------------
Name (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John P. Bantleman....... -- -- -- -- -- --
Marc C. Ferrie.......... -- -- 50,000(1) -- $435,000 --
J. Russell DeLeon....... -- -- 17,083(1) -- $146,569 --
</TABLE>
--------
(1) These options were immediately exercisable pursuant to a right of early
exercise; however, as a condition of exercise, the optionee must enter into
a restricted stock purchase agreement granting us the right to repurchase
any unvested portion of the shares issuable by such exercise at their cost
in the event of the optionee's termination of employment.
Employee Benefit Plans
2000 Stock Plan
As of the date of this prospectus, no options or stock purchase rights have
been granted under the 2000 Stock Plan. The 2000 Stock Plan provides for the
grant of incentive stock options to employees, including officers and employee
directors, and for the grant of non-statutory stock options and stock purchase
rights to employees, directors and consultants.
The total number of shares of common stock currently reserved for issuance
under the 2000 Stock Plan equals 4,000,000 shares. A number of shares will be
added to the 2000 Stock Plan on an annual basis equal to the least of the
aggregate number of shares subject to grants made in the previous year,
3,000,000 shares and any lesser amount determined by our Board of Directors.
Unless terminated sooner, the 2000 Stock Plan will terminate automatically
ten years from the effective date of this offering.
The administrator of our 2000 Stock Plan has the power to determine:
. the terms of the options or stock purchase rights granted, including the
exercise price of the options or stock purchase rights;
. the number of shares subject to each option or stock purchase right;
. the vesting schedule of each option or stock purchase right; and
. the form of consideration payable upon the exercise of each option or
stock purchase right.
Options and stock purchase rights granted under our 2000 Stock Plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under the 2000 Stock Plan must generally be exercised within
three months after the end of optionee's status as an employee, director or
consultant of Evolve, or within twelve months after such optionee's termination
by death or disability, but not later than the expiration of the option's term.
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<PAGE>
In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement grants Evolve a repurchase
option, exercisable for any unvested stock purchase rights, upon the voluntary
or involuntary termination of the purchaser's employment or consulting
relationship with Evolve for any reason, including death or disability. The
purchase price for shares repurchased pursuant to the restricted stock purchase
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to Evolve. The repurchase
option lapses at a rate determined by the administrator.
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. The exercise price of nonstatutory stock options and
stock purchase rights granted under the 2000 Stock Plan is determined by the
administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the exercise price must be at least equal
to the fair market value of our 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 be at least equal to 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 ten years.
The 2000 Stock Plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each option and stock
purchase right must be assumed or an equivalent option or stock purchase right
substituted for by the successor corporation. If the outstanding options and
stock purchase rights are not assumed or substituted for by the successor
corporation, the optionees shall become fully vested in and have the right to
exercise such options or stock purchase rights. If an option or stock purchase
right becomes fully vested and exercisable in the event of a merger or sale of
assets, the administrator must notify the optionee that the option or stock
purchase right is fully exercisable for a period of 15 days from the date of
the notice, and the option or stock purchase right will terminate upon the
expiration of the 15 day period.
2000 Employee Stock Purchase Plan
A total of 2,000,000 shares of common stock have been reserved for issuance
under our 2000 Employee Stock Purchase Plan, plus annual increases equal to the
least of the aggregate number of shares issued pursuant to the 2000 Employee
Stock Purchase Plan in the previous year, 1,500,000 shares and a lesser amount
determined by our Board of Directors. As of the date of this prospectus, no
shares had been granted under our 2000 Employee Stock Purchase Plan.
The plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, will be implemented by a series of overlapping offering periods
of 24 months' duration, with new offering periods, other than the first
offering period, commencing on or about February 1 and August 1 of each year.
Each offering period will consist of four consecutive purchase periods of
approximately six months' duration, at the end of which, an automatic purchase
will be made for participants. The initial offering period is expected to
commence on the date of this offering and end on July 31, 2002. The initial
purchase period is expected to begin on the date of this offering and end on
January 31, 2001. Participants generally may not purchase more than 1,000
shares, or such other number of shares established by the committee or our
Board of Directors, on any purchase date or purchase stock having a value
measured at the beginning of the offering period greater than $25,000 in any
calendar year.
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, any employee who immediately after
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 that exceeds
$25,000 worth of stock for each calendar year may not be granted an option to
purchase stock under this plan. The 2000 Employee Stock Purchase Plan permits
participants to purchase common stock through payroll deductions of up to 15%
of the participant's base compensation.
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<PAGE>
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 Employee Stock Purchase Plan is generally 85% of the
lower of the fair market value of the common stock at the beginning of the
offering period or at the end of the purchase 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.
In the event the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. The new
offering period will use the lower fair market value as of the first date of
the new offering period to determine the purchase price for future purchase
periods. 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.
Rights granted under the 2000 Employee Stock Purchase Plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the plan. The 2000 Employee Stock
Purchase Plan provides that, in the event of our merger with or into another
corporation or a sale of substantially all our assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened and a new
exercise date will be set. The new exercise date will be set prior to the
proposed date of the merger or sale of assets.
The Compensation Committee has the authority to amend or terminate the
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the purchase plan. The Compensation Committee
has the exclusive authority to interpret and apply the provisions of the
purchase plan. The 2000 Employee Stock Purchase Plan will terminate
automatically in 2010, unless terminated earlier.
1995 Stock Option Plan, as Amended
Our 1995 Stock Option Plan, as amended, was adopted by our Board of
Directors and by our stockholders in 1995, and it was amended in 1996, 1998,
1999 and 2000. As of May 31, 2000, we had reserved a total of 5,000,000 shares
of our common stock for issuance under the plan. The 1995 Stock Option Plan, as
amended, provides for the granting to our employees of incentive stock options
within the meaning of Section 422 of the United States tax code, and for the
granting to employees, including officers and directors, non-employee directors
and consultants of non-statutory stock options. No further grants will be made
under the 1995 Stock Option Plan following completion of this offering.
Options granted under our 1995 Stock Option Plan, as amended, are not
generally transferable by the optionee, and each option is exercisable during
the lifetime of the optionee only by the optionee. Options granted under the
1995 Stock Option Plan, as amended, must generally be exercised within three
months of the end of optionee's status as our employee or consultant, or within
twelve months after his or her termination by death or disability, but in no
event later than the expiration of the option's ten year term.
Options granted under our 1995 Stock Option Plan, as amended, will
accelerate and become fully vested in the event we are acquired, unless the
successor corporation assumes or substitutes other options in their place.
401(k) Plan
In April 1996, we adopted a 401(k) plan to provide eligible employees with a
tax preferential savings and investment program. Eligible participants may
elect to reduce their current compensation up to the lesser of 15% of eligible
compensation or the statutorily prescribed annual limit and have such reduction
contributed to the 401(k) plan. At the direction of each participant, the
trustee of the 401(k) plan invests the assets of the 401(k) plan in selected
investment options. Contributions by participants to the 401(k) plan, and
income earned on plan contributions, are generally not taxable to the
participants until withdrawn.
55
<PAGE>
Change of Control, Severance and Employee Arrangements
In March 2000, we entered into a restricted stock purchase agreement with
Mr. Sinclair pursuant to which he purchased 250,000 shares of our common stock
at a price of $6.00 per share, for an aggregate purchase price of $1,500,000.
The purchase price was paid for with a promissory note that accrues interest at
the rate of 6.8% per year. Under the terms of the stock purchase agreement, we
have the right to repurchase shares that have not been released from our
repurchase option at a price of $6.00 per share. Our right to repurchase lapses
as to 1/8 of the total number of shares purchased in October 2000, and each
month thereafter, 1/48 of the shares will be released from our repurchase
option.
In February 2000, we entered into restricted stock purchase agreements with
each of Messrs. DeLeon, Heikkenen, McClure and Gupta. Pursuant to such
agreements, each of these executive officers purchased shares of our common
stock at a price of $3.00 per share. Mr. DeLeon purchased 66,667 shares for an
aggregate purchase price of $200,000; Mr. Heikkinen purchased 25,000 shares for
an aggregate purchase price of $75,000; Mr. McClure purchased 54,167 shares for
an aggregate purchase price of $162,500; and Mr. Gupta purchased 250,000 shares
for an aggregate purchase price of $750,000. The purchase price for each of the
foregoing stock purchases was paid for with a promissory note from each of the
respective officers that accrues interest at the rate of 6.56% per year. Under
the terms of the stock purchase agreements, we have the right to repurchase
from these executive officers shares that have not been released from our
repurchase option at a price of $3.00 per share. With respect to shares
purchased by Mr. DeLeon, our right to repurchase lapses as to 1/48 of the total
number of shares purchased on the first day of each month beginning in February
2000. With respect to shares purchased by Mr. Heikkinen, our right to
repurchase lapses as to 9/48 of the total number of shares purchased on
November 1, 2000, and each month thereafter 1/48 of the shares will be released
from our repurchase option. With respect to shares purchased by Mr. McClure,
our right to repurchase lapses as to 8/48 of the total number of shares
purchased on October 1, 2000, and each month thereafter 1/48 of the shares will
be released from our repurchase option. With respect to shares purchased by Mr.
Gupta, our right to repurchase lapses as to 6/48 of the total number of shares
purchased on September 10, 2000, and each month thereafter 1/48 of the shares
will be released from our repurchase option.
In November 1999, we entered into restricted stock purchase agreements with
each of Messrs. Bantleman, Bozzini, Ferrie, Davis, Heikkinen and DeLeon.
Pursuant to such agreements, each of these executive officers purchased shares
of our common stock at a price of $1.20 per share. Mr. Bantleman purchased
416,667 shares for an aggregate purchase price of $500,000; Mr. Bozzini
purchased 750,000 shares for an aggregate purchase price of $900,000; Mr.
Ferrie purchased 133,333 shares for an aggregate purchase price of $160,000;
Mr. Davis purchased 333,333 shares for an aggregate purchase price of $400,000;
Mr. Heikkinen purchased 225,000 shares for an aggregate purchase price of
$270,000; and Mr. DeLeon purchased 41,667 shares for an aggregate purchase
price of $50,000. The purchase price for each of the foregoing stock purchases
was paid with a promissory note from each of the respective officers that
accrues interest at the rate of 6.08% per year. Under the terms of the stock
purchase agreements, we have the right to repurchase from our executive
officers shares that have not been released from our repurchase option at a
price of $1.20 per share. With respect to shares purchased by Messrs.
Bantleman, Ferrie and DeLeon, our right to repurchase lapses as to 1/48 of the
total number of shares purchased by each of these executive officers on the
first day of each month beginning in October 1999. With respect to shares
purchased by Messrs. Bozzini, Davis and Heikkinen, our right to repurchase
lapses as to 25% of the total number of shares purchased by each of these
officers on November 1, 2000, November 22, 2000 and December 6, 2000,
respectively, and each month thereafter 1/48 of the shares will be released
from our repurchase option.
In February 1999, we entered into restricted stock purchase agreements with
Messrs. Bantleman, Ferrie and DeLeon. Pursuant to such agreements, each of
these executive officers purchased shares of our common stock at a price of
$0.30 per share. Mr. Bantleman purchased 683,333 shares for an aggregate
purchase price of $205,000; Mr. Ferrie purchased 316,667 shares for an
aggregate purchase price of $95,000; and Mr. DeLeon purchased 91,750 shares for
an aggregate purchase price of $27,525. The purchase price for each of the
stock purchases described above was paid with a promissory note from each of
the respective executive officers to us.
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<PAGE>
Under the February 1999 stock purchase agreements, we have the right to
repurchase shares from Messrs. Bantleman, Ferrie and DeLeon that have not been
released from our repurchase option at a price of $0.30 per share. Our right to
repurchase lapses as to 1/48 of the total number of shares purchased by each of
these executive officers on the 15th day of each month beginning in January
1999.
All of the above stock purchase agreements with our executive officers
provide that in the event of a change of control of Evolve:
. if the officer voluntarily terminates his employment before the first
anniversary of the change of control, our right of repurchase will lapse
with respect to stock that would have otherwise been released only to
such termination date, without any acceleration or continued vesting of
the stock beyond the date of the officer's voluntary termination;
. if the officer's position is eliminated and if he is not offered a
similar position with comparable pay, our repurchase option will lapse
with regard to all of the stock;
. if the officer is involuntarily terminated by the acquiring party before
the first year anniversary of such acquisition, our repurchase right will
lapse with respect to, and there will be an acceleration of vesting of,
that stock that would have otherwise been released as of the second
anniversary of the acquisition; and
. upon completion of the officer's first year of employment after the
acquisition, our repurchase right will lapse with respect to, and there
will be an acceleration of vesting in, that stock that would have
otherwise been released as of the second anniversary of the acquisition.
We have also entered into agreements with each of Messrs. Bantleman,
Ferrie and DeLeon dated February 1, 1999, that provide similar
acceleration provisions with respect to all shares of restricted stock
held by such executive officers. Also, in connection with the hiring of
James J. Bozzini as our Chief Operating Officer in November 1999, we
entered into an employment agreement and a restricted stock purchase
agreement with Mr. Bozzini that provide similar acceleration provisions
with respect to all shares of restricted stock held by Mr. Bozzini except
that, in the event of any acquisition of Evolve before the first
anniversary of employment of Mr. Bozzini, our right to repurchase will
lapse with respect to, and there will be an acceleration of vesting in,
that stock that would have otherwise been released as of his first
anniversary of employment; then the above four provisions will be applied
as if the acquisition had occurred on Mr. Bozzini's first anniversary of
employment.
In January 1998 we entered into a restricted stock purchase agreement with
Mr. Bantleman. Pursuant to the agreement, Mr. Bantleman purchased 150,000
shares of our stock at a price of $1.80 per share for an aggregate purchase
price of $270,000 in exchange for a promissory note. We have the right to
repurchase these shares from Mr. Bantleman that have not been released from our
repurchase option at a price of $1.80 per share. Our right to repurchase lapsed
with respect to 20% of the shares on October 20, 1999, and each month after
that 1/60 of the total number of shares purchased will be released from our
repurchase option. In the event of a change of control of Evolve, our
repurchase right will lapse immediately prior to the consummation of such
transaction with respect to all of the shares purchased by Mr. Bantleman under
this agreement.
Options granted under our 1995 Stock Option Plan, as amended, will
accelerate and become fully vested in the event we merge into or with another
company or sell substantially all our assets, unless the successor corporation
assumes the options or substitutes equivalent options in their place.
Our 2000 Employee Stock Purchase Plan provides that, in the event of our
merger with or into another corporation or a sale of substantially all our
assets, each outstanding option shall be assumed or substituted for a new
option by the successor corporation. If the successor corporation refuses to
assume or substitute a new option for the outstanding options, any purchase
periods then in progress will be shortened and a new exercise date will be set
before the date of the proposed sale or merger. All options of an employee will
be automatically exercised on that new exercise date unless that employee
withdraws from the offering period.
57
<PAGE>
Options and stock purchase rights granted under our 2000 Stock Plan will
accelerate and become fully vested in the event we merge into or with another
company or sell substantially all our assets, unless the successor corporation
assumes the options or stock purchase rights or substitutes equivalent options
or stock purchase rights in their place.
For additional common stock sales to members of our Board of Directors and
their affiliates, see "Certain Relationships and Related Transactions--Common
Stock Purchases and Sales" below.
Limitations on Directors' and Officers' Liability and Indemnification
Our amended and restated certificate of incorporation to be filed upon
completion of this offering limits the liability of our directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability associated with any of
the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemption; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of our directors' liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and bylaws also
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 our bylaws would permit
indemnification.
We have entered into indemnification agreements with each of our directors
containing provisions that require us to, among other things, indemnify such
directors against liabilities that may arise by reason of their status or
service as directors (other than liabilities arising from willful misconduct of
a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to cover our
directors under any of our liability insurance policies applicable to our
directors. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below,
since we were formed, there has not been nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
. in which the amount involved exceeded or will exceed $60,000; and
. in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
We believe that each of the transactions described below were on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer will
be subject to approval by a majority of the disinterested members of our Board
of Directors.
Preferred Stock Sales
From July 1, 1996 through June 30, 2000, in a series of private
transactions, we issued securities as follows:
<TABLE>
<CAPTION>
Purchase
Security Date of Issuance Shares Price
-------- --------------------- --------- --------
<S> <C> <C> <C>
Series F Preferred Stock............ 11/25/98 2,772,195 $3.92
Series G Preferred Stock............ 11/25/98 and 12/15/98 4,666,667 $2.14
Series H Preferred Stock............ 9/28/99 and 12/3/99 5,952,382 $4.20
Series I Preferred Stock............ 6/ /00 2,916,667 $6.00
</TABLE>
We issued these securities pursuant to purchase agreements under which we
made representations, warranties and covenants, and provided the purchasers
with registration rights and information rights, among other privileges. Listed
below for holders of 5% or more of our common stock and our directors, officers
and entities affiliated with our directors and our officers are the securities
they purchased in the above financings:
<TABLE>
<CAPTION>
Shares of Preferred Stock
Purchased
---------------------------------
Series
Investor Series G Series H I
-------- --------- --------- -------
<S> <C> <C> <C>
Sierra Ventures VI, L.P................ 4,526,667(1) 1,190,476(2) 833,333(5)
The Goldman Sachs Group, Inc........... -- 1,904,762(3) --
John R. Oltman......................... -- 23,810(4) --
Jeffrey M. Drazan...................... 58,333 11,905 --
</TABLE>
--------
(1) Includes 4,115,152 shares held by Sierra Ventures VI, L.P. and 411,515
shares held by its general partner, Sierra Associates VI, L.P. Jeffrey M.
