<PAGE>
As filed with the Securities and Exchange Commission on December 15, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
the Securities Act of 1933
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divine interVentures, inc.
(Exact name of registrant as specified in its charter)
Delaware 7389 36-4301991
(State or other
jurisdiction of
incorporation or
organization)
(Primary Standard Industrial Classification Code No.)
(I.R.S. Employer
Identification No.)
4225 Naperville Road, Suite 400, Lisle, Illinois 60532, (630) 799-7500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Andrew J. Filipowski
Chairman and Chief Executive Officer
4225 Naperville Road, Suite 400, Lisle, Illinois 60532, (630) 799-7500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Matthew S. Brown, Esq. Marc M. Rossell, Esq.
Mark D. Wood, Esq. Shearman & Sterling
Katten Muchin Zavis 599 Lexington Avenue
525 West Monroe Street, Suite 1600 New York, New York 10022
Chicago, Illinois 60661-3693 (212) 848-4000
(312) 902-5200
------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum Amount of
Title of Each Class of Aggregate Registration
Securities to be Registered Offering Price(1) Fee
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<S> <C> <C>
Class A Common Stock, $0.001 par value.......... $250,000,000 $66,000
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</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) of Regulation C under the Securities Act of 1933, as
amended.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
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<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 DECEMBER 15, 1999
Shares
[DIVINE LOGO]
Class A Common Stock
--------
Prior to this offering, there has been no public market for our class A
common stock. The initial public offering price is expected to be between
$ and $ per share. We are applying to list our class A common stock
on The Nasdaq Stock Market's National Market under the symbol "DVIN."
The underwriters have an option to purchase a maximum of additional
shares of our class A common stock to cover over-allotments of shares.
Investing in our class A common stock involves risks. See "Risk Factors" on
page 7.
<TABLE>
<CAPTION>
Underwriting
Discounts
Price to and Proceeds to
Public Commissions divine
------------ ------------ ------------
<S> <C> <C> <C>
Per share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of class A 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 or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
Robertson Stephens
William Blair & Company
DLJdirect Inc.
The date of this prospectus is , 2000.
<PAGE>
[DESCRIPTION OF GRAPHICS AND CAPTIONS]
2
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 7
Cautionary Note Regarding Forward-Looking Statements...................... 19
Cautionary Note Regarding Statistical Data................................ 19
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 20
Capitalization............................................................ 21
Dilution.................................................................. 22
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................................................... 29
Management................................................................. 45
Certain Transactions....................................................... 57
Principal Stockholders..................................................... 63
Description of Capital Stock............................................... 65
Shares Eligible for Future Sale............................................ 68
Underwriting............................................................... 71
Notice to Canadian Residents............................................... 74
Legal Matters.............................................................. 75
Experts.................................................................... 75
Where Can You Find More Information........................................ 76
Index to Financial Statements.............................................. F-1
</TABLE>
------------
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 prospectus may only be used where it is
legal to sell these securities. The information contained in this document may
only be accurate on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000, 25 days after the commencement of the 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.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in our class A common stock. You should read this entire
prospectus carefully, including the risk factors and our financial statements,
and the notes thereto.
divine interVentures, inc.
We are actively engaged in business-to-business, or B2B, e-commerce through
our Internet Zaibatsu, a community of partner companies. These companies
collaborate to provide cross-selling and marketing opportunities and support
entrepreneurial initiatives, business growth and the sharing of information and
business expertise. We manage, finance, operate and provide services to our
partner companies, offering a turn-key solution for building successful B2B e-
commerce businesses.
In addition to providing capital to our partner companies, we offer them a
comprehensive array of infrastructure services, including web hosting and
design, systems integration, information technology management and marketing
and public relations. These services are designed to allow each of our partner
companies to focus on its core competencies and accelerate the time-to-market
of its products and services. We focus our efforts in geographic areas that we
believe have a strong base of intellectual capital and entrepreneurial talent,
but that have traditionally lacked sufficient infrastructure services and
venture capital funding. We are initially seeking attractive opportunities
primarily in the midwest and plan to address other underserved markets in the
future.
We intend to capitalize on the significant growth in the B2B e-commerce
market. Forrester Research, an independent research firm, estimates that the
inter-company trade of goods and services over the Internet, commonly referred
to as B2B e-commerce, will grow from $43.1 billion in 1998 to $1.3 trillion in
2003. In addition, according to the Gartner Group, an independent research
firm, e-commerce related information technology investments are expected to
account for 50% of the estimated $3.5 trillion in information technology
spending in 2003. Today, many new companies, including spin-outs from
traditional businesses, are being formed and funded to develop technologies and
solutions to support the new B2B e-commerce market. B2B e-commerce solutions
are being rapidly adopted to facilitate the continuous exchange of information
among business partners to large customer audiences and to allow businesses to
interact more efficiently with suppliers, distributors and service providers.
We establish and acquire interests in two categories of B2B e-commerce
companies: market makers, which bring buyers and sellers together on Internet-
based markets to exchange products, services and information, and
infrastructure service providers, which offer software or services, such as
consulting and systems integration. At December 10, 1999, we had established or
acquired interests in the following 19 B2B e-commerce companies:
Market Makers Infrastructure Service Providers
Commerx, Inc. Blueridge Technologies, Incorporated
i-Street, Inc. buzz divine, inc.
The National Transportation Exchange, Inc.
comScore, Inc.
Neoforma.com, Inc. dotspot, inc.
PocketCard Inc. eXperience divine, inc.
TheExecClub.com, Inc. LiveOnTheNet.com, Inc.
Whiplash, Inc. OpinionWare.com, Inc.
OUTTASK.COM, Inc.
Sensoria, Inc.
Sequoia Software Corporation
Synetrics, Inc.
Xqsite, Inc.
Our principal executive offices are located at 4225 Naperville Road, Suite
400, Lisle, Illinois 60532, and our telephone number at that location is (630)
799-7500. Our web site is located at http://www.divine.com. None of the
information contained in our web site or in those of our partner companies is
part of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Class A common stock offered...... shares
Common stock to be outstanding
after this offering:
Class A common stock............ shares
Class B common stock............ shares
Total........................... shares
Use of proceeds................... To acquire interests in, and establish,
partner companies and for general corporate
and working capital purposes.
Proposed Nasdaq National Market DVIN
symbol...........................
</TABLE>
----------------
The number of shares of our common stock to be outstanding after the
offering is based on the number of shares outstanding on , 1999.
This number excludes the following:
. shares of class A common stock issuable upon the exercise of stock
options outstanding on , 1999, with a weighted average
exercise price of $ per share;
. shares of class A common stock reserved for grants that we may make in
the future under our stock incentive plan; and
. shares issuable upon the exercise of the underwriters' over-allotment
option.
----------------
Except where we indicate differently, the information in this prospectus
assumes:
. a for reverse split of our class A common stock and class B
common stock to be effected before the completion of this offering;
. the conversion of our convertible preferred stock into shares of class A
common stock and shares of class B common stock to be effected
before the completion of this offering; and
. no exercise by the underwriters of their over-allotment option.
5
<PAGE>
Summary Financial Information
You should read the following historical and unaudited pro forma financial
information along with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included in this prospectus.
<TABLE>
<CAPTION>
Period from May 7, 1999
(Inception) to
September 30, 1999
-------------------------
(in thousands, except
share and per share data)
<S> <C>
Statement of Operations Data:
Revenues........................................... $ 17
Total operating expenses........................... 1,490
Total other expense................................ (1)
Net loss........................................... (1,474)
Basic and diluted net loss per share............... (0.23)
Shares used in computing basic and diluted net loss
per share......................................... 6,695,918
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------
Pro Pro Forma,
Actual Forma As Adjusted
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $114,294 $369,448 $
Working capital................................. 111,846 344,870
Total assets.................................... 116,050 439,442
Total stockholders' equity...................... 112,006 407,947
</TABLE>
- --------------------
The Pro Forma column reflects (1) our receipt of net proceeds of
$295,941,159 from the sale of 296,241,159 shares of our convertible preferred
stock from October through December 1999 and (2) our acquisitions of interests
in partner companies from October through December 10, 1999. The Pro Forma, As
Adjusted column further reflects the receipt of the estimated net proceeds of
$ million from our sale of shares of class A common stock in
this offering at an assumed initial public offering price of $ per
share, after deducting the estimated underwriting discounts and commissions and
estimated offering expenses.
For an explanation of the determination of the number of shares used in
computing basic and diluted net loss per share, see Note 1(f) of the notes to
our financial statements.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below,
and all of the other information included in this prospectus, before you decide
whether to purchase shares of our class A common stock. Many of these risks may
affect our partner companies and may therefore affect us to the extent of our
interest in the affected partner company. Any of the following risks could
materially adversely affect our business, financial condition or operating
results and could result in a complete loss of your investment.
Risks Particular to Us
We and our partner companies have little operating history, which makes it
difficult to evaluate our business.
We were formed in May 1999 and began operations on June 30, 1999. We have
only engaged in start-up activities, acquired interests in or established our
initial partner companies and analyzed and engaged in discussions with other
potential partner companies. Because we have only recently begun operating and
because many of our partner companies are in the early stages of their
development, we are unable to provide you with significant data upon which you
can evaluate our prospects. We and our current partner companies are, and we
expect that our future partner companies will be, primarily engaged in the
emerging business-to-business, or B2B, e-commerce market. We and our current
partner companies are, and our future partner companies will be, in the early
stages of development. Our business and prospects must be considered in light
of the risk, expense and difficulties frequently encountered by companies in
early stages of development, particularly companies in new and rapidly evolving
markets such as B2B e-commerce. Further, our management has not previously
actively managed, operated or promoted Internet companies, and we cannot assure
you that they will be able to do so effectively.
We expect to incur increasing losses for the foreseeable future and may never
become profitable.
As a company that develops and manages emerging B2B e-commerce companies, we
expect to incur increasing losses for the foreseeable future. In addition, we
expect our expenses to increase significantly as we develop the infrastructure
necessary to implement our business strategy. Our expenses will continue to
increase as we:
. hire additional employees;
. establish and build partner companies to provide infrastructure
services;
. expand our information technology systems;
. lease more space to accommodate our operations and those of our partner
companies; and
. broaden our partner company, service and support capabilities.
Our current partner companies are, and we expect that our future partner
companies will be, in the early stages of development and will have limited or
no revenues. Because B2B e-commerce businesses, even if successful, typically
generate significant losses while they grow, we do not expect our partner
companies to generate income for us for the foreseeable future, and they may
never generate income for us.
We may have to take actions which are not in our best interests in order to
avoid registration under the Investment Company Act of 1940.
Companies which are, or hold themselves out as being, engaged primarily in
the business of investing, reinvesting or trading in securities are subject to
regulation under the Investment Company Act of 1940. We believe that we are
actively engaged in the business of B2B e-commerce and are not an investment
company. However, unless a substantial part of our assets consists of, and a
substantial part of our income is derived from, interests in majority-owned
subsidiaries and companies that we primarily control, we may be required to
7
<PAGE>
register and become subject to regulation under the Investment Company Act.
Because Investment Company Act regulation is, for the most part, inconsistent
with our strategy of actively managing, operating and promoting collaboration
among our network of partner companies, we cannot feasiblely operate our
business as a registered investment company.
To avoid regulation under the Investment Company Act and related SEC rules,
we may need to sell assets which we would otherwise want to retain and may be
unable to sell assets which we would otherwise want to sell. In addition, we
may be forced to acquire additional income-generating or loss-generating assets
that we would not otherwise have acquired, and may need to forego opportunities
to acquire interests in attractive companies that would benefit our business.
If we become an investment company and are unable to rely on exemptions
available under the Investment Company Act and related SEC rules, we may apply
to the SEC for special exemptive relief. The granting of special exemptive
relief is a matter of SEC discretion and, therefore, we cannot assure you that,
if requested, an exemption would be granted.
If, despite our efforts, we are deemed to be, and are required to register
as, an investment company, we will be forced to comply with substantive
requirements under the Investment Company Act, including:
. limitations on our ability to borrow;
. limitations on our capital structure;
. restrictions on acquisitions of interests in partner companies;
. prohibitions on transactions with affiliates;
. restrictions on specific investments; and
. compliance with reporting, record keeping, voting, proxy disclosure and
other rules and regulations.
If we were forced to comply with the rules and regulations of the Investment
Company Act, our operations would significantly change, and we would be
prevented from successfully executing our business model. For more detailed
information regarding the impact of the Investment Company Act on us, see,
"Business--Government Regulations and Legal Uncertainties."
Our success, and the success of our partner companies, is dependent on the
retention of Andrew J. Filipowski and our other senior management and key
personnel.
We believe that Andrew J. Filipowski, our Chairman and Chief Executive
Officer, is critical to our success and that we would suffer severe adverse
consequences if we lost his services. We do not maintain key man life insurance
on Mr. Filipowski. Our success is also dependent on our other senior management
and our ability to attract and retain other key personnel. If one or more of
the members of our senior management were unable or unwilling to continue in
their present position, our business would be disrupted. We are also dependent
on our general managers who help identify potential partner companies,
negotiate the structure of our partner company interests and represent us in
the management of our partner companies. If we are unable to attract and retain
these general managers, our business will suffer. In addition, we may be unable
to find, hire and retain additional qualified management and professional
personnel to help manage, oversee and staff our partner companies, which could
impede our ability to grow.
If we fail to expand our management systems and controls and integrate new
personnel to support our anticipated growth, our business will suffer.
To successfully implement our business strategy, we must rapidly expand our
internal operations, develop a group of partner companies that provides B2B
infrastructure support services and acquire controlling interests in a number
of additional partner companies. Our efforts to achieve these objectives are
placing, and will continue to place, significant strain on our management and
operational and financial resources. In addition, to the extent that we are
responsible for the internal controls of our partner companies, our systems
will be under additional strain. We are still in the process of developing and
implementing our operating and financial
8
<PAGE>
systems, including our internal systems and controls, and have recently begun
integrating our initial partner companies into our operational, financial and
managerial systems. Members of our senior management will be required to devote
considerable amounts of their time to this development and integration process,
which may reduce the time they will have to identify, analyze and acquire
interests in new partner companies and provide management and other necessary
services to our existing partner companies. To continue to develop our
business, we and our partner companies must rapidly hire a substantial number
of new employees. Since we were founded in May 1999, our employee base has
grown to 255 employees, including 196 employees of our majority-owned
subsidiaries, and we expect that we will need to hire a significant number of
additional employees in the future. The recruiting, hiring, training and
integration of this large number of employees will place a significant strain
on our management and operational resources. To manage our growth effectively,
we must successfully develop, implement, maintain and enhance our financial and
accounting systems and controls, integrate new personnel and partner companies
and manage expanded operations.
If our management fails to properly identify and select partner companies to
establish and in which to acquire interests, you may lose all or part of your
investment.
Our success depends on our ability to identify desirable businesses to
establish or in which to acquire interests and to successfully negotiate the
terms of those acquisitions. Our management will have sole and absolute
discretion in identifying and selecting partner companies to establish or in
which to acquire interests and in structuring, negotiating, undertaking and
divesting of interests in our partner companies. You will not be able to
evaluate the merits of the acquisition of an interest in, or the establishment
of, any particular partner company before we make the acquisition or establish
the company. B2B e-commerce is an emerging market and our management has
limited experience in acquiring interests in and establishing B2B e-commerce
companies. In making decisions to acquire interests in or establish partner
companies, we will rely, in part, on financial projections developed by our
management and the management of potential partner companies that will be based
on assumptions and subjective judgments. The actual results of our partner
company interests may differ significantly from these projections.
Even if we identify a company that complements our strategy, we may be
unable to acquire an interest in that company for many reasons, including:
. inability to interest companies in joining our collaborative network;
. inability to agree on the terms of an acquisition or to acquire a
controlling interest in the company;
. incompatibility between us and management of the partner company; and
. competition from other investors in e-commerce companies.
After this offering, we will have approximately $ of cash to
deploy. If we cannot acquire a sufficient number of controlling interests in,
and establish a sufficient number of, emerging B2B e-commerce companies with
this capital, our strategy to build a network of partner companies will not
succeed.
We may sell our partner company interests for less than their maximum value or
at a loss.
While we generally do not anticipate selling our interests in our partner
companies in the ordinary course of business, we may sell our interests to
generate income or cash or to avoid regulation under the Investment Company
Act. Absent these sales, we do not expect a cash return on our partner company
interests. Our ability to make these sales may be limited, however, especially
if no public market for our partner companies' stock exists. Additionally,
market, regulatory, contractual and other conditions largely beyond our control
will affect:
. our ability to sell our interests in partner companies;
. the timing of these sales; and
. the amount of proceeds from these sales.
9
<PAGE>
If we divest all or part of our interests in partner companies, we may not
receive maximum value for our interests and we may sell them for less than the
amount we paid to acquire them. If our partner companies have publicly-traded
stock, we may be unable to sell our interests at then-quoted market prices. In
addition, if we dispose of our interests in partner companies, the strength of
our collaborative network will be adversely affected.
Our business strategy may not be successful if valuations of Internet-related
companies decline.
Our strategy involves creating value for our stockholders and the owners of
our partner companies by helping our partner companies grow and access the
public and private capital markets. Therefore, our success is dependent on
acceptance by the public and private capital markets of Internet-related
companies in general and of initial public offerings of those companies in
particular. If the capital markets for Internet-related companies or the market
for initial public offerings of those companies weaken for an extended period
of time, we may not be able to take our partner companies public as a means of
creating stockholder value.
Our resources and our ability to manage newly acquired partner companies may be
strained as we acquire interests in additional partner companies.
We plan to quickly acquire interests in B2B e-commerce companies that
complement our business strategy. These acquisitions may place significant
strain on our resources. Future acquisitions are subject to the following
risks:
. New acquisitions may cause disruptions in our on-going support of our
existing partner companies, distract our management and use other
resources, making it difficult to maintain our standards, controls and
procedures.
. We may acquire interests in companies in e-commerce markets in which we
have little experience.
. We may not be able to facilitate collaboration between our existing and
new partner companies, including the use of the services offered by
partner companies that we control.
. We may be required to incur debt or issue equity securities to fund
future acquisitions, which may be dilutive to existing stockholders.
Intense competition from other capital providers to acquire interests in B2B e-
commerce companies could result in lower returns or losses on acquisitions.
We face intense competition, including from traditional venture capital
firms, companies with business strategies similar to our own and other capital
providers, to develop and acquire interests in B2B e-commerce companies. Many
of these competitors have more experience identifying and acquiring interests
in B2B e-commerce companies and have greater financial and management
resources, brand name recognition or industry contacts than we do. In addition,
although most of our acquisitions will be made at a stage when our partner
companies are not publicly traded, we may pay higher prices for those interests
because of higher trading prices for securities of similar public Internet-
related companies and competition among capital providers. Intense competition,
and the impact it has on the valuation of B2B e-commerce companies, could limit
our opportunities to acquire interests in partner companies or force us to pay
higher prices to acquire these interests, which would result in lower returns
or losses on acquisitions. In addition, some of our competitors may have a
competitive advantage over us because they have more flexibility than we do in
structuring acquisitions in partner companies because they do not need to
acquire majority or controlling interests in companies to avoid regulation
under the Investment Company Act.
There may be numerous conflicts of interest among partner companies and our
officers, directors and stockholders.
We, our executive officers and directors and their affiliates and our
partner companies may face potential conflicts of interest with each other and
our stockholders. We cannot assure you that our management team or
10
<PAGE>
directors will not make decisions based on interests other than those of our
stockholders. To the extent that our officers and directors or their affiliates
take actions that are more favorable to themselves, our partner companies or
other entities than to us, these actions could have a negative impact on our
financial performance and, consequently, on the value of our class A common
stock.
Examples of these conflicts of interest include:
. We currently intend to provide our employees and the employees of the
partner companies that we establish with approximately 20% of the
initial outstanding equity, subject to vesting, of each partner company
that we establish that provides core infrastructure services. We also
intend to create a pool of options in each of the partner companies that
we establish to be issued to the employees of that partner company.
. Our executive officers and directors and their affiliates may engage in
other activities and have interests in other entities on their own
behalf or on behalf of other persons. We will not have any rights in
these ventures or to their income or profits, whether or not these
ventures are involved with businesses which are similar to the
businesses of our partner companies or are businesses in which we have
acquired interests or will acquire interests. In particular:
. Our executive officers or directors or their affiliates may have
economic interests in, or other business relationships with, our
partner companies. For example, Andrew J. Filipowski, our Chairman
and Chief Executive Officer, and several of our directors have
equity interests in partner companies.
. Our executive officers or directors or their affiliates may have
interests in entities that provide products or services to us for
our internal use, to us for use by our partner companies or directly
to our partner companies.
. Some key members of our management team have personal interests in
the venture capital funds we currently manage. Our executive
officers or directors or their affiliates may have similar interests
in venture capital funds with which we establish relationships in
the future. At times, we may offer these funds an opportunity to
acquire interests in our partner companies.
. Members of our Board of Directors are executive officers or
directors of companies that compete with us to acquire interests in,
and provide support services to, B2B e-commerce companies, such as
CMGI and Internet Capital Group, or are affiliated with venture
capital funds with which we may compete, such as Frontenac Company
and GTCR Goldner Rauner.
. We are currently organizing and intend to manage the Big Shoulders
interTech Fund, L.P., a venture capital fund which is being created
to invest in start-up and early-stage Illinois-based companies. We
may have conflicts in allocating opportunities between us and the
fund when acquiring interests in these companies.
. Under an agreement with some of our stockholders who have
representatives on our Board of Directors, we have agreed that
neither these stockholders nor their director representatives will
have any obligation to us, our stockholders or any other party to
present business opportunities to us before presenting them to other
entities, other than opportunities that are presented to these
directors solely in, and as a direct result of, their capacity as
our directors.
In any of these cases:
. our executive officers or directors may have a conflict between our
interests and their personal financial and other interests in the other
business venture;
. our executive officers or directors may have conflicting fiduciary
duties to us and the other entity; or
. the terms of transactions with the other entity may not be subject to
arm's length negotiations and therefore may be on terms less favorable
to us than those which could be procured through arm's-length
transactions.
For specific information regarding transactions between us and parties
related to us, see "Certain Transactions."
11
<PAGE>
In addition, some of the key members of our management team are, and may
continue to be, active in other business pursuits, including those of investing
in, managing and advising a variety of businesses. These officers are not
required to devote their full time to us and will continue to allocate their
time and attention among various business pursuits as they determine in their
discretion.
Our key personnel have entered into non-compete agreements which may prevent us
from engaging in certain activities and acquiring interests in some companies.
Each of our principal executives, other than our President and Chief
Operating Officer, and other of our key employees have entered into consulting
and non-compete agreements with PLATINUM technology International, inc. or
Computer Associates, Inc. that prohibit them from engaging in activities or
businesses which PLATINUM was engaged in as of March 29, 1999. These agreements
may be interpreted in a way that could severely impact our ability to execute
our business strategy. As a result, to manage our business effectively with
respect to these agreements, we have consulted with PLATINUM and Computer
Associates prior to making any acquisition to confirm that it would not result
in a breach of these agreements. If the relevant parties to these agreements
deem our activities or those of any proposed partner company to be prohibited
by these consulting and non-compete agreements, we may not be able to conduct
those activities or acquire interests in that partner company. These consulting
and non-compete agreements may therefore limit our business opportunities,
which could impair our success. For a detailed description of the consulting
and non-compete agreements and the activities prohibited by them, see
"Management--Consulting and Non-compete Agreements."
Our hosting and other network services which we provide to our partner
companies may fail or work improperly due to physical damage, failure of third-
party services or other unexpected problems.
We intend to provide hosting and other information technology services,
including data warehousing and web server and network facilities to support our
partner companies' operations through partner companies that we control. An
unexpected event, such as a power or telecommunications failure, fire or flood,
or physical or electronic break-in, at any of our facilities or server
facilities, could cause a loss of our, and our partner companies', critical
data and prevent us from offering services to our partner companies or
otherwise prevent us or our partner companies from conducting business. Our
business interruption insurance may not adequately compensate us or our partner
companies for losses that may occur. In addition, we rely on third parties to
securely store our data, connect us to the Internet and, at times, house our
web server and network systems. A failure by us or any of these third parties
to provide these services satisfactorily would impair our ability to support
our operations and those of our partner companies and could subject us to legal
claims.
Risks Particular to Our Partner Companies and the B2B E-Commerce Industry
The success of our partner companies depends on the Internet and the wide-
spread acceptance of the B2B e-commerce market, which is uncertain.
Our current partner companies rely, and our future partner companies will
rely, on the Internet for the success of their businesses. The development of
the B2B e-commerce market is in its early stages. If widespread commercial use
of the Internet does not continue to develop, or if the Internet does not
continue to develop as an effective medium for the provision of products and
services, our partner companies may not succeed.
Our success also depends on the development and widespread acceptance of the
B2B e-commerce market. A number of factors could prevent this acceptance,
including:
. the unwillingness of companies to shift from traditional to e-commerce
processes;
. a lack of the necessary network infrastructure for substantial growth in
the use of e-commerce;
12
<PAGE>
. increased government regulation or taxation of e-commerce;
. insufficient availability of telecommunication services or changes in
telecommunication services, resulting in slower response times for users
of e-commerce; and
. concern and adverse publicity about the security of e-commerce
transactions.
Our partner companies may fail if they do not adapt to the rapidly changing e-
commerce marketplace.
Competition for Internet products and services is intense. As the market for
e-commerce grows, we expect that competition will intensify. Barriers to entry
are minimal, and competitors can offer products and services at a relatively
low cost. Our financial and operating success depends on the financial and
operating success of our partner companies. If our partner companies fail to
adapt to rapid changes in technology and customer and supplier demands, they
may not become or remain profitable. We cannot assure you that the products and
services of our partner companies will achieve market acceptance or commercial
success, nor can we assure you that the businesses of our partner companies
will be successful.
The e-commerce market is characterized by:
. rapidly changing technology;
. evolving industry standards;
. frequent new product and service introductions;
. shifting distribution channels; and
. changing customer demands.
Our future success will depend on our partner companies' ability to adapt to
this rapidly evolving marketplace. They may not be able to adequately or
economically adapt their products and services, develop new products and
services or establish and maintain effective distribution channels for their
products and services. If our partner companies are unable to offer competitive
products and services or maintain effective distribution channels, they will
sell fewer products and services and lose revenue, possibly causing us to lose
money. In addition, we and our partner companies may not be able to respond to
the rapid technology changes occurring in Internet products and services in an
economically efficient manner, and our businesses may become or remain
unprofitable.
Many of our partner companies may grow rapidly and may be unable to manage
their growth.
We expect many of our partner companies to grow rapidly. Rapid growth often
places considerable operational, managerial and financial strain on a business.
To successfully manage rapid growth, our partner companies must, among other
things:
. rapidly improve, upgrade and expand their business infrastructures;
. deliver services and products on a timely basis;
. maintain levels of service expected by clients and customers; and
. maintain adequate levels of liquidity.
Our business will suffer if our partner companies are unable to successfully
manage their growth. In addition, many of our partner companies have only
recently begun developing their financial reporting systems and controls. As a
result, these companies may not be able to provide us with their financial
results on a timely basis, which could delay our ability to complete our
financial statements and review our financial position.
Our partner companies' success depends on their ability to retain their key
personnel.
Our partner companies are dependent upon their ability to attract and retain
senior management and key personnel, including trained technical and marketing
personnel. Our partner companies will also need to
13
<PAGE>
continue to hire additional personnel as they expand. A shortage in the
availability of required personnel would limit the ability of our partner
companies to grow and to increase sales of their existing products and services
and launch new products and services.
Our partner companies may not be able to attract a loyal base of consumers to
their web sites or develop relationships with distribution partners, which will
negatively affect their ability to generate revenues.
Some of our partner companies will be particularly dependent on content that
attracts large numbers of Internet users. If these partner companies are unable
to develop Internet content, products or services that attract a loyal user
base, their ability to earn revenues and profits will be impaired. Our success
depends on the ability of these partner companies to deliver compelling
Internet content, products or service to their targeted consumers. Internet
users can freely navigate and instantly switch among a large number of web
sites. Many of these web sites offer original content, products or services,
which may make it difficult for our partner companies to distinguish the
content on their web sites sufficiently to attract a loyal base of users. If
any partner company fails to differentiate itself from other Internet industry
participants, the value of its brand name could decline and its prospects for
future growth would diminish. In addition, our partner companies will need to
develop relationships with entities, such as Internet service providers,
Internet portals and e-commerce web sites, typically called distribution
partners, that can guide or deliver consumers to visit our partner companies'
web sites. There is intense competition for these distribution partners.
Accordingly, maintaining a strong base of distribution partners may be
difficult and costly for our partner companies.
Our partner companies could make business decisions that are not in our best
interests or that we do not agree with, which could impair the value of our
partner company interests.
Although we will generally seek a significant equity interest and
participation in the management of our partner companies, we may not be able to
control significant business decisions of our partner companies. We may have
shared control or no control over some of our partner companies. In addition,
although we currently own approximately 80% of the equity of, and control, each
of the partner companies that we established, we may not maintain this
ownership level or control. Acquisitions of interests in partner companies in
which we share control or have no control or the dilution of our interests in,
and control over, partner companies will involve additional risks that could
cause the performance of our interests and our operating results to suffer,
including:
. management of a partner company having economic or business interests or
objectives that are different than ours; and
. partner companies not taking our advice with respect to the financial or
operating difficulties that they encounter.
Our inability to adequately control our partner companies could prevent us
from assisting them, financially or otherwise, or could prevent us from
liquidating our interests in them at a time or at a price that is favorable to
us. Additionally, to the extent we do not control them, our partner companies
may not collaborate with each other or act in ways that are consistent with our
business strategy. These factors could hamper our ability to maximize returns
on our interests, and cause us to recognize losses on our interests in partner
companies. In addition, a failure to maintain a controlling interest in our
partner companies could subject us to regulation under the Investment Company
Act.
If we are unable or unwilling to provide our partner companies with the
significant additional financing they will need, our interest in them may be
diluted or they may fail.
Most of our current partner companies are in the early stages of their
development. We expect our future partner companies to be similarly situated.
Our partner companies will require significant amounts of additional capital to
compete successfully, meet their business objectives and produce revenues and
profits. We may not be able to accurately predict these capital needs, and we
may or may not decide to provide the additional
14
<PAGE>
capital they require. If our partner companies receive capital from other
sources, our ownership interest may be diluted. If our partner companies are
unable to obtain additional capital, they may fail.
Our partner companies may lose their competitive advantage if they are unable
to protect their proprietary rights or if they infringe on the proprietary
rights of others, and any related litigation could be time consuming and
costly.
Proprietary rights, particularly in the form of trade secrets, copyrights
and patents, will be important to the success and competitive position of many
of our partner companies. The actions that our partner companies take to
protect their proprietary rights may be inadequate. In addition, effective
copyright and trademark protection may be unenforceable or limited in certain
countries and, due to the global nature of the Internet, some of our partner
companies may be unable to control the dissemination of their content and
products and use of their services. Some of our partner companies may also
license content from third parties, and they could become subject to
infringement actions based on this licensed content. In addition, third parties
may claim that our partner companies have violated their intellectual property
rights. For example, companies have recently brought claims regarding alleged
infringement of patent rights relating to methods of doing business over the
Internet. To the extent that any of our partner companies violates a patent or
other intellectual property right of a third party, it may be prevented from
operating its business as planned, and it may be required to pay damages, to
obtain a license, if available, to use the patent or other right or to use a
non-infringing method, if possible, to accomplish its objectives. Any of these
claims, with or without merit, could subject our partner companies to costly
litigation and the diversion of their technical and management personnel. If
our partner companies incur costly litigation and their personnel are not
effectively deployed, the expenses and losses incurred by them will increase,
and their profits, if any, will decrease.
Our partner companies' operations may be disrupted by technological problems.
Our partner companies' businesses will depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
It may be difficult to project the capacity limits on the technology,
transaction processing systems and network hardware and software of our partner
companies or of third parties they rely on. Our partner companies and the third
parties they rely on may not be able to expand and upgrade their systems to
meet increased use. If traffic increases on our partner companies' web sites,
our partner companies will need to expand and upgrade their technology,
transaction processing systems and network hardware and software or find third
parties to provide these services. Our partner companies may be unable to
accurately project the rate of increase in use of their web sites. In addition,
our partner companies may not be able to expand and upgrade their systems and
network hardware and software capabilities to accommodate increased use of
their web sites or find third parties to provide these services. If our partner
companies are unable to appropriately upgrade their systems and network
hardware and software or find third parties to provide these services, their
operations and processes may be disrupted.
If the Internet and broadband do not continue to be reliable commercial
mediums, our partner companies' businesses could be materially adversely
affected.
Continued growth in Internet usage could cause a decrease in the quality of
Internet connection service. Web sites have experienced service interruptions
as a result of outages and other delays occurring throughout the Internet
network infrastructure. If these outages or delays frequently occur in the
future, usage of our partner companies' products and services could grow more
slowly than anticipated or decline. Other high-speed digital delivery systems,
commonly referred to as "broadband," which are designed to facilitate more
reliable and better quality distribution of online products and services, may
not be widely available or used in the foreseeable future. Even if widely
available, these technologies may not lead to an increased reliability of
network infrastructure. Additionally, broadband technologies may not be able to
support the demands placed on them by continued Internet growth.
15
<PAGE>
Concerns regarding security of transactions or the transmission of confidential
information over the Internet or security problems experienced by our partner
companies may prevent them from expanding their businesses or subject them to
legal exposure.
If a partner company does not offer sufficient security features, its online
products and services may not gain market acceptance, and it could be exposed
to legal liability. Despite the measures that may be taken by our partner
companies, the infrastructure of each of them will be potentially vulnerable to
physical or electronic break-ins, viruses or similar problems. If a person
circumvents the security measures imposed by our partner companies, that person
could misappropriate proprietary information or cause interruptions in the
operations of the partner company. Security breaches that result in access to
confidential information could damage the reputation of any one of our partner
companies and expose the partner company affected to a risk of loss or
liability. Some of our partner companies may be required to make significant
investments and efforts to protect against or remedy security breaches.
Additionally, as e-commerce becomes more widespread, our partner companies'
customers may become more concerned about security. If our partner companies
are unable to adequately address these concerns, they may be unable to sell
their goods and services.
Future government regulation could place financial burdens on the businesses of
our partner companies.
As of the date of this prospectus, there are few laws or regulations
directed specifically at e-commerce. However, because of the Internet's
popularity and increasing use, new laws and regulations may be adopted. These
laws and regulations may cover issues such as the collection and use of data
from web site visitors, including the placing of small information files, or
"cookies," on a user's hard drive to gather information, privacy issues,
pricing, taxation, content, copyrights, online gambling, distribution and
quality of goods and services. The enactment of any additional laws or
regulations, including international laws and regulations, could impede the
growth of the Internet and B2B e-commerce or reduce the effectiveness of our
partner companies' technology, which could decrease the revenue of our partner
companies and place additional financial burdens on our business and the
businesses of our partner companies.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. Although some of these laws may not
have a direct adverse effect on our business or those of our partner companies,
they add to the legal and regulatory burden faced by e-commerce companies. For
a more detailed discussion of the laws and regulations applicable to our
business and our partner companies' business, see "Business--Government
Regulation."
Risks Relating to the Offering
Our founding stockholders can control matters requiring stockholder approval
because they own a large percentage of the voting power of our common stock,
and they may vote in a way with which you do not agree.
After this offering, Andrew J. Filipowski, Michael P. Cullinane, Paul L.
Humenansky, Larry S. Freedman, Thomas A. Slowey, Paul A. Tatro and their
affiliates will together own shares of our class B common stock,
which is entitled to ten votes per share. Therefore, in the aggregate, these
founding stockholders will hold approximately % of the voting power of our
capital stock after this offering. As a result, these stockholders will,
together, have the ability to exercise a controlling influence over our
business and corporate actions requiring stockholder approval, including the
election of our directors, a sale of substantially all of our assets, a merger
with another entity or an amendment to our certificate of incorporation. This
concentration of ownership and voting power could delay, defer or prevent a
change of control and could adversely affect the price that investors might be
willing to pay in the future for shares of our class A common stock.
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<PAGE>
The market price of our class A common stock may fluctuate widely and you may
not be able to sell your shares at or above the initial public offering price.
The initial public offering price for our class A common stock will be
negotiated between us and the underwriters and may not be indicative of the
market price that will prevail after this offering. We believe the following
factors could cause the market price of our class A common stock to fluctuate
widely and could possibly cause our class A common stock to trade at a price
below the initial public offering price:
. announcements of acquisitions of interests in B2B e-commerce companies
or strategic relationships by us or our competitors;
. announcements of new services, products, technological innovations,
acquisitions or strategic relationships by our partner companies;
. trends or conditions in the Internet industry;
. our inability to avoid regulation under the Investment Company Act;
. changes in valuation estimates by securities analysts and in analyst
recommendations;
. variations in the operating results of our partner companies;
. changes in the stock prices of our partner companies that are publicly
traded;
. changes in market valuations of other capital and service providers for
Internet companies; and
. general political, economic and market conditions.
Many of these factors are beyond our control. These factors may decrease the
market price of our class A common stock regardless of our operating
performance.
The market price for our class A common stock may also be affected by our
ability to meet or exceed expectations of analysts or investors. Any failure to
meet these expectations, even if minor, could materially adversely affect the
market price of our class A common stock. In addition, the market prices of
equity securities of companies in the Internet industry often fluctuate
significantly for reasons unrelated to the operating performance of these
companies. We expect to be particularly susceptible to such volatility because
we may be valued in the future on the basis of a number of minority interests
we hold in public Internet companies. The trading prices of many Internet
companies have reached historical highs within the last 52 weeks and have
reflected relative valuations substantially above historical levels. During the
same period, these companies' stocks have also been highly volatile and have
recorded lows well below such historical highs. Our class A common stock may
not trade at the same levels as other Internet-related stocks, and Internet-
related stocks in general may not sustain their current market prices. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against that company. If any securities litigation is initiated against us, we
could incur substantial costs and our management's attention and resources
could be diverted from our business.
You will suffer immediate dilution in the value of your shares and may suffer
further dilution in the future.
Investors purchasing shares in this offering will incur immediate and
substantial dilution in net tangible book value per share. To the extent
outstanding options to purchase class A common stock are exercised, there will
be further dilution. In addition, other elements of our founder and employee
compensation arrangements may cause dilution to investors in our class A common
stock. We may issue shares of our class A common stock, or debt or equity
securities convertible into our class A common stock, in the future to raise
capital to carry out our business strategy of establishing and acquiring
interests in partner companies, and may issue these shares or convertible
securities as consideration in our acquisitions of interests of partner
companies. These issuances may cause further dilution to our stockholders. For
additional information regarding this dilution, see "Dilution" and
"Management--Executive Compensation."
17
<PAGE>
Provisions in our charter, our by-laws and Delaware law could delay or deter
tender offers or takeover attempts that may offer you a premium, which could
adversely affect our stock price.
Various provisions in our certificate of incorporation and by-laws could
make it more difficult for a third party to acquire control of us, even if the
change in control would be beneficial to you. The existence of these provisions
may deprive you of an opportunity to sell your shares at a premium over
prevailing prices. The potential inability of our stockholders to obtain a
control premium could adversely affect the market price for our class A common
stock. For a more detailed description of these provisions, see "Description of
Capital Stock."
Our stock price may decline if a large number of shares are sold after this
offering or there is a perception that these sales may occur.
The market price of our class A common stock could decline as a result of
sales of a large number of shares of our class A common stock by our
stockholders in the market after this offering, or the perception that these
sales could occur. These factors also could make it more difficult for us to
raise funds through future offerings of our equity securities. For a more
detailed discussion regarding potential sales of shares after this offering,
see "Shares Eligible for Future Sale."
Because an active trading market for our class A common stock may not develop
after this offering, it may be difficult for you to sell your shares.
There was no public market for our class A common stock before this
offering. We do not know the extent to which investor interest in us will lead
to the development of a trading market or how liquid that market might be. If
an active and liquid trading market does not develop, you may have difficulty
selling your shares.
We will have broad discretion in using the proceeds from this offering and may
not use them in a manner stockholders would prefer.