Drazan, a director of Evolve, is a general partner of Sierra Ventures VI,
L.P. Mr. Drazan disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest in these shares arising from his
interest in Sierra Ventures VI, L.P.
(2) Includes 1,082,266 shares held by Sierra Ventures VI, L.P. and 108,211
shares held by its general partner, Sierra Associates VI, L.P. Jeffrey M.
Drazan, a director of Evolve, is a general partner of Sierra Ventures VI,
L.P. Mr. Drazan disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest in these shares arising from his
interest in Sierra Ventures VI, L.P.
(3) Includes 1,785,715 shares held by The Goldman Sachs Group, Inc. ("GSG") and
119,048 shares held by Stone Street Fund 1999, L.P., an affiliate of GSG
that shares voting and investing power with GSG.
(4) Represents 23,810 shares held by JRO Consulting, Inc. John R. Oltman, the
President of JRO Consulting, Inc. and a director of Evolve, is the
beneficial owner of these shares.
(5) Includes 757,775 shares held by Sierra Ventures VII, L.P. and 75,558 shares
held by its general partner, Sierra Associates VII, L.P. Jeffrey M. Drazan,
a director of Evolve, is a general partner of Sierra Ventures VII, L.P. Mr.
Drazan disclaims beneficial ownership of these shares except to the extent
of his pecuniary interest in these shares arising from his interest in
Sierra Ventures VII, L.P.
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<PAGE>
Stockholder Rights Agreement
We have entered into an agreement with the preferred stockholders described
above pursuant to which these and other preferred stockholders will have
registration rights with respect to their shares of common stock following this
offering. For a description of these registration rights, see "Description of
Capital Stock" below. Upon the completion of this offering, all shares of our
outstanding preferred stock will be automatically converted into an equal
number of shares of common stock.
In connection with our sale of Series I Preferred Stock we entered into an
agreement with a purchaser of Series I Preferred Stock which limits our ability
to grant additional stock options to our officers, employees, directors or
consultants without either the consent of the purchaser or an amendment to our
Certificate of Incorporation to increase the number of shares of Common Stock
issuable upon conversion of the Series I Preferred Stock. This agreement will
terminate upon conclusion of this offering.
Common Stock Purchases and Sales
In February 2000, we entered into a restricted stock purchase agreement with
Ms. Hamilton, one of our directors. Pursuant to this agreement, Ms. Hamilton
purchased 83,333 shares of our common stock at a price of $3.00 per share for
an aggregate purchase price of $250,000. The purchase price was paid with a
promissory note that accrues interest at the rate of 6.56% per year. We have
the right to repurchase shares that have not been released from our repurchase
option at a price of $3.00 per share. Our right to repurchase lapses as to 25%
of the total number of shares on March 6, 2001, and each month thereafter 1/48
of the shares will be released from our repurchase option.
In November 1999, we sold 83,333 shares of restricted common stock to
Jeffrey M. Drazan, one of our directors, at a price of $1.20 per share for an
aggregate purchase price of $100,000. The purchase price for the foregoing
stock purchase was paid with a promissory note to us from Mr. Drazan that
accrues interest at the rate of 6.08% per year. We have the right to repurchase
from Mr. Drazan any shares that have not been released from our repurchase
option at a price of $1.20 per share. Our right to repurchase will lapse with
respect to 25% of the shares purchased by Mr. Drazan on November 18, 2000, and
each month thereafter 1/48 of the total number of shares purchased by Mr.
Drazan will be released from our repurchase option.
In November 1999, we sold 83,333 shares of our restricted common stock to
The Goldman Sachs Group, Inc. at a price of $1.20 per share for an aggregate
purchase price of $100,000. The purchase price was paid with a promissory note
that accrues interest at the rate of 6.08% per year. We have the right to
repurchase shares that have not been released from our repurchase option at a
price of $1.20 per share. Our right to repurchase will lapse with respect to
25% of the shares on November 18, 2000, and each month thereafter 1/48 of the
total number of shares purchased will be released from our repurchase option.
In October 1999, we sold 333,333 shares of restricted common stock to JRO
Consulting, Inc. at a price of $0.30 per share for an aggregate purchase price
of $100,000. The purchase price was paid with a promissory note that accrues
interest at the rate of 7.0% per year. John R. Oltman, the President of JRO
Consulting, Inc., is a director of Evolve and the beneficial owner of these
shares. We have the right to repurchase shares from JRO Consulting, Inc. that
have not been released from our repurchase option at a price of $0.30 per
share. Our right to repurchase lapses as to 1/48 of the total number of shares
purchased by JRO Consulting, Inc. on the last day of each month beginning in
September 1999.
In January 1998 we entered into a restricted stock purchase agreement with
Mr. Bantleman. Pursuant to the agreement, Mr. Bantleman purchased 150,000
shares of our stock at a price of $1.80 per share for an aggregate purchase
price of $270,000 in exchange for a promissory note that accrues interest at
the rate of 5.69% per year. We have the right to repurchase these shares from
Mr. Bantleman that have not been released from our repurchase option at a price
of $1.80 per share. Our right to repurchase lapsed with respect to 20% of the
shares on October 20, 1998, and each month thereafter 1/60 of the total number
of shares purchased will be released from our repurchase option.
60
<PAGE>
For additional common stock sales to employees, see "Change of Control,
Severance and Employee Arrangements" above.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors.
Such indemnification agreements require us to indemnify our directors to the
fullest extent permitted by Delaware law. We believe that these agreements are
necessary to attract and retain qualified persons as directors. For a
description of the limitation of our directors' liability and our
indemnification of such directors, see "--Limitation on Directors' and
Officers' Liability and Indemnification" above.
Employee and Related Party Loans
As described above, we entered into promissory notes with each of our
executive officers, Messrs. Bantleman, Bozzini, Davis, Ferrie, DeLeon, McClure,
Gupta, Heikkinen and Sinclair; our directors, Mr. Drazan and Ms. Hamilton; JRO
Consulting, Inc.; and The Goldman Sachs Group, Inc., for amounts they each
borrowed to purchase our restricted stock.
We loaned Mr. Ferrie $90,000 on November 17, 1999, Mr. DeLeon $7,179 on
November 18, 1999, and Mr. McClure $135,000 on December 14, 1999, each loan
pursuant to promissory notes that accrue interest at a rate of 6.00%, 6.08% and
6.20%, respectively, per year. These amounts were borrowed to exercise
incentive stock options to purchase shares of our common stock.
We also loaned Mr. Bantleman $20,000 on March 9, 1999, $40,000 on June 30,
1999, and $40,000 on September 30, 1999. Each loan was made pursuant to a
promissory note that accrues interest at a rate of 6.0%. These loans are
secured by shares of our common stock held by Mr. Bantleman.
None of the promissory notes described above requires periodic interest
payments. The principal amount and accrued interest on the loan will be due on
the earliest of the fourth anniversary of the loan, one year after termination
of employment for death or disability, or 30 days after termination of
employment for any other reason.
Repurchase of Restricted Stock
On February 12, 1999 and May 21, 1999, we exercised our right to repurchase
a total of 414,584 shares of common stock from two former officers pursuant to
the repurchase option in the Restricted Stock Purchase Agreements we entered
into with each of these individuals. In connection with the repurchase of this
common stock, we cancelled related stockholder loans to these officers in the
aggregate amount of $221,000.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of May 31, 2000, as adjusted to
reflect the subsequent sale of our Series I Preferred Stock, and as adjusted to
reflect the sale of common stock offered hereby by the following:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each of our executive officers named in the compensation table above;
. each of our directors; and
. all directors and executive officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, on the information furnished by such owners, have
sole voting power and investment power with respect to such shares. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by a
person and the percent ownership of that person, shares of common stock subject
to options or warrants held by that person that are currently exercisable or
will become exercisable within 60 days after May 31, 2000 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percent ownership of any other person. Percent of beneficial
ownership is based upon 29,476,696 shares of our common stock outstanding prior
to this offering and 34,476,696 shares of common stock outstanding after this
offering, assuming no exercise of the underwriters' over-allotment option.
Unless otherwise indicated in the footnotes below, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
The address for those individuals for which an address is not otherwise
indicated is Evolve Software, Inc., 615 Battery Street, Suite 400, San
Francisco, California 94111. To our knowledge, except as indicated in the
footnotes to the table and under applicable community property laws, the
stockholders named in the table have sole voting and investment power over all
shares listed in the table.
<TABLE>
<CAPTION>
Percent of
Shares Outstanding
Shares Beneficially ----------------------
Name and Address of Beneficial Owned Prior to Prior to After
Owners Offering Offering Offering
------------------------------ ------------------- --------- ---------
<S> <C> <C> <C>
Sierra Ventures VI, L.P.(1)..... 6,550,476 22.2% 19.0%
3000 Sand Hill Rd. Building 4,
Suite 210
Menlo Park, CA 94025
The Goldman Sachs Group,
Inc.(2)........................ 1,904,762 6.5 5.5
85 Broad St.
New York, NY 10004
John P. Bantleman(3)............ 1,250,000 4.2 3.6
Marc C. Ferrie(4)............... 500,000 1.7 1.5
John R. Oltman(5)............... 357,144 1.2 1.0
J. Russell DeLeon(6)............ 250,917 * *
Jeffrey M. Drazan(7)............ 118,453 * *
Judith H. Hamilton(7)........... 83,333 * *
All directors and executive
officers as a group (12
persons)(8).................... 4,559,846 15.5 13.2
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 5,197,418 shares held by Sierra Ventures VI, L.P., 519,726 shares
held by its general partner, Sierra Associates VI, L.P., 757,775 shares
held by Sierra Ventures VII, L.P. and 75,558 shares held by its general
partner, Sierra Associates VII, L.P. Jeffrey M. Drazan, a director of
Evolve, is a general partner of Sierra Ventures VI, L.P. and Sierra
Ventures VII, L.P. Mr. Drazan disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in them arising from
his interest in these limited partnerships.
62
<PAGE>
(2) Includes 1,785,715 shares held by The Goldman Sachs Group, Inc. ("GSG")
and 119,048 shares held by Stone Street Fund 1999, L.P., an affiliate of
GSG that shares voting and investing power with GSG.
(3) Includes 953,056 shares subject to our right of repurchase, which lapses
over time.
(4) Includes 387,153 shares subject to our right of repurchase, which lapses
over time.
(5) Includes 357,144 shares subject to our right of repurchase, which lapses
over time. These shares are held by JRO Consulting, Inc. Mr. Oltman, the
President of JRO Consulting, Inc. is the beneficial owner of these shares.
(6) Includes 157,176 shares subject to our right of repurchase, which lapses
over time.
(7) Includes 83,333 shares subject to our right of repurchase, which lapses
over time.
(8) Includes the shares beneficially owned by the persons and entities
described in footnotes (3)-(7), as well as shares held by our other
executive officers.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We will file our amended and restated certificate of incorporation
immediately before the completion of this offering. The following description
of our capital stock is intended as a summary only. You should read the full
text of our amended and restated certificate of incorporation and our bylaws,
which were filed with the registration statement of which this prospectus is a
part.
General
Upon the completion of this offering, we will be authorized to issue
110,000,000 shares of common stock, par value $0.001 per share, and 10,000,000
shares of preferred stock, par value $0.001 per share. After this offering
there will be 34,476,696 shares of our common stock outstanding and 35,226,696
shares if the underwriters exercise their over-allotment option in full.
Common Stock
As of May 31, 2000, assuming the conversion of all outstanding shares of
preferred stock into common stock and after giving effect to an adjustment to
reflect the subsequent sale of our Series I Preferred Stock, there were
29,476,696 shares of common stock outstanding that were held of record by
approximately 608 stockholders. There will be 34,476,696 shares of common stock
outstanding (assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options after May 31, 2000) after giving effect
to the sale of our common stock in this offering. There are outstanding options
to purchase a total of 2,182,500 shares of our common stock. See "Management--
Stock Plans" for a description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering, does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our Board of
Directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. Holders of our common stock have no preemptive or other
subscription or conversion rights. There are no redemption or sinking fund
provisions applicable to our common stock.
Preferred Stock
Upon the completion of this offering and filing of our amended and restated
certificate of incorporation, our Board of Directors will be authorized,
without action by the stockholders, to issue 10,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof. These rights, preferences and privileges may include
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of any series, all or any of which
may be greater than the rights of the common stock. It is not possible to state
the actual effect of the issuance of all shares of preferred stock upon the
right of holders of our common stock until our Board of Directors determines
the specific rights of the holders of any preferred stock that may be issued.
However, the effect 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; and
. delaying or preventing a change in our control without further action by
the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding and we have no present plans to issue any shares of preferred
stock.
64
<PAGE>
Warrants
As of May 31, 2000, there were warrants outstanding to purchase a total of
233,333 shares of our common stock, 8,333 shares of our Series B Preferred
Stock, 5,000 shares of our Series E Preferred Stock, 161,139 shares of our
Series F Preferred Stock, and 5,833 shares of our Series G Preferred Stock. All
but one of these outstanding warrants will expire on the effective date of this
offering. The warrant to purchase 4,167 shares of our Series B Preferred Stock
at $6.00 per share will expire on the earlier of the fifth anniversary of the
effective date of this offering or October 5, 2005.
Registration Rights
Pursuant to an Amended and Restated Stockholder Rights Agreement dated June
27, 2000, we entered into with holders of 19,165,827 shares of our common stock
(assuming conversion of all outstanding shares of preferred stock), the holders
of these shares are entitled to registration rights regarding these shares. The
registration rights provide that if we propose to register any securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, they are entitled to notice of
the registration and are entitled to include shares of their common stock in
the registration. This right is subject to conditions and limitations,
including the right of the underwriters in an offering to limit the number of
shares included in the registration. The holders of these shares may also
require us to file up to two registration statements under the Securities Act
at our expense with respect to their shares of common stock. We are required to
use our best efforts to effect this registration, subject to conditions and
limitations. Furthermore, the holders of these shares may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations. These rights terminate on the fifth anniversary of the effective
date of this offering.
Charter Provisions and Delaware Laws That May Have an Anti-Takeover Effect
Some provisions of Delaware law and our amended and restated certificate of
incorporation and bylaws could make the following more difficult:
. acquisition of us by means of a tender offer;
. acquisition of us by means of a proxy contest or otherwise; or
. removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage 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 us outweigh
the disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
Election and Removal of Directors. Effective with the first annual meeting
of stockholders following completion of this offering, our amended and restated
bylaws provide for the division of our Board of Directors into three classes,
as nearly equal in number as possible, with the directors in each class serving
for a three-year term, and one class being elected each year by our
stockholders. 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 and may maintain the incumbency of the Board of Directors,
as it generally makes it more difficult for stockholders to replace a majority
of the directors. For more information on the classified board, see the Section
entitled "Management--Executive Officers and Directors."
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our restated bylaws establish advance notice procedures with respect
to 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 thereof.
65
<PAGE>
Stockholder Meetings. Under our amended and restated certificate of
incorporation and bylaws, only our Board of Directors, Chairman of the Board or
Chief Executive Officer may call special meetings of stockholders.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. 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.
Elimination of Stockholder Action By Written Consent. Our amended and
restated certificate of incorporation eliminates the right of stockholders to
act by written consent without a meeting.
Elimination of Cumulative Voting. Our amended and restated certificate of
incorporation and bylaws do not provide for cumulative voting in the election
of directors. Cumulative voting provides for a minority stockholder to vote a
portion or all of its shares for one or more candidates for seats on the Board
of Directors. Without cumulative voting, a minority stockholder will not be
able to gain as many seats on our Board of Directors based on the number of
shares of our stock that such stockholder holds than if cumulative voting were
permitted. The elimination of cumulative voting makes it more difficult for a
minority stockholder to gain a seat on our Board of Directors and to influence
the Board of Directors's decision regarding a takeover.
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 the control of Evolve. These and other provisions may have
the effect of deterring hostile takeovers or delaying changes in control or
management of Evolve.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
Listing
We have applied for listing of our common stock on The Nasdaq Stock Market's
National Market under the symbol "EVLV."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of our common stock in the
public market could adversely affect the market price of our common stock.
Upon completion of this offering, based on shares outstanding as of May 31,
2000 we will have 34,476,696 outstanding shares of common stock, assuming the
issuance of shares of common stock in this offering, no exercise of the
underwriters' over-allotment option, and no exercise of options after May 31,
2000 and after giving effect to an adjustment to reflect the subsequent sale of
our Series I Preferred Stock. All of the shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act. However, the sale of any of these share if purchased by
"affiliates" as that term is defined in Rule 144 are subject to the limitations
and restrictions that are described below.
The remaining 29,476,696 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. These shares are "restricted
shares" as that term is defined in Rule 144 and therefore may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. In addition, our
directors and officers as well as most of our other stockholders and
optionholders have entered into "lock-up agreements" with the underwriters.
These lock-up agreements provide that, except under limited exceptions, the
stockholder may not offer, sell, contract to sell, pledge or otherwise dispose
of any of our common stock or securities that are convertible into or
exchangeable for, or that represent the right to receive, our common stock for
a period of 180 days after the effective date without the prior written consent
of Credit Suisse First Boston Corporation. Accordingly, substantially all of
the remaining 29,476,696 shares will become eligible for sale on ,
2000, the 181st day after the effective date subject to Rules 144 and 701,
assuming an effective date of , 2000.
As of May 31, 2000, there were a total of 2,182,500 shares of common stock
subject to outstanding options, 983,151 of which were vested, and nearly all of
which are subject to lock-up agreements. Immediately after the completion of
the offering, we intend to file registration statements on Form S-8 under the
Securities Act to register all of the shares of common stock issued or reserved
for future issuance under our 1995 Stock Option Plan, as amended, our 2000
Stock Plan, and our 2000 Employee Stock Purchase Plan. On the date 180 days
after the effective date of the offering, the date that the lock-up agreements
expire, a total of shares of our common stock subject to outstanding
options will be vested. After the effective dates of the registration
statements on Form S-8, shares purchased upon exercise of options granted
pursuant to our 1995 Stock Option Plan, as amended, our 2000 Stock Plan, and
our 2000 Employee Stock Purchase Plan generally would be available for resale
in the public market.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year, including the holding period of any prior
owner except an affiliate of us, would be entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 345,000 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on The Nasdaq
Stock Market's National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public
information about us.
67
<PAGE>
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell such shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with public information, holding period and volume restrictions
contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates," as defined in Rule 144, subject only to the manner of
sale provisions of Rule 144. Securities issued in reliance on Rule 701 may be
sold by "affiliates" under Rule 144 without compliance with its one year
minimum holding period requirement.
68
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and Wit SoundView Corporation are acting as representatives,
the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Deutsche Bank Securities Inc.......................................
Wit SoundView Corporation..........................................
---------
Total............................................................ 5,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or this
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 750,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share on
sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us... $ $ $ $
Expenses payable by us.... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
69
<PAGE>
Our officers, directors and stockholders have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
transaction that would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make
any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 500,000 shares of the common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in this offering. The number of shares available for sale to the
general public in this offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "EVLV."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
. the information set forth in this prospectus and otherwise available to
the underwriters;
. the history and the prospects for the industry in which we compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives, on behalf of the underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
70
<PAGE>
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters or their affiliates participating
in this offering. The representatives may agree to allocate a number of shares
to underwriters for sale to their online brokerage account holders. Internet
distributions will be allocated by the underwriters that make Internet
distributions on the same basis as other allocations. Wit SoundView Corporation
has allocated shares of common stock for Internet distribution through its
affiliate, Wit Capital Corporation, an online broker/dealer.
71
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws that
will vary depending on the relevant jurisdiction, and that may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that:
. the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under the securities laws;
. where required by law, that the purchaser is purchasing as principal and
not as agent; and
. the purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
72
<PAGE>
LEGAL MATTERS
The validity of the common stock offered under this prospectus will be
passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Legal matters will be passed upon for the
underwriters by Shearman & Sterling, Menlo Park, California. As of the date of
this prospectus, WS Investment Company 99B and WS Investment Company 95A, each
an investment partnership composed of current and former members of and persons
associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in
addition to some of the current individual members of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, beneficially own an aggregate of 23,512
shares of Common Stock of Evolve Software, Inc.
EXPERTS
The audited financial statements of Evolve Software, Inc. as of June 30,
1999 and 1998 and for each of the three years in the period ended June 30,
1999, included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent public accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of InfoWide, Inc. (a development stage company) as
of December 31, 1998 and 1999 and for the period from April 15, 1998
(inception) to December 31, 1998, the year ended December 31, 1999 and the
period from April 15, 1998 (inception) to December 31, 1999 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein (which report expresses an unqualified
opinion and includes an explanatory paragraph concerning InfoWide, Inc.'s being
in the development stage and other factors which raise substantial doubt about
the ability of InfoWide, Inc. to continue as a going concern), and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered under this prospectus. This prospectus,
which constitutes a part of the registration statement, does not contain all of
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not intended to
describe all aspects of the agreements or documents referred to, and in each
instance you should refer to the copy of the contract or other document filed
as an exhibit to the registration statement. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission in Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed
fees. The Commission also maintains a website at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
Upon completion of the offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance with this law, will file periodic reports, proxy statements and
other information with the SEC. These periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms and the website of the SEC referred to above.
73
<PAGE>
EVOLVE SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
EVOLVE SOFTWARE, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of June 30, 1998 and 1999 and March 31,
2000 (unaudited) and pro forma Stockholders' Equity as of March 31, 2000
(unaudited)............................................................. F-3
Consolidated Statements of Operations for the years ended June 30, 1997,
1998 and 1999 and for the nine months ended March 31, 1999 (unaudited)
and 2000 (unaudited).................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1997, 1998
and 1999 and for the nine months ended March 31, 2000 (unaudited)....... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1998 and 1999 and for the nine months ended March 31, 1999 (unaudited)
and 2000 (unaudited).................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
INFOWIDE, INC.
Independent Auditors' Report............................................. F-23
Balance Sheets as of December 31, 1998 and December 31, 1999............. F-24
Statements of Operations for the period from April 15, 1998 to
December 31, 1998 and for year ended December 31, 1999 and for the
period from April 15, 1998 to December 31, 1999......................... F-25
Statements of Shareholders' Equity (Deficit) for the period from
April 15, 1998 to December 31, 1999..................................... F-26
Statements of Cash Flows for the period from April 15, 1998 to December
31, 1998 and for the year ended December 31, 1999 and for the period
from April 15, 1998 to December 31, 1999................................ F-27
Notes to Financial Statements............................................ F-28
Unaudited Balance Sheet at March 31, 2000................................ F-33
Unaudited Statements of Operations for the three months ended March 31,
1999 and 2000........................................................... F-34
Unaudited Statement of Shareholders' Equity (Deficit) for the three
months ended March 31, 2000............................................. F-35
Unaudited Statements of Cash Flows for the three months ended March 31,
1999 and 2000........................................................... F-36
Notes to the Financial Statements........................................ F-37
EVOLVE SOFTWARE, INC.
Unaudited Pro Forma Combined Financial Information....................... F-38
Unaudited Pro Forma Combined Statements of Operations.................... F-39
Notes to Unaudited Pro Forma Combined Financial Information.............. F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Evolve Software, Inc.
The reverse stock split described in Note 12 of the notes to the financial
statements is not effective at June 26, 2000. When it is effective, we will be
in a position to furnish the following report:
In our opinion, the accompanying balance sheets and the related statements
of operations and statements of stockholders' equity (deficit) and redeemable
convertible preferred stock and of cash flows present fairly, in all material
respects, the financial position of Evolve Software, Inc. at June 30, 1998 and
1999, and the results of its operations and its cash flows for the years ended
June 30, 1997, 1998 and 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The Company may require additional financing. See Note 1 to the Notes to the
Consolidated Financial Statements for management's plans in this regard.
PricewaterhouseCoopers LLP
San Jose, California
March 13, 2000
F-2
<PAGE>
EVOLVE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
June 30, Stockholders'
------------------ March 31, Equity March
1998 1999 2000 31, 2000
-------- -------- --------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 2,076 $ 2,840 $ 12,626
Restricted cash................... -- -- 2,000
Short term investments............ -- -- 1,298
Accounts receivable, net of
allowance for doubtful accounts
of none, none and $125........... -- 78 5,126
Prepaid expenses and other
current assets................... 138 340 1,515
-------- -------- --------
Total current assets............ 2,214 3,258 22,565
Property and equipment, net........ 635 521 4,135
Deposits and other assets.......... 206 109 427
Note receivable from related
party............................. 20 60 100
Interest due on receivable from
stockholders...................... -- 139 279
Purchased technology............... -- -- 5,877
Goodwill........................... -- -- 25,329
Other intangibles.................. -- -- 1,353
-------- -------- --------
Total assets.................... $ 3,075 $ 4,087 $ 60,065
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................. $ 282 $ 285 $ 3,120
Accrued liabilities............... 339 671 2,885
Capital lease obligations,
current portion.................. 363 371 640
Deferred revenues, current
portion.......................... 50 931 6,320
-------- -------- --------
Total current liabilities....... 1,034 2,258 12,965
Deferred revenues, less current
portion........................... -- 1,085 --
Capital lease obligations, less
current portion................... 389 238 968
Long term debt..................... 13,746 3,661 3,885
Note payable to related party...... 100 -- --
Deferred tax liability............. -- -- 2,747
-------- -------- --------
Total liabilities............... 15,269 7,242 20,565
-------- -------- --------
Redeemable convertible preferred
stock, $0.01 par value;
100,000,000 shares authorized:
98,577,500 shares designated.
Shares issued and outstanding:
10,182,500, 54,815,669, and
97,494,958 shares as of June 30,
1998, 1999 and March 31, 2000,
respectively...................... 11,393 31,579 61,490
Commitments and contingencies (Note
5)
Stockholders' equity (deficit)
Common stock, $0.01 par value;
25,000,000 shares authorized;
shares issued and outstanding:
2,113,095, 4,171,402 and
10,107,776 shares as of June 30,
1998 and 1999, and March 31,
2000, respectively and
26,356,936 shares issued and
outstanding pro forma............ 21 42 102 $ 293
Additional paid-in capital........ 613 1,857 102,703 181,502
Notes receivable from
stockholders..................... (683) (1,265) (8,263) (8,263)
Unearned stock-based
compensation..................... (359) (48,961) (48,961)
Accumulated deficit............... (23,538) (35,009) (67,571) (67,571)
-------- -------- -------- --------
Total stockholders' equity
(deficit)...................... (23,587) (34,734) (21,990) $ 57,000
-------- -------- -------- ========
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity (deficit).. $ 3,075 $ 4,087 $ 60,065
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
EVOLVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Year Ended June 30, Ended March 31,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- -------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Solutions................... $ -- $ -- $ 150 $ 37 $ 3,748
Subscriptions............... -- -- 367 179 1,848
------- -------- -------- ------- --------
Total revenues............ -- -- 517 216 5,596
Cost of revenues:
Solutions (excludes stock
based charges of $6, $2 and
$715)...................... -- -- 245 139 1,633
Subscriptions............... -- -- 390 189 1,257
------- -------- -------- ------- --------
Total cost of revenues........ -- -- 635 328 2,890
------- -------- -------- ------- --------
Gross margin (loss)....... -- -- (118) (112) 2,706
Operating expenses:
Research and development
(excludes stock based
charges of $58, $26 and
$1,902).................... 4,341 6,138 5,057 3,530 6,248
Sales and marketing
(excludes stock based
charges of $94, $23 and
$2,830).................... 1,194 1,253 3,876 2,422 12,082
General and administrative
(excludes stock based
charges of $60, $24 and
$5,598).................... 2,372 1,834 1,857 1,318 3,253
In-process technology write-
off........................ -- -- -- -- 3,126
Stock-based charges......... -- -- 218 75 11,045
------- -------- -------- ------- --------
Total operating expenses.. 7,907 9,225 11,008 7,345 35,754
------- -------- -------- ------- --------
Loss from operations.......... (7,907) (9,225) (11,126) (7,457) (33,048)
Interest income............... 310 420 277 169 768
Interest expense.............. (495) (1,772) (697) (598) (280)
Other income (expense), net... (1) (5) 75 36 (2)
------- -------- -------- ------- --------
Net loss.................. $(8,093) $(10,582) $(11,471) $(7,850) $(32,562)
======= ======== ======== ======= ========
Net loss per common share--
basic and diluted............ $(12.12) $ (9.27) $ (7.21) $ (5.19) $ (13.56)
======= ======== ======== ======= ========
Shares used in net loss per
common share calculation--
basic and diluted............ 668 1,141 1,591 1,513 2,402
======= ======== ======== ======= ========
Pro forma net loss per share--
basic and diluted (unaudited)
............................. $ (1.52) $ (2.08)
======== ========
Shares used in pro forma net
loss per share calculation--
basic and diluted (unaudited)
............................. 7,545 15,690
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
EVOLVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK
(in thousands)
<TABLE>
<CAPTION>
Redeemable
Convertible
Preferred Notes
Stock Common Stock Additional Receivable Unearned
-------------- -------------- Paid-In from Stock-Based Accumulated
Shares Amount Shares Amount Capital Stockholders Compensation Deficit
------ ------- ------ ------ ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1996...... 9,313 $10,522 1,882 $ 19 $ 252 $ (261) $ (4,863)
Exercise of preferred Series
D warrants, net of issuance
costs of $10................ 840 829 -- -- -- --
Issuance of preferred Series
E for cash, net issuance
costs of $18................ 30 42 -- -- -- --
Exercise of common stock
options..................... -- -- 36 1 16 -- --
Issuance of common stock
options to non-employees.... -- -- -- -- 10 -- --
Repurchase of common stock.. -- -- (47) (1) (13) 14 --
Net loss.................... -- -- -- -- -- -- (8,093)
------ ------- ------ ---- -------- ------- -------- --------
Balances, June 30, 1997..... 10,183 11,393 1,871 19 265 (247) $ -- (12,956)
Repurchase of common stock.. -- -- (116) (1) (209) 14 --
Issuance of common stock.... -- -- 250 2 448 (450) --
Exercise of common stock
options..................... -- -- 108 1 97 -- --
Issuance of common stock
options to non-employees.... -- -- -- -- 12 -- --
Net loss.................... -- -- -- -- -- -- (10,582)
------ ------- ------ ---- -------- ------- -------- --------
Balances, June 30, 1998..... 10,183 11,393 2,113 21 613 (683) -- (23,538)
Repurchase of common stock.. -- -- (138) (1) (221) 222 --
Issuance of common stock for
notes receivable to related
parties..................... -- -- 1,996 20 760 (780) --
Exercise of common stock
options..................... -- -- 200 2 108 (24) --
Issuance of common stock
options to non-employees.... -- -- -- -- 20 -- --
Preferred Series F issued
upon conversion of
promissory notes............ 16,633 10,656 -- -- -- --
Issuance of preferred Series
G for cash and conversion of
debt, net of issuance costs
of $770..................... 28,000 9,530 -- -- -- --
Unearned stock-based
compensation................ 577 (577)
Amortization of unearned
stock-based compensation.... 218
Net loss.................... -- -- -- -- -- -- (11,471)
------ ------- ------ ---- -------- ------- -------- --------
Balances, June 30, 1999..... 54,816 31,579 4,171 42 1,857 (1,265) (359) (35,009)
Repurchase of common stock.. (949) (9) (498) 502 --
Repayment of notes
receivable.................. 39
Issuance of common stock for
notes receivable to related
parties..................... 3,296 33 5,685 (5,718) --
Exercise of common stock
options..................... 1,753 18 2,873 (1,821)
Issuance of common stock and
common stock options to non-
employees................... 6 -- 157
Issuance of preferred Series
H for cash, net of issuance
costs of $39................ 35,714 24,961
Exercise of warrants for
Series G preferred stock.... 6,965 4,950
Issuance of warrants for
stock-based settlement...... 651
Common stock issued for the
acquisition of InfoWide..... 1,833 18 32,982
Unearned stock-based
compensation................ 58,996 (58,996)
Amortization of unearned
stock-based compensation.... 10,394
Net loss.................... (32,562)
------ ------- ------ ---- -------- ------- -------- --------
Balances, March 31, 2000
(unaudited)................. 97,495 $61,490 10,110 $102 $102,703 $(8,263) $(48,961) $(67,571)
--------------------------------------------------
====== ======= ====== ==== ======== ======= ======== ========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balances, July 1, 1996...... $ (4,853)
Exercise of preferred Series
D warrants, net of issuance
costs of $10................
Issuance of preferred Series
E for cash, net issuance
costs of $18................
Exercise of common stock
options..................... 17
Issuance of common stock
options to non-employees.... 10
Repurchase of common stock.. --
Net loss.................... (8,093)
-------------
Balances, June 30, 1997..... (12,919)
Repurchase of common stock.. (196)
Issuance of common stock.... --
Exercise of common stock
options..................... 98
Issuance of common stock
options to non-employees.... 12
Net loss.................... (10,582)
-------------
Balances, June 30, 1998..... (23,587)
Repurchase of common stock.. --
Issuance of common stock for
notes receivable to related
parties..................... --
Exercise of common stock
options..................... 86
Issuance of common stock
options to non-employees.... 20
Preferred Series F issued
upon conversion of
promissory notes............
Issuance of preferred Series
G for cash and conversion of
debt, net of issuance costs
of $770.....................
Unearned stock-based
compensation................ --
Amortization of unearned
stock-based compensation.... 218
Net loss.................... (11,471)
-------------
Balances, June 30, 1999..... (34,734)
Repurchase of common stock.. (5)
Repayment of notes
receivable.................. 39
Issuance of common stock for
notes receivable to related
parties..................... --
Exercise of common stock
options..................... 1,070
Issuance of common stock and
common stock options to non-
employees................... 157
Issuance of preferred Series
H for cash, net of issuance
costs of $39................