We have not identified specific uses for most of the proceeds from this
offering, and we will have broad discretion in how we use them. In addition, we
are unable to determine how much of the proceeds will be used for any
identified purpose because circumstances regarding our planned uses of the
proceeds may change. You will not have the opportunity to evaluate the
economic, financial or other information on which we base our decisions on how
to use the proceeds. The failure of our management to apply the funds
effectively could have a material adverse effect on our business and financial
performance.
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<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements that reflect our current
expectations and projections about our future results, performance, prospects
and opportunities. We have tried to identify these forward-looking statements
by using words such as "may," "will," "expect," "anticipate," "believe,"
"intend," "estimate" and "continue" and similar expressions. These forward-
looking statements are based on information currently available to us and are
subject to a number of risks, uncertainties and other factors that could cause
our actual results, performance, prospects or opportunities to differ
materially from those expressed in, or implied by, these forward-looking
statements. These risks, uncertainties and other factors include:
. our need to continue to identify and acquire interests in suitable
partner companies;
. the intense competition among capital providers to acquire interests in
B2B e-commerce companies;
. existing and future regulations affecting our business, the businesses
of our partner companies or the Internet generally; and
. other factors set forth under "Risk Factors" in this prospectus.
You should not place undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason after the date of this prospectus.
CAUTIONARY NOTE REGARDING STATISTICAL DATA
This prospectus contains statistical data regarding, among other things,
venture capital investing in the United States, the past and projected growth
of B2B online commerce and market sizes of business segments. We have taken
this data from information published by sources specializing in research of the
relevant subject matter. However, this data is by its nature imprecise, and we
caution you not to unduly rely on it.
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the class A common stock
we are offering, assuming an initial public offering price of $ per
share, will be approximately $ million. If the underwriters exercise
their over-allotment option in full, our net proceeds will be approximately
$ . Our net proceeds are what we expect to receive after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. We intend to use these net proceeds to acquire interests in and
establish partner companies and for general corporate and working capital
purposes. Pending these uses, we will invest the net proceeds of this offering
primarily in cash equivalents or direct or guaranteed obligations of the United
States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends in the foreseeable future. We plan to
retain all future earnings, if any, to finance our establishment of, and
acquisitions of interests in, partner companies and for general corporate
purposes. Any future determination as to the payment of dividends will be at
our Board of Directors' discretion and will depend on our financial condition,
operating results, current and anticipated cash needs, plans for expansion and
other factors that our Board of Directors considers relevant.
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<PAGE>
CAPITALIZATION
The table below shows our cash and cash equivalents and total capitalization
as of September 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect (1) the sale of an additional
296,241,159 shares of convertible preferred stock at $1.00 per share
from October through December of 1999 and our receipt of the net
proceeds from these sales, assuming $300,000 of expenses associated
with the offerings, (2) our acquisitions of interests in partner
companies from October through December 10, 1999, as if these events
had occurred on September 30, 1999; and
. on a pro forma, as adjusted basis to reflect (1) a for
reverse split of our class A common stock and class B common stock to
be effected before the completion of this offering, (2) the
conversion of our convertible preferred stock into shares
of our class A common stock and shares of class B common
stock to be effected before the completion of this offering and (3)
our issuance and sale in this offering of shares of our class A
common stock at an assumed initial public offering price of $ per
share, and our receipt of the net proceeds of this offering, after
deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us, as if these events had
occurred on September 30, 1999.
You should read this table along with our financial statements and the
related notes included in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------
Pro Pro Forma,
Actual Forma As Adjusted
-------- -------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash and cash equivalents.................. $114,294 $369,448 $
======== ======== =======
Stockholders' equity:
Preferred stock, $.001 par value,
350,000,000 shares authorized and
160,619,566 convertible shares issued
and outstanding, actual; 700,000,000
shares authorized and 456,860,725
convertible shares issued and
outstanding pro forma; and
shares authorized and no shares issued
and outstanding, pro forma, as adjusted. $ 161 $ 457
Class A common stock, $.001 par value,
400,000,000 shares authorized and
20,700,000 shares issued and
outstanding, actual; 900,000,000 shares
authorized and 20,700,000 shares issued
and outstanding pro forma; and
shares authorized and
shares issued and
outstanding, pro forma, as adjusted..... 21 21
Class B common stock, $.001 par value,
100,000,000 shares authorized and
12,250,000 shares issued and
outstanding, actual and pro forma;
shares authorized and
shares issued and
outstanding, pro forma, as adjusted..... 12 12
Additional paid-in capital................. 113,286 408,931
Accumulated deficit........................ (1,474) (1,474)
-------- -------- -------
Total stockholders' equity............. 112,006 407,947
-------- -------- -------
Total capitalization................. $112,006 $407,947 $
======== ======== =======
</TABLE>
The pro forma, as adjusted number of issued and outstanding shares of our
class A common stock excludes:
. shares issuable upon the exercise of stock options outstanding
on December 10, 1999 with a weighted average exercise price of $
per share;
. shares reserved for grants that we may make in the future
under our stock incentive plan; and
. shares issuable upon conversion of shares of class B
common stock.
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<PAGE>
DILUTION
As of September 30, 1999, after giving effect to (1) an increase in our
total assets to reflect our receipt of $295,941,159 of net proceeds from our
sale of 296,241,159 shares of our convertible preferred stock in October
through December 1999 and (2) the addition of shares of our common stock
issuable upon conversion of those shares, our pro forma net tangible book value
was approximately $408 million, or $ per share. Our pro forma net tangible
book value is our pro forma total assets minus the sum of our liabilities and
intangibles assets. Our pro forma net tangible book value per share is our pro
forma net tangible book value divided by the pro forma total number of shares
of our common stock outstanding. Dilution in pro forma net tangible book value
per share to new investors represents the difference between (1) the assumed
price at which we sell each share of our class A common stock in this offering,
and (2) the pro forma net tangible book value per share immediately following
the completion of this offering.
As of September 30, 1999, after giving effect to (1) an increase in our
total assets to reflect our receipt of $ of estimated net proceeds from
the sale of shares of class A common stock in this offering, at an
assumed initial public offering price of $ per share and following the
deduction of estimated underwriting discounts and commissions and estimated
offering expenses payable by us, and (2) the addition of those shares of class
A common stock, our pro forma net tangible book value would have been $
million, or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an
immediate and substantial dilution of $ per share to new investors
purchasing shares of class A common stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price per share........ $
---
Pro forma net tangible book value per share as of
September 30, 1999 without giving effect to this
offering.............................................. $
Increase per share attributable to new investors.......
-------
Pro forma net tangible book value per share as of
September 30, 1999 after giving effect to this
offering..............................................
--------
Dilution in pro forma net tangible book value per share
to new investors...................................... $
========
</TABLE>
The following table shows the difference, on a pro forma basis as of
September 30, 1999, between existing stockholders and new investors in this
offering with respect to the number of shares of common stock purchased from
us, the total consideration paid to us and the average price paid per share,
assuming an initial public offering price of $ per share and before
deducting estimated underwriting discounts and commissions and estimated
offering expenses, giving effect to the conversion of all outstanding shares of
convertible preferred stock into our common stock.
<TABLE>
<CAPTION>
Shares
Purchased Total Consideration Average
--------------- -------------------- Price
Number Percent Amount Percent Per Share
------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... % $410,247,725 % $
New investors.................
------- ----- ------------ ----- ------
Total..................... 100.0% $ 100.0% $
======= ===== ============ ===== ======
</TABLE>
These calculations do not give effect to shares of class A common
stock issuable upon the exercise of outstanding options at a weighted average
exercise price of $ as of September 30, 1999. To the extent any of these
options are exercised, there will be further dilution to new investors.
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<PAGE>
SELECTED FINANCIAL DATA
In this section, we present our selected financial data. You should read
carefully the financial statements in this prospectus, including the notes to
these financial statements. The selected data in this section is not intended
to replace these financial statements. We derived the statement of operations
data and the balance sheet data from our audited financial statements included
in this prospectus. Those statements were audited by KPMG LLP, independent
public accountants. Our results of operations for the period from May 7, 1999,
our inception, to September 30, 1999 are not necessarily indicative of the
results we may achieve in the future.
<TABLE>
<CAPTION>
Period from May 7, 1999
(Inception) to
September 30, 1999
-----------------------
(in thousands,
except share and
per share data)
<S> <C>
Statement of Operations Data:
Revenues............................................. $ 17
Total operating expenses............................. 1,490
Total other expense.................................. (1)
Net loss............................................. (1,474)
Basic and diluted net loss per share................. (0.23)
Shares used in computing basic and diluted net loss
per share........................................... 6,695,918
<CAPTION>
As of
September 30, 1999
-----------------------
<S> <C>
<CAPTION>
(in thousands)
<S> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $ 114,294
Working capital...................................... 111,846
Total assets......................................... 116,050
Total stockholders' equity........................... 112,006
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion along with our financial statements
and the related notes included in this prospectus. This discussion contains
forward-looking statements that are subject to risks, uncertainties and
assumptions, including those discussed under "Risk Factors." Our actual results
may differ materially from those expressed in, or implied by, these forward-
looking statements. See "Cautionary Note Regarding Forward-Looking Statements."
Overview
We were incorporated on May 7, 1999 and began operations on June 30, 1999.
We actively engage in B2B e-commerce through our community of partner
companies. To date, we have only engaged in start-up activities, acquired
interests in or established our initial partner companies and analyzed and
engaged in discussions with other potential partner companies. Because we had
not established or acquired interests in partner companies prior to September
30, 1999, none of the results of our partner companies are reflected in our
historical operating results.
Because we acquire significant interests in B2B e-commerce companies, many
of which generate net losses, we expect to experience significant volatility in
our quarterly results. We do not know if we will report net income in any
period, and we expect that we will report increasing net losses for the
foreseeable future. Although our partner companies may report net losses in the
future, we may record net income in certain periods due to one-time
transactions and other events incidental to our ownership interests in, and
advances to, partner companies. These one-time transactions may include
dispositions of, or changes to, our partner company ownership interests,
dispositions of our holdings of available-for-sale securities and impairment
charges.
On a continuous basis, but no less frequently than at the end of each
quarterly reporting period, we will evaluate the carrying value of our
ownership interests in, and advances to, each of our partner companies for
possible impairment based on achievement of business plan objectives and
milestones, the fair value of each ownership interest and advance in the
partner company relative to carrying value, the financial condition and
prospects of the partner company, and other relevant factors. The business plan
objectives and milestones we will consider include, among others, those related
to financial performance, such as achievement of planned financial results and
completion of capital raising activities, and those that are not primarily
financial in nature, such as the launching of a web site, the hiring of key
employees, the number of people who have registered to be part of the partner
company's web community and the number of visitors to a web site per month. The
fair value of our ownership interests in, and advances to, privately held
partner companies will generally be determined based on the prices paid by
third parties for ownership interests in the partner company, to the extent
third party ownership interests exist, or based on the achievement of business
plan objectives and the milestones described above. Our quarterly valuations
will be used to determine our ability to continue to avoid regulation under the
Investment Company Act.
The presentation and content of our financial statements is largely a
function of the presentation and content of the financial statements of our
partner companies. To the extent our partner companies change the presentation
or content of their financial statements, as may be required upon review by the
Securities and Exchange Commission or changes in accounting standards, the
presentation and content of our financial statements may also change.
Because many of our partner companies are not majority-owned subsidiaries,
changes in the value of our interests in our partner companies, and the income
or loss and revenue attributable to them, could subject us to regulation as an
investment company under the Investment Company Act unless we take action to
avoid
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<PAGE>
regulation. However, we believe that we can take steps to avoid being regulated
as an investment company that would not adversely affect our operations or
stockholder value.
We also receive management fees from venture capital funds that we manage.
As general partner of Platinum Venture Partners I, we receive an annual
management fee, payable in advance in quarterly installments, of 2 1/2% of the
fair market value of the partnership, adjusted annually by the increase in a
consumer price index during the preceding calendar year. As general partner of
Platinum Venture Partners II, we receive an annual management fee, payable in
advance in quarterly installments, of 2 1/2% of the aggregate partner
commitments, adjusted annually by the percentage increase in a consumer price
index during the preceding calendar year. We received a total of approximately
$275,000 from Platinum Venture Partners I and II on October 1, 1999 for fourth
quarter 1999 management fees. In 2000, we expect to receive a total of
approximately $775,000 in management fees from Platinum Venture Partners I and
II.
In addition, we are currently organizing and expect to manage the Big
Shoulders interTech Fund. As manager of this fund, we expect to be entitled to
receive an annual management fee of 2% of the total capital committed to the
fund during its first six years. We expect that this management fee will then
be reduced by 10% each year until the termination of the fund. In addition,
with respect to each interest in a company acquired by the fund, we expect to
be entitled to receive 20% of all distributions in relation to that interest,
after the partners in the fund have received a return of their invested capital
in that company. If, upon liquidation of the fund, the partners fail to receive
a return of all of their capital contributed to the fund, we expect to be
obligated to contribute an amount equal to the deficiency, not to exceed the
total amount of these distributions received by us.
Effect of Various Accounting Methods on the Consolidated Financial Statements
The various interests that we acquire in our partner companies are accounted
for under three methods: consolidation, equity method or cost method. We
determine the method of accounting for our partner companies on a case by case
basis based upon our ownership percentage in each partner company, as well as
our degree of influence over each partner company.
Consolidation. Partner companies in which we own, directly or
indirectly, more than 50% of the outstanding voting securities are
generally accounted for under the consolidation method of accounting. Under
this method, a partner company's results of operations are reflected within
our consolidated statements of operations. Earnings or losses attributable
to other stockholders of a consolidated partner company are identified as
"minority interest" in our consolidated statements of operations. Minority
interest adjusts our consolidated net results of operations to reflect only
our share of the earnings or losses of a partner company.
Equity Method. Partner companies in which we own 50% or less of the
outstanding voting securities, but over which we exercise significant
influence, are generally accounted for under the equity method of
accounting. Whether or not we exercise significant influence with respect
to a partner company depends on an evaluation of several factors including,
among other things, representation on the partner company's board of
directors, ownership percentage and voting rights associated with our
holdings in the partner company. Under the equity method of accounting, a
partner company's results of operations are not reflected within our
consolidated operating results. However, our share of the earnings or
losses of that partner company is identified as "equity income (loss)" in
our consolidated statements of operations.
The net effect of a partner company's results of operations on our
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because under each
of these methods only our share of the earnings or losses of a partner
company is reflected in the net results of operations in our consolidated
statements of operations. However, the presentation of the consolidation
method differs dramatically from the equity method of accounting. The
consolidation method presents partner company results throughout the
applicable line items within our financial statements. In contrast, the
equity method of accounting presents partner company results in a single
category, "equity income (loss)," within our financial statements.
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<PAGE>
Cost Method. Partner companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under
the cost method of accounting. Under this method, our share of the earnings
and losses of these companies is not included in our consolidated
statements of operations unless earnings or losses are distributed.
We expect to record our ownership interest in equity securities of our
partner companies accounted for under the cost method at cost, unless the
securities have readily determinable fair values based on quoted market
prices, in which case these interests would be classified as available-for-
sale securities or some other classification in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Our interests in Blueridge, buzz divine, dotspot, eXperience divine, i-
Street, LiveOnTheNet, Sensoria, Synetrics, and Xqsite are consolidated and, to
the extent we maintain our current ownership percentage, will be reflected in
our consolidated statements of operations for future periods. We account for
our interests in OpinionWare, Outtask, Pocketcard, TheExecClub and Whiplash
under the equity method. We use the cost method to account for our interests in
Commerx, comScore, Sequoia, National Transportation Exchange and Neoforma.
The presentation of our financial statements may differ from period to
period if our ownership in any of our partner companies changes significantly.
Our consolidated revenues and related costs and expenses may fluctuate due to
the applicable accounting method used for recognizing our participation in the
operating results of a particular partner company.
Results of Operations
General. We were incorporated in the state of Delaware on May 7, 1999 and
had no substantive operations through June 30, 1999. Our financial results for
the period from May 7, 1999 to September 30, 1999 relate to our initial
organization, infrastructure building and marketing activities.
Revenues. For the period ended September 30, 1999, we generated minimal
revenue of approximately $17,000 from consulting services. We had not yet
acquired interests in any partner companies during this period. Effective as of
August 4, 1999, we became the general partner of Platinum Venture Partners I
and II. In this capacity, beginning in the fourth quarter of 1999, we earn
management fees which are described above.
Selling, General and Administrative Expenses. For the period ended September
30, 1999, we incurred selling, general and administrative expenses of
approximately $1.5 million. These expenses consisted primarily of employee
compensation and related benefits, travel and business development costs and
facilities expenses. We expect that selling, general and administrative
expenses will significantly increase as we hire additional employees and build
our infrastructure to support our growth.
Other Income and Expenses. Other income consisted of approximately $17,000
and other expenses consisted of approximately $18,000 for the period ended
September 30, 1999. Other income related to interest income from our invested
funds while interest expense related to borrowings under our line of credit.
Income Taxes. We have recorded no income tax benefit for the period ended
September 30, 1999. Because we have no history of taxable income through
September 30, 1999, the tax benefit associated with our net loss has been fully
reserved.
Net loss. We reported a net loss of approximately $1.5 million for the
period ended September 30, 1999, principally due to selling, general and
administrative costs we incurred compared to the minimal revenue we earned as a
start-up company.
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<PAGE>
Liquidity and Capital Resources
As of December 10, 1999, we had cash and cash equivalents of approximately
$164,980,000, consisting almost entirely of funds raised in private placements
of securities, an increase of $50,686,000 from $114,294,000 as of September 30,
1999. As of September 30, 1999, we had raised $114,073,616 from sales of shares
of our convertible preferred stock and a nominal amount from sales of our class
A common stock and class B common stock. From October 1 through December 1,
1999, we raised an additional $99,241,159 from sales of additional shares of
our convertible preferred stock. On December 7, 1999, we executed an agreement
to sell additional shares of our convertible preferred stock for $197,000,000.
During the period ended September 30, 1999, we borrowed approximately
$927,000 under a line of credit for ongoing operating expenses. This amount
remained outstanding at September 30, 1999 and was repaid during October 1999.
We are currently negotiating to enter into a $15 million line of credit. We
anticipate that this line of credit will be available for working capital
financing and general corporate purposes other than permanent financing for
acquisitions of interests in partner companies. In addition, our obligations
under our office lease in Lisle are secured by a letter of credit for $442,865
issued by Bank of America.
Through December 10, 1999, we have paid $65,317,208 in the form of cash and
promissory notes to acquire interests in partner companies. We expect that the
amount of cash that we use for acquisitions will increase substantially in
future periods.
Following this offering, we will have cash and cash equivalents, and hold
direct or guaranteed obligations of the United States, totaling at least
$ . We expect that our proceeds from this offering, in addition to the
proceeds we received from our private placements of equity securities, will be
sufficient to fund our cash needs, including cash required for acquisitions of
interests in partner companies, for at least the next 12 months. However,
during this period, we may seek additional capital in the private or public
equity markets to enable us to expand our program of acquiring interests in and
establishing B2B e-commerce companies.
Year 2000 Readiness Disclosure
We are currently addressing the Year 2000 issue, which results from the fact
that many computer programs were previously written using two digits rather
than four to define the applicable year. Programs written in this way may
recognize a date ending in "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculation causing disruptions of
operations.
We began operations on June 30, 1999 and are building our systems to be Year
2000 compliant. We are in the process of implementing a new computer
information system. This implementation is expected to occur during the fourth
quarter of 1999. We do not believe that the implementation of this system will
result in Year 2000 remediation issues. We have not incurred, and do not expect
to incur, any material expense to remediate our systems. If we determine that
any of our non-information technology systems are non-compliant and are at risk
of not being remediated in time, we will develop a contingency plan.
Our partner companies are in various stages of assessing, remediating and
testing their internal systems and assessing Year 2000 readiness of their
vendors, business partners and customers. Our partner companies are also in
varying stages of developing contingency plans to operate in the event of a
Year 2000 problem. The total cost and time which will be incurred by our
partner companies on the Year 2000 readiness effort has not been determined.
There can be no assurance that all necessary work will be completed in time, or
that these costs will not materially adversely impact one or more of our
partner companies. In addition, required spending on the Year 2000 effort will
cause customers of most of our partner companies to reallocate at least part of
their information systems budgets. Although some of our partner companies have
offerings which may be useful in such efforts, these allocations could
materially affect the results of operations of our partner companies.
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Recent Accounting Pronouncements
We do not expect the adoption of any recently issued accounting
pronouncements to have a significant impact on our net results of operations,
financial position or cash flows.
Qualitative and Quantitative Disclosure About Market Risk
At September 30, 1999, we had $114,294,000 in cash and cash equivalents. A
decrease in market rates of interest would have no material effect on the value
of these assets.
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<PAGE>
BUSINESS
You should read the following discussion along with our financial statements
and the related notes included in this prospectus. This discussion contains
forward-looking statements that are subject to risks, uncertainties and
assumptions, including those discussed under "Risk Factors." Our actual results
may differ materially from those expressed in, or implied by, these forward-
looking statements. See "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are actively engaged in business-to-business, or B2B, e-commerce through
our Internet Zaibatsu, a community of partner companies. These companies
collaborate to provide cross-selling and marketing opportunities and support
entrepreneurial initiatives, business growth and the sharing of information and
business expertise. We manage, finance, operate and provide services to our
partner companies, offering a turn-key solution for building successful B2B e-
commerce business.
Industry Background
The Growth of B2B E-Commerce
Businesses are increasingly relying on the Internet to share information and
sell goods and services. Forrester Research, an independent research firm,
estimates that the inter-company trade of goods and services over the Internet,
commonly referred to as B2B e-commerce, will grow from $43.1 billion in 1998 to
$1.3 trillion in 2003. This growth is being driven, in part, by advancements in
Internet-related technology that are enabling companies to reach larger
audiences while reducing sales, marketing and related expenses, and integrating
their systems more efficiently with those of their partners and customers.
Today's Internet-driven economy is increasingly competitive and customer-
oriented. The proliferation of the Internet has enabled businesses to establish
direct relationships with customers. As a result of greater availability of
current pricing information from multiple online vendors and marketplaces,
businesses can continuously compare product and service offerings and improve
their purchasing decisions. To attract and retain customers in this
increasingly competitive environment, businesses have been forced to minimize
distribution inefficiencies and adopt more customer-oriented marketing, order
fulfillment and service solutions. Businesses today must make real-time
inventory adjustments, streamline procurement and distribution processes and
automate the entire selling process. Accordingly, businesses are investing
significant amounts in developing and deploying e-commerce solutions. According
to the Gartner Group, e-business related information technology investments are
expected to account for 50% of the estimated $3.3 trillion in information
technology spending in 2002.
To capitalize on these business trends, a large number of new companies
exclusively devoted to developing B2B e-commerce products and services are
being formed and funded. In addition, traditional businesses are committing
significant resources to deploy e-commerce businesses which may eventually
operate as separate companies. We classify B2B e-commerce companies as either
market makers or infrastructure service providers.
Market Makers: Market makers enable commerce to be conducted more
efficiently and at lower costs by bringing together large numbers of buyers
and sellers in traditional businesses on Internet-based markets where they
can exchange products and services. They also provide web-based community
forums which allow businesses and professionals to share information.
Market makers usually operate in specific industries, capitalizing on
inherently inefficient distribution channels and business processes.
Infrastructure Service Providers: Infrastructure service providers
assist companies in building and managing the technological infrastructure
needed to support B2B e-commerce. Their goal is to maintain and extend
their clients' competitive advantage by allowing companies to focus on
their core
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<PAGE>
competencies, thereby improving operating efficiencies and decreasing time-
to-market. They accomplish these goals by offering systems integration, web
site design and hosting, as well as other outsourced services, such as
legal and accounting services and marketing and public relations expertise.
Operating Challenges Facing Emerging B2B E-Commerce Companies
Today's low barriers to entry and the ability of businesses to market
products on a global basis amplifies first-mover advantage in the B2B e-
commerce market and makes it critical that businesses bring new products and
services to market quickly. To be successful, new B2B e-commerce companies
must:
. identify e-commerce needs and opportunities within targeted industries;
. rapidly develop and effectively market solutions that satisfy specific
industry demands;
. quickly build brand recognition and an online presence to establish
market leadership; and
. secure valuable strategic partnerships.
To build the necessary technology and management infrastructure in a timely
manner, new B2B companies must obtain significant capital and rapidly hire
sales and marketing professionals, web designers, information technology
specialists and administrative personnel. Moreover, because e-commerce
solutions are typically targeted at particular industries with distinct
business practices, distribution channels and product and service needs, new
B2B e-commerce companies also often require the assistance of industry experts.
In today's competitive labor market, they may be unable to locate and hire the
personnel needed to ensure commercial success, or the time and effort required
to hire and integrate available individuals could divert management's attention
from efforts to construct core product or service offerings and bring them to
market. Accordingly, in addition to capital, emerging B2B e-commerce companies
require access to:
. industry experts who can help define and refine their business plans;
. management teams experienced in the day-to-day operations of B2B e-
commerce companies;
. infrastructure services that can reduce costs and time-to-market; and
. a variety of service professionals.
Venture capital firms, the traditional source of capital for emerging
technology companies, have primarily focused on providing capital and have not
offered infrastructure services.
Geographic Concentration of Capital and Services
E-commerce businesses, and the capital and services that support them, have
been principally located in Silicon Valley and the eastern seaboard of the
United States. The rest of the United States, which is home to numerous
traditional manufacturing, retail and service businesses, many major research
institutions and a large pool of intellectual capital, as well as a large
consumer population, has, to date, experienced less e-commerce business
development. We believe that this is due, in large part, to this region being
underserved by capital and infrastructure service providers. According to
VentureSource, a venture capital research firm, $8.5 billion of venture capital
investments were made in U.S. businesses in the third quarter of 1999. Of this
amount, approximately $6.0 billion was invested businesses located in
California, New York, Massachusetts and Virginia, including $4.3 billion
invested in California businesses alone. We believe that this capital
concentration has contributed to the lack of infrastructure services available
outside of these areas, making it more difficult to launch successful
e-commerce start-ups and attract capital.
Our Solution and Strategy
We are focused primarily on partnering with, managing and operating emerging
companies that develop new B2B e-commerce products and services and that can
become leaders in their markets. In addition to providing our partner companies
with capital, we offer them a comprehensive suite of strategic and
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infrastructure services. Our collaborative network of B2B e-commerce companies
creates an environment which supports entrepreneurial initiatives and business
growth.
Exploit Our Resources to Identify Successful Partner Companies
We believe that significant industry and management expertise is required to
understand and forecast industry trends, assess the value and needs of our
partner companies and successfully build market leaders. To that end, we have
assembled a team of senior managers and directors with extensive expertise and
industry knowledge in e-commerce infrastructure software, Internet services and
emerging e-commerce solutions. Members of our senior management managed
PLATINUM, an infrastructure software company which completed over 70
acquisitions between late 1994 and early 1999, and Platinum Venture Partners I
and II, venture capital funds which made over 40 investments between 1992 and
1999. We also intend to capitalize on the industry knowledge, insights and
expertise of the members of our board of directors and representatives of the
corporations and venture capital firms that have invested in us, including Dell
and Microsoft. We believe that our team of senior management, directors and
investors bring us the expertise necessary to review and evaluate new
partnering opportunities.
We intend to fund and manage the Big Shoulders interTech Fund, a venture
capital fund in which the State of Illinois and the City of Chicago, among
others, plan to invest. This venture capital fund will focus on making small,
early stage investments in technology companies located in Illinois. Our
management of this fund will enable us to develop relationships with new
companies early in their development cycle and provide us with a pipeline of
potential new partner companies.
Focus on Partnering with B2B E-Commerce Leaders
We focus on partnering with B2B e-commerce companies that we believe are
positioned to become leaders in their markets. We select partner companies
through a comprehensive screening process that involves the contributions of
business, industry and technical experts. In addition, we use the expertise of
existing partner companies to evaluate new companies. In evaluating these
companies, we analyze the size and growth of their target markets that their
products and services address and assess their ability to achieve commercial
success and gain significant market share. We believe that there are several
key elements to successful B2B e-commerce companies, including compelling
concepts, strong management, technological expertise and competitive advantage.
Provide Valuable Infrastructure and Support Services
We typically take an active role in the affairs of partner companies in
which we acquire a significant interest. We and entities we control offer our
network of partner companies a variety of infrastructure services designed to
reduce their operating costs, enable them to focus on product development and
marketing and accelerate their time to market with new products and services.
We believe that our service offerings enhance our competitive position when
compared with traditional venture capital and other private company investors.
We also sell these services to businesses outside our network of partner
companies. These infrastructure services, which are designed to provide a turn-
key approach to building successful Internet businesses, include:
. Business development and strategic . Real estate services
planning . Recruiting and human resources
. Information management . Sales strategy and support
. Systems integration and information . Online travel management services
technology services . Web site design and deployment
. Professional services
. Marketing and public relations
Our executive team dedicates significant attention to our partner companies,
providing them with strategic guidance on such matters as private financings,
public offerings, market positioning and business development.
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In addition, our executive team offers assistance in evaluating, structuring
and negotiating joint ventures, strategic alliances, joint marketing
agreements, acquisitions and other corporate transactions.
In addition, we assist our partner companies' management with day-to-day
operations. We assign a general manager to each of our partner companies to
offer dedicated operational guidance and resources, refine their business
models, adopt sound business practices and act as our liaison with the partner
company. The general manager also has principal responsibility for ensuring
that the partner company has full access to our wide range of infrastructure
and support services. The general manager assigned to a particular partner
company will generally be the same person who led our initial due diligence
review of that company.
Promote Strategic Relationships and Collaboration among our Partner Companies
We are building our Internet Zaibatsu to help our partner companies gain
significant cross-selling and marketing benefits from participating in a large
network of affiliated companies. We also believe that information sharing
within our Internet Zaibatsu will provide an easily accessible, powerful source
of business experience and technology expertise. In addition, we seek to
leverage the aggregate purchasing power of our network of partner companies to
reduce their individual costs of obtaining third party services and products.
We also intend to capitalize on the industry relationships of members of our
management team and board of directors, as well as the corporations and venture
capital firms that have invested in us, to facilitate strategic partnerships,
technology licensing agreements, distribution arrangements and co-marketing
relationships with other technology companies.
Target Underserved Markets
We partner with companies operating in areas that lack easy access to
capital and infrastructure services. We are initially focusing our efforts in
the midwestern United States. We believe that the large number of traditional
manufacturing, retail and service businesses in these area will provide a large
customer base for our partner companies, as well as a source for potential
partner companies as these traditional businesses develop online divisions and
subsidiaries. By focusing on these underserved areas, we are able to support
existing technical and entrepreneurial talent and identify and acquire
interests in promising early-stage companies, while avoiding the intense
competition faced by capital providers in other parts of the country. We
believe that we will be able to replicate our model in other underserved
markets.
Acquisition Criteria and Screening Process for Partner Companies
We devote significant resources to regularly analyzing and monitoring
developments in the B2B e-commerce industry and identify suitable partner
companies. We identify potential partner companies in a variety of ways,
including referrals from multiple sources, such as our existing partner
companies, board members and the corporations and venture capital firms who
have invested in us, and unsolicited proposals and business plans submitted to
our web site. We also expect to identify potential partner companies through
relationships we establish through management of the Big Shoulders interTech
fund. We have developed acquisition criteria that we believe allow us to
identify attractive B2B e-commerce market makers and infrastructure service
providers. Our screening procedures are designed to ensure that we maximize the
number of opportunities we review and acquire interests in a rapid and
efficient manner.
Acquisition Criteria
We believe that there are several key elements to evaluating the potential
success of a B2B e-commerce company. We focus on companies with one or more of
the following characteristics:
. Compelling Concept. We seek partner companies with compelling, unique
concepts that we believe allow them to address unmet market needs or
establish new market opportunities. We also look for
companies that offer products and services which are sufficiently
developed with respect to design, features, functions and pilot
operations to begin large-scale implementation and execution.
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. Technical Expertise. We look for companies whose technology provides
them with a technological advantage which prevents competitors from
easily entering their market. In addition, we look for companies with
accomplished technical teams that have the skills to bring their concept
to commercial readiness.
. Early Stage of Development. We focus on acquiring interests in early-
stage companies that we believe have the greatest potential for growth
and which can most benefit from services provided by us and the partner
companies that we control. We also believe that our focus on early-stage
companies allows us more flexibility to structure our interests in
companies in a manner consistent with our goal of avoiding regulation
under the Investment Company Act.
. Large Target Market. We seek companies that target large and rapidly
growing markets. The size of the target market and a partner company's
share of that market allows us to determine the potential future value
of that company.
. Favorable Competitive Landscape. We favor companies with strong
competitive positions, as well as industries where there is no dominant
B2B e-commerce participant. As part of our assessment of partner
companies, we evaluate current competitors and potential market
entrants.
. Strong Management Team. We target companies with highly-qualified
management which possess significant e-commerce or specific industry
experience and demonstrate the leadership skills critical to guiding the
strategy and development of an early-stage company.
. Potential for Public Capital. We favor companies which can rapidly reach
the stage of development necessary to complete an initial public
offering.
Screening Process
Our screening process is designed to rapidly identify attractive partner
companies, accurately assess their value and determine their ability to be
integrated into our collaborative network. Our screening process consists of
the following steps:
Initial Screening. A potential partner company is initially required to
complete an on-line questionnaire for review by our finance group. This
questionnaire, which provides us with general information about the
potential partner company's business, state of development, market
opportunity, competitive situation, marketing plan, technical team and
capital and infrastructure service needs, allows us to efficiently identify
opportunities that fit our business model. Suitable opportunities will be
passed on to the due diligence phase of the screening process. We
anticipate that only a small percentage of the potential partner companies
that we review will successfully pass through this stage of our screening
process. Attractive opportunities that come to our attention through
referrals or other direct sources may move directly to the due diligence
phase.
Due Diligence. The next step of our screening process involves a
comprehensive due diligence investigation. A due diligence team with
significant transactional and industry expertise is assigned to each
potential partner company. This team assesses the overall business
opportunity by performing a financial review and valuation, reviewing the
technical capability of the company and conducting more specialized reviews
of areas critical to the potential partner company's success.
Commitment Team Approval. Following the completion of due diligence, our
commitment team, which consists of members of our senior management, as
well as other individuals with finance and acquisition experience, makes a
determination as to whether we will pursue acquiring an interest in a
potential partner company.
If we make a decision to pursue an acquisition, the designated general
manager works with our finance department and the potential partner company to
agree to terms for the transaction. As part of this process, partner companies
that we control make proposals to provide infrastructure and other services to
the potential partner company based on its specific needs.
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Structure of Interests in Partner Companies
Partner Companies in Which We Acquire Interests
Generally, we intend to initially acquire more than a 25% voting equity
interest in each of our partner companies. We generally attempt to structure
our interests in our partner companies so that we are the shareholder holding
the most voting power and otherwise maintain our control position in the
companies. However, we have made, and expect to continue to make, a limited
number of smaller investments in partner companies to the extent this activity
is consistent with our desire to avoid having to register as an investment
company under the Investment Company Act. We also may provide additional
capital as our partner companies grow, thereby increasing our ownership
interest. Whenever possible, we intend to obtain rights of participation in, or
control over, material decisions affecting the partner company, including the
right to approve business plans, mergers and acquisitions, management
compensation, stock and option issuances and corporate borrowings. We also
expect to negotiate for additional rights, including registration rights,
rights of first refusal, buy/sell arrangements, anti-dilution protection and
preemptive rights relating to the partner company's issuance of additional
equity. We will generally have the right to appoint or nominate one or more
members of our management team to our partner companies' boards of directors.
By structuring our transactions in this way, we intend to avoid regulation
under the Investment Company Act. Our efforts to avoid regulation may affect
the acquisitions or disposals of our partner company interests.
Partner Companies We Establish
Several of our infrastructure service partner companies have been
established by us as subsidiaries. Typically, we own 80% of the initial equity
of each subsidiary, and approximately 20% of its initial equity is granted to
our employees and the employees of that subsidiary, subject to transfer
restrictions and repurchase rights which lapse over time. We typically receive
class B common stock entitled to 10 votes per share and employees receive class
A common stock entitled to one vote per share. However, we generally do not
hold more than 90% of the voting power of any of these subsidiaries. We also
intend to establish a pool of options for the benefit of our employees and the
employees of our partner companies. We intend to issue one-half of the options
at the time of formation of each of these subsidiaries. Options granted from
this pool will be exercisable only upon an initial public offering or a change
in control of the subsidiary.
Maximizing Stockholder Value
We anticipate that we will realize returns from our partner company
interests principally through initial public offerings and also through mergers
and sales. Following a public offering, we generally expect to continue to
retain a controlling interest in most of our partner companies. In addition, we
seek to create value for our stockholders by providing them with the
opportunity to participate, through directed share subscription programs, in
the underwritten initial public offerings of partner companies in which we
acquire significant interests. We typically seek the right to purchase, or to
assign to our stockholders the right to purchase, 20% of the shares offered in
each of our partner companies' initial public offerings. Currently, we have
this right with respect to i-Street, OpinionWare, TheExecClub and PocketCard.
In addition, we have the right to purchase, or to assign to our stockholders
the right to purchase, 5% of the common stock offered by Outtask in its initial
public offering. We may offer our stockholders similar opportunities to
participate in the initial public offerings of partner companies that we
establish or which we control. We acquire interests in our partner companies
for the long term. Although we do not anticipate selling our interests in
partner companies in the ordinary course of business, we may, from time to
time, undertake these sales when we believe them to be in our best interests.
Overview of Current Partner Companies
The following table sets forth information about our partner companies. Our
ownership percentage has been calculated as of December 10, 1999, based on the
issued and outstanding common stock of each partner company on a fully diluted
basis, assuming the conversion of all outstanding preferred stock. Each partner
company that we established is marked with an asterisk.
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Market Makers:
<TABLE>
<CAPTION>
Our
Description of Ownership
Company Market Business Percentage
------- ------ -------------- ----------
<C> <C> <S> <C>
Commerx, Inc. Plastics Internet-based 1.0%
procurement and sales of
raw materials, tools and
maintenance and repair
products for the
plastics industry
i-Street, Inc. Media/Business Services Internet community 57.4%
network and content
provider for executives
of start-up companies
with targeted business
development content
The National Freight Transportation Internet-based provider 2.1%
Transportation of cargo capacity. Acts
Exchange, Inc. as broker of excess
shipment capacity,
offering online payment,
invoicing and shipment
tracking services
Neoforma.com, Inc. Healthcare Products Internet-based exchange 2.7%
for the procurement and
sale of medical
products, supplies and
equipment
PocketCard Inc. Business Debit and Provider of debit and 31.2%
Credit Cards credit cards which are
funded and monitored
online to supervise and
control use by employees
and others
TheExecClub.com, Inc. Executive Recruiting Online recruiting 38.7%
application service
provider which offers
proprietary matching
software and content
Whiplash, Inc. Travel Web-based global 22.8%
distribution system
provider for travel
products
</TABLE>
Commerx, Inc. (www.commerx.com) provides vertical online marketplaces
for industrial processors. Its first marketplace of this type is called
PlasticsNet, designed for plastics processors and suppliers. The plastics
industry is particularly well suited for B2B e-commerce due to its high
degree of buyer and seller fragmentation, complex supply chains and the
inefficiencies inherent in its traditional paper-based purchasing process.
Commerx believes that the U.S. plastics market represents approximately
one-quarter of the world-wide market and that there are currently
approximately 20,000 processors and 6,000 suppliers in the U.S. plastics
industry. Commerx launched its "PlasticsNet Marketplace" in May 1999 to
streamline the sourcing and procurement process for plastics products and
services. PlasticsNet offers procurement tools, auction exchange
capabilities, and exhaustive information on products. The PlasticsNet
Marketplace includes an online procurement function, an auction exchange
and industry-related information and technical training. Commerx's
customers include Ashland Chemical, Bayer, Morton International, Hewlett-
Packard, Motorola and Owens-Corning. Commerx derives revenues primarily
through e-commerce transaction fees. Commerx is headquartered in Chicago,
Illinois.
i-Street, Inc. (www.i-streetcentral.com) is a B2B media company and news
portal focused on the Internet and technology businesses in Chicago and the
midwest. i-Street's products include i-StreetCentral.com, a web community
which supports entrepreneurs who are establishing and growing start-up B2B
companies. The i-Street news portal features an Internet Who's Who, a
newsletter covering Internet issues, discussion networks and interviews and
webcasts featuring Internet entrepreneurs. i-Street also has e-commerce
partners that offer products and services to help start-up companies and
small businesses. i-Street currently derives revenues from advertising,
sponsorships and content licensing fees. i-Street is headquartered in
Chicago, Illinois.