Exercise of warrants for
Series G preferred stock....
Issuance of warrants for
stock-based settlement...... 651
Common stock issued for the
acquisition of InfoWide..... 33,000
Unearned stock-based
compensation................ --
Amortization of unearned
stock-based compensation.... 10,394
Net loss.................... (32,562)
-------------
Balances, March 31, 2000
(unaudited)................. $(21,990)
--------------------------------------------------
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
EVOLVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Year Ended June 30, Ended March 31,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- -------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(8,093) $(10,582) $(11,471) $(7,850) $(32,562)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss on disposal of fixed assets................... 69 48 7 -- --
Amortization of debt issuance costs................ 49 568 -- -- --
Common stock options issued to non-employees....... 10 12 20 20 59
Allowance for doubtful accounts.................... -- -- -- -- 125
Depreciation and amortization...................... 613 439 384 291 341
In-process technology write-off.................... -- -- -- -- 3,126
Accrued interest................................... 279 1,081 571 496 224
Stock-based charges................................ 218 74 11,045
Changes in assets and liabilities:
Accounts receivable............................... -- -- (78) (33) (5,148)
Notes receivable.................................. -- -- -- -- --
Prepaid expenses and other current assets......... (9) (29) (201) (99) (1,175)
Note receivable from related party................ -- (20) (40) (8) (40)
Interest due on notes receivable from
stockholders..................................... -- -- (61) (119) (140)
Deposits and other assets......................... (68) 37 19 100 (277)
Accounts payable.................................. (134) 155 3 (60) 2,835
Accrued liabilities............................... 79 (28) 331 172 2,052
Deferred revenues................................. -- -- 1,966 2,259 4,304
------- -------- -------- ------- --------
Net cash used in operating activities............ (7,205) (8,319) (8,332) (4,757) (15,231)
------- -------- -------- ------- --------
Cash flows from investing activities:
Purchase of short term investments................. -- -- -- -- (1,298)
Purchases of property and equipment................ (198) -- (41) (141) (2,416)
Restricted cash.................................... -- -- -- -- (2,000)
Purchase of intangibles............................ -- -- -- -- (275)
Cash acquired upon acquisition of InfoWide......... -- -- -- -- 291
------- -------- -------- ------- --------
Net cash used in investing activities............ (198) -- (41) (141) (5,698)
------- -------- -------- ------- --------
Cash flows from financing activities:
Payments under capital lease obligations........... (417) (288) (379) (210) (300)
Repayment of notes payable to related party........ -- -- (100) (100) --
Proceeds from (repayment of) long-term debt........ (19) (21) -- 4 --
Proceeds from payment on note receivable........... -- -- -- -- 39
Proceeds from issuance of preferred stock, net of
issuance costs.................................... 871 -- 9,530 9,530 29,911
Proceeds from issuance of convertible debt......... 12,675 -- -- -- --
Proceeds from exercise of common stock options..... 17 98 86 20 1,070
Payments of debt issuance costs.................... (902) -- -- -- --
Payments on repurchase of common stock............. -- (96) -- -- (5)
------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities...................................... 12,225 (307) 9,137 9,244 30,715
------- -------- -------- ------- --------
Increase/(decrease) in cash and cash equivalents ... 4,822 (8,626) 764 4,346 9,786
Cash and cash equivalents at beginning of period.... 5,880 10,702 2,076 2,076 2,840
------- -------- -------- ------- --------
Cash and cash equivalents at end of period ......... $10,702 $ 2,076 $ 2,840 $ 6,422 $ 12,626
======= ======== ======== ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........... $ 166 $ 123 $ 121 $ 84 $ 44
======= ======== ======== ======= ========
Supplemental schedule of noncash investing and
financing activities:
Assets acquired under capital leases............... $ 230 $ 368 $ 235 $ 22 $ 1,299
======= ======== ======== ======= ========
Notes receivable from stockholder in exchange for
common stock...................................... $ -- $ 450 $ 804 $ 498 $ 7,538
======= ======== ======== ======= ========
Repurchase of common stock issued for notes
receivable........................................ $ 14 $ 14 $ 222 $ -- $ 30
======= ======== ======== ======= ========
Repurchase of common stock for notes payable....... $ -- $ 100 $ -- $ -- $ --
======= ======== ======== ======= ========
Conversion of convertible debt into Series F
preferred stock................................... $ -- $ -- $ 10,656 $10,656 $ --
======= ======== ======== ======= ========
Conversion of convertible debt into non-convertible
promissory note................................... $ -- $ -- $ 3,500 $ 3,500 $ --
======= ======== ======== ======= ========
Acquisition of intangible assets................... $ -- $ -- $ -- $ -- $ 32,196
======= ======== ======== ======= ========
Deferred tax liability on acquisition.............. $ -- $ -- $ -- $ -- $ 2,747
======= ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company
Evolve Software, Inc. (the "Company") was incorporated under the laws of the
state of Delaware in February 1995 for the purpose of designing, developing,
marketing and supporting enterprise application software products. The Company
commenced development of its product, ServiceSphere, in September 1997. This
product was released in early 1999 and enables professional service
organizations to integrate and automate the selling, managing and delivery of
professional services.
The Company had incurred losses of $67.6 million since inception through
March 31, 2000. The Company has funded its operations since inception through
borrowings and the sale of equity securities. The Company needs to obtain
additional financing to fund its ongoing operations. In response to these
factors, management is currently pursuing a private placement of its redeemable
convertible preferred stock and an Initial Public Offering of its common stock.
On March 31, 2000, the Company acquired all the common stock and common
stock options of InfoWide, Inc. for a total purchase price of $33.0 million
which consisted of 1.8 million shares of the Company's common stock and related
expenses. InfoWide, Inc. was incorporated on April 15, 1998 under the laws of
the state of Delaware. The Company has developed a web-hosted, rent on demand
financial management package, designed for professional services organizations.
The acquisition was accounted for as a purchase and the results of operations
of InfoWide, Inc. have been included in the consolidated financial statements
from the date of acquisition.
The allocation of the purchase price was based on the estimated fair value
of the following items:
<TABLE>
<CAPTION>
$ '000
-------
<S> <C>
Assets less liabilities at the date of the acquisition.............. $ 496
Goodwill............................................................ 25,329
Developed technology................................................ 5,877
In-process technology............................................... 3,126
Other intangibles................................................... 990
Acquisition costs................................................... (70)
Deferred tax liability.............................................. (2,747)
-------
$33,001
=======
</TABLE>
The amount allocated to the purchased in-process technology of $3.1 million
was determined based on an appraisal completed by an independent third party
using established valuation techniques and was expensed upon acquisition,
because technological feasibility had not been established and no future
alternative uses existed. The product percentage of completion was estimated to
be 45%. The value of this in-process technology was determined by estimating
the costs to develop the purchased in-process technology into a commercially
viable product, estimating the resulting cash flows from the sale of the
product resulting from the completion of the in-process technology and
discounting the net cash flows back to their present value.
2. Summary of Significant Accounting Policies
Principles of consolidated financial statements
These consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
F-7
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Unaudited interim results
The accompanying interim consolidated financial statements as at March 31,
2000 and for the nine months ended March 31, 1999 and 2000 are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly in all material respects the Company's consolidated financial
position at March 31, 2000 and consolidated results of operations and its cash
flows for the nine months ended March 31, 1999 and 2000. The consolidated
financial data and other information disclosed in these notes to the
consolidated financial statements related to these periods are unaudited.
Cash and cash equivalents
Cash and cash equivalents consist of highly liquid investments with original
or remaining maturities of three months or less at the purchase date.
Substantially all cash and cash equivalents are on deposit with three financial
institutions.
Investments
The Company classifies all of its investments as "available for sale" in
accordance with the provisions of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, the Company states its investments at estimated fair value, with
unrealized gains and losses reported in stockholders' equity. The cost of
securities sold is based on the specific identification method. Such securities
are anticipated to be used for current operations and are, therefore,
classified as current assets. At March 31, 2000, the unrealized holding gains
and losses were not significant. For the nine months ended March 31, 2000,
there were no realized gains or losses.
Property and equipment
Computers and software are stated at cost, and are depreciated using the
straight-line basis over three years. Furniture and fixtures are stated at
cost, and are depreciated on the straight-line basis over five years. Leasehold
improvements are stated at cost, and will be depreciated using the straight-
line basis over seven years. When assets are sold or retired, the cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in the statement of operations.
Income taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities and the
net operating loss and credit carryforwards using enacted tax rates. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
F-8
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, short term investments, accounts
receivable, accounts payable, accrued liabilities and long-term debt
securities, approximate fair value because of their short maturities.
Restricted cash
At March 31, 2000, cash balances of $2.0 million were restricted from
withdrawal and held by a bank in the form of a certificate of deposit. The
certificate of deposit serves as collateral supporting standby letters of
credit issued to the Company's landlord for the Emeryville, California facility
as security deposits.
Concentrations
Cash and cash equivalents are maintained with three major financial
institutions in the United States. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally, these deposits may be
redeemed upon demand and therefore, bear minimum risk.
At June 30, 1997, 1998, and 1999 the Company had no customers that had
significant accounts receivable balances. At March 31, 2000, accounts
receivable was comprised primarily of 3 customers, which represented 26%, 14%,
and 10% of accounts receivable.
Revenue recognition
The Company derives revenues from fees for licenses and services ("Solutions
revenue") and fees from maintenance, application service provider and
subscription agreements ("Subscription revenue").
The Company recognizes revenues in accordance with the provisions of
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 97-2, "Software Revenue Recognition." This was amended by SOP
No. 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2"
and SOP 98-9, "Modification of SOP 97-2 With Respect to Certain Transactions."
Under SOP 97-2 as amended, the Company recognizes revenues when all of the
following conditions are met:
. The Company has signed a non-cancellable agreement with the customer
. The Company has delivered the software product to the customer
. The amount of fees to be paid by the customer is fixed or determinable
and
. The Company believes that collection of these fees is probable
Generally, the Company has vendor specific objective evidence of fair value
for the maintenance element of software arrangements based on the renewal rates
for maintenance in future years as specified in the contracts. In such cases,
the Company defers the maintenance revenue at the outset of the arrangement and
recognizes it ratably over the period during which the maintenance is to be
provided, which normally commences on the date the software is delivered.
The Company does not have vendor specific objective evidence of fair value
for services specified in software arrangements, as the services are never sold
separately. Accordingly the remaining software revenue allocated to the
software license and services are recognized ratably on a straight line basis
over the period during which the services are provided, which is generally
between six and nine months.
F-9
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also expects that it will begin to recognize revenue from its
application service provider ("ASP") business, whereby it provides the
software, and provides maintenance and other services to the customer but also
hosts the software on its own servers making the solution available to the
customer via the Internet. In such situations, customers pay a monthly fee for
the term of the contract in return for access to the Company's software,
maintenance and other services such as implementation, training, consulting and
hosting. For such ASP software arrangements the Company does not have vendor
specific objective evidence of fair value for the elements of the contract and
accordingly fees from such arrangements will be recognized on a monthly basis
as the hosting service is provided.
In software arrangements where, as part of the contract with the customer,
the Company has agreed to deliver unspecified additional software products in
the future, it has accounted for the arrangement as a subscription and all
software revenue from the arrangement is recognized ratably over the term of
the contracts. Additionally, in software arrangements where the amount of fees
to be paid by the customer is deemed not to be fixed or determinable, generally
due to extended payment terms, the Company recognizes revenue when such fees
become due and payable by the customer.
Stock-Based Charges
The Company follows the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS 123 have been presented. Under APB
No. 25, compensation expense is based on the difference, if any, on the date of
grant, between the fair value of the Company's stock and the exercise price of
the option. Stock, stock options, and warrants for stock issued to non-
employees have been accounted for in accordance with the provisions of SFAS 123
and Emerging Issue Task Force Issue No. 96-18, "Accounting for Equity
instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." The Company presents stock-based
compensation expense as a separate line item in its consolidated statements of
operations for the year ended June 30, 1999 and for the nine months ended
March 31, 1999 and 2000.
Segment information
In 1998, the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." Under the new standard the Company is
required to use the "management" approach in reporting its segments. The
management approach designates that the internal organization that is used by
management for making operating decisions and assessing performance be the
source of the Company's segments. The Company believes that it operates in only
one segment, professional services software and uses only one measure of
profitability for internal reporting purposes.
Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. The Company's
total comprehensive loss was the same as its net loss for the years ended June
30, 1997, 1998 and 1999 and for the nine months ended March 31, 1999 and 2000.
F-10
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Software development costs
Costs incurred in the research, design and development of products are
expensed as incurred until technological feasibility has been established. To
date, the establishment of technological feasibility of the Company's products
and general release substantially coincide. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
Net loss per share
Basic net loss per common 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 common 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. Common equivalent shares, composed of
common shares issuable upon the exercise of stock options and warrants and upon
conversion of convertible preferred stock, are included in the diluted net loss
per common share calculation to the extent these shares are dilutive. A
reconciliation of the numerator and denominator used in the calculation of
basic and diluted net loss per common share follows (in thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended June 30, Ended March 31,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- -------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator
Net loss................. $(8,093) $(10,582) $(11,471) $(7,850) $(32,562)
======= ======== ======== ======= ========
Denominator
Weighted average common
shares.................. 1,890 2,000 2,899 2,516 5,952
Weighted average unvested
common shares subject to
repurchase.............. (1,222) (859) (1,308) (1,003) (3,550)
------- -------- -------- ------- --------
Denominator for basic and
diluted calculation..... 668 1,141 1,591 1,513 2,402
======= ======== ======== ======= ========
</TABLE>
The following table summarizes common stock equivalents that are not
included in the denominator used in the diluted net loss per common share
calculation because to do so would be antidilutive for the periods indicated
(in thousands):
<TABLE>
<CAPTION>
June 30,
------------ March 31,
Effect of common stock equivalents at: 1998 1999 2000
-------------------------------------- ----- ------ -----------
(unaudited)
<S> <C> <C> <C>
Series A convertible preferred stock.............. 195 195 195
Series B convertible preferred stock.............. 513 513 513
Series C convertible preferred stock.............. 167 167 167
Series D convertible preferred stock.............. 490 490 490
Series E convertible preferred stock.............. 333 333 333
Series F convertible preferred stock.............. 2,772 2,772
Series G convertible preferred stock.............. 4,667 5,828
Series H convertible preferred stock.............. 5,952
Options to purchase common stock.................. 447 928 1,614
Warrants to purchase convertible preferred and
common stock..................................... 352 1,641 414
----- ------ ------
2,497 11,706 18,278
===== ====== ======
</TABLE>
F-11
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited pro forma net loss per share has been computed as described above
and also gives effect to the conversion of convertible preferred stock that
will automatically convert upon completion of the Company's initial public
offering (using the if-converted method). Pro forma basic and diluted net loss
per share is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
June 30, March 31,
1999 2000
---------- -----------
(unaudited)
<S> <C> <C>
Numerator
Net loss........................................... $(11,471) $(32,562)
======== ========
Denominator
Shares used in computing basic and diluted net loss
per share......................................... 1,591 2,402
Adjusted to reflect the effect of the assumed
conversion of all convertible preferred stock from
the date of issuance.............................. 5,954 13,288
-------- --------
Weighted average shares used in computing pro forma
basic and diluted net loss per share.............. 7,545 15,690
======== ========
</TABLE>
Unaudited pro forma Stockholders' Equity
Upon the closing of the Company's IPO, all outstanding convertible preferred
stock will be converted automatically into common stock. The pro forma effect
of this conversion has been presented as a separate column in the Company's
balance sheet, assuming the conversion had occurred as of March 31, 2000.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," that requires companies to
record derivative financial instruments on their balance sheets as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative instrument and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," that amends SFAS No. 133 to be effective for all fiscal
quarters or all fiscal years beginning after June 15, 2000. The Company is
currently evaluating the implementation of SFAS No. 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of operations of the Company.
In March 2000 the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan,
F-12
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective
July 1, 2000, but certain conclusions cover specific events that occur after
either December 15, 1998, or January 12, 2000. Management believes that the
impact of FIN 44 will not have a material effect on the financial position or
results of operations of the Company.