The National Transportation Exchange, Inc. (www.nte.net) offers an
electronic marketplace, or e-marketplace, that aggregates suppliers and
buyers of freight transportation capacity. Approximately $467
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billion was spent transporting freight in the United States in 1996,
according to the U.S. Census Bureau. The domestic freight transportation
market is highly fragmented, however, and characterized by supply chain
inefficiencies, under-utilized capacity and low net income margins for
industry capacity providers. NTE's e-marketplace is designed to allow
suppliers to efficiently and effectively sell available unused capacity,
improving yields and reducing buyer costs. NTE currently has over 100
shipper members and 250 member carriers, which operate a total of 200,000
trucks, participating in its e-marketplace. NTE generates revenues
primarily from transaction and placement fees. NTE is headquartered in
Downers Grove, Illinois.
Neoforma.com, Inc. (www.neoforma.com) provides B2B e-commerce services
in the medical products market. Neoforma believes that the worldwide market
for new medical products is approximately $150 billion and is growing at an
estimated 6% per year. In the U.S. alone, there are over 20,000
manufacturers and distributors of medical products, which sell to over
200,000 healthcare providers. There is a high degree of fragmentation
between buyers and sellers in the market for medical supplies and services,
causing severe inefficiencies in medical product and service transactions.
Neoforma uses the Internet to address these inefficiencies, offering three
primary services on its web site:
. The Shop service, which provides a marketplace for new medical
products;
. The Auction service, which provides a marketplace for used or
surplus products; and
. The Plan service, which allows hospital planners to view and
manipulate diagrams and photographs of leading medical facilities
worldwide.
Neoforma has established partnerships with companies such as Dell,
General Electric Medical Systems, Healtheon, Owens & Minor, SAP and
Superior Consultant. Neoforma's principal source of revenue is transaction
fees paid by the sellers of medical products that use the Shop and Auction
services. Neoforma recently filed a registration statement with the SEC
with respect to a proposed initial public offering. Neoforma is
headquartered in Santa Clara, California.
PocketCard Inc. (www.pocketcard.com) provides businesses and individuals
with debit and credit cards which allow real-time funding, control and
reporting over the Internet. PocketCard's product and services are targeted
at the B2B, business-to-consumer and consumer markets, offering efficient
credit and payment solutions and meeting the day-to-day spending and
oversight needs of small and large businesses and families. PocketCard uses
web-based technology which allows for secure real time on-line transactions
and reporting. PocketCard is an approved Independent Service Organization
of Visa and also plans to co-brand its cards with recognized companies.
PocketCard also provides funding, spending and risk management expertise.
PocketCard derives revenues through annual membership and transaction fees,
as well as through online advertising. PocketCard is headquartered in
Lindenhurst, Illinois.
TheExecClub.com, Inc. is developing web database and proprietary profile
matching technologies that will allow businesses, recruiters and
experienced professionals to locate, learn about and contact one another
easily and confidentially through its web site. TheExecClub's software will
screen individuals and identify matching job opportunities and board and
advisory panel positions, based on advanced search criteria and personality
profiles. This technology will be coupled with confidential mailboxes,
optional networking features and a referral network. TheExecClub intends to
derive revenue primarily from registration and advertising fees.
TheExecClub is headquartered in Chicago, Illinois.
Whiplash, Inc. (www.whiplashnow.com) is a web-based global distribution
system which allows travel providers to more effectively market and produce
complex leisure travel reservations. The travel industry is characterized
by high fragmentation between buyers and sellers and a lack of automation.
These characteristics create inefficiencies in the supply chain
distribution for leisure travel services. Whiplash uses the Internet and
its proprietary, web-based global distribution system to address these
inefficiencies. Whiplash's digital marketplace allows travel providers and
travel agents to negotiate deals for product representation and
distribution. This marketplace provides these travel providers and travel
agents with workflow and product aggregation, enabling them to achieve
operational efficiencies. Whiplash software integrates reservations and
combines disparate products from various sources on one
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<PAGE>
itinerary and in real time. Whiplash's primary source of revenue is
transaction fees paid by travel providers. Whiplash is headquartered in
Lisle, Illinois.
Infrastructure Service Providers:
<TABLE>
<CAPTION>
Our
Description of Ownership
Company Market Business Percentage
------- ------ -------------- ----------
<C> <C> <S> <C>
Blueridge Technologies, Incorporated Software Online document storage 100.0%
and retrieval services
and document management
software
buzz divine, inc.* Marketing/Public Marketing and public 80.0%
Relations relations services for
B2B e-commerce companies
comScore, Inc. Online Tracking Tools Web-based consumer 0.8%
and Services tracking service that
analyzes and reports
online consumer behavior
to maximize the
efficiency of Internet
marketing programs
dotspot, inc.* Real Estate Real estate facilities 80.0%
management and office
space provider to
emerging Internet
companies
eXperience divine, inc.* Internet Consulting E-commerce consulting 80.0%
services designed to
assist emerging
companies with strategic
planning and
implementation, from
product development to
business modeling
LiveOnTheNet.com, Inc. Webcasting/Online Proprietary technology 69.5%
Advertising for webcasting live
events online.
Aggregates and delivers
local and national
advertising
OpinionWare.com, Inc. Software Proprietary software 29.0%
designed to allow web
site operators to
conduct real-time
surveys of their
Internet users
OUTTASK.COM, Inc. Business Services Online aggregator of 30.0%
business services
targeted to small to
medium sized companies.
Planned launch of web
site in March 2000
Sensoria, Inc.* IT Services Full-service and co- 80.0%
location Internet
hosting and professional
IT services, including
network design and
systems integration
Sequoia Software Corporation Software Online data acquisition, 8.7%
management and
presentation software
provider
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Our
Description of Ownership
Company Market Business Percentage
------- ------ -------------- ----------
<C> <C> <S> <C>
Synetrics, Inc.* Business Services Professional consulting 80.0%
which assists emerging
Internet companies
establish financial
systems and reporting
infrastructure
Xqsite, Inc.* Web Design Web site design, 80.0%
deployment and strategic
consulting services
provider
</TABLE>
Blueridge Technologies, Incorporated (www.blueridge.com) offers a
knowledge management software product, OPTIX, that provides workflow,
document imaging, text retrieval, document management and control, optical
character recognition and computer output to laser disk technology.
Blueridge's key customers include Federal Express, Northwest Airlines, the
United States Patent Office, JC Penney, The Washington Post, and MIT.
Blueridge generates revenues primarily from product licensing fees.
Blueridge is currently located in Flint Hill, Virginia and is moving its
headquarters to Chicago, Illlinois.
buzz divine, inc. is an integrated marketing firm specializing in
servicing B2B Internet companies. According to Legg Mason Precursor Group,
the biggest expense for e-commerce firms and portals as they attempt to
build brand awareness is marketing, averaging between 60% and 65% of their
revenues. buzz divine offers these companies a broad spectrum of services,
including strategic planning, branding, advertising, direct mail, online
marketing, event marketing, graphic design and public relations. It also
provides research services that are designed to monitor the progress and
effectiveness of a company's marketing efforts. buzz divine generates
revenues primarily from service fees. buzz divine is located in Lisle,
Illinois.
comScore, Inc. (www.comScore.com) provides online consumer behavior data
and related consulting services. comScore uses its proprietary research
software technology to track consumers' online behavior by monitoring web
surfing activities, online purchasing habits and responses to online
advertisements, such as banner ads and marketing e-mail. Using its services
and leveraging its data, comScore's customers can obtain competitive market
intelligence to assist them in investment and marketing decisions. Demand
for Internet marketing research data is growing rapidly as more and more
traditional companies move online. comScore derives revenues primarily from
its syndicated, subscription-based online information services. comScore
maintains headquarters in Reston, Virginia and regional offices in Chicago,
Illinois and Palo Alto, California.
dotspot, inc. intends to develop and lease facilities and provide real
estate services for our partner companies, as well as unaffiliated Internet
start-up companies. dotspot intends to work closely with city governments,
architecture firms, office supply vendors and information technology
providers to create alliances to provide real estate, operations and
technical infrastructure support for its customers. dotspot expects to
derive revenues primarily from fees associated with developing, managing
and leasing facilities, as well as from consulting services. dotspot is
headquartered in Lisle, Illinois.
eXperience divine, inc. provides B2B e-commerce consulting services to
traditional and web-based companies. eXperience divine integrates
management and systems consulting to provide a range of consulting services
for clients that are establishing and building e-commerce businesses.
eXperience divine delivers its services through a series of executive
workshops, which cover innovative business plan creation, alliance
formation and strategy-action and IPO planning. eXperience divine intends
to derive revenues primarily from fixed fee contracts. eXperience divine is
headquartered in Lisle, Illinois.
LiveOnTheNet.com (www.liveonthenet.com) provides streaming video content
as a vehicle to showcase local and national advertisers. Forrester Research
estimates that the national web advertising
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<PAGE>
market will grow from $2.8 billion in 1999 to $22 billion in 2004.
LiveOnTheNet acquires and distributes online live events, such as concerts,
sports and educational programming, and has developed expertise in live
webcasts. It partners with content providers, such as Warner Brothers Music
and the Cannes Film Festival, professional sports leagues and record
labels. National advertisers such as Mercedes, Chevy Trucks, Seagrams and
Discover Card have sponsored its live webcasts and over 10,000 small
business customers use Cornerpost, LiveOnTheNet's online promotion and
advertising platform for small businesses. LiveOnTheNet generates revenues
from advertising fees from local and national firms. LiveOnTheNet is
headquartered in Lisle, Illinois with production studios and operational
centers in Nashville, Tennessee, Atlanta, Georgia and Huntsville, Alabama.
OpinionWare.com, Inc. is developing a technology that allows businesses
to gather and analyze the opinions of large public and private online
communities. OpinionWare's solution is designed to help businesses develop
and manage compelling content and enhance the attractiveness of their web
sites by generating information that enables them to build closer
relationships with their customers. Customers will be able to use
OpinionWare to build public opinion-based online communities, create
additional page impressions, continuously monitor customer satisfaction,
create opinion-driven e-commerce applications, develop targeted marketing
programs and add opinion information to business decision-making
applications. OpinionWare expects to derive revenue primarily from product
license fees, product rental fees from web hosting businesses and
advertising revenue-sharing arrangements. OpinionWare is headquartered in
Chicago, Illinois.
OUTTASK.COM, Inc. intends to provide B2B e-commerce applications and
services to technology and Internet companies. OUTTASK will provide its
customers with a full range of supported, hosted applications. OUTTASK's
primary applications will include sales management, customer resource
management, financials, budgeting, time reporting and expense report
management. Its integrated services will include employee travel, payroll,
PC acquisition, telecommunications and e-mail. OUTTASK intends to derive
revenue primarily from annual subscription fees and transaction fees for
integrated services and on-site implementation consulting support. OUTTASK
is headquartered in Arlington, Virginia.
Sensoria, Inc. provides information technology services for B2B Internet
companies, including hosting, customer service and infrastructure
implementation, such as phone and e-mail systems and Internet connectivity.
Sensoria's products and services are designed to reduce the time required
to identify, develop and implement critical operating technology and
improve the quality, reliability and service levels of technology-based
operations. According to International Data Corporation, the Internet
management and outsourcing market is expected to grow from approximately $1
billion in 1997 to over $6 billion by the year 2003. Sensoria intends to
expand its range of information technology offerings to include other
services, such as knowledge management applications and database design,
management and consulting services. Sensoria expects to derive revenue
primarily from customer fees. Sensoria is headquartered in Lisle, Illinois.
Sequoia Software Corporation (www.sequoiasw.com) provides XML-based
Internet infrastructure software to the corporate portal market. Corporate
portals are proprietary web sites designed to facilitate the sharing of
information and the conduct of business among companies and their customers
and partners. A survey of large corporations recently conducted by the
Delphi Group found that 55% of the companies surveyed were developing a
corporate portal, while another 25% anticipated developing a corporate
portal within the next two years. Existing portal sites are predominantly
custom-built. As a result, Sequoia believes that there is a high demand for
Internet-based software applications that shorten the cost and time
necessary to deploy corporate portals. Sequoia offers two XML-based
products: Sequoia XML Portal Server, a software application for deploying
corporate portals, and Xdex, an XML indexing application for organizing
XML-based data. Sequoia's customers include Baylor Health System, General
Electric, Kaiser Permanente, the State of Texas and Blue Cross Blue Shield,
and its partners include Microsoft, Superior Consulting, General Dynamics,
Impact Innovations and S2 Systems. Sequoia's primary source of revenue is
license and transaction fees from the use of its software. Sequoia is
headquartered in Columbia, Maryland and has offices in Santa Clara,
California and Dublin, Ireland.
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<PAGE>
Synetrics, Inc. intends to offer a suite of integrated accounting and
financial services designed to help small- and mid-sized companies get
their products and services to market quickly. Synetrics' services will
include accounts payable, billing and collections, payroll, project
accounting, general ledger, cash management, stock administration and
purchasing. In addition, Synetrics will assist customers with SEC
reporting, tax matters, financial reporting and strategic planning and
analysis. Synetrics expects to derive revenues primarily from customer
fees. Synetrics is headquartered in Lisle, Illinois.
Xqsite, Inc. provides web site design, deployment and implementation
solutions designed to help B2B e-commerce companies use the Internet to
gain competitive advantages. Xqsite uses its expertise in system and asset
integration to provide customized, technologically sophisticated e-commerce
solutions and internet applications. Xqsite leverages integrated strategy,
design and technology with a development methodology to deliver a cohesive
end-to-end customized e-commerce solution. Xqsite's primary source of
revenue is expected to be contract service fees. Xqsite is headquartered in
Lisle, Illinois.
Management of Venture Capital Funds
Big Shoulders interTech Fund. We are currently organizing and intend to
manage the Big Shoulders interTech Fund, L.P., through a wholly-owned
subsidiary as the fund's general partner. Big Shoulders interTech Fund, a
venture capital fund, is being created to invest in start-up and early-stage
Illinois-based technology and e-commerce companies. We expect to provide $4
million of capital to the fund. With respect to each interest in a company
acquired by the fund, we expect to be entitled to receive 20% of all
distributions in relation to that interest, after the partners in the fund have
received a return of their invested capital in that company. If, upon
liquidation of the fund, the partners fail to receive a return of all of their
capital contributed to the fund, we expect to be obligated to contribute an
amount equal to the deficiency not to exceed the total amount of these
distributions received by us. We also expect to be entitled to receive an
annual management fee of 2% of the total capital committed to the fund during
the first six years of the fund. We expect that this management fee will then
be reduced by 10% each year until the termination of the fund. We believe that
our management of this fund will enable us to develop relationships with new
companies early in their development cycles and provide us with a pipeline of
potential new partner companies for our Internet Zaibatsu.
Platinum Venture Partnerships. On August 4, 1999, we became the general
partner of Platinum Venture Partners I and Platinum Venture Partners II. We
manage the operations of these venture capital funds and provide strategic and
operational support to the funds' portfolio companies. However, because the
funds have raised and invested all of their authorized capital, we will not be
making investment decisions on their behalf.
For more information on the management fees we receive from these funds, see
"Management Discussion and Analysis of Financial Condition--Overview."
Competition
Competition for Partner Companies
We face competition from numerous other capital providers seeking to acquire
interests in Internet-related businesses, including:
. publicly-traded Internet companies;
. venture capital companies, including those who have invested in us and
those that we manage;
. large corporations, including those who have invested in us;
. other capital providers who also offer support services to companies;
and
. our partner companies.
Traditionally, venture capital and private equity firms have dominated
investments in emerging technology companies, and many of these types of
competitors may have greater experience and financial resources than
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<PAGE>
us. In addition to competition from venture capital and private equity firms,
several public companies such as CMGI, Internet Capital Group and Safeguard
Scientifics, as well as private companies such as Idealab!, devote significant
resources to providing capital together with other resources to Internet
companies. Additionally, corporate strategic investors, including Fortune 500
and other significant companies, are developing Internet strategies and
capabilities. Many of these competitors have greater financial resources and
brand name recognition than we do, and the barriers to entry for companies
wishing to provide capital and other resources to entrepreneurs and their
emerging technology companies are minimal. We expect that competition from both
private and public companies with business models similar to our own will
intensify. Furthermore, private venture capital firms and other capital
providers who also offer support services to companies who do not plan to go
public can avoid regulation under the Investment Company Act either by having
less than 100 beneficial owners of their securities, other than short-term
paper, or by limiting the owners of their securities to certain qualified
purchasers. This exemption from the Investment Company Act will provide these
competitors with more flexibility regarding their investment strategies,
allowing them to take advantage of more opportunities or, in some cases,
permitting them to invest in companies on more favorable terms to the companies
than we are able to offer. Any of these competitors could limit our
opportunities to acquire interests in new partner companies. If we cannot
acquire controlling interests in attractive companies, our strategy to build a
collaborative network of partner companies will not succeed.
Competition Facing our Partner Companies
Competition for Internet products and services is intense. As the market for
business-to-business e-commerce grows, we expect that competition will
intensify. Barriers to entry are minimal, and competitors can offer products
and services at a relatively low cost. Our partner companies will compete for a
share of a customer's:
. purchasing budget for services, materials and supplies with other online
providers and traditional distribution channels;
. dollars spent on consulting services with many established information
systems and management consulting firms; and
. advertising budget with online services and traditional off-line media,
such as print and trade associations.
Our partner companies will encounter competition from existing companies
that offer competitive solutions and additional companies that develop
competitive solutions in the future. Our partner companies' competitors may
develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our partner companies. If our
partner companies are unable to compete successfully against their competitors,
our partner companies may fail. In addition, our partner companies may compete
with each other for B2B e-commerce opportunities. If this type of competition
develops, it may deter companies from partnering with us and limit our business
opportunities.
Many of our partner companies will have to compete against companies with
greater brand recognition and greater financial, marketing and other resources.
Our partner companies may be at a disadvantage in responding to their
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives.
Government Regulations and Legal Uncertainties
Investment Company Act of 1940
Companies that are, or hold themselves out to be, engaged primarily in the
business of investing, reinvesting or trading of securities are regulated under
the Investment Company Act of 1940. Although we believe that we are actively
engaged in the business of B2B e-commerce and are not an investment company, we
may, in the future, rely on an SEC rule that allows us to avoid investment
company regulation so long as at
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least 55% of our total assets are represented by, and at least 55% of our
income is derived from, majority-owned subsidiaries, primarily controlled
companies and other assets that meet the requirements of that rule. To maintain
compliance with this rule, we may be unable to sell assets which we would
otherwise want to sell and may need to sell assets which we would otherwise
want to retain. In addition, we may have to acquire additional income or loss
generating assets that we might not otherwise have acquired and may need to
forego opportunities to acquire interests in attractive companies that might be
important to our business strategy. In addition, because our partner companies
may not be majority-owned subsidiaries or primarily controlled companies either
when we acquire interests in them or at later dates, changes in the value of
our interests in our partner companies and the income/loss and revenue
attributable to our partner companies could require us to register as an
investment company. Investment Company Act regulations are inconsistent with
our strategy of actively managing, operating and promoting collaboration among
our network of partner companies, and it is not feasible for us to operate our
business as a registered investment company. We believe that because of the
planned structure of our interests in our partner companies and our business
strategy, we will not be regulated under the Investment Company Act. However,
we cannot assure you that the structure of our partner company interests and
our business strategy will preclude regulation under the Investment Company
Act, and we may need to take specific actions which would not otherwise be in
our best interests to avoid such regulation.
If we fall under the definition of an investment company, and are unable to
rely on an SEC rule that would allow us to avoid investment company regulation
so long as at least 55% of our total assets are represented by, and at least
55% of our income is derived from, assets that meet the requirements of that
rule, we can rely on another SEC rule that would exempt us for up to one year
from the requirement of registering as an investment company. After that one-
year period, we must either register under the Investment Company Act or seek
an administrative exemption from regulation under the Investment Company Act.
We may seek that relief even while we are in compliance with this SEC rule in
order to obtain greater assurance that we will not be regulated under the
Investment Company Act.
The SEC has recently granted special exemptive relief to a company that
operates a business that is, in many respects, similar to ours. We expect to
apply for a similar exemption. Although we believe that the facts surrounding
our exemption request would be similar to those submitted by that company, the
granting of such an exemption is a matter of SEC discretion and, therefore, we
cannot assure you that, if requested, an exemption of this type would be
granted to us.
If, despite our efforts, we were required to register as an investment
company, we would have to comply with substantive requirements under the
Investment Company Act applicable to registered investment companies. These
requirements include:
. limitations on our ability to borrow;
. limitations on our capital structure;
. restrictions on acquisitions of interests in partner companies;
. prohibitions on transactions with affiliates;
. restrictions on specific investments; and
. compliance with reporting, record keeping, voting, proxy disclosure and
other rules and regulations.
These rules and regulations would significantly change our operations and
prevent us from executing our business model.
Other Regulations and Legal Uncertainties
As of the date of this prospectus, there were few laws or regulations
directed specifically at e-commerce. However, because of the Internet's
popularity and increasing use, new laws and regulations may be adopted. These
laws and regulations may cover issues such as the collection and use of data
from web site visitors and related privacy issues, pricing, content,
copyrights, online gambling, promotions and sweepstakes, distribution
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and quality of goods and services, registration of domain names and use, export
and distribution of encryption technology. The enactment of any additional laws
or regulations may impede the growth of the Internet and B2B e-commerce, which
could decrease the revenues of our partner companies and place additional
financial burdens on them.
E-commerce businesses are subject to the same numerous laws affecting
interstate commerce in general. However, the application of these laws to
online business is sometimes unclear. Laws and regulations directly applicable
to e-commerce and Internet communications are becoming more prevalent. For
example, Congress recently enacted laws regarding online copyright infringement
and the protection of information collected online from children. Although
these laws may not have a direct adverse effect on our business or those of our
partner companies, they add to the legal and regulatory burden faced by B2B e-
commerce companies. Other specific areas of legislative activity include:
. Taxes. Congress has enacted a three-year moratorium, ending on October
21, 2001, on the application of discriminatory, multiple or special
taxes by the states on Internet access or on products and services
delivered over the Internet. Additionally, the moratorium prevents the
states from creating new collection obligations with respect to
otherwise valid taxes in the context of e-commerce. Congress further
declared that there will be no federal taxes on e-commerce until the end
of the moratorium. However, this moratorium does not prevent states from
taxing activities or goods and services that the states would otherwise
have the power to tax. Furthermore, the moratorium does not apply to
state taxes that were in place before the moratorium was enacted. The
moratorium also does not affect federal and state income taxes on the
taxable income of e-commerce businesses.
. Online Privacy. Both Congress and the Federal Trade Commission are
considering regulating the extent to which companies should be able to
use and disclose information they obtain online from consumers. If any
regulations are enacted, B2B commerce companies may find marketing
activities restricted. Also, the European Union has directed its member
nations to enact much more stringent privacy protection laws than are
generally found in the United States, and has threatened to prohibit the
export of certain personal data to United States companies if similar
measures are not adopted by the United States. More stringent privacy
prohibitions of this type could limit the growth of foreign markets for
United States B2B e-commerce companies. The Department of Commerce is
negotiating with the European Union to provide exemptions from the
European Union regulations, but the outcome of these negotiations is
uncertain.
Private industry initiatives and standards may develop concerning
privacy issues. In addition to any governmental regulation, we and our
partner companies may decide that it is in our best interest to
voluntarily comply with industry standards or public opinion regarding
privacy issues.
. Regulation of Communications Facilities. To some extent, the rapid
growth of the Internet in the United States has been due to the relative
lack of government intervention in the marketplace for Internet access.
This lack of intervention may not continue in the future. For example,
several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal
Communications Commission in the same manner as other telecommunications
services. Additionally, local telephone carriers have petitioned the
Federal Communications Commission to regulate Internet service providers
in a manner similar to long distance telephone carriers and to impose
access fees on the providers. Some Internet service providers are
seeking to have broadband Internet access over cable systems regulated
in much the same manner as telephone services, which could slow the
deployment of broadband Internet access services. Because of these
proceedings or others, new laws or regulations could be enacted which
could burden the companies that provide the infrastructure on which the
Internet is based, slowing the rapid expansion of the medium and its
availability to new users.
. Domain Names. The acquisition and maintenance of web site addresses
generally is regulated by governmental agencies and their designees. The
regulation of web site addresses in the United States and in foreign
countries is subject to change. As a result, our partner companies may
not be able to acquire or maintain relevant web site addresses in all
countries where they conduct business.
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. Other Consumer Regulations. The growth of the Internet and e-commerce
may lead to the enactment of more stringent consumer protection laws.
The Federal Trade Commission may use its existing jurisdiction to police
e-commerce activities, and it may seek authority from Congress to
regulate certain online activities. The Federal Trade Commission has
already issued for public comment proposed regulations governing the
collection of information online from children.
In addition to the specific issues outlined above, other generally
applicable laws may also affect our partner companies and us. The exact
applicability of many of these laws to Internet e-commerce is, however,
uncertain.
Proprietary Rights
Our partner companies have copyrights and patents with respect to software
applications, web sites and other works of authorship or invention. These
materials may constitute an important part of our partner companies' assets and
competitive strengths. Federal law generally protects our partner companies'
copyrights for a period ending on the earlier of 100 years from the creation of
the underlying work or 75 years from the publication of the underlying work.
"divine interVentures" and "Internet Zaibatsu" are our trademarks. We have
applied to register these marks with the United States Patent and Trademark
Office. All other brand, product or company names in this prospectus are trade
names, trademarks or service marks of their respective owners.
Properties
Our corporate headquarters and operational facilities are currently located
in a leased facility in Lisle, Illinois.
We also have an option to lease over 300,000 square feet located in Chicago.
We expect this building will serve as the headquarters of some of our partner
companies, as well as other non-affiliated entities. We are working with a real
estate development team that has previously developed other parcels in that
area of Chicago. An architectural firm has begun to design this high-tech
facility designed to hold between 20 and 30 e-commerce businesses. We
anticipate that the facility could be ready for occupancy in the second half of
next year. However, we are not obligated to proceed with the development of the
facility.
Employees
As of November 30, 1999, we had approximately 255 employees, including 196
employees of majority-owned subsidiaries. We believe that our relations with
our employees are generally good.
Legal Proceedings
We are not currently a party to any legal or administrative proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table contains certain information with respect to our
executive officers and directors as of December 10, 1999. Our Board of
Directors is divided into three classes with staggered three-year terms. The
terms of our Class I directors will expire at our annual meeting of
stockholders in 2000, the terms of our Class II directors will expire at our
annual meeting of stockholders in 2001 and the terms of our Class III directors
will expire at our annual meeting of stockholders in 2002. At each annual
meeting of our stockholders, the successors to the directors whose terms expire
will be elected for three-year terms.
<TABLE>
<CAPTION>
Name Age Position with Company Director Class
---- --- --------------------- --------------
<C> <C> <S> <C>
Chairman of the Board and Chief
Andrew J. Filipowski 49 Executive Officer Class I
President, Chief Operating
Scott A. Hartkopf 41 Officer and Director Class I
Michael P. Cullinane 50 Executive Vice President, Chief
Financial Officer,
Treasurer and Director Class II
Paul L. Humenansky 42 Executive Vice President and
Director Class II
Larry S. Freedman 36 Executive Vice President, General
Counsel
and Secretary
Robert Bernard 38 Director Class II
Michael J. Birck 61 Director Class III
James E. Cowie 44 Director Class I
Andrea Lee Cunningham 43 Director Class II
Thomas P. Danis 52 Director Class III
Michael H. Forster 57 Director Class III
Arthur P. Frigo 58 Director Class I
Gian M. Fulgoni 51 Director Class II
George Garrick 47 Director Class I
Craig D. Goldman 55 Director Class III
Arthur W. Hahn 55 Director Class II
Wade Hansen 31 Director Class III
Jeffrey D. Jacobs 49 Director Class I
Gregory K. Jones 38 Director Class II
Steven Neil Kaplan 39 Director Class III
Richard P. Kiphart 58 Director Class II
Ronald D. Lachman 42 Director Class III
Eric C. Larson 45 Director Class I
William A. Lederer 38 Director Class I
Michael Leitner 32 Director Class I
Lawrence F. Levy 55 Director Class II
Teresa L. Pahl 40 Director Class II
John Rau 51 Director Class III
Bruce V. Rauner 43 Director Class I
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Position
with
Name Age Company Director Class
---- --- -------- --------------
<C> <C> <S> <C>
Andre Rice 42 Director Class I
Mohanbir S. Sawhney 36 Director Class III
Alex C. Smith 40 Director Class II
Timothy Stojka 33 Director Class I
Aleksander Szlam 48 Director Class II
Mark A. Tebbe 38 Director Class III
James C. Tyree 42 Director Class I
William Wrigley, Jr. 36 Director Class I
Robert Jay Zollars 42 Director Class III
</TABLE>
Mr. Filipowski, one of our founders, has been Chairman of our Board of
Directors and our Chief Executive Officer since our inception and was our
President from our inception until October 1999. He is also Chairman and Chief
Executive Officer of Platinum Venture Partners, Inc., the previous general
partner of the Platinum Venture Partners limited partnerships. Mr. Filipowski
was a founder of PLATINUM technology International inc. and served as the
Chairman of its Board of Directors, Chief Executive Officer and President from
its inception in 1987 until it was acquired by Computer Associates in June
1999. Mr. Filipowski is currently a director of eShare technologies, Inc.,
System Software Associates, Inc., Blue Rhino Corporation, Bluestone Software
Inc. and Platinum Entertainment, Inc.
Mr. Hartkopf has been our President and Chief Operating Officer since
October 1999. From 1993 until October 1999, Mr. Hartkopf was the President and
Chief Executive Officer of Brayton International, a wholly-owned subsidiary of
Steelcase, Inc. From 1991 until 1993, Mr. Hartkopf was President of Rucker
Fuller, an office furnishings company. Prior to joining Rucker Fuller, Mr.
Hartkopf was the Vice President of Marketing Strategies for the Management
Horizons consulting practice within PricewaterhouseCoopers.
Mr. Cullinane, one of our founders, has been our Chief Financial Officer and
Treasurer since our inception and our Executive Vice President since August
1999. He is also a principal officer of Platinum Venture Partners, Inc. Mr.
Cullinane served as Executive Vice President and Chief Financial Officer of
PLATINUM from its inception in 1987 until it was acquired in June 1999. Mr.
Cullinane is currently a director of VASCO Data Security International Inc.,
Made2Manage Systems, Inc., Platinum Entertainment, Inc. and Interactive
Intelligence, Inc.
Mr. Humenansky, one of our founders, has been our Executive Vice President
since August 1999. He is also a principal officer of Platinum Venture Partners,
Inc. Mr. Humenansky was a founder of PLATINUM, and served as its Executive Vice
President--Product Development from its inception in 1987 until its acquisition
in June 1999. Mr. Humenansky also served as Chief Operations Officer of
PLATINUM from January 1993 until its acquisition. Mr. Humenansky is currently a
director of Platinum Entertainment, Inc.
Mr. Freedman, one of our founders, has been our Executive Vice President,
Secretary and General Counsel since our inception. Mr. Freedman was Vice
President and Associate General Counsel of PLATINUM from December 1995 until
October 1997 and served as its Senior Vice President and General Counsel from
November 1997 until its acquisition by Computer Associates in June 1999.
Following the acquisition, Mr. Freedman was retained by Computer Associates, in
its legal department, to provide transition services for a period of six
months. Prior to joining PLATINUM, Mr. Freedman was associated with the law
firms of Katten Muchin Zavis, from August 1994 to November 1995, and Rudnick &
Wolfe, from May 1993 to August 1994.
Mr. Bernard is the founder of Whittman-Hart, Inc., an information technology
company, and has served as its Chairman of the Board and Chief Executive
Officer since its inception in 1984. From 1984 to August 1997,
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Mr. Bernard also served as Whittman-Hart's President. Mr. Bernard serves as
Chairman of the subcommittee on education, skill and workforce development for
the Chicago Mayor's Council of Technology Advisors and is a director of Web
Street, Inc.
Mr. Birck is a founder of Tellabs, Inc., a communications products and
services provider, and has been its President and Chief Executive Officer since
its inception in 1975. He currently serves as a director of Tellabs, Molex
Incorporated and Illinois Tool Works Inc.
Mr. Cowie has been a General Partner of Frontenac Company, a Chicago-based
private equity investment firm, since February 1989. Mr. Cowie is currently a
director of 3Com Corporation and Lante Corporation.
Ms. Cunningham founded, and has been the Chief Executive Officer of,
Cunningham Communication, Inc., a public relations and strategic communication
consulting firm serving high-technology companies, since 1985.
Mr. Danis has been the President and Chief Executive Officer of Aon Risk
Services of Missouri since 1992. He has also served as the Managing Director of
the Mid-Rivers Market Area for Aon Corporation since 1997, and has been Co-
Chair of the Merger and Acquisition Practice at Aon Corporation with
responsibilities for international markets since 1996. Mr. Danis has over 20
years experience in the insurance industry, including as a co-founder of
Corroon & Black of Missouri, a joint venture with Corroon & Black, which he
operated for 16 years. Mr. Danis is a director of International Wire Group,
Inc.
Mr. Forster has served as one of the Senior Partners of Operations of
Internet Capital Group, Inc., a provider of capital and services to Internet
businesses, since June 1998. From April 1996 to March 1999, Mr. Forster served
as Senior Vice President of Worldwide Field Operations for Sybase, Inc., a
database management solutions company. From April 1994 to March 1996, Mr.
Forster was Sybase's Senior Vice President and President of Sybase's
Information Connection Division. Mr. Forster has over 30 years of sales,
marketing and general management experience in the information technology
industry. Mr. Forster serves as a director of Tangram Enterprise Solutions,
Inc.,
Mr. Frigo has been the Chairman of the Board of Lucini Cucini Italia
Company, a consumer products company, since 1997. He was formerly the Chief
Executive Officer and owner of M.B. Walton, a consumer products company, and
served as its Chief Executive Officer from 1987 until its sale in January 1998.
Mr. Fulgoni is a founder of comScore, Inc., one of our partner companies,
and has served as its Chairman of the Board since its inception in August 1999.
Mr. Fulgoni also founded Lancaster Enterprises, LLC, which provides investment
and counseling services to emerging growth companies, and has served as its
Chairman since February 1999. From 1986 through 1998, Mr. Fulgoni served as
Chief Executive Officer of Information Resources, Inc., which provides a
variety of information and computer decision support services to the consumer
packaged goods industry. From 1981 through 1998, Mr. Fulgoni also served as
IRI's President, and, from 1991 to 1995, he was its Chairman. Mr. Fulgoni is
currently a director of comScore, Inc. and yesmail.com, inc.
Mr. Garrick has served as Chief Executive Officer and President of Flycast
Communications Corporation, an Internet marketing and advertising network,
since April 1998, has been a member of the board of directors of Flycast since
June 1998 and has been its Chairman of the Board since January 1999. From
September 1997 until May 1998, Mr. Garrick owned and operated his own private
Internet venture and consulting company, G2 Ventures, inc. From April 1997
until September 1997, Mr. Garrick served as Chief Marketing Officer for
PowerAgent, Inc., an Internet media and marketing company. From March 1996
until April 1997, Mr. Garrick founded and operated NetROI LLC, an Internet
audience measurement software company. From November 1993 until March 1996, Mr.
Garrick served as the President and Chief Executive Officer of Information
Resources, Inc.-North America, a marketing measurement company. Other than the
period from July 1993 through October 1993, when Mr. Garrick served as
President and Chief Executive Officer of Nielsen Marketing Research U.S.A., a
unit of A.C. Nielsen Co., Mr. Garrick served Information
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Resources, Inc. in various capacities, including President, European
Information Services, and President, Syndicated Information Division, from 1981
until his departure in March 1996.
Mr. Goldman has served as President and Chief Executive Officer of Cyber
Consulting Services Corp., a technology consulting firm, since March 1996. Mr.
Goldman was Senior Vice President--Technology and Operations at The Chase
Manhattan Bank from March 1988 until October 1991 and was a Senior Vice
President and Chief Information Officer for The Chase Manhattan Bank from
October 1991 until March 1996. Mr. Goldman is also a director of CMGI, Inc.,
Engage Technologies, Inc., NaviSite, Inc., PRT Group Inc. and MangoSoft, Inc.
Mr. Hahn has been a partner with the law firm of Katten Muchin Zavis since
1984 and is a member of the firm's executive committee. Mr. Hahn is Chairman of
the faculty of the Illinois Institute of Technology Chicago-Kent College of Law
Graduate School of Financial Services Law.
Mr. Hansen has been a Principal of Dell Ventures, a division of Dell USA
L.P., since May 1999. From 1995 until May 1999, Mr. Hansen was a Manager at
McKinsey & Company.
Mr. Jacobs has been the President of HARPO Entertainment Group, which
produces The Oprah Winfrey Show, since 1988. In 1993, Mr. Jacobs founded
CIVITAS Initiative, a national communications foundation serving the field of
child development.
Mr. Jones has been the President and Chief Executive Officer of uBid, Inc.
since November 1997 and its Chairman since July 1998. From October 1995 to
November 1997, Mr. Jones was Senior Vice President of Strategic Markets at APAC
TeleServices, Inc., a provider of outsourced telephone-based marketing, sales
and customer management solutions. From October 1990 to October 1995, Mr. Jones
served as the President and Chief Operating Officer of The Reliable
Corporation/Office 1, a Chicago-based direct mail and retailer of office
products. Mr. Jones is also a director of D.I.Y. Home Warehouse, Inc. and uBid.
Professor Kaplan is the Neubauer Family Professor of Entrepreneurship and
Finance at the University of Chicago Graduate School of Business, where he has
taught since 1988. Professor Kaplan is the director of the American Finance
Association and a Research Associate at the National Bureau of Economic
Research. He is a principal at Michigan & Oak, LLC, a venture advisory firm,
and serves as a director of ImageMax, Inc.
Mr. Kiphart has been a General Partner and the head of the Corporate Finance
Department of William Blair & Company since 1995 and a member of its corporate
finance department since 1980. Mr. Kiphart joined William Blair in 1965, served
in the U.S. Navy as Junior Officer in 1966, then rejoined William Blair. In
1972, he became a General Partner of the firm and was promoted to head of
Equity Trading, where he served from 1972 to 1980. Mr. Kiphart is a director of
Concord EFS, Inc.
Mr. Lachman is the co-founder of Lachman Goldman Ventures, which funds and
builds management teams for networking and software related companies, and has
served as its President since 1995. In 1992, Mr. Lachman founded Lachman
Technology, which was acquired by Legent Corporation in 1994. Mr. Lachman
served as Vice President for Open Systems Strategy of Legent from 1994 until
1995. From 1989 until 1992, Mr. Lachman served as Executive Vice President at
Interactive Systems, Corp. Prior to 1989, Mr. Lachman founded Lachman
Associates, a consulting group. Mr. Lachman currently serves in a senior
advisory board member capacity to many different technology companies in the
fields of distributed computing and Internet commerce. Mr. Lachman is also a
director of The Santa Cruz Operation, Inc., a software company.
Mr. Larson has been the Managing General Partner of Bank One Equity Capital,
the private equity investment unit of Bank One Corporation since December 1998.
Bank One Equity Capital is the successor to First Chicago Equity Capital, which
Mr. Larson co-founded in 1991 to make equity investments in middle market
companies. He has served as Senior Vice President since 1994 and has held a
variety of principal and advisory positions since joining First Chicago in
1984.
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<PAGE>
Mr. Lederer is the founder of Minotaur Capital Management and its fund,
Minotaur Partners, L.P., an Illinois-based investment firm, and has served as
its President since 1994. From 1997 until December 1999, Mr. Lederer served as
the Chief Executive Officer of Art.com Inc., an Internet-based art and framing
service, which he founded in 1987. Mr. Lederer currently serves as Governor of
the School of the Art Institute, Chicago.