3. Property and Equipment, Net
<TABLE>
<CAPTION>
June 30,
--------------- March 31,
1998 1999 2000
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
Computers..................................... $1,024 $ 1,153 $ 3,210
Software...................................... 228 258 1,041
Furniture and fixtures........................ 234 254 776
Leasehold improvements........................ -- -- 55
Software developed for internal use........... -- -- 603
------ ------- -------
1,486 1,665 5,685
Less: Accumulated depreciation and
amortization................................. (851) (1,144) (1,550)
------ ------- -------
$ 635 $ 521 $ 4,135
====== ======= =======
</TABLE>
The Company leases certain computers, furniture and fixtures, and software
under capital leases. The total cost and accumulated amortization of these
assets as of June 30, 1998, 1999 and March 31, 2000 are as follows:
<TABLE>
<CAPTION>
June 30,
--------------- March 31,
1998 1999 2000
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
Computers....................................... $1,093 $ 1,203 $ 2,488
Software........................................ 157 200 214
Furniture and fixtures.......................... 216 216 216
------ ------- -------
1,466 1,619 2,918
Less: accumulated amortization.................. (840) (1,113) (1,349)
------ ------- -------
$ 626 $ 506 $ 1,569
====== ======= =======
</TABLE>
4. Accrued Liabilities
<TABLE>
<CAPTION>
June 30,
--------- March 31,
1998 1999 2000
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Accrued compensation and related expenses.............. $229 $553 $1,850
Taxes payable.......................................... -- 19 389
Other.................................................. 110 99 646
---- ---- ------
$339 $671 $2,885
==== ==== ======
</TABLE>
F-13
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Commitments and Contingencies
Capital leases
Future minimum lease payments under capital leases at June 30, 1999 and
March 31, 2000 are as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
-------- -----------
(unaudited)
<S> <C> <C>
2000................................................. $ 434 $ 599
2001................................................. 191 649
2002................................................. 72 446
2003................................................. -- 63
----- ------
Total minimum lease payments........................... 697 1,757
Less amount representing interest...................... (88) (149)
----- ------
Present value of minimum lease payments................ 609 1,608
Less current portion of capital lease obligations...... (371) (640)
----- ------
$ 238 $ 968
===== ======
</TABLE>
During the nine months ended March 31, 2000, the Company had asset leasing
availability of $1.9 million under one master lease agreement which expired
March 2000.
Operating leases
The Company leases its office facilities under operating leases. Future
minimum obligations under noncancelable operating leases at June 30, 1999 and
March 31, 2000 are as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
-------- -----------
(unaudited)
<S> <C> <C>
2000.................................................. $524 $ 1,322
2001.................................................. 149 1,387
2002.................................................. -- 1,429
2003.................................................. -- 1,472
2004.................................................. -- 1,516
Thereafter............................................ -- 3,107
---- -------
$673 $10,233
==== =======
</TABLE>
Rent expense under operating leases for the years ended June 30, 1997, 1998
and 1999 and nine months ended March 31, 1999 and 2000 was $446,000, $446,000,
$483,000, $335,000 and $510,000 (unaudited), respectively.
Contingencies
From time to time, the Company may become involved in litigation relating to
additional claims arising from the ordinary course of business. In January
2000, PeopleSoft, Inc. filed an action in the California Superior Court
alleging certain claims arising out of the Company's employment of former
employees of PeopleSoft, and seeking an injunction to preclude additional
hiring of PeopleSoft employees. The Company believes PeopleSoft's claims are
without merit, and the Company is in the process of contesting these claims.
This litigation, whether or not determined or settled in the Company's favor,
may be costly and may divert the efforts and attention of the Company's
management from normal business operations.
F-14
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt
On March 13, 1997 and April 11, 1997, the Company issued Senior Subordinated
Convertible Notes totaling $12.7 million. The notes were issued in $25,000
units and bore interest of 8.5% per annum, payable upon conversion or maturity
of the notes. In December 1998, the Company converted its outstanding Senior
Subordinated Convertible Notes with principal of $12.7 million and accrued
interest of $1.8 million into 16,633,169 shares of Series F preferred stock and
uncollateralized non-convertible promissory notes with principal of $3.5
million due on the earlier of November 15, 2008 or at the election of the
lenders upon the closing of an acquisition transaction or an initial public
offering with proceeds to the Company of $20.0 million or more. The non-
convertible promissory notes accrue interest at 8.5% per annum. Accrued
interest at June 30, 1999 on the non-convertible notes amounted to $160,568.
In addition, the warrants originally issued in association with the
convertible debt for an aggregate exercise price of $636,000 were converted
into warrants to purchase 966,831 shares of Series F preferred stock (see Note
8).
In October 1998, the Company received a $1.0 million convertible bridge loan
from an investor. This bridge loan accrued interest at a rate of 8% per annum.
In November and December 1998, the Company issued 28,000,000 shares of Series G
preferred stock to the investors for total proceeds of $10.0 million by
conversion in exchange for the $1.0 million bridge loan and $9.0 million in
cash. The Company also granted to the purchaser of the Series G preferred stock
a warrant to purchase up to 7,000,000 shares of Series G preferred stock for an
aggregate exercise price of $5.0 million. The value of these warrants has been
accounted for as a cost of issuance. During the nine months ended March 31,
2000, warrants for 6,965,000 shares of the Series G preferred stock were
exercised. The remaining warrants remain unexercised at March 31, 2000.
7. Income Taxes
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
<TABLE>
<CAPTION>
June 30,
------------------ March 31,
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Net operating loss carryforwards............. $ 6,688 $ 11,309 $ 17,263
Depreciation................................. (16) 77 (63)
Capitalized start-up costs--net.............. 3,635 1,945 1,525
Accrued liabilities.......................... 78 121 205
InfoWide Acquisition liability............... -- -- (2,735)
Research and development credit.............. 135 1,823 1,866
-------- -------- --------
Total deferred assets...................... 10,520 15,275 18,061
Less valuation allowance..................... (10,520) (15,275) (18,061)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its deferred tax assets. At such time as it is determined that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
F-15
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At June 30, 1999, the Company has federal and state net operating loss
carryforwards of approximately $28.6 million and $29.1 million, respectively,
available to reduce future taxable income. These carryforwards expire through
2019 and 2004, respectively. In addition, the Company has research and
development tax credit carryforwards of approximately $1.2 million and
$630,000, respectively, for federal and state income tax purposes at June 30,
1999. The research and development tax credit carryforwards expire in 2019.
At March 31, 2000, the Company has federal and state net operating loss
carryforwards of approximately $44.8 million and $26.1 million, respectively,
available to reduce future taxable income. These carryforwards expire through
2019 and 2004, respectively. In addition, the Company has research and
development tax credit carryforwards of approximately $1.2 million and
$630,000, respectively, for federal and state income tax purposes at March 31,
2000. The research and development tax credit carryforwards expire in 2019.
The Company's ability to utilize its net operating loss carryforwards to
offset future taxable income is subject to restrictions attributable to equity
transactions that result in change in ownership as defined in the Tax Reform
Act of 1986. These restrictions will limit, on an annual basis, the Company's
future use of its net operating loss carryforwards and research and development
tax credit.
8. Stockholders' Equity
Common stock
In fiscal 1999, the Company increased its authorized capital stock to
25,000,000 shares of common stock and 100,000,000 shares of preferred stock.
Each share of common stock is entitled to one vote. The holders of common stock
are also entitled to receive dividends whenever funds are legally available and
when declared by the Board of Directors, subject to the prior rights of holders
of all classes of preferred stock outstanding. As of June 30, 1999, no
dividends have been declared. At June 30, 1999 and March 31, 2000, 2,243,022
and 5,173,473 (unaudited) unvested shares of common stock, respectively, were
subject to repurchase.
Preferred stock
Under the Company's Certificate of Incorporation, as amended in September
1999, the Company is authorized to issue 100,000,000 shares of preferred stock.
From inception through March 31, 2000, the Company issued preferred stock as
follows:
<TABLE>
<CAPTION>
Amount
Net of Common
Original Issuance Shares Issued and Par Value Liquidation Stock
Issue Price Costs Authorized Outstanding Amount Preference Equivalents
----------- -------- ---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A................ $ 0.40 $ 452 1,167,500 1,167,500 $0.01 $ 467 194,583
Series B................ $ 1.00 3,030 3,125,000 3,075,000 0.01 3,075 512,500
Series C................ $ 1.00 988 1,000,000 1,000,000 0.01 1,000 166,667
Series D................ $ 1.00 2,905 2,940,000 2,940,000 0.01 2,940 490,000
Series E................ $ 2.00 4,018 2,030,000 2,000,000 0.01 4,000 333,333
Series F ............... $ 0.65 10,656 17,600,000 16,633,169 0.01 10,942 2,772,195
Series G................ $0.36-$0.71 14,480 35,000,000 34,965,000 0.01 14,975 5,827,500
Series H................ $ 0.70 24,961 35,715,000 35,714,289 0.01 25,000 5,952,381
------- ---------- ---------- ------- ----------
$61,490 98,577,500 97,494,958 $62,399 16,249,159
======= ========== ========== ======= ==========
</TABLE>
F-16
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends
The holders of outstanding Series A, Series B, Series C, Series D, Series E,
Series F, Series G, and Series H are entitled to receive in any fiscal year,
when, if and as declared by the Board of Directors, noncumulative dividends in
cash at an annual rate of 10% of the original issuance price per share. Such
dividends will be declared or paid prior and in preference to any declaration
or payment of any dividend on the common stock. As of June 30, 1999 and March
31, 2000, no dividends have been declared.
Voting Rights
Each share of Series A, Series B, Series C, Series D, Series E, Series F,
Series G, and Series H preferred stock entitles a holder to the number of votes
per share equal to the number of shares of common stock into which each share
of Series A, Series B, Series C, Series D, Series E, Series F, Series G, and
Series H preferred stock is then convertible.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the
Corporation, the holders of Series G and Series H preferred stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus of funds to the holders of Series A, Series B, Series C,
Series D, Series E, and Series F preferred stock and common stock, an amount
equal to the Series G and Series H Original Issue Price for each share of
Series G and Series H preferred stock plus any declared but unpaid dividends on
such shares. After payments are made to holders of Series G and H preferred
stock, the holders of Series F Preferred stock are entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds to
the Series A, Series B, Series C, Series D, and Series E and common stock an
amount equal to the Series F Original Issue Price of each share of Series F
preferred stock then held by them, plus any declared but unpaid dividends on
such shares. After such payments have been made, the holders of Series A, B, C,
D and E preferred stock are entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Company to the
holders of common stock, and amount equal to their respective original issuance
price, plus any declared but unpaid dividends. After payment has been made to
the holders of the Preferred stock of their respective liquidation preferences,
the holders of the Preferred stock and common stock are entitled to receive the
remaining assets of the Company in proportion to the number of shares of common
stock which would be held by each holder if all shares of Preferred stock were
converted into common stock.
Conversion
Each share of Series A, Series B, Series C, Series D, Series E, Series F,
Series G, and Series H preferred stock are convertible, at the option of the
holder into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing $0.70 in the case of the Series H stock, and $0.36
in the case of Series A, Series B, Series C, Series D, Series E, Series F, and
Series G preferred stock by the applicable Conversion Price. The Conversion
Price are initially equal to $4.20 in the case of the Series H stock, and $2.16
in the case of Series A, Series B, Series C, Series D, Series E, Series F, and
Series G preferred stock.
Each share of Series A, Series B, Series C, Series D, Series E, Series F and
Series G Preferred stock are automatically converted into shares of common
stock at the then effective applicable conversion price, in the event of a
public offering for a price greater than $6.00 per share at an aggregate
offering price of not less than $10.0 million, or at the election of the
holders of a majority of the outstanding shares of Preferred stock.
Each share of Series H Preferred stock are automatically converted into
shares of common stock at the then effective applicable conversion price, in
the event of a public offering for a price greater than $8.40 per share at an
aggregate offering price of not less than $20.0 million, or at the election of
the holders of a majority of the outstanding shares of Preferred stock.
F-17
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
In October 1995, in connection with an equipment lease agreement, the
Company granted the lessor warrants to purchase 25,000 shares of Series B
preferred stock at an exercise price equal to $1.00 per share. These warrants
are exercisable through October 6, 2005. As of June 30, 1999 and March 31,
2000, all of the warrants remain outstanding.
In November 1995, in connection with a lease agreement for office space, the
Company granted the lessor a warrant for 200,000 shares of the Company's Series
B preferred stock at an exercise price of $1.00 per share, exercisable through
May 31, 1996 and 25,000 shares of the Company's Series B preferred stock at an
exercise price of $1.00 per share, exercisable through January 1, 2001. As of
June 30, 1999 and March 31, 2000, 25,000 of these warrants remained
outstanding, 75,000 were exercised in prior periods and 125,000 had expired.
In February 1997, the Company granted an investor warrants to purchase
30,000 shares of Series E preferred stock at an exercise price of $2.00 per
share, exercisable through February 2002. As of June 30, 1999 and March 31,
2000, all of the warrants remain outstanding. The value of these warrants are
immaterial to the financial statements.
In January 1998, in conjunction with the common stock repurchase, the
Company granted a stockholder and outside director warrants to purchase 116,667
shares of common stock at $120.00 per share. The warrants vested ratably over a
five year term, on the condition that the stockholder continue service to the
Company as an employee, consultant, officer or director. The warrants were
canceled during fiscal 1999. The value of the warrants are immaterial to the
financial statements.
In March and April 1997, in conjunction with the issuance of the 8.5% Senior
Subordinated Convertible Notes, the Company issued warrants to purchase 211,250
shares of common stock to noteholders and warrants to purchase 10,600 shares of
common stock to the managers of the offering. All of these warrants were to
purchase the shares at the lesser of $12.00 per share or the conversion price.
The value of these warrants was $903,000 and represented a discount to the face
value of the debt. In December 1998, in conjunction with the conversion of the
8.5% Senior Subordinated Convertible Notes into Series F preferred stock at
$0.6534 per share, the remaining unamortized discount of $285,000 was offset to
equity. At the same time, the Company issued 16,633,169 shares of Series F
preferred stock and $3.5 million of non-convertible promissory notes with
interest at 8.5% per annum to holders of the notes, and a warrant to purchase
966,831 shares of Series F preferred stock to the managers of the offering.
In November 1998, the Company granted seven investors warrants to purchase
5,536,363, 35,000, 70,000, 553,637, 70,000, 700,000 and 35,000 shares of Series
G preferred stock valued at $770,000 at a purchase price of $0.7143 per share.
The warrants will terminate on the earlier of five years from the date of
issuance or upon the initial public offering of the Company with gross proceeds
from the offering of $10.0 million and per share price to the public of no less
than $1.00 per share. As of June 30, 1999, all of the warrants remain
outstanding. During the nine months ended March 31, 2000, warrants for
6,965,000 shares of Series G preferred stock were exercised.
In December 1998, in connection with a Company's license and service
agreement, the Company granted a licensee warrants to purchase 66,667 shares of
the Company's common stock at an exercise price of $12.00 per share,
exercisable upon the payment of $4.0 million in program license fees. The
warrants will terminate on the earlier of five years from the date of issuance
or upon the initial public offering of the Company. As of June 30, 1999 and
March 31, 2000, all of the warrants remain outstanding. The value of these
warrants are immaterial to the financial statements.
F-18
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1999, the Company granted an investor warrants to purchase
233,333 shares of common stock valued at $651,000 at a purchase price of $2.16
per share. The warrants will terminate on the earlier of seven years from the
date of issuance or upon the initial public offering of the Company. As of
March 31, 2000, all warrants are outstanding.
The fair value of the warrants were estimated using the Black-Scholes
option-pricing model. The estimates were made based on the full contractual
terms of the warrants at their appropriate ranges of risk-free interest rates,
expected volatility and expected lives, and a zero annual dividend yield.
9. Stock Options
Under the terms of the 1995 Stock Option Plan (the "Plan"), eligible
employees, directors and consultants can receive options to purchase shares of
the Company's common stock at a price not less than 100% and 85% of the fair
value on the grant date for incentive stock options and nonqualified stock
options, respectively. The Company originally authorized 416,667 shares of
common stock for issuance under the Plan. By September 1999, the Company had
increased the number of shares issuable under the Plan to 3,333,333. The
options granted under the Plan are exercisable over a maximum term of ten years
from the date of grant and generally vest over a four to five year period.
Options are exercisable immediately but have a right of repurchase which
generally lapses ratably over four to five years. In some instances, fully
vested options are granted. Options granted under the Plan are subject to
various restrictions as to resale and right of first refusal by the Company.
A summary of the activity under the Plan is set forth below:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------------------------
Weighted
Shares Exercise Aggregate Average
Available Number of Price per Price Exercise
for Grant Shares Share (in thousands) Price
---------- ---------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C>
Balances, June 30,
1996................... 23,661 385,639 $ .30-$ .60 $ 125 $ .32
Additional shares
authorized............. 166,667 -- -- -- --
Options granted......... (186,920) 186,920 $1.20-$1.80 256 $1.38
Options exercised....... -- (36,205) $ .30-$1.20 (17) $ .48
Options canceled........ 94,213 (94,213) $ .30-$1.20 (37) $ .40
---------- ---------- -------
Balances, June 30,
1997................... 97,621 442,141 $ .30-$1.80 327 $ .74
Options granted......... (251,033) 251,033 $ .30-$1.80 452 $1.80
Options exercised....... -- (108,372) $ .30-$1.80 (98) $ .90
Options canceled........ 137,310 (137,310) $ .30-$1.80 (160) $1.16
---------- ---------- -------
Balances, June 30,
1998................... (16,102) 447,492 $ .30-$1.80 521 $1.16
Additional shares
authorized............. 1,083,333 -- -- -- --
Options granted......... (885,382) 885,382 $ .30-$1.80 363 $ .42
Options exercised....... -- (200,584) $ .30-$1.80 (109) $ .54
Options canceled........ 204,144 (204,144) $ .30-$1.80 (202) $ .96
---------- ---------- -------
Balances, June 30,
1999................... 385,993 928,146 $ .30-$1.80 573 $ .60
Additional shares
authorized............. 3,333,333 -- -- -- --
Options granted......... (2,646,210) 2,646,210 $ .30-$7.50 7,337 $2.77
Options exercised....... -- (1,752,500) $ .30-$7.50 (2,891) $1.67
Options canceled........ 208,226 (208,226) $ .30-$7.50 (107) $ .51
---------- ---------- -------
Balances, March 31, 2000
(unaudited)............ 1,281,342 1,613,630 $ .30-$7.50 $ 4,912 $3.04
========== ========== =======
</TABLE>
F-19
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options exercisable without the right of repurchase at June 30, 1997, 1998
and 1999 and March 31, 2000 are 262,560, 240,534, 280,692, and 1,610,297,
respectively.