Mr. Leitner has been a Director of Corporate Development for Microsoft
Corporation since June 1998. From 1994 until June 1998, Mr. Leitner was a Vice
President in the Technology Mergers and Acquisitions group at Merrill Lynch &
Co., Inc.
Mr. Levy is a co-founder of Levy Restaurants, a nationwide food service
company, and has been its Chairman of the Board and the Chief Executive Officer
since 1978. Mr. Levy is a director of Chicago Title Corporation and Il Fornaio
America Corporation.
Ms. Pahl has been the President and Chief Executive Officer of Aon
Enterprise Insurance Services, Inc. since September 1997. From September 1990
until September 1997, she served as Executive Vice President of Aon. Ms. Pahl
has served on the Aon Risk Services U.S. operating board since 1997.
Mr. Rau has been the President and Chief Executive Officer of Chicago Title
Corporation and Chicago Title Company since January 1997. Before joining
Chicago Title, Mr. Rau was Dean of the School of Business at Indiana University
from 1993 through December 1996. Mr. Rau is currently a director of LaSalle
Bank N.A., First Industrial Realty Trust, Inc., Borg-Warner Automotive, Inc.
and Nicor Inc.
Mr. Rauner has been a principal of GTCR Golder Rauner, L.L.C., which manages
private equity funds, since 1981. He has served as its managing principal since
May 1997. Mr. Rauner is a director of Province Healthcare Company, Metamor
Worldwide, Inc. (formerly COREStaff), AppNet, Inc., Polymer Group, Inc.,
Coinmach Laundry Corporation, Lason, Inc., AnswerThink Consulting Group, Inc.
and Esquire Communications Ltd.
Mr. Rice founded Rice Group, Ltd, an investment firm, and has served as its
President since 1986. From 1985 until 1986, Mr. Rice served as Senior Project
Manager in the Mergers and Acquisitions Department at Kraft Inc.
Professor Sawhney is the Tribune Professor of Electronic Commerce and
Technology at the Kellogg Graduate School of Management, Northwestern
University, where he has taught since November 1994. He is a Fellow of the
World Economic Forum, a Fellow of Diamond Technology Partners' Diamond
Exchange, a member of Merrill Lynch's Technology Advisory Board and a principal
at Michigan & Oak, LLC, a venture advisory firm.
Mr. Smith has served as Vice President of Dell Ventures, a division of Dell
USA L.P., since March 1999. From November 1995 until March 1999, Mr. Smith was
the Treasurer of Dell USA L.P. From 1991 until November 1995, Mr. Smith held
various management positions within the Treasury Department of Dell USA L.P.
Mr. Stojka is the founder of Commerx, Inc., one of our partner companies,
and has served as its Chairman of the Board and Chief Executive Officer since
January 1999. From 1991 through 1998, Mr. Stojka served as Chief Executive
Officer of Fast Heat Inc., a manufacturing company. Mr. Stojka holds positions
with several industry groups, including chairman of the International Division
of Society of the Plastics Industry, chairman of operations for the National
Plastics Exposition and member of the National Board in Washington, D.C.
Mr. Szlam founded Melita International, a call center application software
company, and has served as its Chairman and Chief Executive Officer, since
1983. In September 1999, Melita International acquired eShare Technologies,
Inc., an Internet software company, and adopted eShare's name. Mr. Szlam
continues to serve as Chairman and Chief Executive Officer of the combined
entity.
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<PAGE>
Mr. Tebbe is the founder of Lante Corporation, an Internet services company,
and has served as its Chairman since June 1999. Mr. Tebbe served as Lante's
President from 1984 to 1999. Mr. Tebbe currently serves as a director of ZixIt
Corporation, an Internet security technology company.
Mr. Tyree has served as Chairman and Chief Executive Officer of Mesirow
Financial, a diversified financial services firm, since 1994. Mr. Tyree joined
the firm in 1980 as a research associate. Mr. Tyree serves as a director of
Standard Bank and Trust Company.
Mr. Wrigley is President and Chief Executive Officer of William Wrigley Jr.
Company, a chewing gum manufacturer. He has been a director of William Wrigley
Jr. Company since 1988 and served as its Vice President from 1991 until 1998.
Mr. Wrigley is currently a director of The J.M. Smucker Company.
Mr. Zollars became the Chairman, President and Chief Executive Officer of
Neoforma.com, Inc., one of our partner companies, in July 1999. From 1997 until
July of 1999, Mr. Zollars was an Executive Vice President and Group President
at Cardinal Health, Inc., a pharmaceutical service provider. From 1992 until
1997, he served as Corporate Vice President and President of U.S. Distribution
at Baxter Healthcare, Inc. Mr. Zollars is currently a director of Epitope,
Inc., a medical device company.
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Committees of the Board of Directors
Our Board of Directors has established an acquisition committee, audit
committee, compensation committee, conflicts committee, executive committee,
Internet economy strategy committee and Investment Company Act compliance
committee.
Our acquisition committee has responsibility for reviewing, approving or
disapproving, and authorizing significant transactions with partner companies
and, to the extent necessary, may administer the functions of our conflicts
committee with respect to these transactions. Our acquisition committee
consists solely of non-employee directors. The current members of our
acquisition committee are Messrs. Kaplan (Co-Chairman), Sawhney (Co-Chairman),
Bernard, Fulgoni, Jacobs, Smith, Szlam, Tebbe, Wrigley and Zollars.
Our audit committee recommends the independent public accountants to be
engaged by us, considering independence and effectiveness. It also reviews the
plan, scope and results of our annual audit, reviews our accounting and
financial controls and reviews our accounting principles and financial
disclosure practices with our independent public accountants. Our audit
committee consists solely of non-employee directors. The current members of the
audit committee are Messrs. Larson (Chairman), Bernard, Birck, Danis, Frigo,
Garrick, Jones and Kiphart.
Our compensation committee reviews, monitors, administers and establishes or
recommends to our full Board of Directors compensation arrangements for our
Chief Executive Officer and other members of our senior management. Our
compensation committee also administers our incentive compensation plans and
determines the number of shares covered by, and terms of, options to be granted
to executive officers and other key employees under these plans. Our
compensation committee consists solely of non-employee directors. The current
members of the compensation committee are Messrs. Fulgoni (Chairman), Levy,
Rice, Szlam, Tyree, Zollars and Ms. Pahl.
Our conflicts committee has principal responsibility for approving or
disapproving contracts and transactions between us or any of our subsidiaries,
on the one hand, and any of the directors or officers of our subsidiaries or
any other corporation, partnership, association or other organization in which
one or more of our directors or officers are directors or officers or have
financial interests, on the other hand. Our conflicts committee consists solely
of non-employee directors. The current members of the conflicts committee are
Messrs. Goldman (Chairman), Forster, Fulgoni and Garrick.
Our executive committee has responsibility for reviewing and generally
recommending matters to the full Board of Directors for approval. The current
members of the executive committee are Messrs. Filipowski (Chairman), Cowie,
Cullinane, Forster, Goldman, Hahn, Hartkopf, Humenansky and Smith.
Our Internet economy strategy committee assists our management in developing
our business strategy as it relates to the B2B Internet economy and offers
strategic guidance and industry expertise to us and our partner companies. The
current members of our Internet economy strategy committee are Messrs. Garrick
(Co-Chairman), Sawhney (Co-Chairman), Bernard, Cunningham, Fulgoni, Hansen,
Jacobs, Kaplan, Lachman, Lederer, Rau, Rauner, Smith, Stojka, Szlam, Tebbe,
Wrigley and Zollars.
Our Investment Company Act compliance committee has the responsibility for
ensuring that we do not become required to register as an investment company
and subject to regulation under the Investment Company Act, including,
specifically, responsibility determining the value of our securities holdings,
total assets and net income after taxes, as required from time to time but not
less frequently than the end of each of our fiscal quarters. The current
members of our Investment Company Act compliance committee are Messrs. Frigo
(Co-Chairman), Goldman (Co-Chairman), Cowie, Forster, Fulgoni, Garrick, Jones
and Kiphart.
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Arrangements for Nomination as Director and Committee Member
Under a stockholders agreement, we have agreed to take all necessary
actions, and each of Messrs. Filipowski, Cullinane, Humenansky, Freedman,
Kennedy, Santer, Slowey and Tatro and certain of their affiliates and some
purchasers of our series D preferred stock and Series D-1 preferred stock, have
agreed to vote all their divine capital stock and take all other necessary
actions, so that:
. each of (1) CBW/SK divine Investments, (2) First Chicago Investment
Corporation and Cross Creek Capital Partners IX, LLC, (3) Frontenac VII
Limited Partnership and Frontenac Masters VII Limited Partnership, which
we together refer to as Frontenac, and (4) Microsoft Corporation can
designate one member of our Board of Directors; and
. Dell USA L.P. can designate two members of our Board of Directors,
so long as each designating entity continues to own at least 25% of the divine
capital stock owned by it on the date of the stockholders agreement.
Under this stockholders agreement, we have also agreed to take all necessary
action so that one of the directors designated by each of Frontenac and Dell is
designated as a member of our executive committee, so long as each designating
entity continues to own at least 25% of the divine capital stock owned by it on
the date of the stockholders agreement.
Compensation of Directors
Our directors do not currently receive any cash compensation for their
service as members of our board of directors, although we may decide to provide
them with cash compensation in the future. We reimburse our non-employee
directors for their reasonable out-of-pocket expenses incurred in attending
board and committee meetings. In September 1999, each of the persons then
serving as a non-employee director was given the opportunity to purchase
shares of our class A common stock at a price of $ per share. In December
1999, each of the persons who was appointed as a non-employee director after
September 1999 was granted an option to purchase shares of our
class A common stock at an exercise price of $ per share. In addition, our
1999 stock incentive plan provides for the automatic grant on December 1 of
each year, commencing December 1, 1999, of an option to purchase
shares of class A common stock to each of our non-employee directors. For more
information about these options and our stock incentive plan, see "--1999 Stock
Incentive Plan." Directors who are also our employees receive no additional
compensation from us for services they render in their capacity as directors.
Executive Compensation
The following table contains information with respect to all compensation
paid by us during 1999 to our chief executive officer and our only other
executive officer whose combined salary and bonus exceeded $100,000 for 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Awards
-------------------- ------------
Securities
Underlying All Other
Name and Principal Positions Salary($) Bonus($) Options(#) Compensation
---------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Andrew J. Filipowski
Chairman and Chief Executive
Officer (1).................... $ -- $ -- (2)
Scott A. Hartkopf,
President...................... 41,500(3) 200,000
</TABLE>
- ---------------------
(1) Mr. Filipowski has agreed to waive all cash compensation through June 15,
2004.
(2) Based on an annual rate of $239,778.
(3) Includes $ in premiums paid by us for term life and disability
insurance, $ paid by us for the term portion of split-dollar life
insurance and $ representing the dollar value to Mr. Filipowski of the
remainder of the premiums paid by us for the split-dollar life insurance.
52
<PAGE>
Each of Messrs. Cullinane and Humenansky has agreed to waive all cash
compensation through June 15, 2000. Mr. Freedman agreed to waive all cash
compensation through December 15, 1999. After that date, Mr. Freedman receives
a base salary at an annual rate of $200,000.
1999 Option Grants
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Percentage Potential Realizable
Number of of Total Value at Assumed
Shares Options Annual Rates of Stock
Underlying Granted to Price Appreciation
Options Employees Exercise for Option Term (1)
Granted in Fiscal Price Expiration -----------------------
Name (#) (2) 1999 ($/Sh) Date 5% ($) 10% ($)
- ---- ---------- ---------- -------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Andrew J. Filipowski.... 11/5/2009
Scott A. Hartkopf....... 11/5/2009
</TABLE>
The following table contains information regarding our grant of stock
options to our chief executive officer and our only other executive officer
whose combined salary and bonus exceeded $100,000 for 1999.
- ---------------------
(1) Potential realizable value is presented net of the option exercise price,
but before any federal or state income taxes associated with exercise. It
is calculated assuming that the fair market value on the date of the grant
appreciates at the indicated annual rates, compounded annually, for the
term of the option. The 5% and 10% assumed rates of appreciation are
mandated by the rules of the SEC and do not represent our estimate or
projection of future increases in the price of our common stock. Actual
gains will be dependent on the future performance of our common stock and
the option holder's continued employment through the vesting periods. The
amounts reflected in the table may not be achieved.
(2) These options are immediately exercisable, but vest in equal annual
installments on the first four anniversaries of the grant date if the
executive continues to be employed by us on each of these anniversaries.
The shares of our class A common stock issuable upon exercise of these
options are subject to restrictions on transfer and a right of repurchase
by us at a price per share equal to the lower of the option exercise price
and the fair market value per share of our class A common stock. These
restrictions and repurchase right expire based on the option vesting
schedule.
Our other executive officers were granted options in 1999 to purchase the
following number of shares of class A common stock at an exercise price of
$ per share: Mr. Cullinane shares; Mr. Humenansky shares; and Mr.
Freedman shares.
1999 Option Values
The following table shows information regarding the unexercised options held
by our chief executive officer and our only other executive officer whose
combined salary and bonus exceeded $100,000 for 1999 as of December 31, 1999.
None of our executive officers exercised any options during 1999.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised in-the-Money
Options as of Options as of
December 31, 1999(#) December 31, 1999($)(1)
------------------------- -------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Andrew J. Filipowski........ / /
Scott A. Hartkopf........... / /
</TABLE>
- ---------------------
(1) The value per option is calculated by subtracting the exercise price of the
option from the fair market value of our class A common stock of $ per
share on December 31, 1999, as determined by our Board of Directors based
on the most recent price prior to December 31, 1999 at which we issued our
class A common stock.
53
<PAGE>
Compensation Committee Interlocks and Insider Participation
Upon completion of this offering, our compensation committee will make all
compensation decisions and will administer our 1999 Stock Incentive Plan. Mr.
Fulgoni, Mr. Levy, Ms. Pahl, Mr. Rice, Mr. Szlam, Mr. Tyree and Mr. Zollars
serve as the members of the compensation committee. None of our executive
officers, directors or compensation committee members currently serve, or in
the past served, on the compensation committee of any other company the
executive officers or directors of which served on our compensation committee.
Consulting and Noncompete Agreements
Andrew J. Filipowski, Michael P. Cullinane and Paul L. Humenansky have
entered into consulting and non-compete agreements under which each has agreed
to provide consulting services to PLATINUM for a two year period, in the case
of Mr. Filipowski, beginning on June 29, 1999 and, in the case of each of
Messrs. Cullinane and Humenansky, beginning on the later of June 29, 1999 and
the end of his employment period. In their respective consulting agreements,
Messrs. Cullinane and Humenansky have agreed, at the request of PLATINUM, to
remain as employees to provide transition services for a period of up to six
months from June 29, 1999. We believe these transition services have been
materially completed.
The consulting agreements contain non-competition provisions that prohibit
Mr. Filipowski until June 29, 2007, and each of Messrs. Cullinane and
Humenansky until June 29, 2004 from participating or engaging, directly or
indirectly, on their own behalf or on behalf of others in any activities or
business developing, manufacturing, marketing or distributing any products or
services offered by PLATINUM on March 29, 1999, or any products or services
offered by PLATINUM after that date and in which the consultant had actively
participated. PLATINUM is engaged principally in the businesses of developing,
marketing and supporting software products for managing information technology
infrastructures and providing related professional services. Its products are
designed to assist in the management and operation of large, complex,
distributed environments by performing fundamental functions such as automating
operations, maintaining the operating efficiency of systems and applications
and ensuring data access and integrity. Additionally, PLATINUM's products
provide support for certain multiple database management systems and packaged
applications. As of March 29, 1999, PLATINUM also offered products and services
for the creation, deployment and management of web content.
Under the consulting agreement, competitive activities which Messrs.
Filipowski, Cullinane and Humenansky are prohibited from conducting include:
. selling goods or rendering services, or assisting another person to sell
goods or render services or attempt to sell goods or render services, of
the type, or similar to the type, sold or rendered by PLATINUM; and
. soliciting or assisting another person to solicit or attempt to solicit
persons or entities that are current customers, have been customers in
the three years before March 29, 1999 or are or were prospective
customers of PLATINUM or its affiliates before the end of the respective
employment periods of Messrs. Filipowski, Cullinane and Humenansky,
unless the solicitation of these customers is for goods or services
unrelated to any activity which competes with PLATINUM.
The consulting agreements also prohibit each of Messrs. Filipowski,
Cullinane and Humenansky from performing any action, activity or course of
conduct that is detrimental in any material respect to the businesses or
business reputation of PLATINUM, or any of its affiliates, such as soliciting,
recruiting or hiring any employees of PLATINUM or any of its affiliates or
persons who have worked for PLATINUM or any of its affiliates at any time since
January 1, 1998 and soliciting or encouraging any employees of PLATINUM or any
of its affiliates to leave their employment, except that the consultants may
hire, but not solicit or recruit (1) any terminated employees of PLATINUM, or
(2) employees of PLATINUM (a) in connection with a business that is not an
activity that competes with PLATINUM or (b) to work in a venture capital
business but not in a company in which a venture capital business invests or
acquires an interest. In addition, each consultant may
54
<PAGE>
not disclose to any other person or use any confidential information relating
to or used by PLATINUM or any of its affiliates, except in connection with the
performance of the consultant's duties under the agreement.
Each of Messrs. Filipowski, Cullinane and Humenansky is permitted (1) to
remain as a director of those companies of which each was a director as of June
29, 1999, (2) to engage in venture capital activities so long as he does not
invest through any venture in any company whose primary business is an activity
which competes with PLATINUM, (3) to engage in competitive activities, as
described above, after receiving written permission of PLATINUM, which
permission will not be unreasonable withheld or delayed after June 29, 2004, in
the case of Mr. Filipowski, and June 29, 2002, in the cases of Messrs.
Cullinane and Humenansky, as long as the consultant's activities would not have
a material adverse impact on any of PLATINUM's lines of business and (4) to
engage in activities that Computer Associates has confirmed are not
inconsistent with the prohibitions of the non-competition provisions of the
consulting agreements.
Additionally, other of our key employees have entered into consulting and
non-compete agreements with Computer Associates containing substantially the
same terms as those of Messrs. Filipowski, Cullinane and Humenansky, all of
which terminate on June 29, 2001.
Incentive Program
We intend to implement an incentive program for our employees. We expect
that among the components of this program will be a plan under which our
employees earn stock bonuses based upon any increases in the value of a
portfolio that consists of our interests in partner companies that have
completed initial public offerings and in any public companies into which
partner companies have been merged or sold. We will allocate 12.5% of these
increases to a pool in which our employees will share as determined by our
management. We will periodically distribute to each participating employee a
number of shares of class A common stock equal in value to a portion of that
employee's share of the pool.
1999 Stock Incentive Plan
Effective October 1, 1999, we adopted our 1999 stock incentive plan. Our
officers, employees, directors, consultants and advisors are eligible to
participate in this plan. The purpose of this plan is to attract and retain
persons eligible to participate in the plan, motivate participants to achieve
our long-term goals and further align the interest of participants with those
of our stockholders through compensation that is directly linked to the
profitability of our business and increases in stockholder value. We initially
made available for issuance under the plan shares of our class A common
stock. Subsequent to that date, the maximum number of shares available for
delivery under the plan automatically increases on January 1 of each year,
beginning on January 1, 2001 by a number of shares of class A common stock
equal to the lesser of (1) 10% of the total number of shares of class A common
stock then outstanding, assuming for that purpose the conversion into class A
common stock of all then outstanding convertible securities, or (2) 300,000,000
shares. Our compensation committee will administer the 1999 stock incentive
plan. This plan provides our compensation committee with broad discretion to
select the officers, employees and consultants to whom awards may be granted,
as well as the type, size and terms and conditions of each award. The 1999
stock incentive compensation plan will permit grants of the following types of
awards:
. non-qualified and incentive stock options;
. stock appreciation rights; and
. other stock-based awards.
Options granted will provide for the purchase of class A common stock at
prices determined by our compensation committee. Options granted under the plan
become fully exercisable and vested upon a change in control of us.
The 1999 stock incentive plan provides for the automatic grant on December 1
of each year, beginning on December 1, 1999, of an option to purchase
shares of class A common stock to each non-employee director. Options granted
to non-employee directors will have an exercise price equal to the fair market
value of
55
<PAGE>
our common stock on the date of grant. Stock options granted to non-employee
directors will expire on the earliest of (1) ten years after their date of
grant, (2) one year after the termination of such non-employee director's
service as our director because of death, disability or retirement at or after
age 65 or (3) 90 days after the termination of such non-employee director's
service as our director for any other reason. In the event that a non-employee
director's service as a director is terminated before the first anniversary of
the grant date of any stock option for any reason other than death, disability
or retirement at or after age 65, we have the right to re-purchase the shares
obtained upon exercise of the stock option at a price per share equal to the
lesser of (1) the exercise price per share under the stock option or (2) the
fair market value per share as of the date the shares are repurchased.
We currently have outstanding options to purchase shares of class A
common stock under our 1999 stock incentive plan. Each of these outstanding
options is immediately exercisable in full, but vests in equal annual
installments on the first four anniversaries of the grant date if the option
recipient continues to be employed by us on each of these anniversaries. The
shares of our class A common stock issuable upon exercise of each of these
options are subject to restrictions on transfer and a right of repurchase by us
at a price per share equal to the lower of the option exercise price and the
fair market value per share of our class A common stock. These restrictions on
transfer and repurchase right expire based on the option vesting schedule.
Limitation of Liability of Directors and Officers
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors will not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful dividends or unlawful stock purchases or redemptions; or
. for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to obtain
monetary damages from a director for breach of the director's duty of care.
However, these provisions do not affect a director's responsibilities under any
other laws, including federal securities laws.
Indemnification
Our certificate of incorporation provides for the indemnification of our
directors, to the fullest extent authorized by the Delaware General Corporation
Law, and of selected officers, employees and agents, to the extent determined
by the board, except that we will generally not be obligated to indemnify a
person in connection with an action initiated by that person without our prior
written consent. The indemnification provided under our certificate of
incorporation obligates us to pay the expenses of a director, or an officer who
is entitled to indemnification, in advance of the final disposition of any
proceeding for which indemnification may be had, provided that the payment of
these expenses incurred by a director or officer may be made only upon delivery
to us of an undertaking by or on behalf of the director or officer to repay all
amounts paid in advance if ultimately the director or officer is not entitled
to indemnification. We are entering into indemnification agreements with each
of our directors and executive officers providing for the indemnification
described above.
Insurance
Under our certificate of incorporation, we have the power to purchase and
maintain insurance on behalf of any person who is or was one of our directors,
officers, employees or agents, or is or was serving at our request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, limited liability company, trust or other enterprise, against any
liability asserted against the person or incurred by the person in any of these
capacities, or arising out of the person's fulfilling one of these capacities,
whether or not we would have the power to indemnify the person against the
claim under the provisions of our certificate of incorporation. We intend to
purchase director and officer liability insurance on behalf of our directors
and officers.
56
<PAGE>
CERTAIN TRANSACTIONS
The following is a description of transactions since our inception, to which
we have been a party, in which the amount involved in the transaction exceeds
$60,000 and in which any director, executive officer or holder of more than 5%
of our capital stock has or will have a direct or indirect material interest
other than compensation arrangements which are otherwise described under
"Management." Unless otherwise indicated, the information below does not assume
the reverse stock split of our class A common stock and class B common stock or
the conversion of our convertible preferred stock, each to be effected before
the completion of this offering.
Our Organization
Andrew J. Filipowski, our Chairman and Chief Executive Officer, was involved
in our founding and organization and may be considered our promoter. At our
inception in June 1999, we issued 1,000 shares of common stock to Mr.
Filipowski, who contributed a nominal amount of capital for our initial
capitalization. These shares of common stock were converted into 10,000 shares
of our class B common stock.
Recent Financings
Since our inception, we have funded our growth primarily through the sale of
common stock and convertible preferred stock. We have issued the following
shares:
Common Stock Financing
In August 1999, we sold 20,700,000 shares of class A common stock at a
purchase price of $0.001 per share to a group of 77 persons and 12,250,000
shares of class B common stock at a purchase price of $0.001 per share to a
group of six persons. The following directors, executive officers and
beneficial owners of more than five percent of either our class A or class B
common stock (assuming the conversion of all shares of our convertible
preferred stock into common stock) directly or indirectly acquired beneficial
ownership of class A common stock and class B common stock in our common stock
financing:
<TABLE>
<CAPTION>
Directors, Executive Officers and 5%
Stockholders Class A Shares Class B Shares
------------------------------------ -------------- --------------
<S> <C> <C>
Andrew J. Filipowski..................... -- 5,500,000
Michael P. Cullinane..................... -- 2,500,000
Larry S. Freedman........................ -- 1,250,000
Scott A. Hartkopf........................ 1,500,000 --
Paul L. Humenansky....................... -- 100,000
Michael J. Birck......................... 250,000 --
James E. Cowie........................... 250,000 --
Andrea Lee Cunningham.................... 250,000 --
Michael H. Forster....................... 250,000 --
Arthur P. Frigo.......................... 250,000 --
Gian M. Fulgoni.......................... 250,000 --
George Garrick........................... 250,000 --
Craig D. Goldman......................... 250,000 --
Arthur N. Hahn........................... 250,000 --
Jeffrey D. Jacobs........................ 250,000 --
Gregory K. Jones......................... 250,000 --
Brian Kennedy............................ 1,000,000 --
Teresa L. Pahl........................... 250,000 --
John Rau................................. 250,000 --
Andre Rice............................... 250,000 --
Michael Santer........................... 1,000,000 --
Thomas Slowey............................ -- 1,000,000
Paul Tatro............................... -- 1,000,000
William Wrigley, Jr...................... 250,000 --
Robert Jay Zollars....................... 250,000 --
</TABLE>
57
<PAGE>
Series A Preferred Financing
In September 1999, we sold 9,236,600 shares of our series A-1 junior
convertible preferred stock at a purchase price of $0.25 per share to a group
of 51 persons and 37,750,000 shares of series A-2 junior convertible preferred
stock at a purchase price of $0.25 to a group of seven persons. Each share of
our series A-1 preferred stock converts into shares of our class A
common stock upon the completion of this offering, and each share of our series
A-2 preferred stock converts into shares of our class B common stock
upon completion of this offering. The following directors, executive officers
and beneficial owners of more than five percent of either our class A or class
B common stock (assuming the conversion of all shares of preferred stock into
common stock) directly or indirectly acquired beneficial ownership of series A-
1 preferred stock and series A-2 preferred stock in our series A preferred
stock financing:
<TABLE>
<CAPTION>
Directors, Executive Officers and 5% Series A-1 Series A-2
Stockholders Preferred Shares Preferred Shares
------------------------------------ ---------------- ----------------
<S> <C> <C>
Andrew J. Filipowski................. 19,950,000
Michael P. Cullinane................. 3,000,000
Larry S. Freedman.................... 400,000
Scott A. Hartkopf.................... 200,000
Paul L. Humenansky................... 3,000,000
</TABLE>
Series B Preferred Financing
In September 1999, we sold 2,712,000 shares of our series B-1 convertible
preferred stock at a purchase price of $0.50 per share to a group of 35 persons
and 20,100,000 shares of series B-2 convertible preferred stock at a purchase
price of $0.50 per share to a group of two persons. Each share of our series B-
1 preferred stock converts into shares of our class A common stock
upon the completion of this offering, and each share of our series B-2
preferred stock converts into shares of our class B common stock upon
the completion of this offering. The following directors, executive officers
and beneficial owners of more than five percent of either our class A or class
B common stock (assuming the conversion of all shares of preferred stock into
common stock) acquired beneficial ownership of series B-2 preferred stock in
the series B preferred stock financing:
<TABLE>
<CAPTION>
Series B-2
Directors, Executive Officers and 5% Stockholders Preferred Shares
------------------------------------------------- ----------------
<S> <C>
Andrew J. Filipowski..................................... 20,000,000
</TABLE>
Series C Financing
From September through December 1, 1999, we sold 190,062,125 shares of our
series C senior convertible preferred stock at a purchase price of $1.00 per
share to a group of 473 persons. Each share of our series C preferred stock
converts into shares of our class A common stock upon the completion of
this offering. The following directors, executive officers and beneficial
owners of more than five percent of either our class A or class B common stock
(assuming the conversion of all shares of preferred stock into common stock),
and family members of these persons, acquired beneficial ownership of series C
preferred stock in the series C preferred stock financing:
<TABLE>
<CAPTION>
Series C
Directors, Executive Officers and 5% Stockholders Preferred Shares
------------------------------------------------- ----------------
<S> <C>
Robert A. Bernard(1)..................................... 2,000,000
Michael J. Birck(2)...................................... 5,000,000
James Cullinane.......................................... 200,000
Michael J. and Dorothy M. Cullinane...................... 15,000
Thomas P. Danis.......................................... 350,000
Richard M. Freedman...................................... 100,000
Arthur Frigo, Jr......................................... 100,000
Arthur Frigo, Sr......................................... 4,700,000
Natalie Frigo............................................ 100,000
Renee Frigo.............................................. 100,000
Gian M. Fulgoni.......................................... 1,100,000
George Garrick........................................... 100,000
</TABLE>
- ---------------------
(1) Represents shares held by Whittman-Hart, Inc. Mr. Bernard is the Chairman
of the Board and Chief Executive Officer of Whittman-Hart.
(2) Represents shares held by Tellabs, Inc. Mr. Birck is the President and
Chief Executive Officer and a director of Tellabs.
58
<PAGE>
<TABLE>
<CAPTION>
Series C
Directors, Executive Officers and 5% Stockholders Preferred Shares
------------------------------------------------- ----------------
<S> <C>
Craig D. Goldman......................................... 200,000
Ezra Goldman............................................. 100,000
Arthur W. Hahn........................................... 360,000
Jeffrey D. Jacobs........................................ 1,000,000
Richard P. Kiphart....................................... 1,000,000
Ronald D. Lachman........................................ 60,000
William A. Lederer....................................... 300,000
Michael Leitner.......................................... 100,000
Lawrence F. Levy......................................... 2,741,000
Teresa L. Pahl........................................... 100,000
William D. Prim.......................................... 1,020,000
John Rau................................................. 1,000,000
Bruce V. Rauner.......................................... 550,000
Andre Rice............................................... 200,000
Tim J. Stojka............................................ 1,000,000
Aleksander Szlam......................................... 1,000,000
Mark A. Tebbe............................................ 250,000
William J. Wrigley, Jr................................... 17,000,000
Robert Jay Zollars....................................... 350,000
</TABLE>
Series D Preferred Financing
On December 7, 1999, we entered into an agreement to sell 191,830,300 shares
of our series D senior participating convertible redeemable preferred stock at
a purchase price of $1.00 per share to a group of 11 persons and 5,169,700
shares of our series D-1 senior participating convertible redeemable (non-
voting) preferred stock to two entities at a purchase price of $1.00 per share.
These entities will be obligated to purchase our series D and series D-1
preferred stock upon expiration or termination of applicable antitrust waiting
periods. Each share of our series D preferred stock and series D-1 preferred
stock converts into shares of our class A common stock upon the
completion of this offering. The following beneficial owners of more than five
percent of our common stock (assuming the conversion of all shares of preferred
stock into common stock) have agreed to acquire beneficial ownership of series
D preferred stock in the series D preferred stock offering:
<TABLE>
<CAPTION>
Series D
Directors, Executive Officers and 5% Stockholders Preferred Shares
------------------------------------------------- ----------------
<S> <C>
CBW/SK divine Investments................................ 25,000,000
Dell USA L.P............................................. 100,000,000
Microsoft Corporation.................................... 25,000,000
</TABLE>
Stockholders Agreement
Under a stockholders agreement, we have agreed to take all necessary
actions, and each of Messrs. Filipowski, Cullinane, Humenansky, Freedman,
Kennedy, Santer, Slowey and Tatro and certain of their affiliates and some
purchasers of our series D preferred stock and series D-1 preferred stock, have
agreed to vote all their divine capital stock and take all other necessary
actions, so that
. each of (1) CBW/SK divine Investments, (2) First Chicago Investment
Corporation and Cross Creek Capital Partners IX, LLC, (3) Frontenac VII
Limited Partnership and Frontenac Masters VII Limited Partnership, which
we together refer to as Frontenac, and (4) Microsoft Corporation has the
right to designate one member of our Board of Directors; and
59
<PAGE>
. Dell USA L.P. can designate two members of our Board of Directors,
in all cases, so long as each designating entity continues to own at least
25% of the divine capital stock owned by it on the date of the stockholders
agreement.
Under this agreement, the parties above have also agreed to take all
necessary action so that the director designated by Frontenac and one of the
directors designated by Dell are designated as members of our executive
committee, so long as each designating entity continues to own at least 25% of
the divine capital stock owned by it on the date of the stockholders agreement.
Under this stockholders agreement, Mr. Filipowski has agreed that for a
period of one year from the consummation of this offering he will not sell more
than 10% of the divine capital stock that he owns, other than to certain family
members and other permitted transferees, without first giving notice to
stockholders who acquired class A common stock upon the conversion of our
series D preferred stock and series D-1 preferred stock in connection with the
completion of this offering and giving such parties the right to participate
pro rata in the sale.
Registration Rights
At any time after six months following the completion of this offering, the
holders of shares of our class A common stock will be entitled to demand
registration rights, allowing them to require us to file a registration
statement covering all or part of their shares for registration under the
Securities Act, subject to limitations. We are required to pay the expenses of
no more than two demand registrations on Form S-1 and unlimited demand
registrations on Form S-3 for these holders. In the event that a registration
statement filed pursuant to these demand registration rights is an underwritten
offering, and the managing underwriter advises us that the number of shares to
be included in the offering exceeds the number of shares which can be sold in
an orderly manner, we will include shares in the offering as follows: first,
shares of stockholders requesting the demand registration and other shares with
equivalent rights, on a pro rata basis, and second, other securities requested
to be included.
In addition, after the completion of this offering, the holders of
shares of our class A common stock will be entitled to request us to register
their shares under the Securities Act for resale to the public in the event
that we initiate a public offering. These rights, commonly referred to as
piggyback registration rights, are subject to limitations, including the right
of the underwriters to limit the number of shares included in such
registration. In the event that we propose to register any shares of class A
common stock under the Securities Act either for our account or for the account
of our other security holders, the holders of shares having piggyback rights
are entitled to receive notice of the registration and are entitled to include
their shares in any such registration.
These piggyback registration rights are subject to limitations, including
the right of the underwriters of an offering to limit the number of shares
included in a registration. If the number of shares is so limited, we will
include shares with piggyback registration rights in the registration statement
in accordance with their priority level. Shares of class A common stock that we
propose to sell will be the first included in the registration. Second, shares
of our class A common stock issued upon conversion of our series D preferred
stock and series D-1 preferred stock will be included. Third, shares of our
class A common stock issued directly or indirectly upon conversion of our
series C senior preferred stock, series B preferred stock and series A
preferred stock will be included in the registration, pro rata, on the basis of
shares which are owned by such security holders and requested to be included.
Finally, shares of our class A common stock which were sold by us in
August 1999, or which were issued upon conversion of class B common stock sold
in August 1999, will be included in the registration, but only if all other
shares with piggyback registration rights requested to be included are
permitted to be included.
We are generally required to bear all of the expenses of all these
registrations, except underwriting discounts, selling commissions, applicable
transfer taxes and fees of counsel retained by any shareholder. Registration of
any of the shares of class A common stock held by security holders with
registration rights
60
<PAGE>
would result in such shares becoming freely tradable without restriction under
the Securities Act immediately upon effectiveness of the registration.
Partner Company Transactions
Gian Fulgoni, one of our directors, is the founder and chairman of comScore
and owns approximately 20% of comScore on a fully diluted basis. On September
27, 1999, we acquired 0.8% of comScore on a fully diluted basis.
Timothy Stojka, one of our directors, is the Chief Executive Officer of
Commerx and owns approximately 13% of Commerx on a fully diluted basis. On
November 19, 1999, we acquired 1.0% of Commerx on a fully diluted basis.
Robert J. Zollars, one of our directors, is the Chairman, President and
Chief Executive Officer of Neoforma and owns approximately 10% of Neoforma on a
fully diluted basis. On October 14, 1999, we acquired 2.7 % of Neoforma. Mr.
Filipowski is a director of Neoforma.com on a fully diluted basis.
Real Estate Transactions
Mr. Filipowski owns 3% and is a manager of Blackhawk, LLC. Mr. Filipowski
has the right to acquire an additional 30.3% of Blackhawk, and Blackhawk has
the right to require Mr. Filipowski to purchase this additional interest.
Beginning in July 1999, we have paid, and continue to pay, Blackhawk $50,000 a
month in connection with an option to lease our planned facility in Chicago. We
expect to enter into a long-term lease with Blackhawk for the facility upon the
completion of its construction, which is currently expected to occur in the
second half of 2000. We believe that our lease with Blackhawk will be on terms
no less favorable to us than those terms that would be available in an arm's-
length transaction with a third party.
Venture Capital Transactions
Effective August 4, 1999, Platinum Venture Partners, Inc. withdrew, and we
were substituted as, the general partner of Platinum Venture Partners I L.P.
and Platinum Venture Partners II L.P. Messrs. Filipowski, Humenansky and
Cullinane are principal shareholders and officers of Platinum Venture Partners,
Inc. Mr. Filipowski owns approximately 22.5%, and each of Messrs. Cullinane and
Humenansky owns less than 5%, of the equity of Platinum Venture Partners, Inc.
Each of Messrs. Filipowski, Humenansky and Cullinane also directly owns a
limited partnership interest in both Platinum Venture Partners I and Platinum
Venture Partners II. Further, Platinum Venture Partners, Inc. owns a limited
partnership interest in both Platinum Venture Partners I and Platinum Venture
Partners II.
As general partner of Platinum Venture Partners I, we receive an annual
management fee, payable in advance in quarterly installments of 2 1/2% of the
fair value of the partnership, adjusted annually by the increase in a consumer
price index during the preceding calendar year. As general partner of Platinum
Venture Partners II, we receive an annual management fee, payable in advance in
quarterly installments, of 2 1/2% of the aggregate partner commitments,
adjusted annually by the percentage increase in a consumer price index during
the preceding calendar year. We received a total of $275,000 from Platinum
Venture Partners I and II on October 1, 1999 for fourth quarter 1999 management
fees. In 2000, we expect to receive a total of approximately $775,000 in
management fees from Platinum Venture Partners I and II.
Other Transactions
Arthur Hahn, one of our directors, is a partner in the law firm of Katten
Muchin Zavis, counsel to the Company. Katten Muchin Zavis has billed us
approximately $1,450,000 for legal services from our inception through
October 31, 1999. We paid the first $400,000 of this total billed amount by
issuing 400,000 shares of our series C senior preferred stock to Katten Muchin
Zavis. Additionally, partners in Katten Muchin Zavis, including Mr. Hahn, also
purchased a total of 2,670,000 shares of our series C preferred stock prior to
this offering.
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<PAGE>
Wade Hansen, one of our directors, is a principal of Dell Ventures, a
division of Dell USA L.P. Alex C. Smith, also one of our directors, is the
Vice-President of Dell Ventures, a division of Dell USA L.P. We have purchased
approximately $500,000 of desktop computers, laptop computers and servers from
Dell USA L.P. through November 30, 1999. We expect similar purchases to
continue as we grow.
Michael Leitner, one of our directors, is a Director of Corporate
Development of Microsoft Corporation. On November 22, 1999, we entered into a
Memorandum of Understanding with Microsoft Corporation. Under this memorandum,
we have agreed to use reasonable efforts and exercise good faith to negotiate
and execute definitive agreements with Microsoft whereby we would incorporate
Microsoft products, technologies and services into our systems and the web
application hosting services that we provide to our partner companies. In
connection with this agreement, we would purchase approximately $15 million of
Microsoft software and services over a four-year period. This agreement would
allow us and our partner companies to be preferred providers of outsourced
Microsoft software solutions and would allow Microsoft to be our preferred
platform. In connection with the agreement, we would commit to use commercially
reasonable efforts to encourage our partner companies to migrate to Microsoft
software solutions. In addition, we have agreed to use commercially reasonable
efforts to develop a Seattle-based Internet incubator habitat based on our
current business model within one year from the date of the memorandum.
Richard Kiphart, one of our directors, is a principal of William Blair &
Company, one of the underwriters of this offering. William Blair is receiving
underwriting discounts and commissions of approximately $ in connection
with this offering.