The following tables summarize information with respect to stock options and
warrants outstanding at June 30, 1999 and March 31, 2000 (unaudited):
<TABLE>
<CAPTION>
Options
Exercisable
Without the Right
Outstanding Options of Repurchase
-------------------------- ------------------
Weighted Average
Weighted Average Number Remaining Number Exercisable Weighted Average
Exercise Price of Shares Contractual Life at June 30, 1999 Exercise Price
---------------- --------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
$ .30................. 711,735 8.19 173,684 $ .30
$ .60................. 4,500 6.89 4,500 $ .60
$1.20................. 41,968 7.14 36,670 $1.20
$1.80................. 169,943 8.46 65,838 $1.80
--------- ---------
$ .60................. 928,146 8.18 280,692 $ .78
========= =========
<CAPTION>
Options
Exercisable
Without the Right
Outstanding Options of Repurchase
-------------------------- ------------------
Weighted Average
Weighted Average Number Remaining Number Exercisable Weighted Average
Exercise Price of Shares Contractual Life at March 31, 2000 Exercise Price
---------------- --------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
$ .30................. 157,687 7.48 154,354 $ .30
$ .60................. 1,667 6.14 1,667 $ .60
$1.20................. 515,281 9.56 515,281 $1.20
$1.50................. 35,167 9.83 35,167 $1.50
$1.80................. 32,364 7.68 32,364 $1.80
$3.00................. 379,857 9.89 379,857 $3.00
$6.00................. 470,774 9.97 470,774 $6.00
$7.50................. 20,833 9.95 20,833 $7.50
--------- ---------
$3.06................. 1,613,630 9.53 1,610,297 $3.04
========= =========
</TABLE>
The following information concerning the Company's stock option plan is
provided in accordance with Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"). The Company has
continued to account for its plan in accordance with APB No. 25.
The weighted average fair value per share of the options granted for the
years ended June 30, 1997, 1998 and 1999 and the nine months ended March 31,
2000 is $0.40, $0.54, $0.10 and $1.10 (unaudited), respectively. The fair value
of each stock option is estimated on the date of grant using the minimum value
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
June 30,
----------------------- March 31,
1997 1998 1999 2000
------- ------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Risk-free interest rate.................. 6.00% 6.00% 5.81% 6.19%
Expected life............................ 6 years 6 years 5 years 5 years
Expected dividends....................... -- -- -- --
</TABLE>
F-20
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following pro forma net loss information has been prepared following the
provisions of SFAS 123.
<TABLE>
<CAPTION>
For the Year Ended June Nine Months
30, Ended
--------------------------- March 31,
1997 1998 1999 2000
------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Net loss:
As reported....................... $(8,093) $(10,582) $(11,471) $(32,562)
Pro forma......................... $(8,169) $(10,715) $(11,561) $(35,642)
</TABLE>
In connection with the granting of stock options and the sales of restricted
stock to our employees and the granting of equity instruments to non-employees
for services rendered, we recorded deferred stock-based charges totaling
approximately $577,000 and $59.0 million (unaudited) as of June 30, 1999 and
March 31, 2000, respectively. This amount represents the difference between the
exercise or purchase price at which the stock options were granted or the
restricted stock was issued, and the deemed fair value of our common stock for
accounting purposes on the date of grant or issuance. This amount is included
as a component of stockholders' equity and, in accordance with the method
described in Financial Accounting Standards Board Interpretation No. 28, is
being amortized on an accelerated basis by charges to operations over the
vesting period of the options and restricted stock, which is generally
four years. This resulted in an expense of $218,000 for the year ended June 30,
1999, and an expense of $10.4 million (unaudited) for the nine months ended
March 31, 2000.
10. Related Party Transactions
During the year ended June 30, 1998, the Company loaned two of its officers
and directors an aggregate of $450,000. Each of the loans is due five years
from the date of issuance, relates to the purchase of common stock of the
Company, and are collateralized by the pledge of common stock of the Company.
In addition, the loans may be prepaid in part or in full without notice or
penalty, and are represented by a promissory note which bears interest at the
Applicable Federal Rate at the date of issuance (ranging from 5.69% to 6.39%
per annum). Interest on these notes is due on maturity.
On January 1, 1998, in connection with the repurchase of common stock, the
Company canceled a loan to an officer and director for $14,000 and forgave the
related interest receivable of $3,514. In addition, the Company also issued a
$96,243 note in exchange for these shares of common stock. The note bears
interest of 7.75% per annum. In January 1999, the Company repaid the note and
related interest of $7,459.
On June 30, 1998, the Company loaned a stockholder, who is also an executive
officer of the Company, $19,691. The loan was due on December 31, 1998 and was
represented by a promissory note bearing interest of 7% per annum. Interest was
due upon maturity of the note. The loan was repaid during fiscal 1999. On
March 9, 1999, June 30, 1999 and September 30, 1999, the Company issued
additional loans to the stockholder for $20,000, $40,000 and $40,000,
respectively, with interest bearing at a rate of 6% per annum. The principal
and accrued interest are due on the earlier of June 30, 2001, thirty days after
termination other than for death or disability, or one year after termination
for death or disability. The loans are represented by two promissory notes and
are collateralized by all shares of the Company's common stock held by the
borrower.
During the year ended June 30, 1999, the Company loaned seven of its
officers and directors an aggregate of $780,025 under the Company's Restricted
Stock Purchase agreements with the officers and directors. All of the loans
relate to the purchase of common stock of the Company and are collateralized by
the pledge of common stock of the Company. In addition, the loans may be
prepaid in part or in full without notice or penalty, and are presented by
promissory notes which bear interest ranging from 5% to 7%. The notes are due
four to five years from date of issuance.
F-21
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 1, 1999, the Company loaned a former employee $24,003 pursuant to
the terms of a severance agreement for the purposes of exercising the
employee's stock options for 26,165 shares of common stock of the Company. The
loan bears interest at a rate of 5% per annum and was repaid in full on
December 16, 1999.
During the year ended June 30, 1999, the Company exercised its right to
repurchase 414,584 shares of common stock from two stockholders under the right
to repurchase option of the Restricted Stock Purchase agreements entered into
by the Company and the two stockholders. In connection with the repurchase of
common stock, the Company canceled the related stockholder loans for an
aggregate amount of $222,000.
During the nine months ended March 31, 2000, the Company loaned seventeen of
its officers, directors, employees, investors and vendors an aggregate of $5.7
million under the Company's Restricted Stock Purchase agreements. All of the
loans relate to the purchase of common stock of the company collateralized by
the pledge of common stock of the Company. In addition, the loans may be
prepaid in part or in full without notice or penalty, and are represented by
promissory notes which bear interest ranging from 6% to 7%. The notes are due
three to five years from date of issuance.
11. Employee Savings Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All employees of the Company are eligible
to participate in the Savings Plan. The Company is not required to contribute
to the Savings Plan and has made no contributions since the inception of the
Savings Plan.
12. Subsequent Events
Initial Public Offering
On March 13, 2000, the Company approved the issuance and sale in an
underwritten public offering of the Company's common stock.
Stock Split
On , 2000, the Company approved a 1 for 6 reverse split of its common
stock, which will be effected prior to the closing of the public offering. All
common stock data and common stock option plan information has been restated to
reflect the reverse split.
In addition, the conversion prices of the Company's convertible preferred
stock have also been adjusted to reflect the effect of the reverse split.
Stock Plans
In January 2000, the Company's Board of Directors authorized an increase of
2,250,000 shares to be issued under the Company's stock plans.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
InfoWide, Inc.:
We have audited the accompanying balance sheets of InfoWide, Inc. (a
development stage company) (the "Company") as of December 31, 1998 and 1999,
and the related statements of operations, shareholders' equity (deficit) and
cash flows for the period from April 15, 1998 (inception) to December 31, 1998
and the year ended December 31, 1999 and for the period from April 15, 1998
(inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in 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, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1998 and 1999,
and the results of its operations and its cash flows for the period from April
15, 1998 (inception) to December 31, 1998, the year ended December 31, 1999 and
for the period from April 15, 1998 (inception) to December 31, 1999 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing and marketing automated information sharing
services. As discussed in Note 1 to the financial statements, the Company's
operating losses since inception, its negative working capital and
shareholders' deficit raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
San Jose, California
March 10, 2000
F-23
<PAGE>
INFOWIDE, INC
(A Development Stage Company)
BALANCE SHEETS
December 31, 1998 and 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1998 1999
----- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 98 $ 21
Accounts receivable.......................................... -- 14
Prepaid expenses and other assets............................ 16 1
----- -------
Total current assets....................................... 114 36
PROPERTY AND EQUIPMENT, net.................................... 88 148
DEPOSIT........................................................ 60 41
----- -------
TOTAL...................................................... $ 262 $ 225
===== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accrued expenses............................................. $ -- $ 92
Notes payable to related parties............................. -- 390
----- -------
Total current liabilities.................................. -- 482
----- -------
DEPOSIT FROM RELATED PARTY..................................... 30 20
COMMITMENTS (Note 3)
SHAREHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock--Series A, par value: $0.0001 per
share; 5,500,000 shares authorized; shares issued and
outstanding: 3,923,079 in 1998 and 4,923,079 in 1999........ 510 640
Convertible preferred stock--Series B, par value: $0.0001 per
share; 2,500,000 shares authorized; shares issued and
outstanding: none in 1998 and 948,720 in 1999... -- 370
Common stock--par value: $0.0001 per share; 18,000,000 shares
authorized; shares issued and outstanding: 5,333,333 in 1998
and 1999.................................................... 9 496
Deferred compensation........................................ -- (303)
Deficit accumulated during the development stage............. (287) (1,480)
----- -------
Total shareholders' equity (deficit)....................... 232 (277)
----- -------
TOTAL...................................................... $ 262 $ 225
===== =======
</TABLE>
See notes to financial statements.
F-24
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Period from Period from
April 15, 1998 April 15, 1998
(Inception) to Year Ended (Inception) to
December 31, December 31, December 31,
1998 1999 1999
-------------- ------------ --------------
<S> <C> <C> <C>
NET SALES........................... $ -- $ 26 $ 26
COSTS AND EXPENSES:
Cost of sales..................... -- 36 36
General and administrative........ 91 303 394
Research and development.......... 200 724 924
Sales and marketing............... 1 152 153
----- -------- --------
Total costs and expenses........ 292 1,215 1,507
----- -------- --------
LOSS FROM OPERATIONS................ (292) (1,189) (1,481)
INTEREST INCOME (EXPENSE), Net...... 5 (4) 1
----- -------- --------
NET LOSS............................ $(287) $ (1,193) $ (1,480)
===== ======== ========
</TABLE>
See notes to financial statements.
F-25
<PAGE>
INFOWIDE, INC.
A Development Stage Company
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Period from April 15, 1998 (Inception) through December 31, 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Series B
Series A Convertible Deficit
Convertible Preferred Accumulated
Preferred Stock Stock Common Stock Deferred During the
---------------- -------------- ---------------- Compen- Development
Shares Amount Shares Amount Shares Amount sation Stage Total
--------- ------ ------- ------ --------- ------ -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders for cash at
$0.0014 per share in
April 1998............. $-- $-- 5,333,333 $ 8 $ -- $ -- $ 8
Issuance of Series A
preferred stock at
$0.13 per share in May
1998................... 3,923,079 510 510
Issuance of stock
options to
consultants............ 1 1
Net loss................ (287) (287)
--------- ---- ------- ---- --------- ---- ------ ------- -------
BALANCES, December 31,
1998................... 3,923,079 510 -- -- 5,333,333 9 -- (287) 232
Issuance of Series A
preferred stock at
$0.13 per share in
March 1999............. 1,000,000 130 130
Issuance of Series B
preferred stock at
$0.39 per share in May
1999................... 948,720 370 370
Issuance of stock
options to
consultants............ 166 166
Deferred compensation... 321 (321) --
Amortization of deferred
stock compensation..... 18 18
Net loss................ (1,193) (1,193)
--------- ---- ------- ---- --------- ---- ------ ------- -------
BALANCES, December 31,
1999................... 4,923,079 $640 948,720 $370 5,333,333 $496 $(303) $(1,480) $ (277)
========= ==== ======= ==== ========= ==== ====== ======= =======
</TABLE>
See notes to financial statements.
F-26
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from
April 15,
Period from 1998
April 15, 1998 Year (Inception)
(Inception) to Ended to
December 31, December 31, December 31,
1998 1999 1999
-------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $(287) $(1,193) $(1,480)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 7 45 52
Amortization of deferred
compensation and noncash
compensation to consultants........ 1 184 185
Changes in assets and liabilities:
Prepaid expenses and other assets.. (16) 15 (1)
Accounts receivable................ -- (14) (14)
Accrued expenses................... -- 92 92
Deposit from related party......... 30 (10) 20
Deposit............................ (60) 19 (41)
----- ------- -------
Net cash used in operating
activities....................... (325) (862) (1,187)
----- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.. (95) (105) (200)
----- ------- -------
Net cash used in investing
activities....................... (95) (105) (200)
----- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock.......... 510 500 1,010
Issuance of common stock............. 8 -- 8
Notes payable to related parties..... -- 390 390
----- ------- -------
Net cash provided by financing
activities....................... 518 890 1,408
----- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................... 98 (77) 21
CASH AND CASH EQUIVALENTS, Beginning
of period............................ -- 98 --
----- ------- -------
CASH AND CASH EQUIVALENTS, End of
period............................... $ 98 $ 21 $ 21
===== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--
Cash paid during the period for
interest............................ $ -- $ -- $ --
===== ======= =======
</TABLE>
See notes to financial statements.
F-27
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Period From April 15, 1998 (Inception) To December 31, 1998 and Year Ended
December 31, 1999
1. Organization and Summary of Significant Accounting Policies
Organization--InfoWide, Inc. (the "Company") was incorporated on April 15,
1998 under the laws of the state of Delaware. The Company has developed a web-
hosted, rent on demand financial management package designed for professional
services organizations. The Company is subject to the risks associated with a
development stage enterprise, including the need to refine its product
technology, extend its marketing and distribution channels and continue to
raise financing.
Commercial selling commenced from August 1999; as of December 31, 1999, the
Company is considered to be a development stage enterprise because revenues
through that date have not been significant. The accompanying financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company's continuation as a going concern is dependent upon
its ability to generate enough cash flow to meet its obligations on a timely
basis, to comply with the terms of its financing agreements, and to attain
successful operations. The Company's operating losses since inception, its
negative working capital and shareholders' deficit raise substantial doubt
about its ability to continue as a going concern. The Company plans to finance
its operations with proceeds from the sale of equity securities and,
ultimately, with revenues from product sales. In the event that the Company is
unsuccessful in raising sufficient funding or there are other unexpected
adverse developments affecting cash flow, the Company will have to
significantly reduce its operating expenses or curtail operations.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of 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 debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk consist of cash and cash
equivalents. Cash and cash equivalents consist primarily of interest-bearing
accounts and are regularly monitored by management.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over their respective
useful lives of three to five years.
Software Development Costs--The costs for the development of new software
products are expensed as incurred until technological feasibility has been
established, at which time any additional costs would be capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise
Marketed." Because the Company believes its current process for developing
software is essentially completed concurrently with the establishment of
technological feasibility, no costs have been capitalized to date.
Income Taxes--The Company accounts for income taxes using the asset and
liability approach for financial reporting. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes and operating loss and tax credit carryforwards. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets recorded will not be recognized.
F-28
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Comprehensive Income (Loss)--The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in net assets during the period
from nonowner sources. Comprehensive loss was the same as net loss for the
period from April 15, 1998 (inception) to December 31, 1998 and the year ended
December 31, 1999.
New Accounting Pronouncement--In June 1998, the Financial Accounting
Standards Board issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that
entities recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. The Company is in the process of studying the
impact of SFAS 133 on its financial position, results of operations and cash
flows. The Company will adopt SFAS 133 in the first quarter of the year ending
December 31, 2001.
2. Property and Equipment, Net
Property and equipment at December 31, 1998 and 1999 consists of (in
thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Computers and accessories...................................... $66 $101
Furniture and equipment........................................ 7 42
Software....................................................... 22 34
Telephones..................................................... -- 23
--- ----
95 200
Accumulated depreciation and amortization...................... (7) (52)
--- ----
$88 $148
=== ====
</TABLE>
3. Lease Commitments
The Company leases its office facilities under a noncancelable operating
lease. Rent expense for the period from April 15, 1998 (inception) to December
31, 1998 and the year ended December 31, 1999 was $67,000 and $117,000,
respectively.