On December 7, 1999, we entered into a Business Opportunities Agreement with
CBW/SK divine Investments, Cross Creek Partners IX, LLC, Dell USA L.P., First
Chicago Equity Corporation, Frontenac VII Limited Partnership, Frontenac
Masters VII Limited Partnership, Mesirow Capital Partners VII, L.P. and
Microsoft Corporation, each of which purchased shares of our Series D preferred
stock or Series D-1 preferred stock in our Series D financing described above
and each of which, either alone or together with other of these stockholders,
have representatives on our Board of Directors. Under this agreement, neither
these stockholders nor their director representatives will have any obligation
to us, our stockholders or any other party to present business opportunities to
us before presenting them to other entities, other than opportunities that are
presented to directors solely in, and as a direct result of, their capacity as
our directors.
Company Policy
We intend that any future transactions between us and our officers,
directors and affiliates will be on terms no less favorable to us than can be
obtained on an arm's length basis from unaffiliated third parties and that any
transactions with these persons and related parties will be approved by the
conflicts committee or the acquisition committee of our Board of Directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table contains information regarding the beneficial ownership
of our common stock as of December 10, 1999, and as adjusted to reflect the
sale of the shares of common stock in this offering, by:
. each person or group of affiliated persons known by us to beneficially
own more than 5% of the outstanding shares of either our class A or
class B common stock;
. each of our directors and executive officers; and
. all of our directors and executive officers as a group.
Unless otherwise indicated below, the persons in the table have sole voting
and investment power with respect to all shares shown as beneficially owned by
them. Beneficial ownership is determined in accordance with the rules of the
SEC. The number of shares beneficially owned by a person and the percentage
ownership of that person include all shares of common stock subject to options
held by that person, because all of our options are immediately exercisable in
full. Unless we indicate otherwise, the address of each person who beneficially
owns 5% or more of the outstanding shares of our common stock is c/o divine
interVentures, inc., 4225 Naperville Road, Suite 400, Lisle, Illinois 60532.
<TABLE>
<CAPTION>
Class A Class B Percent of Total
Common Stock Common Stock Voting Power
-------------- -------------- -----------------
Number Percent Number Percent Before After
of of of of the the
Name of Beneficial Owner Shares Class Shares Class Offering Offering
------------------------ ------ ------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Andrew J. Filipowski(1)..
Michael P. Cullinane(2)..
Scott A. Hartkopf(3).....
Paul L. Humenansky(3)....
Larry S. Freedman(4).....
Robert Bernard(5)........
Michael J. Birck(6)......
CBW/SK divine
Investments(7)..........
James E. Cowie(6)........
Andrea Lee Cunningham(6).
Thomas P. Danis(5).......
Dell USA L.P.(8).........
Michael H. Forster(6)....
Arthur P. Frigo(6).......
Gian M. Fulgoni(6).......
George Garrick(6)........
Craig D. Goldman(6)......
Arthur W. Hahn(6)........
Wade Hansen(5)...........
Jeffrey D. Jacobs(6).....
Gregory K. Jones(6)......
Steven Neil Kaplan(5)....
Richard P. Kiphart(5)....
Ronald D. Lachman(5).....
Eric C. Larson(5)........
William A. Lederer(5)....
Michael Leitner(5).......
Lawrence F. Levy(5)......
Microsoft Corporation(9).
Teresa L. Pahl(6)........
John Rau(6)..............
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Class A Class B Total Voting
Common Stock Common Stock Power
-------------- -------------- -----------------
Number Percent Number Percent Before After
of of of of the the
Name of Beneficial Owner Shares Class Shares Class Offering Offering
------------------------ ------ ------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Bruce V. Rauner(5).......
Andre Rice(6)............
Mohanbir S. Sawhney(5)...
Thomas A. Slowey(10).....
Alex C. Smith(5).........
Tim J. Stojka(5).........
Aleksander Szlam(5)......
Paul A. Tatro(11)........
Mark A. Tebbe(5).........
James C. Tyree(5)........
William Wrigley, Jr.6)...
Robert Jay Zollars(6)....
Our executive officers
and directors as a
group (38 persons)(6)...
</TABLE>
- ---------------------
(1) Includes shares of class A common stock issuable upon exercise of
currently exercisable stock options. Includes shares of class B
common stock held by the Flip Divine Trust and shares of class
B common stock held by Platinum Construction Corp.
(2) Includes shares of class A common stock issuable upon exercise of
currently exercisable stock options.
(3) Includes shares of class A common stock issuable upon exercise of
currently exercisable stock options.
(4) Includes shares of class A common stock issuable upon exercise of
currently exercisable stock options.
(5) Includes shares of class A common stock issuable upon exercise of
currently exercisable stock options.
(6) Includes shares of class A common stock issuable upon exercise of
currently exercisable stock options.
(7) The address of CBW/SK divine Investments is CBW/SK divine Investments, c/o
Computer Associates, 1 Computer Associates Plaza, Islandia, NY 11749.
(8) The address of Dell USA L.P. is 1 Dell Way, Round Rock, TX 78682.
(9) The address of Microsoft Corporation is One Microsoft Way, Building 8,
North Office 2211, Redmond, WA 98052.
(10) Includes shares of class A common stock issuable upon exercise of
currently exercisable stock options.
(11) Includes shares of class A common stock issuable upon exercise of
currently exercisable stock options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The following summary describes the material terms of our capital stock. It
summarizes material provisions of our Third Amended and Restated Certificate of
Incorporation, which we will file with the Secretary of State of Delaware
before the completion of this offering, and our Amended and Restated By-laws.
We will file a form of our Third Amended and Restated Certificate of
Incorporation and a copy of our Amended and Restated By-laws as exhibits to the
registration statement of which this prospectus is a part. See "Where You Can
Find More Information."
Our Third Amended and Restated Certificate of Incorporation will authorize
us to issue shares of capital stock, of which shares will be
designated class A common stock, $0.001 par value per share, shares will
be designated class B common stock, $0.001 par value per share and
shares will be designated preferred stock, $0.001 par value per share. Upon
completion of this offering, our outstanding convertible preferred stock will
convert into shares of our class A common stock and shares of
our class B common stock, and we will have no outstanding shares of our
preferred stock. Of our authorized class A and class B common stock, upon
completion of this offering:
. shares of our class A common stock will be issued and
outstanding;
. shares of our class B common stock will be issued and
outstanding;
. shares of our class A common stock will be reserved for issuance
upon exercise of currently outstanding options; and
. shares of our class A common stock will be reserved for future
awards under our 1999 Stock Incentive Plan.
Common Stock
We have two classes of common stock: class A common stock and class B common
stock. Except as set forth below, our class A common stock and class B common
stock have identical rights.
Voting
Holders of our class A common stock are entitled to one vote per share.
Holders of class B common stock are entitled to ten votes per share. All
actions submitted to a vote of stockholders will be voted on by holders of
class A common stock and class B common stock voting together as a single
class, except as discussed below or provided by law.
Conversion
The class A common stock has no conversion rights. Holders of class B common
stock may convert their class B common stock into class A common stock, in
whole or in part, at any time and from time to time on a share-for-share basis.
If any shares of class B common stock are beneficially owned by any person
other than Andrew J. Filipowski, Paul L. Humenansky, Michael P. Cullinane,
Larry S. Freedman, Thomas A. Slowey or Paul A. Tatro, or their family members,
descendants or trusts for their benefit, entities or organizations controlled
by these persons or foundations or charitable organizations established by
these persons, these shares will automatically convert into an equal number of
shares of class A common stock. Otherwise, the class A common stock and the
class B common stock are identical in all material respects except that the
class B common stock has 10 votes per share. If at any time the number of
outstanding shares of class B common stock, plus the number of class B common
stock obtainable by conversion of other outstanding securities, represents less
than 10% of the total number of outstanding shares of both classes of common
stock, then at that time the outstanding shares of class B common stock will
automatically convert into an equal number of shares of class A common stock.
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<PAGE>
Dividends
Holders of class A common stock and class B common stock are entitled to
receive cash dividends equally on a per share basis if and when the dividends
are declared by our Board of Directors from legally available funds. We will
only be able to pay a dividend on our common stock when all accrued and unpaid
dividends on our preferred stock have been paid or declared and set apart for
payment. In the case of any dividend paid in common stock, holders of class A
common stock are entitled to receive the same percentage dividend payable in
shares of class A common stock that the holders of class B common stock receive
payable in shares of class B common stock.
Liquidation
After satisfaction of the liquidation preferences of all securities ranking
senior to the class A and class B common stock, the holders of class A common
stock and class B common stock will share with each other on an equal basis as
a single class in any net assets available for distribution to holders of
shares of common stock upon liquidation.
Other Terms
We will not be able to reclassify, subdivide or combine shares of one class
of common stock without at the same time proportionately reclassifying,
subdividing or combining shares of the other class of common stock.
In any merger, consolidation or business combination, the consideration to
be received per share by holders of either class A common stock or class B
common stock must be identical to that received by holders of the other class
of common stock, except that in any transaction in which shares of capital
stock are distributed, the shares may differ as to voting rights only to the
extent that voting rights now differ between class A common stock and class B
common stock.
The rights, preferences and privileges of holders of class A common stock
and class B common stock will be subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred stock which we
may designate and issue in the future. Holders of class A common stock and
class B common stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of class A common stock and class B common stock
are, and the shares of class A common stock offered by us in this offering will
be, when issued and paid for, fully paid and nonassessable. The rights,
preferences and privileges of holders of class A common stock and class B
common stock are subject to the rights of the holders of shares of any series
of preferred stock that we may designate and issue in the future.
Preferred Stock
Under the terms of our certificate of incorporation, our Board of Directors
is authorized to designate and issue shares of preferred stock in one or more
series without stockholder approval. The Board has discretion to determine the
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock.
The purpose of authorizing our Board of Directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could make it more difficult for a third party to
acquire, or could discourage a third party from attempting to acquire, a
majority of our outstanding voting stock. We have no present plans to issue any
shares of preferred stock.
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<PAGE>
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Section 203 of Delaware General Corporate Law
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved by our board of directors and/or stockholders in a
prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.
Classified Board of Directors
Our certificate of incorporation and bylaws provide for the division of our
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. Any vacancy on the Board of Directors, including a
vacancy resulting from an enlargement of the Board of Directors, may only be
filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitation on filling of
vacancies could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, control of us. In
addition, our classified Board could delay attempts by stockholders who do not
approve of our policies or procedures to elect a majority of our Board of
Directors.
No Stockholder Action by Written Consent; Special Meetings
Our bylaws also provide that any action required or permitted to be taken by
our stockholders at an annual meeting or special meeting of stockholders may
only be taken if it is properly brought before such meeting and may not be
taken by written action instead of a meeting. Our bylaws further provide that
special meetings of our stockholders may only be called by our Chairman of the
Board, President or a majority of the Board of Directors. In order for any
matter to be considered properly brought before a meeting, a stockholder must
comply with certain requirements regarding advance notice and provide certain
information to us. These provisions could have the effect of delaying until the
next stockholders' meeting stockholder actions which are favored by the holders
of a majority of our outstanding voting securities. These provisions could also
discourage a third party from making a tender offer for our common stock,
because even if it acquired a majority of our outstanding voting securities, it
would only be able to take action as a stockholder, such as electing new
directors or approving a merger, at a duly called stockholders' meeting and not
by written consent.
Transfer Agent and Registrar
The transfer agent and registrar for the class A common stock is
.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
When we complete the offering, we will have outstanding shares of
class A common stock and outstanding shares of class B common stock
convertible at any time into an equal number of shares of our class A common
stock. The shares of our class A common stock sold in this offering will
be freely transferable, unless they are purchased by our affiliates, as that
term is defined in Rule 144 under the Securities Act. The remaining total of
outstanding shares of our common stock will be restricted, which means
they were originally issued in offerings, or upon conversion of convertible
preferred stock issued in offerings, that were not subject to a registration
statement filed with the SEC. These restricted shares may be resold only
through registration under the Securities Act or under an available exemption
from registration, including the exemption provided by Rule 144.
In addition, upon completion of this offering, options to purchase
shares of class A common stock will be issued and outstanding, all of which
will be exercisable in full.
Lock-Up Agreements
Our directors, executive officers and each of our stockholders have agreed
with the underwriters that, for a period of 180 days from the date of this
prospectus, they will not without the prior written consent of Credit Suisse
First Boston, directly or indirectly offer, sell, transfer or dispose of any
shares of our common stock, or any securities convertible into or exercisable
for shares of our common stock, or enter into a transaction that would have the
same effect, or publicly announce an intention to effect any of these
transactions. As a result of these contractual restrictions, the shares subject
to these lock-up agreements cannot be sold until the agreements expire or
unless prior written consent is received from Credit Suisse First Boston, even
if they are earlier eligible for sale under Rule 144, 144(k) or 701 of the
Securities Act discussed below. Any early waiver of the lock-up agreements by
the underwriters, which, if granted, could permit sales of a substantial number
of shares and could adversely affect the trading price of our shares, may not
be accompanied by an advance public announcement by us. Credit Suisse First
Boston may release all of a portion of the shares subject to these lock-up
agreements at any time without notice. For a more detailed description of these
lock-up arrangements relating to this offering, see "Underwriting."
Rule 144
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person, or persons whose shares are aggregated, including a
person who may be deemed our affiliate, who has beneficially owned restricted
shares of class A common stock for at least one year (including any period in
which the person owned securities convertible into these shares), 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 class A common stock then outstanding,
which will equal approximately shares immediately after this
offering; or
. the average weekly trading volume of our class A common stock on The
Nasdaq Stock Market's National Market during the four calendar weeks
before the filing of a notice on Form 144 relating to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
From August through December 2000, restricted shares will become
eligible for sale pursuant to Rule 144, subject to these volume and manner of
sale limitations. We are unable to estimate accurately the number of restricted
shares that will actually be sold under Rule 144 because this will depend in
part on the market price of our common stock, the personal circumstances of the
sellers and other factors.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned
for at least two years the shares proposed to be sold,
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<PAGE>
including the holding period of any prior owner other than an affiliate, would
be entitled to sell these shares under Rule 144(k) without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
Rule 701
Beginning 90 days after the date of this prospectus, shares of our
common stock sold by us in August 1999, and shares issuable upon exercise
of options granted by us before (the effective date of the registration
statement of which this prospectus is a part), will be eligible for sale in the
public market through Rule 701 under the Securities Act, subject to the
underwriters' lock-up agreements discussed above. Rule 701 covers shares issued
before an initial public offering under compensatory benefit plans and
contracts. In general, Rule 701 permits resales of these shares beginning 90
days after the issuer becomes subject to the reporting requirements of the
Securities Exchange Act in reliance upon Rule 144, but without compliance with
the holding period requirements and other restrictions contained in Rule 144.
Restrictions on Sales of Securities
Under a stockholders agreement, Mr. Filipowski has agreed that for a period
of one year from the consummation of this offering he will not sell more than
10% of the divine capital stock that he owns, other than to certain family
members and other permitted transferees, without first giving notice to
stockholders who acquired class A common stock upon the conversion of our
series D preferred stock and series D-1 preferred stock in connection with the
completion of this offering and giving such parties the right to participate
pro rata in the sale.
Registration Rights
At any time after six months following the consummation of this offering,
the holders of shares of our class A common stock will be entitled to
demand registration rights, allowing them to require us to file a registration
statement covering all or part of their shares for registration under the
Securities Act, subject to limitations. We are required to pay the expenses of
no more than two demand registrations on Form S-1 and unlimited demand
registrations on Form S-3 for these holders. In the event that a registration
statement filed pursuant to these demand registration rights is an underwritten
offering, and the managing underwriter advises us that the number of shares to
be included in the offering exceeds the number of shares which can be sold in
an orderly manner, we will include shares in the offering as follows: first,
shares of stockholders requesting the demand registration and other shares with
equivalent rights, on a pro rata basis, and second, other securities requested
to be included.
In addition, after the completion of this offering, the holders of shares of
our class A common stock will be entitled to request us to register their
shares under the Securities Act for resale to the public in the event that we
initiate a public offering. These rights, commonly referred to as piggyback
registration rights, are subject to limitations, including the right of the
underwriters to limit the number of shares included in such registration. In
the event that we propose to register any shares of class A common stock under
the Securities Act either for our account or for the account of our other
security holders, the holders of shares having piggyback rights are entitled to
receive notice of the registration and are entitled to include their shares in
any such registration.
These piggyback registration rights are subject to limitations, including
the right of the underwriters of an offering to limit the number of shares
included in a registration. If the number of shares is so limited, we will
include shares with piggyback registration rights in the registration statement
in accordance with their priority level. Shares of class A common stock that we
propose to sell will be the first included in the registration. Second, shares
of our class A common stock issued upon conversion of our series D preferred
stock and series D-1 preferred stock will be included. Third, shares of our
class A common stock issued upon conversion of our
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<PAGE>
series C senior preferred stock, series B preferred stock and series A
preferred stock will be included in the registration, pro rata, on the basis of
shares which are owned by such security holders and requested to be included.
Finally, shares of our class A common stock which were sold by us in August
1999, or which were issued upon conversion of class B common stock sold in
August 1999, will be included in the registration, but only if all other shares
with piggyback registration rights requested to be included are permitted to be
included.
We are generally required to bear all of the expenses of all these
registrations, except underwriting discounts, selling commissions, applicable
transfer taxes and fees of counsel retained by any shareholder. Registration of
any of the shares of class A common stock held by security holders with
registration rights would result in such shares becoming freely tradable
without restriction under the Securities Act immediately upon effectiveness of
the registration.
Registration Statements on Form S-8
After we complete this offering, we intend to file under the Securities Act
a registration statement on Form S-8 to register:
. shares of class A common stock issuable upon exercise of
outstanding options granted under our 1999 stock incentive plan; and
. shares of class A common stock reserved for future grants under our
1999 stock incentive plan.
We expect this registration statement to become effective upon filing with the
SEC. Shares covered by these registration statements will be freely tradeable,
subject to exercise of options and vesting provisions and, in the case of
affiliates only, to the restrictions of Rule 144, other than the holding period
requirement. These shares will also be subject to expiration of the
underwriter's lock-up agreements discussed above.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated , we have agreed to sell to the underwriters named below,
for whom Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Banc Boston Robertson
Stephens Inc., William Blair & Company, L.L.C. and DLJdirect Inc. are acting as
representatives, the number of shares of class A common stock set forth
opposite each name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Donaldson, Lufkin & Jenrette Securities Corporation................
Bear, Stearns & Co. Inc............................................
BancBoston Robertson Stephens Inc..................................
William Blair & Company, L.L.C.....................................
DLJdirect Inc. ....................................................
---------
Total..........................................................
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of class A 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 the offering of class A common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of class A common stock.
The underwriters propose to offer the shares of class A 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.
Underwriting compensation will consist of the underwriting discount and
reimbursement of expenses described below. The underwriting discount consists
of the difference between the amount paid by the underwriters to purchase the
shares of class A common stock from us and the offering price of the shares to
the public. The underwriting discount is expected to represent approximately
% of the public offering price per share of class A common stock. The
following table summarizes the underwriting discount and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------- -------------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us... $ $ $ $
Expenses payable by us.... $ $ $ $
</TABLE>
71
<PAGE>
The underwriters have informed us that they do not expect sales to accounts
over which any underwriter exercises discretionary authority to exceed 5% of
the shares of class A common stock being offered.
From September through November 1999, Peter Pond, Brian Webber, Chad Schultz
and Chris Baldwin, affiliates of Donaldson, Lufkin & Jenrette Securities
Corporation and DLJdirect Inc., purchased a total of 425,000 shares;
Willblairco Associates, an affiliate of William Blair & Company, purchased
1,000,000 shares; and Richard P. Kiphart, one of our directors and an affiliate
of William Blair & Company purchased 1,000,000 shares of our series C preferred
stock on the same terms and conditions as the other investors in the private
placement, including price per share. Each share of series C preferred stock
will automatically convert into shares of class A common stock upon the
closing of this offering.
We and each of our executive officers, directors and stockholders have
agreed not to offer, sell, pledge or otherwise dispose of, directly or
indirectly, or file with the SEC a registration statement under the Securities
Act of 1933 relating to any shares of our common stock or securities
convertible into or exchangeable or exercisable for shares of our common stock,
or enter into a transaction that would have the same effect, 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,
in our case, issuances pursuant to the exercise of employee stock options
outstanding on the date of this prospectus or pursuant to our stock incentive
plans.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We will make application to list the shares of class A common stock on The
Nasdaq Stock Market's National Market under the symbol "DVIN."
Prior to this offering, there has been no public market for our class A
common stock. The initial public offering price will be determined by
negotiation between us and the representatives. The principal factors
considered in determining the public offering price will include:
. the information set forth in this prospectus and otherwise available to
the representatives;
. the history of, and the prospects for, us and the industry in which we
compete;
. an assessment of our management;
. the prospects for, and the timing of, 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;
. the recent market prices of, and the demand for, publicly-traded common
stock of generally comparable companies; and
. market conditions for initial public offerings.
The representatives 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 class A 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 class A common stock originally sold by
that syndicate member is purchased in a stabilizing transaction or in a
syndicate covering transaction to cover syndicate short positions.
72
<PAGE>
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the class A 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.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the class A common stock for employees,
directors and certain other persons associated with us who have expressed an
interest in purchasing class A common stock in the offering. The number of
shares available for sale to the general public in this offering will be
reduced to the extent those persons purchase 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.
73
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the class A 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 authority in each province where
trades of class A common stock are effected. Accordingly, any resale of the
class A common stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which 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 class A common stock.
Representations of Purchasers
Each purchaser of class A common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that the purchaser is entitled under
applicable provincial securities law to purchase the class A common stock
without the benefit of a prospectus qualified under the securities laws; where
required by law, that such 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 such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canada courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of class A common stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sales of
any class A common stock acquired by the purchaser pursuant to this offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanker Order BOR #95/17, a copy of which may be obtained from us.
Only one such report must be filed in respect of class A common stock acquired
on the same date and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of class A common stock should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
class A common stock in their particular circumstances and with respect to the
eligibility of the class A common stock for investment by the purchaser under
relevant Canadian legislation.
74
<PAGE>
LEGAL MATTERS
Katten Muchin Zavis, Chicago, Illinois, will pass upon the validity of the
class A common stock offered in this offering for divine. Arthur W. Hahn, a
partner in Katten Muchin Zavis is one of our directors. Mr. Hahn and several
additional partners of Katten Muchin Zavis beneficially own a total of
3,220,000 shares of our class A common stock. These include shares issued
upon conversion of 400,000 shares of series C preferred stock to Katten Muchin
Zavis as consideration for legal services. Shearman & Sterling, New York, New
York, will pass upon selected legal matters in connection with this offering
for the underwriters.
EXPERTS
Our financial statements as of September 30, 1999 and for the period from
May 7, 1999 (date of inception) through September 30, 1999 have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon authority of said firm as experts in auditing and accounting.
The financial statements of Blueridge Technologies, Incorporated as of March
31, 1998 and 1999 and for the years then ended have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon authority of
said firm as experts in auditing and accounting.
The financial statements of i-Street, Inc. as of December 31, 1998 and
September 30, 1999 and for the period from September 15, 1998 (date of
inception) through December 31, 1998 and for the nine months ended September
30, 1999 have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of LiveOnTheNet.com, Inc. as of January 3, 1998 and
January 2, 1999 and for the years then ended included in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of OpinionWare.com, Inc. as of September 30, 1999
and for the period from April 1, 1999 (date of inception) through September 30,
1999 have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of Outtask.com, Inc. as of September 30, 1999 and
for the period from April 6, 1999 (date of inception) through September 30,
1999 have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of PocketCard Inc. as of December 31, 1998 and
September 30, 1999 and for the period from September 3, 1998 (date of
inception) through December 31, 1998 and for the nine months ended September
30, 1999 have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of Whiplash, Inc. as of December 31, 1997 and 1998
and for the years then ended have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in auditing and accounting.
75
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 under the Securities Act
with the SEC in connection with this offering. This prospectus is part of the
registration statement and does not contain all of the information contained in
the registration statement and all of the exhibits and the schedule filed with
the registration statement. For further information about us and our class A
common stock, please see the registration statement and the exhibits filed with
the registration statement. Summaries in this prospectus of the contents of any
agreement or other document filed as an exhibit are not necessarily complete.
In each instance, please refer to the copy of that agreement or other document
filed as an exhibit to the registration statement.
After we complete this offering, we will be required to file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read any document we file with the SEC, including the registration
statement and the exhibits filed with the registration statement, without
charge at the following SEC public reference rooms:
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Judiciary Plaza Suite 1300 500 West Madison Street
Room 1024 New York, New York 10048 Suite 1400
Washington, D.C. 20549 Chicago, Illinois 60661
You may copy all or any part of our SEC filings from these offices upon
payment of the fees charged by the SEC. You may obtain information on the
operation of the public reference room in Washington, D.C. by calling the SEC
at 1-800-SEC-0330.
Our SEC filings, including the registration statement and the exhibits filed
with the registration statement, are available from the SEC's web site at
http://www.sec.gov, which contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
DIVINE INTERVENTURES, INC.
Independent Auditors' Report............................................. F-3
Balance Sheet............................................................ F-4
Statement of Operations.................................................. F-5
Statement of Stockholders' Equity........................................ F-6
Statement of Cash Flows.................................................. F-7
Notes to Financial Statements............................................ F-8
DIVINE INTERVENTURES, INC. UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Financial Information Basis of Presentation.......... F-12
Unaudited Pro Forma Condensed Combined Balance Sheet..................... F-13
Unaudited Pro Forma Condensed Combined Statements of Operations.......... F-14
Notes to Unaudited Pro Forma Condensed Combined Financial Statements..... F-16
BLUERIDGE TECHNOLOGIES, INCORPORATED
Independent Auditors' Report............................................. F-17
Balance Sheets........................................................... F-18
Statements of Operations................................................. F-19
Statements of Net Investment by Parent................................... F-20
Statements of Cash Flows................................................. F-21
Notes to Financial Statements............................................ F-22
I-STREET, INC.
Independent Auditors' Report............................................. F-28
Balance Sheets........................................................... F-29
Statements of Operations................................................. F-30
Statements of Stockholders' Equity (Deficit)............................. F-31
Statements of Cash Flows................................................. F-32
Notes to Financial Statements............................................ F-33
LIVEONTHENET.COM, INC.
Report of Independent Public Accountants................................. F-36
Balance Sheets........................................................... F-37
Statements of Operations................................................. F-38
Statements of Shareholders' Investment................................... F-39
Statements of Cash Flows................................................. F-40
Notes to Financial Statements............................................ F-41
OPINIONWARE.COM, INC.
Independent Auditors' Report............................................. F-47
Balance Sheet............................................................ F-48
Statement of Operations.................................................. F-49
Statement of Shareholders' Deficit....................................... F-50
Statement of Cash Flows.................................................. F-51
Notes to Financial Statements............................................ F-52
OUTTASK.COM, INC.
Independent Auditors' Report............................................. F-56
Balance Sheet............................................................ F-57
Statement of Operations.................................................. F-58
Statement of Stockholders' Deficit....................................... F-59
Statement of Cash Flows.................................................. F-60
Notes to Financial Statements............................................ F-61
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
POCKETCARD INC.
Independent Auditors' Report............................................. F-64
Balance Sheets........................................................... F-65
Statements of Operations................................................. F-66
Statements of Stockholders' Deficit...................................... F-67
Statements of Cash Flows................................................. F-68
Notes to Financial Statements............................................ F-69
WHIPLASH, INC.
Independent Auditors' Report............................................. F-73
Balance Sheets........................................................... F-74
Statements of Operations................................................. F-75
Statements of Stockholders' Deficit...................................... F-76
Statements of Cash Flows................................................. F-77
Notes to Financial Statements............................................ F-78
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
divine interVentures, inc.:
We have audited the accompanying balance sheet of divine interVentures, inc.
as of September 30, 1999, and the related statements of operations,
stockholders' equity, and cash flows for the period from May 7, 1999
(inception) through September 30, 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of divine interVentures, inc.
as of September 30, 1999, and the results of its operations and its cash flows
for the period from May 7, 1999 (inception) through September 30, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
December 10, 1999
F-3
<PAGE>
DIVINE INTERVENTURES, INC.
BALANCE SHEET
September 30, 1999
Assets
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents...................................... $114,293,555
Accounts receivable............................................ 17,004
Receivable for stock issued.................................... 1,245,584
Prepaid expenses and other current assets...................... 253,670
------------
Total current assets....................................... 115,809,813
Property and equipment, net of accumulated depreciation........ 240,261
------------
Total assets............................................... $116,050,074
============
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under line of credit................................ $ 927,114
Accounts payable............................................... 923,177
Accrued expenses............................................... 973,380
Deposit on Series C preferred stock subscriptions.............. 1,140,000
------------
Total current liabilities.................................. 3,963,671
Deferred rent payable.......................................... 80,088
------------
Total liabilities.......................................... 4,043,759
------------
Stockholders equity:
Series A-1 junior convertible preferred stock, $.001 par value;
48,000,000 shares authorized; 9,236,600 shares issued and
outstanding................................................... 9,237
Series A-2 junior convertible preferred stock, $.001 par value;
39,000,000 shares authorized; 37,750,000 shares issued and
outstanding................................................... 37,750
Series B-1 junior convertible preferred stock, $.001 par value;
25,000,000 shares authorized; 2,712,000 shares issued and
outstanding................................................... 2,712
Series B-2 junior convertible preferred stock, $.001 par value;
21,000,000 shares authorized; 20,100,000 shares issued and
outstanding................................................... 20,100
Series C senior convertible preferred stock, $.001 par value;
100,000,000 shares authorized; 90,820,966 shares issued and
outstanding................................................... 90,821
Series C preferred stock subscribed: 364,834 shares............ 365
Class A common stock, $.001 par value; 900,000,000
shares authorized; 20,700,000 shares issued and outstanding... 20,700
Class B common stock, $.001 par value; 100,000,000
shares authorized; 12,250,000 shares issued and outstanding... 12,250
Additional paid-in capital..................................... 113,286,243
Accumulated deficit............................................ (1,473,863)
------------
Total stockholders' equity................................. 112,006,315
------------
Total liabilities and stockholders' equity................. $116,050,074
============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DIVINE INTERVENTURES, INC.
STATEMENT OF OPERATIONS
Period from May 7, 1999 (inception) through September 30, 1999
<TABLE>
<S> <C>
Revenues.......................................................... $ 17,004
Selling, general and administrative expenses...................... 1,489,778
-----------
Operating loss................................................ (1,472,774)
-----------
Other income (expense):
Interest income................................................. 17,120
Interest expense................................................ (18,209)
-----------
Total other expense........................................... (1,089)
-----------
Net loss...................................................... $(1,473,863)
===========
Basic and diluted net loss per share.......................... $ (0.23)
Shares used in computing basic and diluted net loss per share. 6,695,918
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DIVINE INTERVENTURES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Period from May 7, 1999 (inception) through September 30, 1999
<TABLE>
<CAPTION>
Preferred stock Preferred Common stock Additional Total
-------------------- stock ------------------ paid-in Accumulated stockholders'
Shares Amount subscribed Shares Amount capital deficit equity
----------- -------- ---------- ---------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 7, 1999
(inception)............ -- $ -- -- -- $ -- -- -- --
Issuance of Class A
common stock........... -- -- -- 20,700,000 20,700 -- -- 20,700
Issuance of Class B
common stock........... -- -- -- 12,250,000 12,250 -- -- 12,250
Issuance of Series A-1
preferred stock........ 9,236,600 9,237 -- -- -- 2,287,413 -- 2,296,650
Issuance of Series A-2
preferred stock........ 37,750,000 37,750 -- -- -- 9,387,250 -- 9,425,000
Issuance of Series B-1
preferred stock........ 2,712,000 2,712 -- -- -- 1,340,788 -- 1,343,500
Issuance of Series B-2
preferred stock........ 20,100,000 20,100 -- -- -- 10,017,400 -- 10,037,500
Issuance of Series C
preferred stock........ 90,820,966 90,821 -- -- -- 89,888,923 -- 89,979,744
Series C preferred stock
subscription........... -- -- 365 -- -- 364,469 -- 364,834
Net loss................ -- -- -- -- -- -- (1,473,863) (1,473,863)
----------- -------- --- ---------- ------- ----------- ---------- -----------
Balance at
September 30, 1999..... 160,619,566 $160,620 365 32,950,000 $32,950 113,286,243 (1,473,863) 112,006,315
=========== ======== === ========== ======= =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DIVINE INTERVENTURES, INC.
STATEMENT OF CASH FLOWS
Period from May 7, 1999 (inception) through September 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss....................................................... $ (1,473,863)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation................................................. 7,616
Changes in assets and liabilities:
Accounts receivable........................................ (17,004)
Prepaid expenses and other current assets.................. (178,670)
Accounts payable........................................... 923,177
Accrued expenses........................................... 133,380
Deferred rent payable...................................... 80,088
------------
Net cash used in operating activities.................... (525,276)
------------
Cash flows from investing activities--purchase of property and
equipment....................................................... (247,877)
------------
Net cash used in investing activities.................... (247,877)
------------
Cash flows from financing activities:
Borrowings under line of credit................................ 927,114
Deposit on Series C preferred stock subscriptions.............. 1,140,000
Proceeds from the issuance of common stock..................... 31,700
Proceeds from the issuance of preferred stock, net of issuance
costs......................................................... 112,967,894
------------
Net cash provided by financing activities................ 115,066,708
------------
Net increase in cash and cash equivalents................ 114,293,555
Cash and cash equivalents at beginning of period................. --
------------
Cash and cash equivalents at end of period....................... $114,293,555
============
Supplemental disclosure of cash flow information--interest paid.. $ 11,095
============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
DIVINE INTERVENTURES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Description of Business
divine interVentures, inc. (the Company) was incorporated in the State of
Delaware on May 7, 1999, as an Internet-holding company actively engaged in
business to business (B2B), e-commerce, and Internet support services. The
Company commenced operations on June 30, 1999.
(b) Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be cash
equivalents. Cash and cash equivalents at September 30, 1999 are invested
principally in money market accounts.
(c) Property and Equipment
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three years.
(d) Revenue Recognition
The Company's revenues since inception consist primarily of consulting
services provided to third parties. Revenues from consulting services are
recognized as the services are performed.
(e) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(f) Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding during the period and the net loss available to common
stockholders of $1,520,884, which includes preferred stock dividends of
$47,021. Because the Company reported a net loss for the period ended September
30, 1999, potentially dilutive securities have not been included in the shares
used to compute net loss per share.
Had the Company reported net income for the period ended September 30, 1999,
the weighted average number of shares outstanding would have potentially been
diluted by approximately 18,000,000 common equivalent securities, assuming the
conversion of preferred stock.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(h) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial position or cash flows.
F-8
<PAGE>
DIVINE INTERVENTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Property and Equipment
Property and equipment, at cost, less accumulated depreciation, are
summarized as follows at September 30, 1999:
<TABLE>
<S> <C>
Office equipment................................................. $234,436
Software......................................................... 13,441
--------
247,877
Less accumulated depreciation.................................... 7,616
--------
$240,261
========
</TABLE>
(3) Line of Credit
On July 7, 1999, the Company established a line of credit with Bank of
America, N.A. in the amount of $5,000,000. The line of credit accrued interest
at the Eurodollar rate plus 2.0% (7.40% at September 30, 1999). At September
30, 1999, the Company had borrowings of $927,114 outstanding under this line of
credit. Borrowings on the line of credit are personally guaranteed by a
stockholder of the Company. The Company repaid all borrowings outstanding under
the line of credit on October 21, 1999. The line of credit expired on November
7, 1999.
(4) Lease Commitments
The Company leases office facilities under noncancelable operating lease
agreements. Rental expense, including an allowable share of real estate taxes
and common area maintenance expense, was $87,186 for the period from May 7,
1999 (inception) through September 30, 1999.
At September 30, 1999, future noncancelable lease payments due under these
leases are as follows:
<TABLE>
<CAPTION>
Year ended
December 31, Amount
------------ ----------
<S> <C>
1999........................................................... $ 15,992
2000........................................................... 313,407
2001........................................................... 536,966
2002........................................................... 545,232
2003........................................................... 561,556
2004........................................................... 578,328
Thereafter..................................................... 1,209,264
----------
$3,760,745
==========
</TABLE>
(5) Income Taxes
The reconciliation of income tax expense (benefit) computed using the
Federal statutory rate of 34% to the Company's income tax expense (benefit) is
as follows:
<TABLE>
<S> <C>
Federal income tax benefit at the statutory rate.............. $(501,110)
State income tax benefit...................................... (88,431)
Permanent differences......................................... 25,603
Effect of change in valuation allowance....................... 563,938
---------
$ --
=========
</TABLE>
F-9
<PAGE>
DIVINE INTERVENTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1999 are
as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Lease acquisition costs...................................... $ 80,450
Deferred rent................................................ 32,035
Net operating loss carryforward.............................. 453,245
---------
Total gross deferred tax assets............................ 565,730
Less valuation allowance..................................... (563,938)
---------
Net deferred tax assets.................................... 1,792
Deferred tax liabilities--depreciation......................... (1,792)
---------
Net deferred tax asset..................................... $ --
=========
</TABLE>
(6) Ownership Interest in Platinum Venture Partners I, L.P. and Platinum
Venture Partners II, L.P.
On August 4, 1999, the Company became the general partner of Platinum
Venture Partners I, L.P. (PVP I) and Platinum Venture Partners II, L.P. (PVP
II). The Company provides strategic and operations support to the portfolio
companies of PVP I and PVP II. These services are generally provided by the
Company's employees, members of its board of directors, and outside
consultants. The costs related to employees are paid by the Company and will be
reflected by the Company in selling, general and administrative expenses on the
statement of operations.
As general partner of PVP I, the Company will receive an annual management
fee, payable in advance in quarterly installments commencing on October 1,
1999, of 2 1/2% of the fair market value of the partnership, adjusted annually,
by the increase in the Consumer Price Index for All Urban Consumers, U.S. City
Average during the preceding calendar year. As general partner of PVP II, the
Company receives an annual management fee, payable in advance in quarterly
installments commencing on October 1, 1999, of 2 1/2% of the aggregate partner
commitments, adjusted annually, by the percentage increase in the Consumer
Price Index for All Urban Consumers, U.S. City Average during the preceding
calendar year.
Under the terms of the PVP I and PVP II Agreements of Limited Partnership
(the Agreements), the Company may be removed as the general partner of PVP I
and PVP II upon the written request of those limited partners which have at
least two-thirds of the total limited partner interests as defined in the
Agreements.
(7) Capital Stock
The Company's initial certificate of incorporation authorized the issuance
of 1,000 shares of common stock with a par value of $.01 per share.
On August 13, 1999, the Company amended its certificate of incorporation to
authorize the issuance of 405,000,000 shares of $.001 par value capital stock,
of which 350,000,000 shares are designated class A common stock, 50,000,000
shares are designated class B common stock, and 5,000,000 shares are designated
preferred stock. Additionally, the Company converted 1,000 shares of
outstanding common stock to 10,000 shares of class B common stock.
On August 31, 1999, the Company amended its certificate of incorporation to
authorize the issuance of 850,000,000 shares of $.001 par value capital stock,
of which 400,000,000 shares are designated class A common stock, 100,000,000
shares are designated class B common stock and 350,000,000 shares are
designated preferred stock.
F-10
<PAGE>
DIVINE INTERVENTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On September 14, 1999, the Company designated 48,000,000 preferred shares as
series A-1 junior convertible preferred stock, and 39,000,000 preferred shares
as series A-2 junior convertible preferred stock. Both A-1 and A-2 stock carry
a par value of $.001 per share and are collectively referred to as series A
preferred stock.
On September 30, 1999, the Company designated 25,000,000 preferred shares as
series B-1 junior convertible preferred stock, and 21,000,000 preferred shares
as series B-2 junior convertible preferred stock. Both B-1 and B-2 stock carry
a par value of $.001 per share and are collectively referred to as series B
preferred stock.
On September 30, 1999, the Company designated 100,000,000 preferred shares
as series C senior convertible preferred stock. Series C preferred stock
carries a par value of $.001 per share.