Future minimum lease commitments are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000................................................................. $121
2001................................................................. 51
----
Total.............................................................. $172
====
</TABLE>
The Company also subleases part of its office space under a sublease
agreement with an entity which is owned by three of the Company's preferred
shareholders. This entity also made a deposit to the Company on the leased
facility. Sublease income for the period from April 15, 1998 (inception) to
December 31, 1998 and the year ended December 31, 1999 amounted to $31,000 and
$58,000, respectively.
F-29
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Notes Payable to Related Parties
Notes payable include $40,000 payable to a shareholder and $350,000 payable
to an entity which is owned by three preferred shareholders of the Company. The
notes bear interest at 6% per annum and are payable on demand. Also see Note 9.
5. Convertible Preferred Stock
Significant terms of the Series A and Series B preferred stock are as
follows:
. Each share is convertible into one share of common stock at the holder's
option, subject to adjustment for issuances of common stock, as defined.
Each share of preferred stock shall automatically be converted into
common stock upon closing of a public offering with gross proceeds to the
Company of at least $7.5 million or on a date specified by written
agreement of the holders of a majority of the then outstanding shares of
preferred stock.
. The holders of the Series A and Series B preferred stock are entitled to
receive noncumulative dividends of $0.0078 and $0.0234, respectively, per
share per annum, when and as declared by the Board of Directors.
Dividends on preferred stock are payable prior and in preference to any
dividends on common stock. No dividends have been declared or paid since
inception.
. Upon liquidation dissolution or winding up of the Company, the holders of
Series A and Series B preferred stock will be entitled to receive an
amount per share equal to (a) in the case of the Series A preferred
stock, the sum of (i) $0.13 for each outstanding share of Series A
preferred stock and (ii) an amount equal to declared but unpaid dividends
on such shares, and (b) in the case of Series B preferred stock the sum
of (i) $0.39 for each outstanding share of Series B preferred stock and
(ii) an amount equal to declared but unpaid dividends on such shares.
. The holders of the preferred stock have been granted a right of first
offer with respect to future sales of the Company's shares as defined.
. Each share has voting rights equivalent to the number of shares of common
stock into which it is convertible.
6. Common Stock
During the period ended December 31, 1998, the Company sold 5,333,333 shares
of common stock to the founder of the Company, resulting in net proceeds of
$8,000. 75% of all the shares are subject to the Company's option to repurchase
the shares in the event the founder is terminated from the Company without
cause. Such repurchase right expires ratably at 2.0833% of purchased shares
after each month of continuous services. At December 31, 1999, 1,777,813 shares
were subject to repurchase at a weighted average price of $0.014 per share.
7. Stock Option Plan
Under the Company's 1999 Stock Option Plan (the "Plan"), the Company may
grant options to purchase up to 3,000,000 shares of common stock to employees,
directors and consultants. The options generally vest over a period of four
years and expire no more than ten years from the date of grant. Generally,
holders of the options may exercise shares prior to vesting under a restricted
stock purchase agreement which allows the Company the option to repurchase any
unvested shares from the holder upon the holder's termination. The Company's
repurchase option terminates in accordance with the vesting schedule contained
in the holder's original option agreement.
F-30
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company grants fully vested options for common stock to nonemployees for
services performed. During the period from April 15, 1998 (inception) to
December 31, 1998 and the year ended December 31, 1999, the amount of stock-
based compensation expense related to such options was $1,000 and $166,000,
respectively.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise
Outstanding Price
----------- --------
<S> <C> <C>
Balance, April 15, 1998............................... -- $ --
Granted (weighted average minimum value of $0.02 per
share)............................................... 170,000 $0.02
---------
Balance, December 31, 1998............................ 170,000
Granted (weighted average minimum value of $0.42 per
share)............................................... 1,180,000 $0.04
Cancelled............................................. (30,000) $0.02
--------- -----
Balance, December 31, 1999............................ 1,320,000 $0.04
========= =====
</TABLE>
At December 31, 1999, 1,680,000 shares were available for future grants
under the plan.
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
-------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02 310,000 9.08 $0.02 310,000 $0.02
0.04 1,010,000 9.80 0.04 1,010,000 0.04
--------- ---------
1,320,000 9.57 0.04 1,320,000 0.04
========= =========
</TABLE>
During the year ended December 31, 1999, in connection with the grant of
certain stock options, the Company recorded deferred stock compensation of
$321,000, representing the difference between the exercise price of the options
and the estimated fair value of the Company's common stock on the date of
grant. Such amounts are being amortized over the vesting period of the related
options, generally 48 months.
Additional Stock Plan Information
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) requires
the disclosure of pro forma net loss had the Company adopted the minimum value
method. Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including expected time to exercise, which greatly affects the
calculated values. The Company's calculations were made using the minimum value
method with the following weighted average
F-31
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
assumptions: expected life, five years; risk free interest rate, 5.5%; and no
dividends during the expected term. The Company's calculations are based on a
single option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the stock option awards had been amortized to
expense over the vesting period of the awards, pro forma net loss would have
been $287,000 and $1,195,000 for the period from April 15, 1998 (inception) to
December 31, 1998 and the year ended December 31, 1999, respectively.
At December 31, 1999, the Company had reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Conversion of convertible preferred stock.......................... 5,871,799
Issuance under stock option plan................................... 3,000,000
---------
Total............................................................ 8,871,799
=========
</TABLE>
8. Income Taxes
No income tax benefit was recorded during the period from April 15, 1998
(inception) to December 31, 1998 and the year ended December 31, 1999 due to
the Company's net losses. At December 31, 1998 and 1999, the net deferred tax
assets generated by net operating loss carryforwards totaling approximately
$120,000 and $460,000, respectively, have been fully reserved due to the
uncertainty surrounding the realization of such benefits.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $1,400,000 available to offset future federal and state taxable
income.
Federal and California tax rules impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an "ownership
change," as defined by the Internal Revenue Code. Any such ownership change
could significantly limit the Company's ability to utilize its tax
carryforwards.
9. Subsequent Events
On January 15, 2000 the Company borrowed approximately $1,216,000 from a
related entity (See Note 4) to finance its working capital needs. The borrowing
carries interest at the rate of 5.74% and the principal and interest are to be
repaid on August 1, 2000. In the event that another stock issuance occurs
during the term of the borrowing, the related party has the right to convert
the obligation into common stock under terms and conditions as defined in the
secured note. The borrowing is secured by substantially all of the Company's
assets.
On March 9, 2000 the shareholders of the Company entered into an agreement
and plan of reorganization with Evolve Software, Inc. to acquire the Company in
a stock-for-stock transaction expected to be consummated in March 2000.
* * * * *
F-32
<PAGE>
INFOWIDE, INC
(A Development Stage Company)
BALANCE SHEETS
March 31, 2000
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 291
Accounts receivable.............................................. 25
Prepaid expenses and other assets................................ --
-------
Total current assets........................................... 316
PROPERTY AND EQUIPMENT, net........................................ 230
DEPOSIT............................................................ 41
-------
TOTAL.......................................................... $ 587
=======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accrued expenses................................................. $ 72
-------
Total current liabilities...................................... 72
-------
DEPOSIT FROM RELATED PARTY......................................... 20
SHAREHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock--Series A, par value: $0.0001 per
share; 5,500,000 shares authorized; shares issued and
outstanding: none............................................... --
Convertible preferred stock--Series B, par value: $0.0001 per
share; 2,500,000 shares authorized; shares issued and
outstanding: none............................................... --
Common stock--par value: $0.0001 per share; 18,000,000 shares
authorized; shares issued and outstanding: 13,689,882........... 2,767
Deferred compensation............................................ (283)
Deficit accumulated during the development stage................. (1,989)
-------
Total shareholders' equity (deficit)........................... 495
-------
TOTAL.......................................................... $ 587
=======
</TABLE>
See notes to financial statements.
F-33
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 2000
--------- ---------
(unaudited)
<S> <C> <C>
NET SALES................................................ $ -- $ 35
COSTS AND EXPENSES:
Cost of sales.......................................... -- 22
General and administrative............................. 51 132
Research and development............................... 113 310
Sales and marketing.................................... -- 64
--------- ---------
Total costs and expenses............................. 164 528
--------- ---------
LOSS FROM OPERATIONS..................................... (164) (493)
INTEREST INCOME (EXPENSE), Net........................... -- (16)
--------- ---------
NET LOSS................................................. $ (164) $ (509)
========= =========
</TABLE>
See notes to financial statements.
F-34
<PAGE>
INFOWIDE, INC.
A Development Stage Company
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Period from December 31, 1999 to March 31, 2000
(In thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Series A Series B Deficit
Convertible Convertible Accumulated
Preferred Stock Preferred Stock Common Stock Deferred During the
------------------ ---------------- ----------------- Compen- Development
Shares Amount Shares Amount Shares Amount sation Stage Total
---------- ------ -------- ------ ---------- ------ -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31,
1999................... 4,923,079 $ 640 948,720 $ 370 5,333,333 $ 496 $(303) $(1,480) $ (277)
Conversion of preferred
stock to common stock.. (4,923,079) (640) (948,720) (370) 5,871,799 1,010 -- -- --
Exercise of stock
options for common
stock, net of
repurchases ........... 1,268,750 45 45
Conversion of notes
payable to common
stock.................. 1,216,000 1,216 1,216
Amortization of deferred
stock compensation..... 20 20
Net loss................ (509) (509)
---------- ----- -------- ----- ---------- ------ ----- ------- ------
BALANCES, March 31,
2000................... -- $ -- -- $ -- 13,689,882 $2,767 $(283) $(1,989) $ 495
========== ===== ======== ===== ========== ====== ===== ======= ======
</TABLE>
See notes to financial statements.
F-35
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1999 2000
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (164) $ (509)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 6 23
Amortization of deferred stock compensation............... -- 20
Changes in assets and liabilities:
Prepaid expenses and other assets........................ 6 1
Accounts receivable...................................... -- (11)
Accrued expenses......................................... 46 (20)
------- --------
Net cash used in operating activities................... (106) (496)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchases of property and equipment........................ (44) (105)
------- --------
Net cash used in investing activities................... (44) (105)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Notes Payable................................ -- 866
Issuance of common stock................................... -- 45
Payment of notes payable to related parties................ -- (40)
Issuance of loans payable.................................. 110 0
------- --------
Net cash provided by financing activities............... 110 871
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (40) 270
CASH AND CASH EQUIVALENTS, Beginning of period.............. 98 21
------- --------
CASH AND CASH EQUIVALENTS, End of period.................... $ 58 $ 291
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
Conversion of notes payable to common stock................ $ -- $ 1,216
======= ========
</TABLE>
See notes to financial statements.
F-36
<PAGE>
INFOWIDE, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization--InfoWide, Inc. (the "Company") was incorporated on April 15,
1998 under the laws of the state of Delaware. The Company has developed a web-
hosted, rent on demand financial management package designed for professional
services organizations. The Company is subject to the risks associated with a
development stage enterprise, including the need to refine its product
technology, extend its marketing and distribution channels and continue to
raise financing.
Commercial selling commenced from August 1999; as of March 31, 2000, the
Company is considered to be a development stage enterprise because revenues
through that date have not been significant. On March 9, 2000, the Company
agreed to be acquired by Evolve Software, Inc.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of 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 debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over their respective
useful lives of three to five years.
Software Development Costs--The costs for the development of new software
products are expensed as incurred until technological feasibility has been
established, at which time any additional costs would be capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise
Marketed." Because the Company believes its current process for developing
software is essentially completed concurrently with the establishment of
technological feasibility, no costs have been capitalized to date.
Income Taxes--The Company accounts for income taxes using the asset and
liability approach for financial reporting. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes and operating loss and tax credit carryforwards. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets recorded will not be recognized.
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Comprehensive Income (Loss)--The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in net assets during the period
from nonowner sources. Comprehensive loss was the same as net loss for the
quarters ended March 31, 1999 and 2000.
F-37
<PAGE>
EVOLVE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information for Evolve
Software, Inc, (the "Company") consists of the Unaudited Pro Forma Combined
Statements of Operations for the year ended June 30, 1999 and the nine months
ended March 31, 2000. This pro forma financial information gives effect to
Evolve's acquisition of InfoWide, Inc. which was accounted for as a purchase.
The definitive terms of the InfoWide acquisition were agreed to on March 9,
2000 and the acquisition was consummated on March 31, 2000. The stockholders of
InfoWide received 1.7 million shares of Evolve common stock and 123,000 options
to purchase shares of Evolve common stock. The unaudited pro forma combined
statements of operations for the year ended June 30, 1999 and for the nine
months ended March 31, 2000 give effect to the acquisition as if it had
occurred on July 1, 1998 by consolidating the results of operations of InfoWide
with the results of operations of Evolve.
The unaudited pro forma combined statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as being representative of future
operating results. The historical financial statements of the Company, and
InfoWide are included elsewhere in this Prospectus and the unaudited pro forma
combined financial information presented herein should be read in conjunction
with those financial statements and related notes.
F-38
<PAGE>
EVOLVE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended March 31, 2000
-----------------------------------------
Evolve Pro Forma
Software InfoWide Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.............................. $ 5,596 $ 61 $ -- $ 5,657
Cost of revenues...................... 2,890 58 -- 2,948
-------- ------- ------- --------
Gross margin (loss)................... 2,706 3 -- 2,709
Operating expenses
Research and development............ 6,248 760 -- 7,008
Sales and marketing................. 12,082 205 -- 12,287
General and administrative.......... 3,253 252 -- 3,505
In-process technology write-off..... 3,126 -- (3,126) --
Amortization of goodwill and other
intangibles........................ -- -- 8,361 8,361
Stock-based charges................. 11,045 -- -- 11,045
-------- ------- ------- --------
Total operating expenses.......... 35,754 1,217 5,235 42,206
-------- ------- ------- --------
Loss from operations.................. (33,048) (1,214) (5,235) (39,497)
Interest income (expense), net........ 486 (20) -- 466
-------- ------- ------- --------
Net loss............................ $(32,562) $(1,234) $(5,235) $(39,031)
======== ======= ======= ========
Net loss per share.................... $ (9.62)
========
Shares used in net loss per share
calculation.......................... 4,058
========
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1999
----------------------------------------
Evolve Pro Forma
Software InfoWide Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.............................. $ 517 $ -- $ -- $ 517
Cost of revenues...................... 635 -- -- 635
-------- ----- -------- --------
Gross margin (loss)................... (118) -- -- (118)
Operating expenses
Research and development............ 5,057 474 -- 5,531
Sales and marketing................. 3,876 12 -- 3,888
General and administrative.......... 1,857 274 -- 2,131
Amortization of goodwill and other
intangibles........................ -- -- 11,148 11,148
Stock-based charges................. 218 -- -- 218
-------- ----- -------- --------
Total operating expenses.......... 11,008 760 11,148 22,916
-------- ----- -------- --------
Loss from operations.................. (11,126) (760) (11,148) (23,034)
Interest income (expense), net........ (345) 5 -- (340)
-------- ----- -------- --------
Net loss............................ $(11,471) $(755) $(11,148) $(23,374)
======== ===== ======== ========
Net loss per share.................... $ (6.82)
========
Shares used in net loss per share
calculation.......................... 3,425
========
</TABLE>
F-39
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Note 1--Basis of Presentation: The pro forma combined financial information
gives effect to Evolve's acquisition of InfoWide, which was consummated on
March 31, 2000. The acquisition was accounted for as a purchase. InfoWide
stockholders and option holders received an aggregate total of 1.8 million
shares of Evolve common stock. The pro forma combined financial information has
been prepared on the basis of assumptions described in the following notes and
include assumptions relating to the allocation of the consideration paid for
the assets and liabilities based on estimates of their fair values. The
Unaudited Pro Forma Combined Statement of Operations for the year ended June
30, 1999 and the nine months ended March 31, 2000 gives effect to the
acquisitions as if they had taken place on July 1, 1998. The pro forma combined
financial information is not necessarily indicative of what the actual
financial results would have been had the transactions taken place on July 1,
1998 and do not purport to be indicative of the results of the future
operations.
Note 2--Purchase Price Allocation: The unaudited pro forma combined
information reflects a total purchase price for the InfoWide acquisition of
$33.0 million including the value of the Evolve shares issued upon the
consummation of the InfoWide acquisition and transaction costs. The allocation
of the purchase price using balances as of March 31, 2000 is summarized below:
The allocation of the purchase price was based on the estimated fair value
of the following items:
<TABLE>
<CAPTION>
$ '000
-------
<S> <C>
Assets less liabilities at the date of the acquisition.............. $ 496
Goodwill............................................................ 25,329
Developed technology................................................ 5,877
In-process technology............................................... 3,126
Other intangibles................................................... 990
Acquisition costs................................................... (70)
Deferred tax liability.............................................. (2,747)
-------
$33,001
=======
</TABLE>
The amount allocated to the purchased in-process technology was determined
based on an appraisal completed by an independent third party using established
valuation techniques and was expensed upon acquisition, because technological
feasibility had not been established and no future alternative uses existed.
The product percentage of completion was estimated to be 45%. The value of this
in-process technology was determined by estimating the costs to develop the
purchased in-process technology into a commercially viable product, estimating
the resulting cash flows from the sale of the product resulting from the
completion of the in-process technology and discounting the net cash flows back
to their present value.