Holders of Class A common stock are entitled to one vote per share. Holders
of class B common stock are entitled to 10 votes per share. Holders of series
A, series B, and series C preferred stock will vote on an as-converted basis
with the holders of class A and class B common stock as a single class on all
matters requiring stockholder approval.
The class A common stock has no conversion rights. A holder of class B
common stock is able to convert its class B common stock into class A common
stock, in whole or in part, at any time and from time to time on a share-for-
share basis.
Series A-1 and series B-1 shares are convertible at any time into class A
common stock on a share-for-share basis. Series A-2 and series B-2 shares are
convertible at any time into class B common stock on a share-for-share basis.
Each share of series C preferred stock is convertible into one share of class A
common stock at any time.
The series C preferred stock will automatically convert into class A common
stock immediately before the completion of a firm commitment underwritten
public offering of the Company's class A common stock in which the aggregate
price paid for the shares by the public is at least $50,000,000 at a price per
share of class A common stock of no less than twice the effective conversion
price of the series C preferred stock.
Dividends on series A preferred stock are cumulative and accrue on a daily
basis at an annual rate of 5.0% of the series A liquidation value. Dividends on
series B preferred stock are cumulative and accrue on a daily basis at an
annual rate of 6.5% of the series B liquidation value. Dividends on series C
preferred stock are cumulative and accrue at an annual rate of 8.0% of the
$1.00 purchase price. No dividends will be paid on common stock until all
accrued but unpaid dividends on the series C, series B, and series A preferred
stock, in that order, are paid or declared and set apart for payment. Dividends
are payable only upon declaration by the Company's board of directors.
Common and preferred stockholders are entitled to receive cash dividends
equally on a per share basis, or on an as-converted basis for preferred
stockholders, if and when the dividends are declared by the board of directors
from legally available funds.
In the case of any dividend paid in stock, holders of class A common stock
will be entitled to receive the same percentage dividend payable in shares of
class A common stock that the holders of class B common stock receive payable
in shares of class B common stock.
Preferred stock dividends in arrears as of September 30, 1999 are $24,624
for series A, $2,491 for series B, and $19,906 for series C.
F-11
<PAGE>
DIVINE INTERVENTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Holders of the series C, series B, and series A preferred stock are paid, in
that order, upon the liquidation of the Company. Each series of preferred stock
is entitled to its liquidation value plus any accrued but unpaid dividends,
insofar as there are sufficient assets of the Company to be distributed. After
satisfaction of the liquidation preferences of all series of preferred stock,
any remaining assets will be distributed ratably among all holders of the
common stock.
Holders of series C preferred stock may choose to convert their shares into
common stock and participate ratably as common stockholders rather than receive
the liquidation preference as preferred stockholders. The Company is entitled
at any time, upon 30 days prior notice, to redeem all or any portion of the
series C preferred stock at a price per share equal to $1.00 plus all accrued
but unpaid dividends.
On December 1, 1999, the Company amended its certificate of designation to
increase the number of preferred shares designated as series C preferred stock
to 200,000,000. Between September 30, 1999 and December 10, 1999, an additional
99,241,159 shares of series C preferred stock were sold resulting in net
proceeds of approximately $99,100,000.
On December 1, 1999, the Company designated 197,000,000 preferred shares as
series D senior convertible preferred stock, with a par value of $.001 per
share. With regard to dividends and distributions on liquidation, series D
preferred stock ranks senior to all other classes and series of capital stock
in the Company.
Dividends on series D preferred stock are cumulative, accrue on a daily
basis at an annual rate of 8.0% of the series D liquidation value and are
payable only upon declaration by the Company's board of directors. Series D
preferred stock votes together with the common stock as a single class and is
convertible into shares of class A common stock based upon the liquidation
value of the series D preferred stock, at any time by the stockholder.
As of December 10, 1999, the Company has agreed to sell 197,000,000 shares
of series D preferred stock for estimated net proceeds of $196,800,000.
(8) Related-party Transactions
The Company's Chief Executive Officer owns 3% of Blackhawk, LLC (Blackhawk)
and has the right to acquire an additional 30.3% of Blackhawk. The Company
entered into an agreement with Blackhawk whereby it was granted the option to
lease a planned office facility in Chicago, Illinois. The Company is required
to pay a monthly fee of $50,000 to maintain its option to lease the planned
facility. The option term expires on February 29, 2000. Should the Company not
exercise the option, it would have to pay a $200,000 building material loss fee
to Blackhawk. During the period from July 1, 1999 through September 30, 1999,
the Company paid Blackhawk, LLC $150,000.
F-12
<PAGE>
(9) Subsequent Events
Ownership Interests in Partner Companies
During the period from October 1, 1999 through December 10, 1999, divine
interVentures, inc. acquired ownership interests in the following companies:
<TABLE>
<CAPTION>
Approximate
Company Ownership Interest
- ------- ------------------
<S> <C>
Blueridge Technologies, Incorporated......................... 100%
Commerx, Inc................................................. 1%
comScore, Inc................................................ 2%
i-Street, Inc................................................ 64%
LiveOnTheNet.com, Inc........................................ 77%
Neoforma.com, Inc............................................ 3%
OpinionWare.com, Inc......................................... 44%
Outtask.com, Inc............................................. 32%
PocketCard Inc............................................... 37%
Sequoia Software Corporation................................. 8%
The ExecClub.com, Inc........................................ 43%
The National Transportation Exchange, Inc.................... 2%
Whiplash, Inc................................................ 27%
</TABLE>
The aggregate investment amount committed for these ownership interests was
approximately $65,000,000.
Stock Options
Effective October 1, 1999, the Company adopted the 1999 stock incentive plan
(the Plan). The Company initially made available for issuance under the Plan
40,000,000 shares of class A common stock. Subsequent to October 1, 1999, the
maximum number of shares available for delivery under the Plan automatically
increases on January 1 of each year, beginning on January 1, 2001, by a number
of shares of class A common stock equal to the lesser of (1) 10% of the total
number of shares of class A common stock then outstanding, assuming for that
purpose the conversion into class A common stock of all then outstanding
convertible securities, or (2) 300,000,000 shares.
F-13
<PAGE>
DIVINE INTERVENTURES, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BASIS OF PRESENTATION
During the period from October 1, 1999 through December 10, 1999, the
Company acquired a controlling majority voting interest in Blueridge
Technologies, Inc., LiveOnThe Net.com, Inc., and i-Street, Inc., significant
minority ownership interests in five equity method partner companies and
ownership interests in five cost method partner companies. The unaudited pro
forma condensed combined balance sheet as of September 30, 1999 reflects the
acquisitions as if they occurred on that date. The unaudited pro forma
condensed combined statements of operations for the year ended December 31,
1998 and for the nine months ended September 30, 1999 reflect these
transactions as if they occurred on January 1, 1998.
Since the pro forma financial information is based upon the financial
condition and operating results of the acquired entities during periods when
they were not under the control, influence or management of the Company, the
information presented may not be indicative of the results which would have
actually been obtained had the acquisitions been completed as of the respective
periods presented, nor are they indicative of future financial or operating
results. The unaudited pro forma financial information does not give effect to
any synergies that may occur due to the integration of the Company with its
acquired entities. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the historical audited financial
statements of the Company and the notes thereto as well as the audited
historical financial statements of Blueridge Technologies, Inc.,
LiveOnTheNet.com, Inc., i-Street, Inc. and certain equity method partner
companies and the notes thereto included elsewhere in this prospectus.
F-14
<PAGE>
DIVINE INTERVENTURES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
divine Blueridge
interVentures, Technologies, LiveOnTheNet.com, i-Street, Pro forma Pro forma
inc. Incorporated Inc. Inc. adjustments combined
-------------- ------------- ----------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $114,293,555 2,588 28,000 -- 295,941,159 (a)
(40,817,208)(b) 369,448,094
Accounts receivable.... 17,004 450,175 1,803,000 -- -- 2,270,179
Receivable for stock
issued................ 1,245,584 -- -- -- -- 1,245,584
Prepaid expenses and
other current assets.. 253,670 52,045 1,713,000 113 -- 2,018,828
------------ --------- --------- ------ ----------- -----------
Total current
assets............ 115,809,813 504,808 3,544,000 113 255,123,951 374,982,685
Property and
equipment, net of
accumulated
depreciation.......... 240,261 784,999 1,212,000 1,331 -- 2,238,591
Investment in partner
companies............. -- -- -- -- 45,317,208 (b) 45,317,208
Goodwill and other
intangible assets..... -- 629,889 -- -- 15,995,624 (b) 16,625,513
Other assets........... -- -- 278,000 318 -- 278,318
------------ --------- --------- ------ ----------- -----------
Total assets....... $116,050,074 1,919,696 5,034,000 1,762 316,436,783 439,442,315
============ ========= ========= ====== =========== ===========
Current liabilities:
Notes payable related
to partner company
acquisitions.......... $ -- -- -- -- 24,500,000 (b) 24,500,000
Borrowings under line
of credit............. 927,114 -- -- -- -- 927,114
Accounts payable....... 923,177 222,395 332,000 7,321 -- 1,484,893
Accrued expenses....... 973,380 553,778 273,000 3,719 -- 1,803,877
Deferred revenue....... -- 102,961 -- -- -- 102,961
Current portion of
capital lease
obligations........... -- 24,248 130,000 -- -- 154,248
Due to parent.......... -- 694,529 4,514,000 -- (5,208,529)(c) --
Deposit on Series C
preferred stock
subscriptions......... 1,140,000 -- -- -- -- 1,140,000
------------ --------- --------- ------ ----------- -----------
Total current
liabilities....... 3,963,671 1,597,911 5,249,000 11,040 19,291,471 30,113,093
------------ --------- --------- ------ ----------- -----------
Deferred rent payable.. 80,088 -- -- -- -- 80,088
Capital lease
obligations, less
current portion....... -- -- 145,000 -- -- 145,000
Deferred income taxes.. -- -- 162,000 -- -- 162,000
Minority interest...... -- -- -- -- 994,660 (d) 994,660
------------ --------- --------- ------ ----------- -----------
Total liabilites... 4,043,759 1,597,911 5,556,000 11,040 20,286,131 31,494,841
------------ --------- --------- ------ ----------- -----------
Stockholders' equity:
Net investment by
parent................ -- 321,785 (522,000) (9,278) 209,493 (b) --
Preferred stock........ 160,620 -- -- -- 296,241 (a) 456,861
Series C preferred
stock subscribed:
364,834 shares........ 365 -- -- -- -- 365
Common stock........... 32,950 -- -- -- -- 32,950
Additional paid-in
capital............... 113,286,243 -- -- -- 295,644,918 (a) 408,931,161
Accumulated deficit.... (1,473,863) -- -- -- -- (1,473,863)
------------ --------- --------- ------ ----------- -----------
Total stockholders'
equity............ 112,006,315 321,785 (522,000) (9,278) 296,150,652 407,947,474
------------ --------- --------- ------ ----------- -----------
Total liabilities
and stockholders'
equity............ $116,050,074 1,919,696 5,034,000 1,762 316,436,783 439,442,315
============ ========= ========= ====== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-15
<PAGE>
DIVINE INTERVENTURES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
divine Blueridge
interVentures, Technologies, LiveOnTheNet.com, i-Street, Pro forma Pro forma
inc. Incorporated Inc. Inc. adjustments combined
-------------- ------------- ----------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- 4,519,945 6,237,000 -- -- 10,756,945
Operating expenses:
Cost of revenues...... -- 1,782,918 5,391,000 -- -- 7,173,918
Selling, general, and
administrative....... -- 3,146,042 1,506,000 2,429 3,199,125 (e) 7,853,596
Gain on sale of
business............. -- -- (1,427,000) -- -- (1,427,000)
--------- --------- ---------- ------ ----------- -----------
Total operating
expenses........... -- 4,928,960 5,470,000 2,429 3,199,125 13,600,514
--------- --------- ---------- ------ ----------- -----------
Operating income (loss). -- (409,015) 767,000 (2,429) (3,199,125) (2,843,569)
Other expense........... -- (10,871) (63,000) -- -- (73,871)
--------- --------- ---------- ------ ----------- -----------
Net income (loss) before
taxes, minority
interest and equity
income (loss).......... -- (419,886) 704,000 (2,429) (3,199,125) (2,917,440)
--------- --------- ---------- ------ ----------- -----------
Income tax expense...... -- 121,000 250,000 -- -- 371,000
Minority interest....... -- -- -- -- 434,102 (g) 434,102
Equity income (loss).... -- -- -- -- (6,665,737)(f) (6,665,737)
--------- --------- ---------- ------ ----------- -----------
Net income (loss)....... $ -- (540,886) 454,000 (2,429) (10,298,964) (10,388,279)
========= ========= ========== ====== =========== ===========
Basic and diluted net
loss per share......... $ -- (1.29)
Shares used to compute
basic and diluted net
loss per share......... -- 32,950,000
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-16
<PAGE>
DIVINE INTERVENTURES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
divine Blueridge LiveOnThe i-
interVentures, Technologies, Net.com, Street, Pro forma Pro forma
inc. Incorporated Inc. Inc. adjustments combined
-------------- ------------- ---------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 17,004 2,996,809 4,165,000 -- -- 7,178,813
Operating expenses:
Cost of revenues...... -- 974,324 4,855,000 -- -- 5,829,324
Selling, general and
administrative....... 1,489,778 1,600,325 1,617,000 44,204 2,399,344 (e) 7,150,651
----------- --------- ---------- ------- ---------- -----------
Total operating
expenses........... 1,489,778 2,574,649 6,472,000 44,204 2,399,344 12,979,975
----------- --------- ---------- ------- ---------- -----------
Operating income (loss). $(1,472,774) 422,160 (2,307,000) (44,204) (2,399,344) (5,801,162)
Other income (expense).. (1,089) 109,382 (350,000) -- -- (241,707)
----------- --------- ---------- ------- ---------- -----------
Net income (loss) before
taxes, minority
interest and equity
income (loss).......... (1,473,863) 531,542 (2,657,000) (44,204) (2,399,344) (6,042,869)
----------- --------- ---------- ------- ---------- -----------
Income tax expense...... -- 362,250 -- -- 362,250
Minority interest....... -- -- -- -- 683,709 (g) 683,709
Equity income (loss).... -- -- -- -- (5,259,355)(f) (5,259,355)
----------- --------- ---------- ------- ---------- -----------
Net income (loss)....... $(1,473,863) 169,292 (2,657,000) (44,204) (8,342,408) (12,348,183)
=========== ========= ========== ======= ========== ===========
Basic and diluted net
loss per share....... $ (0.78) (1.11)
Shares used to compute
basic and diluted net
loss per share......... 32,950,000 32,950,000
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-17
<PAGE>
DIVINE INTERVENTURES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1.Basis of Presentation
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1998 and for the nine months ended September 30, 1999
give effect to the acquisitions of Blueridge Technologies, Incorporated,
LiveOnTheNet.com, Inc. and i-Street, Inc. (collectively, the "Consolidated
Companies"), the acquisitions of significant minority ownership interests in
five equity method partner companies and ownership interests in five cost
method partner companies as if they had occurred on January 1, 1998. The
aggregate purchase price for these transactions was approximately $65 million.
The following summarizes information concerning the estimated purchase price
allocation for the acquisitions of the Consolidated Companies.
<TABLE>
<CAPTION>
Fair
value of
tangible Goodwill
Purchase net and
Price assets intangibles
----------- --------- -----------
<S> <C> <C>
$20,000,000 3,374,487 16,625,513
</TABLE>
The effects of these transactions have been presented using the purchase
method of accounting and accordingly, the purchase price was allocated to the
assets and liabilities assumed based upon management's best preliminary
estimate of fair value with any excess purchase price being allocated to
goodwill or other identifiable intangibles. The preliminary allocation of the
purchase price will be subject to further adjustments, which are not
anticipated to be material, as the Company finalizes its allocation of purchase
price in accordance with generally accepted accounting principles. The pro
forma adjustments related to the purchase price allocation of the acquisitions
represent management's best estimate of the effects of the acquisitions.
2.Pro Forma Balance Sheet Adjustments
(a) Reflects the sale of an additional 296,241,159 shares of convertible
preferred stock at $1.00 per share, par value $0.001, in October through
December of 1999, and receipt of the net proceeds from these sales,
assuming $300,000 of expenses associated with the offerings.
(b) Reflects the acquisitions, in the form of cash or promissory notes,
of the Consolidated Companies, the acquisitions of significant minority
ownership interests in five equity method partner companies (collectively,
the "Equity Method Companies") and the acquisitions of ownership interests
in five cost method partner companies (collectively, the "Cost Method
Companies").
Goodwill and other intangible assets consist of the difference in the
Company's consideration for the Consolidated Companies and the Company's
ownership interest in the underlying net equity of the Consolidated
Companies. Investment in partner companies consists of the Company's
consideration for the Equity Method Companies and the Cost Method
Companies.
(c) Reflects forgiveness of debt by the parent company of Blueridge
Technologies, Incorporated and the parent company of LiveOnTheNet.com, Inc.
upon acquisition by the Company.
(d) Represents the minority ownership of LiveOnTheNet.com, Inc. and i-
Street, Inc.
3.Pro Forma Statements of Operations Adjustments
The pro forma statements of operations adjustments for the year ended
December 31, 1998 and the nine months ended September 30, 1999 consist of:
(e) Selling, general and administrative expenses have been adjusted to
reflect the amortization of intangible assets associated with the
acquisitions of Blueridge Technologies, Inc., LiveOnTheNet.com, Inc. and i-
Street, Inc. over the estimated useful life of five years.
F-18
<PAGE>
(f) Equity income (loss) has been adjusted to reflect the Company's
ownership interest in the income (loss) of the Equity Method Companies and
the amortization of the difference in the Company's carrying value in the
Equity Method Companies and the Company's ownership interest in the
underlying net equity of the Equity Method Companies over an estimated
useful life of five years. For the year ended December 31, 1998 and the
nine months ended September 30, 1999, equity income (loss) includes $(0.4)
million and $(0.5) million, respectively, of the Company's equity income
(loss) in the Equity Method Companies and $(6.3) million and $(4.8)
million, respectively, of amortization of the difference between the
Company's carrying value and equity in net assets.
(g) Minority interest has been adjusted to reflect the Company's
minority interest in LiveOnTheNet.com, Inc. and i-Street, Inc., as well as
amortization of goodwill associated with the acquisitions of
LiveOnTheNet.com, Inc. and i-Street, Inc.
4.Pro Forma Net Loss Per Share
Shares used to compute basic and diluted net loss per share are based upon
the total number of common shares outstanding as of September 30, 1999,
assuming they had been issued and outstanding from January 1, 1998.
Net loss used in the computation of basic and diluted net loss per share has
been adjusted to include assumed preferred stock dividends of $32,281,193 for
the year ended December 31, 1998 and $24,144,563 for the nine months ended
September 30, 1999, under the presumption that preferred stock had been issued
and outstanding from January 1, 1998.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Blueridge Technologies, Incorporated:
We have audited the accompanying balance sheets of Blueridge Technologies,
Incorporated (a wholly-owned subsidiary of Metters Industries, Inc.) as of
March 31, 1998 and 1999, and the related statements of operations, net
investment by Parent, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Blueridge Technologies,
Incorporated as of March 31, 1998 and 1999, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
McLean, Virginia
November 12, 1999, except as
to note 13, which is as of
November 19, 1999
F-20
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
BALANCE SHEETS
March 31, 1998 and 1999 and September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
March 31,
-------------------- September 30,
ASSETS 1998 1999 1999
------ ---------- --------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash.................................. $ 111,244 60,942 2,588
Accounts receivable................... 955,863 542,545 450,175
Inventory............................. 380,318 29,251 13,200
Deposits and prepaid expenses......... 4,083 56,464 38,845
---------- --------- ---------
Total current assets................ 1,451,508 689,202 504,808
Property and equipment, net............. 155,238 219,439 784,999
Goodwill, net of accumulated amortiza-
tion of $726,818, $1,114,454, and
$1,308,272, respectively............... 1,211,343 823,707 629,889
---------- --------- ---------
Total assets........................ $2,818,089 1,732,348 1,919,696
========== ========= =========
<CAPTION>
LIABILITIES AND NET INVESTMENT BY PARENT
- ----------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable...................... $ 326,648 201,851 222,395
Accrued expenses...................... 241,934 258,003 553,778
Deferred revenue...................... 1,169,054 795,090 102,961
Current maturities of obligations un-
der capital leases................... 34,002 44,790 24,248
Deferred taxes........................ 38,000 -- --
Due to Parent......................... 203,146 414,582 694,529
---------- --------- ---------
Total current liabilities........... 2,012,784 1,714,316 1,597,911
---------- --------- ---------
Obligations under capital leases, net of
current portion........................ 66,470 762 --
---------- --------- ---------
Total liabilities................... 2,079,254 1,715,078 1,597,911
Net investment by Parent................ 738,835 17,270 321,785
---------- --------- ---------
Total liabilities and net investment
by Parent.......................... $2,818,089 1,732,348 1,919,696
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
STATEMENTS OF OPERATIONS
Years ended March 31, 1998 and 1999 and the six months ended September 30, 1998
(unaudited) and 1999 (unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
-----------------------
1998 1999 1998 1999
---------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue......................... $4,943,641 4,519,945 2,819,246 1,866,823
Operating expenses:
Costs of revenue.............. 1,789,021 1,782,918 1,076,651 528,594
Selling, general and adminis-
trative...................... 2,358,437 3,113,163 1,558,842 813,814
Research and development...... 390,063 32,879 3,316 --
---------- --------- --------- ---------
Operating income (loss)..... 406,120 (409,015) 180,437 524,415
Other income (expense):
Interest expense.............. (21,296) (12,598) (3,700) --
Interest income............... 2,801 1,727 1,300 --
Other income.................. -- -- -- 112,100
---------- --------- --------- ---------
Total other income
(expense).................. (18,495) (10,871) (2,400) 112,100
---------- --------- --------- ---------
Income (loss) before income tax-
es............................. 387,625 (419,886) 178,037 636,515
Provision (benefit) for income
taxes.......................... 197,000 121,000 60,500 332,000
---------- --------- --------- ---------
Net income (loss)........... $ 190,625 (540,886) 117,537 304,515
========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
STATEMENTS OF NET INVESTMENT BY PARENT
Years ended March 31, 1998 and 1999 and the six months ended September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Capital Retained
contributed Distributions earnings Net investment
by Parent to Parent (deficit) by Parent
----------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Balance at March 31, 1997. $2,389,925 -- (1,310,699) 1,079,226
Distribution to Parent.. -- (531,016) -- (531,016)
Net income.............. -- -- 190,625 190,625
---------- -------- ---------- ---------
Balance at March 31, 1998. 2,389,925 (531,016) (1,120,074) 738,835
Distribution to Parent.. -- (180,679) -- (180,679)
Net loss................ -- -- (540,886) (540,886)
---------- -------- ---------- ---------
Balance at March 31, 1999. 2,389,925 (711,695) (1,660,960) 17,270
Net income (unaudited).. -- -- 304,515 304,515
---------- -------- ---------- ---------
Balance at September 30,
1999 (unaudited)......... $2,389,925 (711,695) (1,356,445) 321,785
========== ======== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
STATEMENTS OF CASH FLOWS
Years ended March 31, 1998 and 1999 and the six months endedSeptember 30, 1998
(unaudited) and 1999 (unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
-----------------------
1998 1999 1998 1999
--------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............... $ 190,625 (540,886) 117,537 304,515
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization. 461,156 483,984 241,992 340,166
Deferred taxes................ 38,000 (38,000) (38,000) --
Changes in assets and
liabilities:
Accounts receivable......... (711,384) 413,318 572,846 92,370
Inventory................... (379,343) 351,067 347,756 16,051
Deposits and prepaid
expenses................... 45,458 (52,381) 2,801 17,619
Accounts payable............ 241,602 (124,797) (168,091) 20,544
Accrued expenses............ 88,817 16,069 (45,134) 295,775
Deferred revenue............ 859,893 (373,964) (693,315) (692,129)
Due to Parent............... 10,146 211,436 79,293 279,947
--------- -------- -------- --------
Net cash provided by
operating activities..... 844,970 345,846 417,685 674,858
--------- -------- -------- --------
Cash flows from investing
activities--purchases of
equipment........................ (53,618) (160,549) (65,138) (711,908)
Cash flows from financing
activities:
Payments under capital lease
obligations.................... (45,287) (54,920) (28,300) (21,304)
Distributions to Parent......... (531,016) (180,679) (180,679) --
Proceeds from line of credit.... 175,000 -- -- --
Repayments on line of credit.... (375,000) -- -- --
--------- -------- -------- --------
Net cash used in financing
activities............... (776,303) (235,599) (208,979) (21,304)
--------- -------- -------- --------
Net increase (decrease) in
cash and cash
equivalents.............. 15,049 (50,302) 143,568 (58,354)
Cash, beginning of period......... 96,195 111,244 111,244 60,942
--------- -------- -------- --------
Cash, end of period............... $ 111,244 60,942 254,812 2,588
========= ======== ======== ========
Cash paid for interest............ $ 20,222 13,672 7,000 6,000
========= ======== ======== ========
Supplemental disclosure of noncash
investing activities:
Capital lease obligations....... $ 145,759 -- -- --
========= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Business
Blueridge Technologies, Incorporated, a Virginia corporation (the Company),
is a wholly-owned subsidiary of Metters Industries, Inc. (Metters or the
Parent). The Company specializes in the design and development of software
products and services for internet and intranet enabled document management
systems including storage and retrieval, document imaging, workflow, text
search, and computer output to laser disk (COLD) that run in a client server
environment on a variety of platforms.
In May 1996, Metters acquired all of the outstanding stock of the Company in
exchange for Metters common stock. The transaction was accounted for using the
purchase method. The purchase price of approximately $2,527,000 was allocated
to the net assets acquired based upon their estimated fair values. The excess
of the purchase price over the estimated fair value of the net assets acquired,
which approximated their historical recorded book amounts, of approximately
$1,938,000 was recorded as goodwill by Metters and is being amortized on a
straight-line basis over five years. The fair value adjustments of all assets
and liabilities, including the amounts recorded as goodwill and its related
amortization, have been reflected in the accompanying financial statements of
the Company.
The Company operates in a highly competitive marketplace and depends on
proprietary technology, and attracting and retaining key personnel. The Company
depends, in part, on financing from its Parent. There can be no assurance that
the Company or its Parent will be able to raise additional capital to expand
the Company's business activities, if necessary.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying financial statements include the accounts of Blueridge
Technologies, Incorporated, a wholly-owned subsidiary of Metters Industries,
Inc.
(b) Unaudited Interim Financial Information
The financial statements as of September 30, 1999 and for the six months
ended September 30, 1998 and 1999, respectively, are unaudited. In the opinion
of the Company's management, the unaudited interim financial statements include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for that
period. The results of operations for the six months ended September 30, 1999
are not necessarily indicative of the results of operations to be expected for
the year ended March 31, 2000.
(c) Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
(d) Revenue Recognition
The Company accounts for software transactions in accordance with Statement
of Position ("SOP") 97-2, Software Revenue Recognition. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements,
such as software products, upgrades/enhancements, post-contract customer
F-25
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
support, installation, and training, to be allocated to each element based on
the relative fair values of the elements. The revenue allocated to software
licenses is generally recognized upon delivery where the separate service
elements are not essential to functionality of the other elements. When the
separate service elements are essential to the functionality of the other
elements, software license revenues are recognized according to the contract
accounting provisions outlined in SOP 81-1, Accounting for Performance of
Construction-Type and Certain Performance-Type Contracts, specifically the
percentage of completion method. The revenue allocated to post-contract
customer support is recognized ratably over the term of the support, and
revenue allocated to service elements such as training, installation and
customization is recognized as the services are performed. Consulting revenue
is also recognized as the services are performed. Revenue from equipment sales
is recognized upon shipment. Amounts received in advance of meeting the revenue
recognition criteria are deferred.
(e) Inventories
Inventories, which consist primarily of finished goods, are stated at the
lower of cost or market. Cost is determined on a specific identification basis.
(f) Property and Equipment
Property and equipment is carried at historical cost less accumulated
depreciation. Depreciation and amortization is calculated using the straight-
line method based on the estimated remaining useful lives of the assets as
follows:
<TABLE>
<S> <C>
Computer equipment................ 3 to 5 years
Furniture and fixtures............ 5 years
Capital leases.................... Shorter of estimated life or lease term
</TABLE>
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standard ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
the Company periodically reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the undiscounted
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(g) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with an
original maturity of three months or less to be cash equivalents. The Company
did not have any cash equivalents at March 31, 1998 or 1999.
(h) Software Development Costs
Product development expenses are expensed as incurred. Statement of
Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed does not materially
affect the Company.
F-26
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(i) Goodwill
The excess of cost over the fair value of net tangible and identifiable
intangible assets acquired has been assigned to goodwill and is being amortized
using the straight-line method over five years.
(j) Income Taxes
The Company is included in the consolidated federal and state returns of the
Parent. However, the Company recognizes its provisions for income taxes as if
the Company files its income tax returns separately. The Company accounts for
income taxes under the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Annually, the Parent charges (reimburses) the Company for its federal and
state income tax expense (benefit). Deferred income tax assets (liabilities)
represent amounts to be recovered from (settled with) the Parent. These amounts
are included in Due to Parent in the accompanying balance sheets. The tax
attributes of the Parent are considered in assessing the recoverability of the
Company's federal and state deferred tax assets.
(k) Comprehensive Income (Loss)
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. The
Company has no amounts associated with the components of other comprehensive
income (loss) in the Company's financial statements.
(l) Services Provided by the Parent
The Parent provides certain services to the Company on an ongoing basis,
including marketing, financial, and administrative support, and insurance.
Certain costs of such services are charged to the Company by the Parent and may
not be reflective of the actual costs of such services had they been provided
by unrelated third parties.
(3) Property and Equipment
Property and equipment consists of the following at March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Computer equipment.................................... $499,149 659,698
Furniture and fixtures................................ 3,862 3,862
-------- --------
503,011 663,560
Less accumulated depreciation......................... (347,773) (444,121)
-------- --------
$155,238 219,439
======== ========
</TABLE>
F-27
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Lease Commitments
The Company has noncancelable operating and capital lease commitments for
office space and computer equipment, respectively. The future minimum lease
payments as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year ending March 31, --------- --------
<S> <C> <C>
2000............................................... $40,932 49,790
2001............................................... -- 840
------- --------
Total minimum lease payments..................... $40,932 50,630
=======
Less amount representing interest.................... (5,078)
--------
Present value of minimum lease payments.............. 45,552
Less current maturities of obligations under capital
leases.............................................. (44,790)
--------
Obligations under capital leases, net of current
maturities.......................................... $ 762
========
</TABLE>
Rental expense under operating leases was approximately $55,000 and $73,000
for the years ended March 31, 1998 and 1999, respectively. Cost and accumulated
amortization for computer equipment under capital leases at March 31, 1999 are
$145,759 and $97,174, respectively.
(5) Net Investment by Parent
Net investment by Parent represents the net equity of the Company. Net
investment by Parent is increased (decreased) for the Company's net income
(loss) and contributions (distributions). As of March 31, 1998 and 1999, the
Company had 100,000 shares of common stock authorized, no par value, and 66,911
shares issued and outstanding, all of which was held by the Parent. During the
years ended March 31, 1998 and 1999, all of the outstanding common stock of the
Company was pledged as collateral by the Parent to secure a line of credit from
a bank.
(6) Accounts Receivable
Accounts receivable consists of the following at March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Billed................................................... $621,760 534,229
Unbilled................................................. 334,103 8,316
-------- -------
$955,863 542,545
======== =======
</TABLE>
The unbilled amounts are due within one year and are billed on the basis of
contract terms and delivery schedules.
(7) Accrued Expenses
Accrued expenses consists of the following at March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Accrued compensation and benefits........................ $166,802 185,751
Other.................................................... 75,132 72,252
-------- -------
$241,934 258,003
======== =======
</TABLE>
F-28
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8) Related Party Transactions
During the years ended March 31, 1998 and 1999, the Parent collected cash
from a customer on behalf of the Company in the amounts of $531,016 and
$180,679, respectively, both of which are reflected as distributions to the
Parent in the accompanying financial statements of the Company.
During the years ended March 31, 1998 and 1999, the Company incurred
expenses of approximately $141,000 and $159,000 for certain support services
provided by the Parent. At March 31, 1998 and 1999, the Company owed $44,146
and $96,582, respectively, to the Parent in connection with the support
services.
(9) Note Payable
During fiscal year 1998, the Company had a $200,000 line of credit with a
financial institution payable on demand with an interest rate at the bank's
prime rate plus 1 percent. The loan was guaranteed and secured by the personal
assets of certain stockholders of the Parent who were stockholders of the
Company prior to its acquisition by the Parent. The line of credit expired in
May 1998, and the Company did not renew the line of credit. The Company had no
outstanding balance under the line of credit as of March 31, 1998.
(10) Income Taxes
The components of the income tax provisions for the years ended March 31,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Current:
Federal................................................ $135,150 102,850
State.................................................. 23,850 18,150
-------- -------
159,000 121,000
Deferred:
Federal................................................ 32,300 --
State.................................................. 5,700 --
-------- -------
38,000 --
-------- -------
$197,000 121,000
======== =======
</TABLE>
The actual income tax provision differs from the expected income tax
provision (benefit) computed using the statutory federal income tax rate of 34
percent applied to pretax loss as a result of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Computed "expected" tax provision (benefit).......... $131,793 (142,761)
Increase (reduction) in income taxes resulting from:
Increase in the beginning of the year valuation
allowance......................................... (89,848) 95,723
Amortization of goodwill........................... 151,308 151,308
Other, net......................................... 3,747 16,730
-------- --------
$197,000 121,000
======== ========
</TABLE>
F-29
<PAGE>
BLUERIDGE TECHNOLOGIES, INCORPORATED
(a wholly-owned subsidiary of Metters Industries, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities as of March 31,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Book depreciation in excess of tax depreciation........ $56,881 54,649
Other accruals......................................... 38,760 44,400
------- -------
Total deferred tax assets............................ 95,641 99,049
------- -------
Deferred tax liabilities:
Unbilled accounts receivable........................... 133,641 3,326
------- -------
Total deferred tax liabilities....................... 133,641 3,326
Valuation allowance...................................... -- (95,723)
------- -------
Net deferred income tax liability.................... $38,000 --
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the temporary differences are available to reduce income taxes
payable, management has established a valuation for the full amount of the
deferred tax assets at March 31, 1998 and 1999. The net change in the valuation
allowance during the year ended March 31, 1999 was an increase of $95,723. No
income tax payments were made during the years ended March 31, 1998 and 1999.
(11) Retirement Plan
The Company maintains a qualified defined contribution retirement plan under
the provisions of Internal Revenue Code Section 401(k). The participants may
contribute any whole percentage of salary each pay period, subject to federal
limitations. The Company may make discretionary contributions to the Plan.
During the years ended March 31, 1998 and 1999, the Company made no
discretionary contributions to the Plan.
(12) Significant Customers
During the year ended March 31, 1998, the Company generated approximately 44
percent of its total revenues from three customers. During the year ended March
31, 1999, the Company generated approximately 37 percent of its total revenues
from three customers. At March 31, 1998 and 1999, accounts receivable from
these customers was approximately $68,700 and $269,800, respectively.
(13)Subsequent Event
On November 19, 1999, the Parent entered into a purchase agreement (the
"Agreement") with a third party. Under the terms of the Agreement, the third
party will acquire all of the outstanding common stock of the Company, subject
to normal conditions of closing.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
i-Street, Inc.:
We have audited the accompanying balance sheets of i-Street, Inc., (a
development stage enterprise) as of December 31, 1998 and September 30, 1999,
and the related statements of operations, stockholder's equity (deficit), and
cash flows for the period from September 15, 1998 (inception) through December
31, 1998, the nine months ended September 30, 1999, and for the period from
September 15, 1998 (inception) to September 30, 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, the financial statements referred to above present fairly,
in all material respects, the financial position of i-Street, Inc. (a
development stage enterprise) as of December 31, 1998 and September 30, 1999,
and the results of its operations and its cash flows for the period from
September 15, 1998 (inception) through December 31, 1998, the nine months ended
September 30, 1999, and for the period from September 15, 1998 (inception) to
September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
November 12, 1999, except for
note 6 which is as of
November 23, 1999
F-31
<PAGE>
I-STREET, INC.
(a development stage enterprise)
BALANCE SHEETS
December 31, 1998 and September 30, 1999
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1998 1999
------ ------------ -------------
<S> <C> <C>
Current assets:
Prepaid expenses.................................. $ 45 88
Other current assets, net......................... -- 25
------- -------
Total current assets............................ 45 113
Property and equipment, net of accumulated
depreciation....................................... 1,820 1,331
Other assets, net................................... 51 318
------- -------
Total assets.................................... $ 1,916 1,762
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.................................. $ 29 238
Accrued liabilities............................... -- 3,719
Amounts payable to sole shareholder............... -- 7,083
------- -------
Total current liabilities....................... 29 11,040
------- -------
Stockholder's equity (deficit) (see note 6):
Series A-1 convertible preferred stock, $.001 par
value; 574,000 shares authorized; none issued and
outstanding...................................... -- --
Series A-2 convertible preferred stock, $.001 par
value; 574,000 shares authorized; none issued and
outstanding...................................... -- --
Class A common stock, $.001 par value; 1,500,000
shares authorized; 326,000 issued and
outstanding...................................... 326 326
Class B common stock, $.001 par value; 1,500,000
shares authorized; none issued and outstanding... -- --
Additional paid-in capital........................ 3,990 37,029
Deficit accumulated during the development stage.. (2,429) (46,633)
------- -------
Total stockholder's equity (deficit)............ 1,887 (9,278)
------- -------
Total liabilities and stockholder's equity
(deficit)...................................... $ 1,916 1,762
======= =======
</TABLE>
See accompanying notes to the financial statements.
F-32
<PAGE>
I-STREET, INC.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
Period from September 15, 1998 (inception) through December 31, 1998, nine
months ended September 30, 1999, and period from September 15, 1998 (inception)
through September 30, 1999
<TABLE>
<CAPTION>
Period from Period from
September 15, 1998 Nine September 15, 1998
(inception) months (inception)
through ended through
December 31, 1998 September 30, 1999 September 30, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues................ $ -- -- --
------- ------- -------
Operating expenses:
Organizational costs.. 178 150 328
Operations............ 869 26,737 27,606
Payroll expense for
sole shareholder..... -- 7,083 7,083
Administration........ 1,079 9,617 10,696
Depreciation and
amortization......... 303 617 920
------- ------- -------
Total operating
expenses........... 2,429 44,204 46,633
------- ------- -------
Net loss............ $(2,429) (44,204) (46,633)
======= ======= =======
</TABLE>
See accompanying notes to the financial statements.
F-33
<PAGE>
I-STREET, INC.
(a development stage enterprise)
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
Period from September 15, 1998 (inception) through December 31, 1998 and nine
months ended September 30, 1999
<TABLE>
<CAPTION>
Deficit
Class A accumulated
common stock Additional during the Total
-------------- paid-in development stockholder's
Shares Amount capital stage equity (deficit)
------- ------ ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at September 15,
1998 (inception) ...... -- $ -- -- -- --
Issuance of common stock
in formation of the
Company................ 326,000 326 -- -- 326
Contributed capital..... -- -- 3,990 -- 3,990
Net loss................ -- -- -- (2,429) (2,429)
------- ---- ------ ------- -------
Balance at December 31,
1998................... 326,000 326 3,990 (2,429) 1,887
Contributed capital..... -- -- 33,039 -- 33,039
Net loss................ -- -- -- (44,204) (44,204)
------- ---- ------ ------- -------
Balance at September 30,
1999................... 326,000 $326 37,029 (46,633) (9,278)
======= ==== ====== ======= =======
</TABLE>
See accompanying notes to the financial statements.
F-34
<PAGE>
I-STREET, INC.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
Period from September 15, 1998 (inception) through December 31, 1998,
nine months ended September 30, 1999, and period from
September 15, 1998 (inception) through September 30, 1999
<TABLE>
<CAPTION>
Period from Period from
September 15, 1998 September 15, 1998
(inception) Nine months (inception)
through ended through
December 31, 1998 September 30, 1999 September 30, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(2,429) (44,204) (46,633)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation........ 284 489 773
Amortization........ 19 128 147
Changes in assets
and liabilities:
Prepaid expenses.. (45) (43) (88)
Other assets...... (70) (420) (490)
Accounts payable
and accrued
expenses......... 29 11,011 11,040
------- ------- -------
Net cash used in
operating
activities..... (2,212) (33,039) (35,251)
------- ------- -------
Cash flow from investing
activities--additions
to property and
equipment.............. (2,104) -- (2,104)
------- ------- -------
Cash flows from
financing activities:
Proceeds from issuance
of common stock...... 326 -- 326
Capital contributions
from sole
shareholder.......... 3,990 33,039 37,029
------- ------- -------
Net cash
provided by
financing
activities..... 4,316 33,039 37,355
------- ------- -------
Net increase in
cash........... -- -- --
Cash at beginning of
period................. -- -- --
------- ------- -------
Cash at end of period... $ -- -- --
======= ======= =======
</TABLE>
See accompanying notes to the financial statements.
F-35
<PAGE>
I-STREET, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1) Nature of the Business
i-Street, Inc. (the Company) was incorporated as a C-corporation on
September 15, 1998 and is an Internet-based business focused on providing web-
based services for the start-up business community. The Company's web site,
www.i-streetcentral.com, provides information on the Company and the services
it performs.
Since inception, the Company has devoted substantially all of its efforts to
business planning, product development, acquiring operating assets, raising
capital, marketing, and business development activities. Accordingly, the
Company is in the development stage, as defined by the Statement of Financial
Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development
Stage Enterprises.
i-Street, Inc. is subject to risks and uncertainties common to growing
technology-based companies, including technological change, growth and
commercial acceptances of the Internet, dependence on principal products and
third party technology, new product development and performance, new product
introductions and other activities of competitors, and its limited operating
history.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(b) Impairment of Long-lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, the Company records
impairment of losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
(c) Property and Equipment
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from three to five years.
(d) Computer Software
The Company has adopted the provisions of Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Accordingly, certain costs to develop internal-use computer
software are capitalized. During the period from September 15, 1998 (inception)
through December 31, 1998, no software development costs were incurred. During
the nine months ended September 30, 1999, software development costs of $21,000
related to website development were incurred. Such amounts were expensed due to
the uncertainty of recovery.
(e) Other Assets
Other assets (current and long-term) include amounts paid for domain name
rights which are being amortized over their two year lives.
F-36
<PAGE>
I-STREET, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(g) Revenue Share Agreements
The Company entered into two revenue share agreements during 1999. In
conjunction with the revenue share agreements, the Company has a banner link to
two third-party websties. The Company earns a commission based upon a
percentage of any sales generated from the banner link on the Company's web
site. The revenue share agreements are cancelable at any time by either party.
No revenues have been recognized from the revenue share agreements.
(h) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position, or cash flows.
(3) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Property and equipment:
Office equipment............................. $ 526 526
Computer equipment........................... 1,578 1,578
------ -----
2,104 2,104
Less accumulated depreciation.................. (284) (773)
------ -----
Property and equipment, net................ $1,820 1,331
====== =====
</TABLE>
(4) Income Taxes
The reconciliation of income tax expense (benefit) computed using the
Federal statutory rate of 34% to the Company's income tax expense (benefit)
is as follows:
<TABLE>
<CAPTION>
Period from
September 15, 1998
(inception) Nine months
through ended
December 31, 1998 September 30, 1999
------------------ ------------------
<S> <C> <C>
Expected income tax benefit from
continuing operations............ $ (826) (15,030)
State income tax benefit, net of
federal taxes.................... (146) (2,652)
Permanent differences............. 160 226
Effect of change in valuation
allowance........................ 812 17,456
------ -------
$ -- --
====== =======
</TABLE>
F-37
<PAGE>
I-STREET, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Temporary differences giving rise to significant portions of the deferred
tax assets and liabilities at December 31, 1998 and September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Deferred tax assets--start-up costs............ $ 870 18,286
Deferred tax liabilities--depreciation......... (58) (18)
----- -------
Net deferred tax assets.................... 812 18,268
Valuation allowance............................ (812) (18,268)
----- -------
Net deferred taxes ........................ $ -- --
===== =======
</TABLE>
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
(5) Related Party Transactions
The Company's sole shareholder contributed capital to the Company to pay
operating expenses. Such amounts are not due to the shareholder.
The Company has $7,083 of accrued salary at September 30, 1999, payable to
the sole shareholder of the Company.
The Company's operating facilities are located in Chicago, Illinois. During
the period from September 15, 1998 (inception) through September 30, 1999, the
Company occupied office space owned by the sole shareholder. The Company
incurred no rent or utility expenses, with the exception of phone expense, from
inception through September 30, 1999.
(6) Subsequent Events
In October 1999, the Company increased its authorized capital stock to
1,500,000 shares of $.001 par value Class A common stock, 1,500,000 shares of
$.001 par value Class B common stock, and 1,500,000 shares of $.001 par value
Series A preferred stock, of which 574,000 shares were designated as Series A-1
shares and 574,000 shares were designated as Series A-2 shares. Also in October
1999, the Company affected a 326:1 stock split on its then outstanding shares
of Class A common stock. All share information included in these financial
statements has been retroactively adjusted to reflect the revised authorized
capital stock and the stock split.
On November 23, 1999, the Company entered into a Series A Preferred Stock
Purchase Agreement (the Agreement) with a third party. Under the terms of the
Agreement, the Company issued 574,000 shares of Series A-2 preferred stock. The
Series A-2 preferred stock is ultimately convertible into shares of common
stock in accordance with the terms of the Agreement.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LiveOnTheNet.com, Inc.:
We have audited the accompanying balance sheets of LiveOnTheNet.com, Inc.
(formerly Traveller Information Services, Inc., an Alabama corporation and 75%-
owned subsidiary of Thermo Information Solutions Inc.) as of January 3, 1998
and January 2, 1999, and the related statements of operations, shareholders'
investment and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LiveOnTheNet.com, Inc. as
of January 3, 1998 and January 2, 1999, and the results of their operations and
their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 18, 1999
F-39
<PAGE>
LIVEONTHENET.COM, INC.
BALANCE SHEETS
January 3, 1998, January 2, 1999, and October 2, 1999 (unaudited)
(In thousands except share amounts)
<TABLE>
<CAPTION>
January 3, January 2, October 2,
ASSETS 1998 1999 1999
------ ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 141 1,440 28
Accounts receivable, less allowances of
$21, $177, and $666....................... 1,079 3,219 1,803
Prepaid income taxes (note 5).............. 235 558 640
Prepaid expenses and other current assets.. 22 228 1,073
------ ----- ------
1,477 5,445 3,544
------ ----- ------
Property and equipment, at cost, net......... 612 953 1,212
------ ----- ------
Other assets................................. 265 302 278
------ ----- ------
$2,354 6,700 5,034
====== ===== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' INVESTMENT
----------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term capital
lease obligations (note 7)................ $ 20 147 130
Accounts payable........................... 261 472 332
Accrued income taxes....................... -- 487 --
Deferred revenue........................... -- 113 --
Other accrued expenses..................... 102 404 273
Due to parent company (note 6)............. 290 2,630 4,514
------ ----- ------
673 4,253 5,249
------ ----- ------
Long-term capital lease obligations (note 7). -- 150 145
------ ----- ------
Deferred income taxes........................ -- 162 162
------ ----- ------
Commitments (note 8)
Shareholders' investment (note 4):
Common stock, $.01 par value, 1,000,000
shares authorized at January 3, 1998 and
January 2, 1999 and 1,100,000 shares
authorized at October 2, 1999; 929,861
shares issued............................. 9 9 9
Capital in excess of par value............. 2,193 2,193 2,193
Treasury stock at cost, 2,600 shares....... (23) (23) (23)
Accumulated deficit........................ (498) (44) (2,701)
------ ----- ------
1,681 2,135 (522)
------ ----- ------
$2,354 6,700 5,034
====== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
LIVEONTHENET.COM, INC.
STATEMENTS OF OPERATIONS
Years ended January 3, 1998 and January 2, 1999
and the periods from January 4, 1998 through October 3, 1998 (unaudited)
and January 3, 1999 through October 2, 1999 (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Period from Period from
January 4, January 3,
1998 1999
Year ended Year ended through through
January 3, January 2, October 3, October 2,
1998 1999 1998 1999
---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues......................... $3,231 6,237 5,347 4,165
------ ------ ----- ------
Costs and operating expenses:
Cost of revenues............... 2,087 5,391 4,422 4,855
Selling, general and
administrative expenses (note
6)............................ 1,416 1,506 1,024 1,959
Gain on sale of business (note
2)............................ -- (1,427) -- --
------ ------ ----- ------
3,503 5,470 5,446 6,814
------ ------ ----- ------
Operating income (loss).......... (272) 767 (99) (2,649)
Interest income.................. 17 -- -- 8
Interest expense................. -- (63) (12) (16)
------ ------ ----- ------
Income (loss) before income
taxes....................... (255) 704 (111) (2,657)
Income tax (provision) benefit
(note 5)........................ 96 (250) 39 --
------ ------ ----- ------
Net income (loss)............ $ (159) 454 (72) (2,657)
====== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
LIVEONTHENET.COM, INC.
STATEMENTS OF SHAREHOLDERS' INVESTMENT
Years ended January 3, 1998 and January 2, 1999
and the period from January 3, 1999 through October 2, 1999 (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Common
stock,
$.01 Capital in
par excess of Treasury Accumulated
value par value stock deficit
------ ---------- -------- -----------
<S> <C> <C> <C> <C>
Balance at December 28, 1996............. $ 9 2,193 (23) (339)
Net loss................................. -- -- -- (159)
---- ----- --- ------
Balance at January 3, 1998............... 9 2,193 (23) (498)
Net income............................... -- -- -- 454
---- ----- --- ------
Balance at January 2, 1999............... 9 2,193 (23) (44)
Net loss (unaudited)..................... -- -- -- (2,657)
---- ----- --- ------
Balance at October 2, 1999 (unaudited)... $ 9 2,193 (23) (2,701)
==== ===== === ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
LIVEONTHENET.COM, INC.
STATEMENTS OF CASH FLOWS
Years ended January 3, 1998 and January 2, 1999
and the periods from January 4, 1998 through October 3, 1998 (unaudited)
and January 3, 1999 through October 2, 1999 (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Period from Period from
January 4, January 3,
1998 1999
Year ended Year ended through through
January 3, January 2, October 3, October 2,
1998 1999 1998 1999
---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss).............. $(159) 454 (72) (2,657)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and
amortization................ 230 364 134 374
Provision for losses on
accounts receivable......... -- 787 66 622
Deferred income tax expense
(benefit) (note 5).......... (109) (169) 14 (569)
Gain on sale of business
(note 2).................... -- (1,427) -- --
Changes in current accounts:
Accounts receivable........ (744) (2,927) (2,381) 794
Other current assets....... 117 29 52 (845)
Accounts payable........... 19 211 254 (140)
Other current liabilities.. 88 701 490 (244)
----- ------ ------ ------
Net cash used in
operating activities.... (558) (1,977) (1,443) (2,665)
----- ------ ------ ------
Investing activities:
Proceeds from sale of business
(note 2)...................... -- 1,478 -- --
Purchases of property and
equipment..................... (405) (252) (154) (578)
Other.......................... (98) (57) 54 (23)
----- ------ ------ ------
Net cash provided by
(used in) investing
activities.............. (503) 1,169 (100) (601)
----- ------ ------ ------
Financing activities:
Advances from parent company... 279 2,221 1,512 1,884
Payments under capital lease
obligations................... (34) (114) (76) (30)
----- ------ ------ ------
Net cash provided by
financing activities.... 245 2,107 1,436 1,854
----- ------ ------ ------
Increase (decrease) in
cash and cash
equivalents............. (816) 1,299 (107) (1,412)
Cash and cash equivalents at
beginning of year............... 957 141 141 1,440
----- ------ ------ ------
Cash and cash equivalents at end
of year......................... $ 141 1,440 34 28
===== ====== ====== ======
Cash paid for:
Interest....................... $ -- 63 12 16
Income taxes................... -- -- -- 473
===== ====== ====== ======
Noncash activities--
Acquisition of property and
equipment under capital lease. $ -- 391 362 8
===== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
LIVEONTHENET.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
LiveOnTheNet.com, Inc. (formerly Traveller Information Services Inc., "the
Company") designs, develops and provides a broad array of information
technology products and services.
Relationship with Thermo Information Solutions Inc., Thermo Coleman
Corporation and Thermo Electron Corporation
On October 17, 1996, Thermo Coleman Corporation ("Coleman") acquired a 75%
interest in the Company. In March 1997, Coleman transferred to Thermo
Information Solutions Inc. ("TIS") the assets and liabilities relating to its
information technology business, including its 75% interest in the stock of the
Company. As of January 2, 1999, TIS owned 713,247 shares of the Company's
common stock representing 75% of such outstanding common stock. TIS is a 79%-
owned subsidiary of Coleman. Coleman is an 87%-owned subsidiary of Thermo
Electron Corporation ("Thermo Electron").
The accompanying financial statements include the assets, liabilities,
income and expenses of the Company as included in TIS's, Coleman's and Thermo
Electron's consolidated financial statements.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to fiscal 1997 and 1998 are for the fiscal years ended January
3, 1998 and January 2, 1999, respectively. Fiscal year 1998 included 52 weeks;
fiscal 1997 included 53 weeks.
Unaudited Interim Financial Information
The financial statements as of October 2, 1999 and for the periods from
January 4, 1998 through October 31, 1998 and from January 3, 1999 through
October 2, 1999, respectively, are unaudited. In the opinion of the Company's
management, the unaudited interim financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the financial position and results of operations for that period. The
results of operations for the period from January 3, 1999 through October 2,
1999 are not necessarily indicative of the results of operations to be expected
for the year ended January 1, 2000.
Revenue Recognition
The Company earns revenues through Webcasting and Web page development,
hosting and advertising. In general, revenues are recognized in the month in
which services are performed, provided that no significant obligations remain.
Webcasting revenues are recognized when events are cast. Web advertising
revenues are recognized in the period in which the advertising is displayed.
The Company provides automated Web page development, hosting and advertising to
small businesses. The one-time fee for developing a Web page is recognized upon
completion of the work. Revenues for Web hosting and advertising are recognized
in the period the services are provided.
Through December 1998, the Company also earned revenues as an Internet
services provider, and recognized revenue as services were provided (note 2).
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (note 3).
F-44
<PAGE>
LIVEONTHENET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accordingly, no accounting recognition is given to stock options granted at
fair market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to shareholders' investment.
Income Taxes
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," the Company recognizes deferred income
taxes based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Cash and Cash Equivalents
The Company's cash equivalents are invested in an interest-bearing money
market account. Cash and cash equivalents are carried at cost, which
approximates market value.
Property and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: machinery and equipment, 3 to 7 years
and leasehold improvements, the shorter of the term of the lease or the life of
the asset. Property and equipment consists of:
<TABLE>
<CAPTION>
1997 1998
---- -----
(In
thousands)
<S> <C> <C>
Machinery and equipment........................................ $925 1,447
Leasehold improvements......................................... 52 55
---- -----
977 1,502
Less accumulated depreciation and amortization................. 365 549
---- -----
$612 953
==== =====
</TABLE>
Other Assets
Other assets in the accompanying balance sheet relate primarily to
specifically identifiable intangible assets and are amortized using the
straight-line method over an estimated useful life of 5 years. These assets
were $337,000 at year-end 1997 and 1998, net of accumulated amortization of
$80,000 and $137,000, at year-end 1997 and 1998, respectively.
Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements
for disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"Other comprehensive items," which represents certain items reported as
components of shareholders' investment. The Company has no such items and,
accordingly, its comprehensive income (loss) is equal to its net income (loss)
for all periods presented.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and due to parent company.
The carrying amounts of these financial instruments approximate fair value due
to their short-term nature.
F-45
<PAGE>
LIVEONTHENET.COM, INC.
NOTES TO 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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) Disposition
In December 1998, the Company sold its access and virtual domain (vdom) line
of business to an unrelated third party for $1,628,000 in cash, of which
$150,000 is held in escrow, resulting in a gain of $1,427,000. The access and
vdom business provided regional Internet services and World Wide Web services
to small businesses. This line of business represented 25% of the Company's
revenues in 1998.
(3) Employee Benefit Plans
Stock-based Compensation Plans
The Company has an incentive stock option plan for its key employees, which
permits the grant of incentive stock option awards as determined by the
Company's Board of Directors (the "Board"). The option recipients and the terms
of the options granted under this plan are determined by the Board. As of year-
end 1998, options to purchase 23,735 shares were outstanding. These options
vested and became immediately exercisable on the two-month anniversary of the
grant date. The term of the options is five years. Incentive stock options must
be granted at not less than fair market value of the Company's stock on the
date of grant.
A summary of the Company's stock option activity is:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
------ -------- ------ --------
(Shares in thousands)
<S> <C> <C> <C> <C>
Options outstanding, at beginning and
end of year............................ 24 $3.00 24 $3.00
=== ===== === =====
Options exercisable..................... 24 $3.00 24 $3.00
=== ===== === =====
Options available for grant............. -- --
=== ===
</TABLE>
As of January 2, 1999, the options outstanding were exercisable at $3.00 and
had a weighted-average remaining contractual life of 1.7 years.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to
account for its stock-based compensation plans. Had compensation costs for
awards granted under the Company's
F-46
<PAGE>
LIVEONTHENET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
stock-based compensation plans been determined based on the fair value at the
grant dates consistent with the method set forth under SFAS No. 123, the effect
on the Company's net income (loss) would have been:
<TABLE>
<CAPTION>
1997 1998
-------- -------
(In thousands)
<S> <C> <C>
Net income (loss):
As reported........................................... $ (159) 454
======== ======
Pro forma............................................. (169) 446
======== ======
</TABLE>
Pro forma compensation expense for options granted is reflected over the
vesting period; therefore, future pro forma compensation expense may be greater
as additional options are granted.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Defined Contribution Pension Plan
Beginning in February 1997, substantially all of the Company's full-time
employees are eligible to participate in a defined contribution pension plan
after one year of service. Contributions to the plan are made by both the
employee and the Company. Company contributions are based upon 2% of employee's
gross wages for the prior year. For these plans, the Company contributed and
charged to expense $11,000 and $13,000 in 1997 and 1998, respectively.
(4) Common Stock
At January 2, 1999, the Company had reserved 23,735 unissued shares of its
common stock for possible issuance under stock-based compensation plans.
(5) Income Taxes
The components of the income tax (provision) benefit are:
<TABLE>
<CAPTION>
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Currently payable:
Federal................................................ $ -- (370)
State.................................................. -- (41)
------- -------
-- (411)
------- -------
Prepaid (deferred), net:
Federal................................................ 83 135
State.................................................. 13 26
------- -------
96 161
------- -------
$ 96 (250)
======= =======
</TABLE>
F-47
<PAGE>
LIVEONTHENET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The income tax (provision) benefit in the accompanying statement of
operations differs from the amount calculated by applying the statutory
federal income tax rate of 34% to income (loss) before income taxes due to:
<TABLE>
<CAPTION>
1997 1998
------- -------
(In thousands)
<S> <C> <C>
(Provision) benefit for income taxes at statutory
rate................................................. $ 87 (239)
Increases (decreases) resulting from:
State income taxes, net of federal.................. 9 (10)
Nondeductible expenses.............................. (1) (12)
Other............................................... 1 11
------ -------
$ 96 (250)
====== =======
</TABLE>
Prepaid income taxes in the accompanying balance sheet consist of:
<TABLE>
<CAPTION>
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Prepaid income taxes:
Net operating loss carryforward....................... $ 260 --
Depreciation.......................................... (31) (162)
Reserves and accruals................................. 6 558
------- -------
$ 235 396
======= =======
</TABLE>
(6) Related-party Transactions
Corporate Services
Thermo Electron's corporate staff provides certain administrative services,
including certain legal advice and services, risk management, certain employee
benefit administration, tax advice and preparation of tax returns, centralized
cash management and certain financial and other services. Since the beginning
of 1998, the Company has paid Thermo Electron annually an amount equal to 0.8%
of the Company's revenues. From October 1996 through year-end 1997, the
Company paid an amount equal to 1.0% of the Company's revenues. For these
services, the Company was charged $32,000 and $50,000 in 1997 and 1998,
respectively. The annual fee is reviewed and adjusted annually by mutual
agreement of the parties. Management believes that the service fee charged by
Thermo Electron is reasonable and that such fees are representative of the
expenses the Company would have incurred on a stand-alone basis. For
additional items such as employee benefit plans, insurance coverage and other
identifiable costs, Thermo Electron charges the Company based upon costs
attributable to the Company.
Other Related-party Transactions
In 1997 and 1998, Coleman paid the Company $755,000 and $42,000,
respectively, for Internet services.
Due to Parent Company
The Company had $290,000 and $2,630,000 of interest-bearing advances from
TIS at year-end 1997 and 1998, respectively, which bore interest at a rate of
5% and were due on demand.
F-48
<PAGE>
LIVEONTHENET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(7) Long-term Capital Lease Obligations
The Company leases computer equipment under capital leases. The carrying
amount of the equipment is $291,000, which is included in property and
equipment, net in the accompanying balance sheet.
The future minimum lease payments under capital leases are as follows (in
thousands):
<TABLE>
<S> <C>
1999................................................................ $163
2000................................................................ 111
2001................................................................ 47
----
321
Less amount representing interest................................... 24
----
Present value of minimum lease payments............................. 297
Less current portion................................................ 147
----
Long-term capital lease obligations................................. $150
====
</TABLE>
(8) Commitments
The Company leases portions of its office, operating facilities and certain
equipment under various operating lease arrangements. The accompanying
statement of operations includes expenses from operating leases of $101,000 and
$45,000 in 1997 and 1998, respectively. At January 2, 1999, future minimum
payments due under noncancelable operating leases, expiring at various dates
through 2000, are $57,000 in 1999 and $26,000 in 2000. Total future minimum
lease payments are $83,000.
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
OpinionWare.com, Inc.:
We have audited the accompanying balance sheet of OpinionWare.com Inc. (a
development stage enterprise) (the Company) as of September 30, 1999, and the
related statements of operations, shareholders' deficit, and cash flows for the
period from April 1, 1999 (inception) through September 30, 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OpinionWare.com, Inc. as of
September 30, 1999, and the results of its operations and its cash flows for
the period from April 1, 1999 (inception) through September 30, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Minneapolis, Minnesota
November 24, 1999, except
for note 8, which is as of
December 8, 1999
F-50
<PAGE>
OPINIONWARE.COM, INC.
(a development stage enterprise)
BALANCE SHEET
September 30, 1999
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash.............................................................. $ 47,092
---------
Property and equipment.............................................. 37,054
Less accumulated depreciation..................................... (5,260)
---------
31,794
---------
Other assets, net................................................... 60,720
---------
Total assets.................................................... $ 139,606
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Line of credit.................................................... $ 135,000
Accrued expenses.................................................. 36,074
Note payable...................................................... 10,000
---------
Total current liabilities....................................... 181,074
Advance from investor............................................... 375,000
---------
Total liabilities............................................... 556,074
---------
Shareholders' deficit:
Common stock, authorized 10,000,000 shares, no par; issued and
outstanding 2,400,000
shares........................................................... 40,000
Additional paid-in capital........................................ 87,120
Deficit accumulated during the development stage.................. (543,588)
---------
Total shareholders' deficit..................................... (416,468)
---------
Total liabilities and shareholders' deficit..................... $ 139,606
=========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
OPINIONWARE.COM, INC.
(a development stage enterprise)
STATEMENT OF OPERATIONS
Period from April 1, 1999 (inception) through September 30, 1999
<TABLE>
<S> <C>
Revenues.............................................................. $ --
--------
Operating expenses:
Research and development............................................ 242,325
General and administrative.......................................... 272,668
--------
Total operating expenses.......................................... 514,993
Interest expense...................................................... 28,595
--------
Net loss.......................................................... $543,588
========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
OPINIONWARE.COM, INC.
(a development stage enterprise)
STATEMENT OF SHAREHOLDERS' DEFICIT
Period from April 1, 1999 (inception) through September 30, 1999
<TABLE>
<CAPTION>
Deficit
accumulated
Common Stock Additional during the Total
----------------- paid-in development shareholders' ---
Shares Amount capital stage deficit
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1999
(inception)............ -- $ -- -- -- --
Issuance of common stock
at May 26, 1999 (date
of incorporation)...... 2,400,000 40,000 -- -- 40,000
Options issued in
connection with advance
from investor.......... -- -- 87,120 -- 87,120
Net loss................ -- -- -- (543,588) (543,588)
--------- ------- ------ -------- --------
Balance at September 30,
1999................... 2,400,000 $40,000 87,120 (543,588) (416,468)
========= ======= ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
OPINIONWARE.COM, INC.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
Period from April 1, 1999 (inception) through September 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.......................................................... $(543,588)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 5,260
Interest expense related to the issuance of options............. 26,400
Increase in accrued expenses.................................... 36,074
---------
Net cash used in operating activities......................... (475,854)
---------
Cash flows from investing activities--purchases of property and
equipment.......................................................... (27,054)
---------
Net cash used in investing activities......................... (27,054)
---------
Cash flows from financing activities:
Net proceeds from line of credit.................................. 135,000
Proceeds from issuance of note payable............................ 10,000
Advance from investor............................................. 375,000
Proceeds from issuance of common stock............................ 30,000
---------
Net cash provided by financing activities..................... 550,000
---------
Net increase in cash................................................ 47,092
Cash, beginning of period........................................... --
---------
Cash, end of period................................................. $ 47,092
=========
Supplemental disclosure of noncash financing and investing
activities:
Common stock issued in exchange for fixed assets.................. $ 10,000
Cash paid for interest............................................ 2,195
=========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
OPINIONWARE.COM, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
(a) Development Stage
OpinionWare.com, Inc. (the Company) commenced operations on April 1, 1999,
and was incorporated in the State of Minnesota on May 26, 1999 under the name
OpinionWare.com, Inc. The Company is a development stage enterprise that plans
to provide a first-of-its-kind product for web-based opinion discussion that
allows businesses to interact and understand the opinions of public and private
online communities. The Company currently conducts operations in Minnesota,
Ohio, Colorado, Illinois, and Massachusetts.
The Company has had no operating revenues, as its activities have focused on
initial product development, market development, and raising capital. Financing
of the development activities has been provided primarily through the sale of
common stock, establishment of a line of credit and an advance from a third
party investor. The accumulated loss from inception through September 30, 1999
was $543,588.
On November 16, 1999, the Company reincorporated as a Delaware corporation
and on December 8, 1999 amended its articles of incorporation (see note 8).
(b) Cash Equivalents
The Company considers highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
(c) Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, which is
three years.
(d) Research and Development
The cost of research and development is expensed in the period in which it
is incurred.
(e) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
(f) Stock-based Compensation
The Company applies the intrinsic value method prescribed in APB Opinion No.
25 to account for the issuance of stock incentives to employees and directors
and, accordingly, no compensation expense related to employees' and directors'
stock incentives has been recognized in the financial statements. Pro forma
disclosure of the net income impact of applying the provisions of SFAS No. 123,
Accounting for Stock-based Compensation, of recognizing stock compensation
expense over the vesting period based on the fair value of all stock-based
awards on the date of grant is presented in note 2.
F-55
<PAGE>
OPINIONWARE.COM, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Income Taxes
Deferred taxes are provided on an asset and liability method for temporary
differences and for operating loss and tax credit carryforwards. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis.
(2) Stock Options
Incentive stock options and nonqualified options may be granted for the
purchase of up to 1,618,000 shares of common stock.
During the period from May 26, 1999 (date of incorporation) through
September 30, 1999, the Company granted options for the purchase of 1,220,000
shares of common stock, at $0.05 per share. All options vest over a 28 month
period and expire no later than 9 years and 4 months from date of grant. At
September 30, 1999, 100,000 of these options were exercisable at a price of
$0.05 per share.
Information with respect to options outstanding as of September 30, 1999 is
summarized as follows:
<TABLE>
<CAPTION>
Weighted
average exercise
Options price per share
--------- ----------------
<S> <C> <C>
Outstanding at May 26, 1999 (date of
incorporation).............................. -- --
Granted.................................... 1,220,000 $0.05
--------- -----
Outstanding at September 30, 1999............ 1,220,000 $0.05
========= =====
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options exercisable
---------------------------------- ----------------------
Weighted
Number average Number
outstanding remaining exercisable
Exercise September 30, contractual Exercise September 30, Exercise
prices 1999 life price 1999 price
-------- ------------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.05 1,220,000 9.1 $0.05 100,000 $0.05
</TABLE>
The Company has adopted the disclosure provisions only of SFAS No. 123, for
employees and directors, and will continue to account for its stock option plan
in accordance with the provisions of APB No. 25, Accounting for Stock Issued to
Employees.
The estimated per share weighted-average fair value of all stock options
granted during the period ended September 30, 1999 was $0.02, as of the date of
grant. The fair value of the Company's stock-based awards was estimated using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected life in years........................................ 9.33
Risk-free interest rates...................................... 5.5 to 6.4%
Expected volatility........................................... 0%
</TABLE>
Pursuant to the requirements of SFAS No. 123, the following is the pro forma
net loss amount for the period from April 1, 1999 (inception) through September
30, 1999, as if the compensation cost for the stock
F-56
<PAGE>
OPINIONWARE.COM, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
options issued had been determined based on the fair value at the grant date
for grants issued during the period ended September 30, 1999, reflected over
the options vesting period.
<TABLE>
<S> <C>
Net loss:
As reported................................................... $543,588
Fair value of stock-based compensation........................ 1,990
--------
Pro forma net loss.......................................... $545,578
========
</TABLE>
(3) Advance from Investor
The Company received $375,000 from a third party investor through the period
ended September 30, 1999 to be converted in the future to a yet undetermined
number of shares of the Company. Coincident with the issuance of shares, the
Company plans to issue 100,000 options to the investor to purchase 100,000
shares of the Company as consideration for the advance. The fair value of the
consideration represents debt issuance costs and has been reflected in other
assets net of amortization as of September 30, 1999 (see note 8).
(4) Line of Credit
On June 15, 1999, the Company entered into a loan agreement with a financial
institution, which made available a line of credit of $135,000 through May 14,
2000. Interest on the outstanding balance is based on the prime rate of
interest plus one and one-quarter percent. The interest rate on the outstanding
balance of $135,000 at September 30, 1999 was 9.5 percent. The line of credit
is collateralized by any and all of the assets of the Company and the personal
guarantees of the shareholders of the Company. The Company also has agreed to
pay the financial institution a facility fee, which is calculated at the rate
of .01 percent per annum on $135,000.
(5) Note Payable
On June 15, 1999 the Company entered into a promissory note agreement with a
third party in the amount of $10,000. Outstanding principal and interest is due
at the earlier of June 15, 2004 or upon demand. The promissory note agreement
calls for interest to be charged on the outstanding principal balance at 6
percent per annum. At an undetermined future date, the Company plans to issue
the holder of the note 8,000 options to purchase 8,000 shares of the Company.
(6) Income Taxes
The Company has incurred net operating losses since inception. Given the
uncertainty of future earning trends, the Company has not reflected any benefit
of such net operating loss carryforwards in the accompanying financial
statements.
As of September 30, 1999, the Company has U.S. tax net operating loss
carryforwards of approximately $500,000, which will be available to offset
earnings during the carryforward period. If not used, these carryforwards begin
to expire in 2019. Pursuant to Sections 382 and 383 of the Internal Revenue
Code, the annual use of the Company's net operating loss and credit
carryforwards may be limited if a cumulative change in ownership (as defined by
the Internal Revenue Code) of more than 50 percent occurs within a three-year
testing period.
F-57
<PAGE>
OPINIONWARE.COM, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(7) Commitments and Contingencies
(a) Lease Agreements
The Company leases certain office space in Massachusetts under a
noncancelable operating lease that expired on September 30, 1999. Rental
expense under the lease during the period April 1, 1999 (inception) through
September 30, 1999 was $21,000. The lease was renewed on October 1, 1999 for a
six-month period with base rent of $3,500 per month.
(b) Employment Contracts
The Company has employment agreements and arrangements with the two
shareholders of the Company and certain management personnel that provide for
aggregate minimum annual base compensation of $760,000, expiring on various
dates through July 2001.
(c) Options to be Granted
The Company has agreed to appoint two directors to the board contingent upon
the completion of an investment in the Company by a third party (see note 8).
Coincident with the appointment of the two directors to the Company's board,
the Company has agreed to grant each of the newly appointed directors 75,000
options for the purchase of 75,000 shares of common stock of the Company.
(8) Subsequent Events
On December 8, 1999, the Company entered into a Series A Preferred Stock
Purchase Agreement (the Agreement) with a third party. Under the terms of the
Agreement, the Company issued 2,222,222 shares of Series A-2 convertible
preferred stock. The Series A-2 preferred stock is ultimately convertible into
shares of common stock of the Company in accordance with the terms of the
Agreement.
As of the closing of the Agreement, the Company's authorized capital stock
consisted of 10,000,000 shares of $.001 par value Class A common stock,
4,900,000 shares of $.001 par value Class B common stock, 4,900,000 shares of
$.001 par value Series A-1 preferred stock, and 4,900,000 shares of $.001 par
value Series A-2 preferred stock.
On December 8, 1999, the advance from investor (see note 3) was converted
into 416,666 shares of Series A-1 preferred stock. In addition, options to
purchase 100,000 shares of Class A common stock with an exercise price of $.05
per share were issued to the investor.
F-58
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Outtask.com, Inc.:
We have audited the accompanying balance sheet of Outtask.com, Inc. (a
development stage enterprise) as of September 30, 1999, and the related
statements of operations, stockholders' deficit, and cash flows for the period
from April 6, 1999 (inception) through September 30, 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Outtask.com, Inc. (a
development stage enterprise) as of September 30, 1999, and the results of its
operations and its cash flows for the period from April 6, 1999 (inception)
through September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
McLean, Virginia
November 5, 1999, except as to note 8, which is as of December 10, 1999
F-59
<PAGE>
OUTTASK.COM, INC.
(a development stage enterprise)
BALANCE SHEET
September 30, 1999
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash.............................................................. $ 190,747
Prepaid rent...................................................... 2,909
---------
Total current assets............................................ 193,656
Property and equipment, net......................................... 72,506
Deposit............................................................. 5,816
---------
Total assets.................................................... $ 271,978
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................................. $ 55,425
Accrued vacation.................................................. 2,300
Advance from founder.............................................. 234,750
---------
Total current liabilities....................................... 292,475
---------
Stockholders' deficit:
Common stock, $.01 par value; 30,000,000 shares authorized;
11,775,000 shares issued and outstanding......................... 117,750
Deficit accumulated during the development stage.................. (138,247)
Total stockholders' deficit..................................... (20,497)
---------
Total liabilities and stockholders' deficit..................... $ 271,978
=========
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
OUTTASK.COM, INC.
(a development stage enterprise)
STATEMENT OF OPERATIONS
Period from April 6, 1999 (inception) through September 30, 1999
<TABLE>
<S> <C>
Revenue............................................................... $ --
--------
Operating expenses:
Research and development............................................ 59,187
Marketing........................................................... 42,849
General and administrative.......................................... 36,211
--------
Total operating expenses.......................................... 138,247
Income taxes.......................................................... --
--------
Net loss.......................................................... $138,247
========
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE>
OUTTASK.COM, INC.
(a development stage enterprise)
STATEMENT OF STOCKHOLDERS' DEFICIT
Period from April 6, 1999 (inception) through September 30, 1999
<TABLE>
<CAPTION>
Deficit
accumulated
Common Stock during the Total
------------------- development stockholders'
Shares Amount stage deficit
---------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at April 6, 1999
(inception)..................... -- $ -- -- --
Issuance of common stock....... 11,775,000 117,750 -- 117,750
Net loss....................... -- -- (138,247) (138,247)
---------- -------- -------- --------
Balance at September 30, 1999.... 11,775,000 $117,750 (138,247) (20,497)
========== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-62
<PAGE>
OUTTASK.COM, INC.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
Period from April 6, 1999 (inception) through September 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.......................................................... $(138,247)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation.................................................... 978
Changes in assets and liabilities:
Prepaid rent.................................................. (2,909)
Accounts payable.............................................. 55,425
Accrued vacation.............................................. 2,300
---------
Net cash used in operating activities....................... (82,453)
---------
Cash flows from investing activities:
Purchases of property and equipment............................... (73,484)
Deposit........................................................... (5,816)
---------
Net cash used in investing activities....................... (79,300)
Cash flows from financing activities:
Proceeds from issuance of common stock............................ 117,750
Advance from founder.............................................. 234,750
---------
Net cash provided by financing activities................... 352,500
---------
Net increase in cash........................................ 190,747
Cash, beginning of period........................................... --
---------
Cash, end of period................................................. $ 190,747
=========
</TABLE>
See accompanying notes to financial statements.
F-63
<PAGE>
OUTTASK.COM, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Business
Outtask.com, Inc. (the "Company"), a Delaware corporation, was founded on
April 6, 1999. The Company is a development stage enterprise as it is currently
devoting substantially all of its efforts to commencing its planned principal
operations and has not yet begun to generate revenue. The Company will provide
a variety of web-based business applications and solutions.
The Company operates in a highly competitive marketplace and depends on
proprietary technology, and attracting and retaining key personnel. The
Company's products, when developed, will be subject to rapid technological
obsolescence and potential failures, and there can be no assurance that the
Company will develop a marketable product. In addition, there can be no
assurance that the Company will be able to raise sufficient capital to support
its product development efforts and business activities.
(2) Summary of Significant Accounting Policies
(a) Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Property and equipment
Property and equipment is carried at historical cost less accumulated
depreciation. Depreciation and amortization is calculated using the straight-
line method based on the estimated remaining useful lives of the assets as
follows:
<TABLE>
<S> <C>
Computer hardware................................................. 3 years
Video hardware.................................................... 3 years
Furniture and fixtures............................................ 5 years
</TABLE>
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standard ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
the Company periodically reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the undiscounted
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(c) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with an
original maturity of three months or less to be cash equivalents. The Company
did not have any cash equivalents at September 30, 1999.
F-64
<PAGE>
OUTTASK.COM, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(d) Research and Development
Research and development expenses include product development activities and
are expensed as incurred. Statement of Financial Accounting Standards ("SFAS")
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed does not materially affect the Company.
(e) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(f) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. The
Company has no amounts associated with the components of other comprehensive
income in the Company's financial statements.
(3) Leases and Other Commitments
The Company has a noncancellable operating lease for office space in
Virginia, which expires in June 2000. Rental expense under the lease, which was
executed on August 16, 1999, was approximately $8,500 for the period from April
6, 1999 (inception) through September 30, 1999. The remaining lease payments as
of September 30, 1999 are approximately $34,900.
The Company entered into an agreement in September 1999 with a third party
to provide internet and related support services. The agreement expires in
September 2000 and requires monthly payments in the amount of $1,540.
(4) Property and Equipment
Property and equipment consists of the following at September 30, 1999:
<TABLE>
<S> <C>
Computer hardware................................................ $51,920
Video hardware................................................... 13,995
Furniture and fixtures........................................... 7,569
-------
73,484
Less accumulated depreciation.................................... (978)
-------
$72,506
=======
</TABLE>
(5) Capital Stock
In April 1999, the Company issued an aggregate of 117,500 shares of common
stock to the Company's founders at a price of $1.00 per share.
F-65
<PAGE>
OUTTASK.COM, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Related Party Transactions
During the period from April 6, 1999 (inception) through September 30, 1999,
the Company received advances from its founder in the aggregate amount of
$234,750. The advances are unsecured, do not bear interest, and are repayable
upon demand.