Note 3--Unaudited Pro Forma Combined Net Loss Per Share: The net loss per
share and shares used in computing the net loss per share for the year ended
June 30, 1999 and the nine months ended March 31, 2000 are based upon the
Evolve historical weighted average common shares outstanding together with the
shares issued in the transaction as if such shares were issued July 1, 1998.
Common stock issuable upon the conversion of convertible preferred stock and
exercise of Evolve stock options and warrants has been excluded as the effect
would be anti-dilutive.
Note 4--Purchase Adjustments: The following adjustments were applied to the
pro forma combined financial information: (A) To reflect amortization of the
goodwill, purchased technology and other intangibles related to the InfoWide
acquisition over the estimated useful lives of three years, as if the
acquisition occurred on July 1, 1998. (B) To reflect the issuance of shares in
the InfoWide acquisition and to record estimated transaction costs and other
assets and liabilities at their fair values. The amount allocated to in-process
research and development for the InfoWide acquisition has not been included in
the unaudited pro forma combined statement of operations as it is nonrecurring.
This amount was expensed in the period the acquisition was consummated.
F-40
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Evolve Software, Inc. in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 17,160
NASD filing fee.................................................. 7,000
Nasdaq Stock Market's National Market listing fee................
Director and officer insurance premiums..........................
Printing and engraving costs.....................................
Legal fees and expenses..........................................
Accounting fees and expenses.....................................
Blue Sky fees and expenses.......................................
Transfer Agent and Registrar fees................................
Miscellaneous expenses...........................................
----------
Total.......................................................... $1,200,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article Ninth of the registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article 6 of the registrant's Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of
the registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
The registrant has entered into indemnification agreements with its
directors, in addition to indemnification provided for in the registrant's
Amended and Restated Bylaws, and intends to enter into indemnification
agreements with any new directors in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of the registrant and its executive officers and directors,
and by the registrant of the underwriters for some liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the underwriters for inclusion in the
Registration Statement.
Item 15. Recent Sales of Unregistered Securities
Since July 1, 1996, we have issued unregistered securities to a limited
number of persons as described below (all share numbers and exercise prices in
this Item 15 have been adjusted for our one for six stock split to become
effective immediately prior to the effectiveness of this initial public
offering.
(a) On July 1, 1996, we sold an aggregate of 88,333 shares of our Series E
Preferred Stock for $12.00 per share to a group of private investors
for an aggregate purchase price of $1,060,000 which was paid in cash.
We sold the shares to a total of 56 investors, all of whom the
Registrant believes to be accredited investors, and we relied on Rule
506 of Regulation D for an exemption from registration.
II-1
<PAGE>
(b) From July 1, 1996 through May 31, 2000, we sold an aggregate of
1,804,372 shares of our common stock at exercise prices ranging from
$0.30 to $7.50 per share to employees, consultants, directors and other
service providers pursuant to our 1995 Stock Option Plan, as amended,
some of which was paid in cash and some of which was paid via
promissory notes. We relied on Rule 701 promulgated under the
Securities Act of 1933 for an exemption from registration.
(c) On February 5, 1997, we issued a warrant to purchase 5,000 shares of
our Series E Preferred Stock at an exercise price of $12.00 per share
to a commercial lender in partial consideration for a $1 million line
of credit. We sold the warrant to one investor, which the Registrant
believes to be an accredited investor, and we relied on Section 4(2) of
the Securities Act of 1933 for an exemption from registration.
(d) On March 13, 1997 and April 10, 1997, we issued 8.5% senior
subordinated convertible promissory notes to various private investors
in the aggregate amount of $12,675,000 in exchange for cash. Except for
$3,500,000 million, which was restructured on December 15, 1998, as
8.5% nonconvertible debt due within thirty days of the effectiveness of
this initial public offering, the principal (plus accrued interest of
approximately $1,689,000) on these notes were converted into 2,772,195
shares of Series F Preferred Stock in conjunction with our Series G
Preferred Stock Financing on November 25, 1998. We issued the notes to
a total of 38 investors, all of whom the Registrant believes to be
accredited investors, and we relied on Rule 506 of Regulation D for an
exemption from registration.
(e) On March 13, 1997 and April 10, 1997, in conjunction with the issuance
of the 8.5% senior subordinated convertible promissory notes, we issued
warrants to purchase 221,850 shares of our common stock at the lesser
of $12.00 and the conversion price of the convertible debt financing.
These warrants were cancelled in conjunction with our Series G
Preferred Stock Financing on November 25, 1998. We issued these
warrants to a total of 38 investors, all of whom the Registrant
believes to be accredited investors, and we relied on Rule 506 of
Regulation D for an exemption from registration.
(f) On April 10, 1997, we issued a warrant to Index Securities, S.A., a
private investor, to purchase $636,000 of conversion stock in
consideration for financial consulting services. On November 25, 1998,
the warrant was reissued to Index Securities, S.A. in conjunction with
our sale of Series G Preferred Stock, as a warrant to purchase
161,139 shares of our Series F Preferred Stock at an exercise price of
$3.94 per share, for an aggregate purchase of $636,000. We issued the
warrant to one investor, which the Registrant believes to be an
accredited investor, and we relied on Section 4(2) of the Securities
Act of 1933 for an exemption from registration.
(g) In January 1998, we sold 150,000 shares of our common stock for $1.80
per share for an aggregate purchase price of $270,000, the payment of
which was made via a promissory note. We sold the shares to one
investor, which the Registrant believes to be an accredited investor,
and we relied on Section 4(2) of the Securities Act of 1933 for an
exemption from registration.
(h) On October 16, 1998, we issued a $1,000,000 convertible promissory note
to Sierra Ventures VI, L.P. in consideration for a $1,000,000 loan. On
November 25, 1998 this note was converted into 466,667 shares of Series
G Preferred Stock in conjunction with our Series G Preferred Stock
Financing. We issued the note to one investor, which the Registrant
believes to be an accredited investor, and we relied on Section 4(2) of
the Securities Act of 1933 for an exemption from registration.
(i) On November 25, 1998, and December 15, 1998, we sold an aggregate of
4,200,000 shares of our Series G Preferred Stock for $2.14 per share to
Sierra Ventures VI, L.P. and certain of its affiliates, for an
aggregate purchase price of $9,000,000 paid in cash. On November 25,
1998, in conjunction with our Series G Preferred Stock Financing, we
issued warrants to Sierra Ventures VI, L.P. and various private
investors to purchase 1,166,667 shares of our Series G Preferred Stock
for $4.28 per share, for an aggregate purchase price of $5,000,000 paid
in cash. We sold the shares to a total of seven investors, all of whom
the Registrant believes to be accredited investors, and we relied on
Rule 506 of Regulation D for an exemption from registration.
II-2
<PAGE>
(j) On December 15, 1998, we issued a warrant to Whittman-Hart, Inc. to
purchase up to 66,667 shares of our common stock at an exercise price
of $12.00 per share in connection with a commercial transaction. We
issued the warrant to one investor, which the Registrant believes to be
an accredited investor, and we relied on Section 4(2) of the Securities
Act of 1933 for an exemption from registration.
(k) In February 1999, we sold 1,091,750 shares of our common stock to
certain officers for $0.30 per share, for an aggregate purchase price
of $327,525, payment of which was made via promissory notes. We sold
the shares to three investors, all of whom the Registrant believes to
be accredited investors, and we relied on Section 4(2) of the
Securities Act of 1933 for an exemption from registration.
(l) On September 14, 1999, in consideration for the settlement of a dispute
regarding a prior transaction, we issued a warrant to an investor to
purchase 233,333 shares of our common stock for $2.14 per share for an
aggregate purchase price of $500,000. We issued the warrant to one
investor, which the Registrant believes to be an accredited investor,
and we relied on Section 4(2) of the Securities Act of 1933 for an
exemption from registration.
(m) On September 28, 1999, and December 3, 1999, we sold an aggregate of
5,952,382 shares of our Series H Preferred Stock for $4.20 per share to
a group of private investors for an aggregate purchase price of
$25,000,000 paid in cash. We sold the shares to a total of 24
investors, all of whom the Registrant believes to be accredited
investors, and we relied on Rule 506 of Regulation D for an exemption
from registration.
(n) In October 1999, we sold 333,333 shares of our common stock to an
entity controlled by one of our directors for $0.30 per share, for an
aggregate purchase price of $100,000, payment of which was made via a
promissory note. We sold the shares to one investor, which the
Registrant believes to be an accredited investor, and we relied on
Section 4(2) of the Securities Act of 1933 for an exemption from
registration.
(o) In November 1999, we sold 83,333 shares of our common stock to an
investor for $1.20 per share, for an aggregate purchase price of
$100,000, payment of which was made via a promissory note. We sold the
shares to one investor, which the Registrant believes to be an
accredited investor, and we relied on Section 4(2) of the Securities
Act of 1933 for an exemption from registration.
(p) In November 1999, we sold 83,333 shares of our common stock to one of
our directors for $1.20 per share, for an aggregate purchase price of
$100,000, payment of which was made via a promissory note. We sold the
shares to one investor, which the Registrant believes to be an
accredited investor, and we relied on Section 4(2) of the Securities
Act of 1933 for an exemption from registration.
(q) In November 1999, we sold 1,900,000 shares of our common stock to
certain officers for $1.20 per share, for an aggregate purchase price
of $2,280,000, payment of which was made via promissory notes. We sold
the shares to six investors, all of whom the Registrant believes to be
accredited investors, and we relied on Section 4(2) of the Securities
Act of 1933 for an exemption from registration.
(r) In February 2000, we sold 395,833 shares of our common stock to certain
officers for $3.00 per share, for an aggregate purchase price of
$1,187,500, payment of which was made via promissory notes. We sold the
shares to four investors, all of whom the Registrant believes to be
accredited investors, and we relied on Section 4(2) of the Securities
Act of 1933 for an exemption from registration.
(s) In February 2000, we sold 83,333 shares of our common stock to a
director for $3.00 per share, for an aggregate purchase price of
$250,000, payment of which was made via a promissory note. We sold the
shares to one investor, which the Registrant believes to be an
accredited investor, and we relied on Section 4(2) of the Securities
Act of 1933 for an exemption from registration.
(t) In March 2000, we sold 250,000 shares of our common stock to an officer
for $6.00 per share, for an aggregate purchase price of $1,500,000,
payment of which was made via a promissory note. We sold the shares to
one investor, which the Registrant believes to be an accredited
investor, and we relied on Section 4(2) of the Securities Act of 1933
for an exemption from registration.
(u) In June 2000, we sold 2,916,667 shares of Series I Preferred Stock for
$6.00 per share to a group of private investors for an aggregate
purchase price of $17,500,000, which was paid in cash. We sold the
shares to a total of four investors, all of whom the Registrant
believes to be accredited investors, and we relied on Rule 506 of
Regulation D for an exemption from registration.
II-3
<PAGE>
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein.
The sales of the above securities were deemed to be exempt from registration
in reliance on Rule 701 promulgated under Section 3(b) under the Securities Act
as transactions pursuant to a compensatory benefit plan or a written contract
relating to compensation, or in reliance on Section 4(2) of the Securities Act
or Regulation D promulgated thereunder as transactions by an issuer not
involving any public offering. The recipients of securities in each such
transaction represented their intention 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 share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Evolve or had access, through
employment or other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of the Registrant
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant to be adopted upon completion of this offering
3.3* Bylaws of the Registrant
4.1* Form of stock certificates
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1+ Form of Indemnification Agreement between the Registrant and each of
its directors
10.2* Paradigm Technologies License Agreement
10.3+ Office Building Lease, 615 Battery Street, San Francisco, CA
10.4+ Office Building Lease, 1400 65th Street, Emeryville, CA
10.5+ 1995 Stock Option Plan, as amended
10.6 2000 Stock Plan
10.7 2000 Employee Stock Purchase Plan
10.8+ Employment Offer Letter for John P. Bantleman
10.9+ Employment Offer Letter for James J. Bozzini
10.10 Employment Offer Letter for Douglas S. Sinclair
10.11+ Employment Offer Letter for Marc C. Ferrie
10.12+ Employment Offer Letter for Mark L. Davis
10.13+ Employment Offer Letter for Kurt M. Heikkinen
10.14+ Employment Offer Letter for Jeff A. McClure
10.15+ Employment Offer Letter for Anil K. Gupta
10.16 Restricted Stock Purchase Agreements for John P. Bantleman dated
January 1998, February 1999 and November 1999
10.17 Restricted Stock Purchase Agreement for James J. Bozzini dated
November 1999
10.18 Restricted Stock Purchase Agreement for Douglas S. Sinclair dated
March 2000
10.19 Restricted Stock Purchase Agreements for Marc C. Ferrie dated February
1999 and November 1999
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.20 Restricted Stock Purchase Agreement for Mark L. Davis dated November
1999
10.21 Restricted Stock Purchase Agreements for J. Russell DeLeon dated May
1995, February 1999, November 1999 and February 2000
10.22 Restricted Stock Purchase Agreements for Kurt M. Heikkinen dated
November 1999 and February 2000
10.23 Restricted Stock Purchase Agreement for Jeff A. McClure dated February
2000
10.24 Restricted Stock Purchase Agreement for Anil K. Gupta dated February
2000
10.25 Agreement that provides acceleration for vesting for Jeff A. McClure
dated March 2000
10.26 Agreement that provides acceleration for vesting for Marc C. Ferrie
dated February 1999
10.27 Agreement that provides acceleration for vesting for J. Russell DeLeon
dated February 1999
10.28* Amended and Restated Stockholder Rights Agreement among certain
investors dated June 2000
21.1 List of Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers, LLP, Independent Accountants
23.2 Consent of Deloitte & Touche, LLP, Independent Accountants
23.3 Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (see page II-6)
27.01 Financial Data Schedule
</TABLE>
--------
* To be filed by amendment.
+ Previously filed.
(b)Financial Statement Schedules
No financial statement schedules have been included because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Francisco, State of California, on the 27th day of June, 2000.
Evolve Software, Inc.
/s/ John P. Bantleman
By:
-----------------------------------
John P. Bantleman
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ John P. Bantleman President and Chief June 27, 2000
____________________________________ Executive Officer
John P. Bantleman (Principal Executive
Officer)
/s/ Douglas S. Sinclair Chief Financial Officer, June 27, 2000
____________________________________ Corporate Secretary,
Douglas S. Sinclair Treasurer (Principal
Financial and
Accounting Officer)
/s/ Jeffrey M. Drazan* Director June 27, 2000
____________________________________
Jeffrey M. Drazan
/s/ Judith H. Hamilton* Director June 27, 2000
____________________________________
Judith H. Hamilton
/s/ John R. Oltman* Director, Chairman of June 27, 2000
____________________________________ the Board
John R. Oltman
*By: /s/ J. Russell DeLeon June 27, 2000
_________________________________
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of the Registrant
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant to be adopted upon completion of this offering
3.3* Bylaws of the Registrant
4.1* Form of stock certificates
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1+ Form of Indemnification Agreement between the Registrant and each of
its directors
10.2* Paradigm Technologies License Agreement
10.3+ Office Building Lease, 615 Battery Street, San Francisco, CA
10.4+ Office Building Lease, 1400 65th Street, Emeryville, CA
10.5+ 1995 Stock Option Plan, as amended
10.6 2000 Stock Plan
10.7 2000 Employee Stock Purchase Plan
10.8+ Employment Offer Letter for John P. Bantleman
10.9+ Employment Offer Letter for James J. Bozzini
10.10 Employment Offer Letter for Douglas S. Sinclair
10.11+ Employment Offer Letter for Marc C. Ferrie
10.12+ Employment Offer Letter for Mark L. Davis
10.13+ Employment Offer Letter for Kurt M. Heikkinen
10.14+ Employment Offer Letter for Jeff A. McClure
10.15+ Employment Offer Letter for Anil K. Gupta
10.16 Restricted Stock Purchase Agreements for John P. Bantleman dated
January 1998, February 1999 and November 1999
10.17 Restricted Stock Purchase Agreement for James J. Bozzini dated
November 1999
10.18 Restricted Stock Purchase Agreement for Douglas S. Sinclair dated
March 2000
10.19 Restricted Stock Purchase Agreements for Marc C. Ferrie dated February
1999 and November 1999
10.20 Restricted Stock Purchase Agreement for Mark L. Davis dated November
1999
10.21 Restricted Stock Purchase Agreements for J. Russell DeLeon dated May
1995, February 1999, November 1999 and February 2000
10.22 Restricted Stock Purchase Agreements for Kurt M. Heikkinen dated
November 1999 and February 2000
10.23 Restricted Stock Purchase Agreement for Jeff A. McClure dated February
2000
10.24 Restricted Stock Purchase Agreement for Anil K. Gupta dated February
2000
10.25 Agreement that provides acceleration for vesting for Jeff A. McClure
dated March 2000
10.26 Agreement that provides acceleration for vesting for Marc C. Ferrie
dated February 1999
10.27 Agreement that provides acceleration for vesting for J. Russell DeLeon
dated February 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.28* Amended and Restated Stockholder Rights Agreement among certain
investors dated June 2000
21.1 List of Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers, LLP, Independent Accountants
23.2 Consent of Deloitte & Touche, LLP, Independent Accountants
23.3 Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (see page II-6)
27.01 Financial Data Schedule
</TABLE>
--------
* To be filed by amendment.
+ Previously filed.