(7)Income Taxes
No provision has been made for income taxes as the Company incurred a
taxable loss for the period from April 6, 1999 (inception) through September
30, 1999. The actual income tax provision (benefit) differs from the expected
income tax benefit computed using the statutory federal income tax rate of 34
percent applied to pretax loss as a result of the following:
<TABLE>
<S> <C>
Computed "expected" tax benefit................................. $(47,004)
(Increase) reduction in tax benefit resulting from:
Increase in the beginning of the year valuation allowance..... 55,299
State income tax benefit...................................... (8,295)
--------
$ --
========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities as of September
30, 1999 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward............................... $ 23,675
Start-up and organizational costs............................. 31,624
--------
Total deferred tax assets................................... 55,299
--------
Valuation allowance............................................. (55,299)
--------
Net deferred tax asset...................................... $ --
========
</TABLE>
The Company had net operating loss carryforwards of approximately $59,000 at
September 30, 1999 for income tax purposes. These carryforwards expire, if
unused, in 2019. Because of the "change of ownership" provision of the Internal
Revenue Code, a portion of the Company's net operating loss carryforwards may
be subject to annual limitations regarding their utilization in the event of a
change in control of the Company.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the temporary differences are available to reduce income taxes
payable, management has established a valuation allowance for the full amount
of the deferred tax assets at September 30, 1999. No income tax payments were
made during the period from April 6, 1999 (inception) through September 30,
1999.
(8) Subsequent Events
In November 1999, the Company increased its authorized capital stock to
30,000,000 shares of $.01 par value Class A common stock, 10,000,000 shares of
$.01 par value Class B common stock, 9,259,259 shares of
F-66
<PAGE>
$.01 par value Series A-1 preferred stock, and 8,101,852 shares of $.01 par
value Series A-2 preferred stock. Also in November 1999, the Company executed a
100:1 common stock split. All common stock share amounts have been
retroactively adjusted in the accompanying financial statements to reflect the
split.
On December 10, 1999, the Company entered into a Series A Preferred Stock
Purchase Agreement (the Agreement) with a third party. Under the terms of the
Agreement, the Company issued 8,101,852 shares of Series A-2 preferred stock.
The Series A-2 preferred stock is ultimately convertible into shares of common
stock of the Company in accordance with the terms of the Agreement.
On December 10, 1999, the Company increased the number of shares of Class A
common stock reserved for issuance under its Stock Incentive Plan to 1,500,000
and issued 945,000 common stock options.
In December 1999, the Company issued 1,115,407 shares of Series A-1
preferred stock including 1,012,731 shares issued to the Company's founder.
F-67
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PocketCard Inc.:
We have audited the accompanying balance sheets of PocketCard Inc. (a
development stage enterprise) as of December 31, 1998 and September 30, 1999
and the related statements of operations, stockholders' deficit, and cash flows
for the period from September 3, 1998 (inception) through December 31, 1998,
for the nine months ended September 30, 1999, and for the period from September
3, 1998 (inception) through September 30, 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, the financial statements referred to above present fairly,
in all material respects, the financial position of PocketCard Inc. (a
development stage enterprise) as of December 31, 1998 and September 30, 1999,
and the results of its operations and its cash flows for the period from
September 3, 1998 (inception) through December 31, 1998, for the nine months
ended September 30, 1999, and for the period from September 3, 1998 (inception)
through September 30, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
November 5, 1999, except for note 7, which is as of November 23, 1999
F-68
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
BALANCE SHEETS
December 31, 1998 and September 30, 1999
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1998 1999
------ ------------ -------------
<S> <C> <C>
Current assets:
Cash.............................................. $ 900 6,793
Restricted cash................................... -- 6,175
Stock subscriptions receivable.................... 9,000 52,083
--------- --------
Total current assets............................ 9,900 65,051
Property and equipment, net of accumulated
depreciation....................................... -- 25,344
Other assets........................................ -- 395
--------- --------
Total assets.................................... $ 9,900 90,790
========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Due to affiliates................................. $ 306,620 602,622
Accrued expenses.................................. -- 16,313
Customer deposits................................. -- 8,642
Deferred revenue.................................. -- 1,925
--------- --------
Total current liabilities....................... 306,620 629,502
--------- --------
Stockholders' deficit (see notes 3 and 7):
Series A-1 convertible preferred stock, $.0000001
par value; 16,863,905 shares authorized; none
issued and outstanding........................... -- --
Series A-2 convertible preferred stock, $.0000001
par value; 14,792,899 shares authorized; none
issued and outstanding........................... -- --
Class A common stock, $.0000001 par value;
90,000,000 shares authorized; 20,000,000 and
24,629,629 shares issued and outstanding at
December 31, 1998 and September 30, 1999......... 2 2
Class B common stock, $.0000001 par value;
14,792,899 shares authorized; none issued and
outstanding...................................... -- --
Additional paid-in capital........................ 9,998 62,081
Deficit accumulated during the development stage.. (306,720) (600,795)
--------- --------
Total stockholders' deficit..................... (296,720) (538,712)
--------- --------
Total liabilities and stockholders' deficit..... $ 9,900 90,790
========= ========
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
Period from September 3, 1998 (inception) through December 31, 1998,
the nine months ended September 30, 1999, and the period from
September 3, 1998 (inception) through September 30, 1999
<TABLE>
<CAPTION>
Period from Period from
September 3, September 3,
1998 1998
(inception) Nine months (inception)
through ended through
December 31, September 30, September 30,
1998 1999 1999
------------ ------------- -------------
<S> <C> <C> <C>
Revenues.............................. $ -- 4,020 4,020
Operating expenses:
Product development primarily to
related parties (note 6)........... 291,920 220,818 512,738
Selling and marketing primarily to
related parties (note 6)........... 8,250 23,850 32,100
General and administrative primarily
to related parties (note 6)........ 6,550 50,653 57,203
Depreciation........................ -- 2,774 2,774
--------- -------- --------
Total operating expenses.......... 306,720 298,095 604,815
--------- -------- --------
Net loss.......................... $(306,720) (294,075) (600,795)
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
STATEMENTS OF STOCKHOLDERS' DEFICIT
Period from September 3, 1998 (inception) through December 31, 1998,the nine
months ended September 30, 1999, and the period fromSeptember 3, 1998
(inception) through September 30, 1999
<TABLE>
<CAPTION>
Deficit
Class A accumulated
common stock Additional during the Total
------------------ paid-in development stockholders'
Shares Amount capital stage deficit
---------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 3,
1998 (inception)....... -- $ -- -- -- --
Issuance of common
stock.................. 20,000,000 9,998 2 -- 10,000
Net loss................ -- -- -- (306,720) (306,720)
---------- ------- --- -------- --------
Balance at December 31,
1998................... 20,000,000 9,998 2 (306,720) (296,720)
Exercise of employee
stock options.......... 4,629,629 52,083 -- -- 52,083
Net loss................ -- -- -- (294,075) (294,075)
---------- ------- --- -------- --------
Balance at September 30,
1999................... 24,629,629 $62,081 2 (600,795) (538,712)
========== ======= === ======== ========
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
Period from September 3, 1998 (inception) through December 31, 1998,
the nine months ended September 30, 1999, and the period from
September 3, 1998 (inception) through September 30, 1999
<TABLE>
<CAPTION>
Period from Period from
September 3, September 3,
1998 1998
(inception) Nine months (inception)
through ended through
December 31, September 30, September 30,
1998 1999 1999
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(306,720) (294,075) (600,795)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation...................... -- 2,774 2,774
Changes in assets and liabilities:
Restricted cash................. -- (6,175) (6,175)
Other assets.................... -- (395) (395)
Accrued expenses................ -- 16,313 16,313
Customer deposits............... -- 8,642 8,642
Deferred revenue................ -- 1,925 1,925
Due to affiliate................ 306,620 296,002 602,622
--------- -------- --------
Net cash provided by (used in)
operating activities......... (100) 25,011 24,911
--------- -------- --------
Cash flows from investing activities--
capital expenditures................. -- (28,118) (28,118)
--------- -------- --------
Net cash used in investing
activities................... -- (28,118) (28,118)
--------- -------- --------
Cash flows from financing activities--
proceeds from issuance of common
stock................................ 1,000 9,000 10,000
--------- -------- --------
Net cash provided by financing
activities................... 1,000 9,000 10,000
--------- -------- --------
Net increase in cash.......... 900 5,893 6,793
Cash at beginning of period........... -- 900 --
--------- -------- --------
Cash at end of period................. $ 900 6,793 6,793
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Description of Business
PocketCard Inc. (the Company) was incorporated in Illinois on September 3,
1998 for the purpose of providing business and family groups with supervised
access to funds.
Since inception, the Company has been engaged principally in organizational
activities, including raising capital, recruiting a management team and
employees, executing agreements, negotiating strategic relationships, and
developing operational plans and marketing activities. Accordingly, the
Company is in the development stage, as defined by Statement of Financial
Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development
Stage Enterprises.
(b) Revenue Recognition
Revenues from membership fees are recognized ratably over the membership
period. Revenues from transaction fees are recognized upon the completion of
the related transaction.
Of the $4,020 of revenue for the nine months ended September 30, 1999,
$3,000 related to one customer.
(c) Property and Equipment
Property and equipment are carried at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three years.
(d) Customer Deposits
Customer deposits consist of amounts received from customers loading
available funds on spender cards. The cash related to customer deposits is
held in a custodial bank account and is not used in the operations of the
Company.
(e) Product Development Costs
The Company has adopted the provisions of the American Institute of
Certified Public Accountants' Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.
Accordingly, certain costs to develop internal-use computer software are
capitalized. During the period from September 3, 1998 (inception) through
December 31, 1998, and during the nine months ended September 30, 1999,
software development costs of $291,920 and $220,818, respectively, were
incurred related to the development of a web-based network and website. Such
amounts were expensed due to the uncertainty of recovery.
(f) Stock-based Compensation
The Company accounts for its stock options under the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 permits entities
to recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123 allows entities
to continue to apply the provisions of Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and provide pro
forma net income disclosures for employee stock option grants made as if the
fair value-based method defined in SFAS No. 123 had been applied. Under APB
No. 25, compensation
F-73
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
expense would be recorded on the date of grant only if the current fair value
of the underlying stock exceeded the exercise price. The Company has elected to
apply the provisions of APB No. 25 and provide the pro forma disclosures of
SFAS No. 123.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) Property and Equipment
Property and equipment, at cost, less accumulated depreciation, is
summarized as follows at September 30, 1999:
<TABLE>
<S> <C>
Computer equipment............................................... $20,376
Software......................................................... 7,742
-------
28,118
Less accumulated depreciation.................................... (2,774)
-------
$25,344
=======
</TABLE>
(3) Stockholders' Deficit
As of December 31, 1998, there was a $9,000 subscription receivable related
to the issuance of common stock on the date of incorporation. The subscription
receivable was subsequently paid in 1999. As of September 30, 1999, there was a
$52,083 subscription receivable related to the exercise of stock options during
the nine months then ended. This subscription receivable was fully paid in
October 1999.
(4) Stock Option Plan
In 1999, the Company adopted a stock option plan under which certain
employees may be granted the right to purchase shares of common stock at the
fair value on the date of grant. The Company has reserved an aggregate of
7,889,098 shares of common stock for issuance under the plan. Stock options may
be exercised only to the extent they have vested in accordance with provisions
determined by the Board of Directors.
F-74
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company applies APB No. 25 in accounting for its plans and, accordingly,
no compensation cost has been recognized in the financial statements for its
stock options. Had the Company determined compensation cost based on the fair
value at the grant date for its stock-based compensation plans under SFAS No.
123, the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Period from
September 3, 1998 Nine months
(inception) ended
through September 30,
December 31, 1998 1999
----------------- -------------
<S> <C> <C>
Net loss:
As reported............................. $306,720 294,075
Pro forma............................... 306,720 303,603
======== =======
</TABLE>
For purposes of calculating the compensation cost consistent with SFAS No.
123, the fair value of each option grant in 1999 is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions: expected dividend yield 0%, expected volatility of 0%,
risk-free interest rate of 4.51% to 5.66% and an expected life of one to two
years.
Stock option activity for the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted-average
Shares exercise price
---------- ----------------
<S> <C> <C>
Outstanding on January 1, 1998............... -- $ --
Granted...................................... 4,652,590 .01
Exercised.................................... (4,629,629) .01
---------- -----
Outstanding on September 30, 1999............ 22,961 $ .02
========== =====
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------- -----------------------
Weighted-average Weighted-average
Range of exercise prices Shares exercise price Shares exercise price
------------------------ ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
$0.01 to $0.025 22,961 $.02 5,841 $.01
====== ==== ===== ====
</TABLE>
The remaining contract life of 5,600 of the outstanding options is 9.8
years. The remaining 17,361 outstanding options expire 30 days after the
employees' termination of employment with the Company.
(5) Income Taxes
The provision for income taxes differs from the amounts which would result
by applying the applicable Federal income tax rate to income before provision
for income taxes for the period from September 3, 1998 (inception) to December
31, 1998 and for the nine months ended September 30, 1999 as follows:
<TABLE>
<CAPTION>
Period from
September 3, 1998
(inception) Nine months
through ended
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Expected income tax benefit......... $(104,285) (99,985)
State income tax benefit............ (18,403) (17,644)
Effect of change in valuation
allowance.......................... 122,688 117,629
--------- -------
$ -- --
========= =======
</TABLE>
F-75
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.............. $ -- 51,715
Start-up costs............................... 122,688 189,720
-------- --------
Total gross deferred tax assets............ 122,688 241,435
-------- --------
Deferred tax liabilities--depreciation......... -- (1,118)
-------- --------
Total gross deferred tax liabilities....... -- (1,118)
-------- --------
Net deferred tax assets.................... 122,688 240,317
Valuation allowance............................ (122,688) (240,317)
-------- --------
Net deferred taxes......................... $ -- --
======== ========
</TABLE>
Net operating losses for income tax purposes of $129,289 generated for the
nine month period ended September 30, 1999 can be carried forward for twenty
years and will expire in the year 2019.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the temporary differences are available to reduce income taxes
payable, management has established a valuation allowance for the full amount
of the net deferred tax assets.
(6) Related-party Transactions
The Company maintains significant relationships with certain related parties
in regards to service agreements. One affiliate charges the Company a fee
related to programming, customer service and data processing services. The term
of this agreement extends through June 30, 2002. Another affiliate charges the
Company for check guaranty and debit card fund transfer services. The Company
and these affiliates (the Affiliates) are related parties through common
ownership. The Company is charged rates for these services that are
substantially similar to those paid by other clients of the Affiliates.
Operating expenses include amounts to the Affiliates as follows:
<TABLE>
<CAPTION>
Period from
September 3, 1998
(inception) Nine months
through ended
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Product development.................. $291,920 223,848
Selling and marketing................ 8,250 16,886
General and administrative........... 6,450 27,150
-------- -------
Total............................ $306,620 267,884
======== =======
</TABLE>
F-76
<PAGE>
POCKETCARD INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Concluded)
(7) Subsequent Events
On November 23, 1999, the Company entered into a Series A Preferred Stock
Purchase Agreement the Agreement) with various third parties. Under the terms
of the Agreement, the Company issued 14,792,899 shares of Series A-2
convertible preferred stock. The Company also issued a total of 98,618 shares
of Series A-1 convertible preferred stock under the Agreement to other third
parties. The Series A-1 and A-2 convertible preferred stock are ultimately
convertible into shares of common stock in accordance with the terms of the
Agreement.
As of the closing of the Agreement, the Company's authorized capital stock
consisted of 90,000,000 shares of $.0000001 par value Class A common stock,
14,792,899 shares of $.0000001 par value Class B common stock, 16,863,905
shares of $.0000001 par value Series A-1 convertible preferred stock, and
14,792,899 shares of $.0000001 par value Series A-2 convertible preferred
stock. On , the Company was reincorporated in the State of Delaware and
affected a twenty-for-one stock dividend on its then outstanding shares of
Class A common stock. All share information included in these financial
statements has been retroactively adjusted to reflect the revised authorized
capital stock and the stock dividend.
F-77
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Whiplash, Inc.
We have audited the accompanying balance sheets of Whiplash, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' deficit, and cash flows for the years
then ended and for the period from March 7, 1996 (inception) through December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Whiplash, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the results
of its operations and its cash flows for the years then ended and for the
period from March 7, 1996 (inception) through December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
December 10, 1999
F-78
<PAGE>
WHIPLASH, INC.
(a development stage enterprise)
BALANCE SHEETS
December 31, 1997 and 1998 and September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
December 31,
----------------------- September 30,
ASSETS 1997 1998 1999
------ ----------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 102,035 69,751 98,211
Accounts receivable .................. 52,163 56,209 817
Common stock subscription receivable.. 67,500 67,500 --
----------- ---------- ----------
Total current assets ............... 221,698 193,460 99,028
Property and equipment, net of
accumulated depreciation and
amortization........................... 55,227 42,406 26,541
Other assets............................ 5,000 5,982 9,605
----------- ---------- ----------
Total assets........................ $ 281,925 241,848 135,174
=========== ========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable ..................... $ 75,144 171,134 62,576
Accrued expenses ..................... 10,689 74,140 107,127
Current portion of notes payable to
stockholders ........................ -- 200,000 1,100,000
----------- ---------- ----------
Total current liabilities .......... 85,833 445,274 1,269,703
Notes payable to stockholders, less
current portion ....................... 140,000 650,000 495,000
----------- ---------- ----------
Total liabilities .................. 225,833 1,095,274 1,764,703
----------- ---------- ----------
Stockholders' equity (deficit):
Common stock, $.0001 par value;
25,000,000 shares authorized;
9,250,000 shares issued and
outstanding at December 31, 1997 and
1998 and 9,306,664 shares issued and
outstanding at September 30, 1999
(unaudited).......................... 925 925 931
Additional paid-in capital ........... 1,383,739 1,383,739 1,383,733
Deficit accumulated during the
development stage ................... (1,328,572) (2,238,090) (3,014,193)
----------- ---------- ----------
Total stockholders' equity (deficit)
................................... 56,092 (853,426) (1,629,529)
----------- ---------- ----------
Total liabilities and stockholders'
(equity) (deficit) ................ $ 281,925 241,848 135,174
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE>
WHIPLASH, INC.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
Years ended December 31, 1997 and 1998,
the period from March 7, 1996 (inception) through
December 31, 1998, and the nine months ended September 30, 1998
(unaudited) and 1999 (unaudited)
<TABLE>
<CAPTION>
Period from
March 7, 1996
Years ended (inception) Nine months ended
December 31, through September 30,
------------------- December 31, -----------------------
1997 1998 1998 1998 1999
--------- -------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 52,163 3,390 55,553 3,390 600
--------- -------- ---------- -------- --------
Operating expenses:
Product development... 578,290 738,161 1,714,026 529,097 585,245
General and
administrative....... 298,566 116,239 485,653 99,497 110,928
Depreciation and
amortization......... 25,436 29,265 66,876 21,949 23,267
--------- -------- ---------- -------- --------
Total operating
expenses........... 902,292 883,665 2,266,555 650,543 719,438
Other income (expense):
Interest income....... 1,439 188 2,343 167 443
Interest expense...... -- (29,431) (29,431) (17,570) (57,708)
--------- -------- ---------- -------- --------
Total other income
(expense).......... 1,439 (29,243) (27,088) (17,403) (57,265)
--------- -------- ---------- -------- --------
Net loss............ $(848,690) (909,518) (2,238,090) (664,556) (776,103)
========= ======== ========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE>
WHIPLASH, INC.
(a development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997 and 1998,
the period from March 7, 1996 (inception) through
December 31, 1998, and the nine months ended September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Deficit
accumulated
Common Stock during the Total
---------------- Additional development stockholders'
Shares Amount paid-in capital stage equity (deficit)
--------- ------ --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at March 7, 1996
(inception)............ -- $-- -- -- --
Issuance of common
stock................ 9,250,000 925 1,327,075 -- 1,328,000
Net loss.............. -- -- -- (479,882) (479,882)
--------- ---- --------- ---------- ----------
Balance at December 31,
1996................... 9,250,000 925 1,327,075 (479,882) 848,118
Common stock
subscribed for
services............. -- -- 56,664 -- 56,664
Net loss.............. -- -- -- (848,690) (848,690)
--------- ---- --------- ---------- ----------
Balance at December 31,
1997................... 9,250,000 925 1,383,739 (1,328,572) 56,092
Net loss.............. -- -- -- (909,518) (909,518)
--------- ---- --------- ---------- ----------
Balance at December 31,
1998................... 9,250,000 925 1,383,739 (2,238,090) (853,426)
Issuance of common
stock subscribed
(unaudited).......... 56,664 6 (6) -- --
Net loss (unaudited).. -- -- -- (776,103) (776,103)
--------- ---- --------- ---------- ----------
Balance at September 30,
1999 (unaudited)....... 9,306,664 $931 1,383,733 (3,014,193) (1,629,529)
========= ==== ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE>
WHIPLASH, INC.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1998,
the period from March 7, 1996 (inception) through
December 31, 1998, and the nine months ended September 30, 1998
(unaudited) and 1999 (unaudited)
<TABLE>
<CAPTION>
Period from
March 7, 1996
Years ended (inception) Nine months ended
December 31, through September 30,
------------------- December 31, -----------------------
1997 1998 1998 1998 1999
--------- -------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(848,690) (909,518) (2,238,090) (664,556) (776,103)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization....... 25,436 29,265 66,876 21,949 23,267
Changes in assets
and liabilities:
Accounts
receivable....... (52,163) (4,046) (56,209) (3,859) 55,392
Other assets...... -- (982) (5,982) (982) (3,623)
Accounts payable.. 18,493 95,990 171,134 70,206 (108,558)
Accrued expenses.. 2,347 63,451 74,140 16,497 32,987
--------- -------- ---------- -------- --------
Net cash used in
operating
activities..... (854,577) (725,840) (1,988,131) (560,745) (776,638)
Cash flows from
investing activities--
purchase of property
and equipment.......... (6,526) (16,444) (109,282) (16,444) (7,402)
--------- -------- ---------- -------- --------
Net cash used in
investing
activities..... (6,526) (16,444) (109,282) (16,444) (7,402)
Cash flows from
financing activities:
Payments on common
stock subscriptions.. 590,000 -- 1,260,500 -- 67,500
Common stock
subscribed for
services............. 56,664 -- 56,664 -- --
Proceeds from notes
payable to
stockholders......... 140,000 710,000 850,000 490,000 745,000
--------- -------- ---------- -------- --------
Net cash
provided by
financing
activities..... 786,664 710,000 2,167,164 490,000 812,500
--------- -------- ---------- -------- --------
Net increase
(decrease) in
cash........... (74,439) (32,284) 69,751 (87,189) 28,460
Cash and cash
equivalents at
beginning of period.... 176,474 102,035 -- 102,035 69,751
--------- -------- ---------- -------- --------
Cash and cash
equivalents at end of
period................. $ 102,035 69,751 69,751 14,846 98,211
========= ======== ========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-82
<PAGE>
WHIPLASH, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Description of Business
Whiplash, Inc. (the Company) was incorporated in Delaware as a C-corporation
on March 7, 1996 (inception), for the purpose of becoming an online business-
to-business global distribution company for the leisure travel marketplace. The
Company was formed around the goal of becoming the premier "electronic retail
enabler" for all travel-related companies by enhancing the existing supply
chain between the travel provider, dealer direct and business-to-business
model.
Since inception, the Company has been engaged principally in organizational
activities, including raising capital, recruiting a management team and
employees, executing agreements, negotiating strategic relationships, and
developing operational plans and marketing activities. Accordingly, the Company
is in the development stage, as defined by Statement of Accounting Standards
(SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises.
(b) Unaudited Interim Financial Information
The financial statements as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999, respectively, are unaudited. In the opinion
of the Company's management, the unaudited interim financial statements include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position and results of
operations. The results of operations for the nine months ended September 30,
1999 are not necessarily indicative of the results of operations to be expected
for the year ending December 31, 1999.
(c) Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be cash
equivalents.
(d) Property and Equipment
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from three to seven years.
(e) Revenue Recognition
The Company's revenues since inception consist primarily of consulting
services provided to third parties. Revenues from consulting services are
recognized as the services are performed.
(f) Product Development Costs
Product development costs are expensed as incurred and consist primarily of
payroll and payroll related expenses for personnel dedicated to developing the
Company's global distribution network.
(g) Stock-based Compensation
The Company accounts for its stock options under the provisions of SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to
F-83
<PAGE>
WHIPLASH, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Employees, and provide pro forma net income disclosures for employee stock
option grants made as if the fair value-based method defined in SFAS 123 had
been applied. Under APB No. 25, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. The Company has elected to apply the provisions of APB No.
25 and provide the pro forma disclosures required by SFAS No. 123.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) Property and Equipment
Property and equipment, at cost, less accumulated depreciation, are
summarized as follows at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- -------
<S> <C> <C>
Computer hardware and software......................... $ 66,362 82,806
Office furniture and equipment......................... 26,476 26,476
-------- -------
92,838 109,282
Less accumulated depreciation and amortization......... (37,611) (66,876)
-------- -------
$ 55,227 42,406
======== =======
</TABLE>
(3) Stock Option Plan
In 1996, the Company adopted a stock option plan under which certain
employees may be granted the right to purchase shares of common stock at or
above the fair value on the date of grant. The Company has reserved an
aggregate of 790,000 shares of common stock for issuance under the plan. Stock
options may be exercised only to the extent they have vested in accordance with
provisions determined by the Board of Directors.
The per share weighted-average fair value of stock options granted during
1998 was $0.03 on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: expected dividend yield
0%, expected volatility of 0%, risk-free interest rate of 5.6% and an expected
life of 3 years. There were no stock option grants in 1997.
F-84
<PAGE>
WHIPLASH, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company applies APB No. 25 in accounting for its plans and accordingly,
no compensation cost has been recognized in the financial statements for its
stock options. Had the Company determined compensation cost based on the fair
value at the grant date for its stock-based compensation plans under SFAS No.
123, the Company's net loss would have been the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
--------- --------
<S> <C> <C>
Net loss:
As reported........................................ $(848,690) (909,518)
Pro forma.......................................... (854,046) (915,669)
========= ========
</TABLE>
Stock option activity for the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
------- ---------
<S> <C> <C>
Outstanding on December 31, 1996 and 1997..................... 640,000 $0.20
Granted during 1998........................................... 150,000 0.20
-------
Outstanding on December 31, 1998.............................. 790,000 $0.20
======= =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options
Options outstanding exercisable
---------------------------------- --------------------
Weighted-
average Weighted- Weighted-
remaining average average
contractual exercise exercise
Exercise price Shares life price Shares price
-------------- ------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.20 790,000 7.8 years $0.20 320,000 $0.20
======= ========= ===== ======= =====
</TABLE>
(4) Notes Payable to Stockholders
During 1997 and 1998, the Company issued various unsecured promissory notes
to certain stockholders. These promissory notes bear interest at rates ranging
from 5.58% to 7.28% and are generally due two years from the issuance date. The
total principal balance outstanding on the notes at December 31, 1998 was
$850,000, of which $200,000 has been classified as a current liability. The
outstanding principal balance and related accrued interest shall be
automatically converted into shares of the Company's Series A preferred stock
upon the closing of an external financing in which the Company receives at
least $5.0 million from the sale of equity securities (see note 6).
(5) Income Taxes
The reconciliation of income tax expense (benefit) computed using the
Federal statutory rate of 34% to the Company's income tax expense (benefit) is
as follows:
<TABLE>
<CAPTION>
1997 1998
--------- --------
<S> <C> <C>
Expected income tax benefit at the statutory rate... $(269,289) (309,236)
State income tax benefit............................ (47,522) (54,571)
Permanent differences............................... 55 650
Effect of change in valuation allowance............. 316,756 363,157
--------- --------
$ -- --
========= ========
</TABLE>
F-85
<PAGE>
WHIPLASH, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- --------
<S> <C> <C>
Deferred tax assets:
Capitalized start-up costs......................... $ 509,935 858,618
Accrued expenses................................... -- 11,772
Property and equipment--depreciation............... -- 894
Other.............................................. 547 547
--------- --------
Total gross deferred tax assets.................. 510,482 871,831
Less valuation allowance............................. (508,401) (871,558)
--------- --------
Net deferred tax assets.......................... 2,081 273
--------- --------
Deferred tax liabilities:
Property and equipment--depreciation............... 1,917 --
Other.............................................. 164 273
--------- --------
Total gross deferred tax liabilities............. 2,081 273
--------- --------
Net deferred tax asset (liability)............... $ -- --
========= ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax asset will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which temporary differences become deductible. Based upon the level
of historical taxable income and projections for future taxable income over
the periods in which the temporary differences are available to reduce income
taxes payable, management has established a valuation allowance for the full
amount of the net deferred tax assets.
(6) Subsequent Events
On November 8, 1999, the Company entered into a Series A Preferred Stock
Purchase Agreement (the Agreement) with a third party. Under the terms of the
Agreement, the Company issued 3,726,708 shares of Series A-2 preferred stock.
The Series A-2 preferred stock is ultimately convertible into shares of common
stock of the Company in accordance with the terms of the Agreement.
During the period from January 1, 1999 through November 8, 1999, the
Company issued $800,000 of additional unsecured promissory notes to certain
stockholders. These promissory notes bear interest at a rate of 5.58%. The
total principal balance outstanding of all unsecured promissory notes at
November 8, 1999 was $1,650,000. In conjunction with the Agreement, the
$1,650,000 of principal outstanding on the notes plus accrued interest was
converted into 1,024,845 shares of Series A-1 preferred stock. The Series A-1
preferred stock is ultimately convertible into shares of common stock of the
Company in accordance with the terms of the Agreement.
As of the closing of the Agreement, the Company's authorized capital stock
consisted of 20,000,000 shares of $.001 par value Class A common stock,
3,726,708 shares of $.001 par value Class B common stock, 4,751,553 shares of
$.001 par value Series A-1 preferred stock, and 3,726,708 shares of $.001 par
value Series A-2 preferred stock.
On November 8, 1999, the Company increased the number of shares of Class A
common stock reserved for issuance under its stock option plan to 2,290,000.
F-86
<PAGE>
[DIVINE LOGO]
[divine interVentures logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the approximate amount of fees and
expenses, other than underwriting commissions and discounts, payable by the
Registrant in connection with the issuance and distribution of our common stock
pursuant to the Prospectus contained in this Registration Statement. The
Registrant will pay all of these expenses.
<TABLE>
<CAPTION>
Approximate
Amount
-----------
<S> <C>
SEC registration fee................................................ $66,000
NASD filing fee..................................................... 25,500
Nasdaq National Market listing fee.................................. *
Accountants' fees and expenses...................................... *
Legal fees and expenses............................................. *
Transfer agent and registrar fees and expenses...................... *
Printing and engraving.............................................. *
Miscellaneous expenses.............................................. *
-------
Total............................................................. $ *
=======
</TABLE>
- ---------------------
* To be provided by amendment
All expenses other than the SEC registration fee, NASD filing fee and Nasdaq
National Market listing fee are estimated.
Item 14. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation will provide that the
Registrant shall indemnify its directors to the full extent permitted by the
General Corporation Law of the State of Delaware and may indemnify its officers
and employees to such extent, except that the Registrant shall not be obligated
to indemnify any such person (1) with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by way of defense,
without the Registrant's prior written consent, or (2) for any amounts paid in
settlement of an action indemnified against by the Registrant without the prior
written consent of the Registrant. Prior to the completion of this offering,
the Registrant will enter into indemnity agreements with each of its directors.
These agreements may require the Registrant, among other things, to indemnify
such directors against certain liabilities that may arise by reason of their
status or service as directors, to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to indemnification,
and to obtain directors' liability insurance.
In addition, the Registrant's Certificate of Incorporation will provide that
a director of the Registrant shall not be personally liable to the Registrant
or its stockholders for monetary damages for breach of his or her fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to the Registrant or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) for willful or negligent conduct in paying
dividends or repurchasing stock out of other than lawfully available funds or
(4) for any transaction from which the director derives an improper personal
benefit.
Reference is made to Section 145 of the General Corporation Law of the State
of Delaware which provides for indemnification of directors and officers in
certain circumstances.
The Registrant intends to obtain directors' and officers' liability
insurance prior to completion of this offering.
II-1
<PAGE>
Under the terms of the Underwriting Agreement, the Underwriters have agreed
to indemnify, under certain conditions, the Registrant, its directors, certain
of its officers and persons who control the Registrant within the meaning of
the Securities Act of 1933.
Item 15. Recent Sales of Unregistered Securities
The following information does not reflect the conversion of the
Registrant's (1) series A-1, series B-1, series C, series D and series D-1
preferred stock into class A common stock and (2) series A-2 and series B-2
preferred stock into class B common stock, each to be effected upon
consummation of this offering.
(1) In June 1999, the Registrant issued 1,000 shares of common stock to Mr.
Filipowski for cash in the amount of $10. In August 1999, these shares
converted into 10,000 shares of class B common stock.
(2) In August 1999, the Registrant issued (a) an aggregate of 20,700,000
shares of class A common stock to 77 investors consisting of (i) officers,
directors and employees of the Registrant (including persons who had accepted
offers of employment) (collectively, "Employees") and (ii) certain persons,
trusts, foundations and other entities who are related to officers, directors
or employees of the Registrant and who represented that they were "accredited
investors" (as defined in Regulation D under the Securities Act) (collectively,
"Related Persons"), for cash in the aggregate amount of $20,700 and (b) issued
an aggregate of 12,250,000 shares of class B common stock to Messrs.
Filipowski, Cullinane, Freedman, Slowey and Tatro and a trust related to Mr.
Humenansky (collectively, the "Principals") for cash in the aggregate amount of
$12,250. The shares of class A common stock and class B common stock issued to
Employees were issued pursuant to the Registrant's 1999 Stock Purchase Plan.
(3) In September 1999, the Registrant (a) issued an aggregate of 9,236,600
shares of series A-1 preferred stock to 51 Employees and Related Persons for
cash in the aggregate amount of $2,409,150 and (b) issued 37,750,000 shares of
series A-2 preferred stock to the six Principals, a trust related to Mr.
Filipowski and a partnership related to Mr. Freedman for cash in the aggregate
amount of $9,437,500. The shares of series A-1 preferred stock and series A-2
preferred stock issued to Employees were issued pursuant to the Registrant's
1999 Stock Purchase Plan.
(4) In September 1999, the Registrant (a) issued an aggregate of 2,712,000
shares of series B-1 preferred stock to 35 Employees and Related Persons for
cash in the aggregate amount of $1,356,000 and (b) issued 20,100,000 shares of
series B-2 preferred stock to two of the Principals for cash in the aggregate
amount of $10,050,000. The shares of series B-1 preferred stock and series B-2
preferred stock issued to Employees were issued pursuant to the Registrant's
1999 Stock Purchase Plan.
(5) In September through December 1999, the Registrant issued an aggregate
of 199,999,400 shares of series C preferred stock to 473 investors, all of whom
represented that they were "accredited investors" (as defined in Regulation D
under the Securities Act), for cash in the aggregate amount of $199,999,400.
(6) In October through December 1999, the Registrant issued options to
purchase an aggregate of 15,533,350 shares of class A common stock to
Employees, including options issued to Employees who represented that they were
"accredited investors" (as defined in Regulation D of the Securities Act). All
of these options were issued pursuant to the Registrant's 1999 Stock Incentive
Plan.
(7) In December 1999, the Registrant agreed to issue an aggregate of
197,000,000 shares of series D preferred stock and series D-1 preferred stock
to 11 investors, all of whom represented that they were "accredited investors"
(as defined in Regulation D under the Securities Act), for cash in the
aggregate amount of $197,000,000. These investors are obligated to purchase
these shares upon the expiration or termination of the applicable antitrust
waiting periods.
No underwriters were involved in any of the transactions described above.
The sale of securities described in Item 15(1) was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, as a transaction by an issuer not involving a public offering.
The sales of securities described in Items 15(2) and 15(6) were deemed to be
exempt from registration under the Securities Act in
II-2
<PAGE>
reliance on Section 4(2) of the Securities Act, including Regulation D
promulgated thereunder, as transactions by an issuer not involving a public
offering, and Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The sales of securities described
in Items 15(3), 15(4), 15(5) and 15(7) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, including Regulation D promulgated thereunder, as transactions
by an issuer not involving a public offering. Each recipient of securities in
each of the transactions described above represented (a) the recipient's
intention to acquire the securities for investment purposes only and not with a
view to, or for sale in connection with, any distribution thereof and (b) that,
either alone or together with a purchaser representative, the recipient had
such knowledge and experience in financial and business matters that the
recipient was capable of evaluating the merits and risks of the investments
(with appropriate legends being affixed to the share certificates issued in
such transactions).
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
<C> <S> <C>
1* Form of Underwriting Agreement.
3.1* Form of Third Amended and Restated Certificate of
Incorporation of the Registrant.
3.2* Amended and Restated By-laws of the Registrant.
4.1* Form of specimen stock certificate representing common
stock.
5* Opinion of Katten Muchin Zavis as to the legality of the
securities being registered (including consent).
10.1* divine interVentures, inc. 1999 Incentive Compensation
Plan.
10.2* Form of Option Agreement under the divine interVentures,
inc. 1999 Incentive Compensation Plan.
10.3* Form of Indemnification Agreement for Directors and
Executive Officers.
10.4* Agreement of Sublease between Budget Rent A Car
Corporation and divine interVentures, inc. indicated
August 25, 1999.
10.5* Letter Agreement, dated July 1, 1999, among divine
interVentures, inc., Blackhawk LLC and Andrew J.
Filipowski.
10.6* Purchase Agreement, dated as of December 7, 1999, between
divine interVentures, inc. and the purchasers named
therein.
10.7* Series D Stockholders Agreement, dated as of December 7,
1999, among divine interVentures, inc., the Management
Stockholders (as defined therein) and the Purchasers (as
defined therein).
10.8* Founders Shares Registration Rights Agreement, dated as of
August 18, 1999, among divine interVentures, inc. and the
Purchasers (as defined therein).
10.9* Series A Registration Rights Agreement, dated as of
September 3, 1999, among divine interVentures, inc. and
the Purchasers (as defined therein).
10.10* Series B Registration Rights Agreement, dated as of
September 17, 1999, among divine interVentures, inc. and
the Purchasers (as defined therein).
10.11* Series C Registration Rights Agreement, dated as of
September 30, 1999, among divine interVentures, inc. and
the Purchasers (as defined therein).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
10.12* Series D Registration Rights Agreement, dated as of
December 7, 1999, among divine interVentures, inc. and
the Purchasers (as defined therein).
<C> <S> <C>
10.13* Memorandum of Understanding, dated as of November 22,
1999, between divine interVentures, inc. and Microsoft
Corporation.
21* Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP with respect to financial statements
of divine interVentures, inc.
23.2 Consent of KPMG LLP with respect to financial statements
of Blueridge Technologies, Inc.
23.3 Consent of KPMG LLP with respect to financial statements
of i-Street, Inc.
23.4 Consent of Arthur Andersen LLP with respect to financial
statements of LiveOnTheNet.com, Inc.
23.5 Consent of KPMG LLP with respect to financial statements
of OpinionWare.com, Inc.
23.6 Consent of KPMG LLP with respect to financial statements
of Outtask.com, Inc.
23.7 Consent of KPMG LLP with respect to financial statements
of PocketCard Inc.
23.8 Consent of KPMG LLP with respect to financial statements
of Whiplash, Inc.
23.9 Consent of Katten Muchin Zavis (contained in its opinion
to be filed as Exhibit 5 hereto).
24 Power of Attorney (included on signature page hereto).
27 Financial Data Schedule
</TABLE>
- ---------------------
* To be filed by amendment
(b) Financial Statement Schedules
No financial statement schedules are required to be filed with this
Registration Statement.
Item 17. Undertakings
The Registrant hereby undertakes:
(1) 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.
II-4
<PAGE>
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act, (a)
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 and (b) 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on the 15th day of December, 1999.
divine interVentures, inc.
/s/ Andrew J. Filipowski
By:__________________________________
Andrew J. Filipowski
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Andrew J. Filipowski, Michael P. Cullinane, Larry S. Freedman and Mark D. Wood,
and each of them, his or her true and lawful attorney-in-fact and agent, with
full power of substitution, to sign on his behalf, individually and in each
capacity stated below, all amendments and post-effective amendments to this
Registration Statement on Form S-1 (including registration statements filed
pursuant to Rule 462(b) under the Securities Act of 1933, and all amendments
thereto) and to file the same, with all exhibits thereto and any other
documents in connection therewith, with the Securities and Exchange Commission
under the Securities Act of 1933, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as each might or could do in person, hereby ratifying
and confirming each act that said attorneys-in-fact and agents may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on December 15, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Andrew J. Filipowski Chairman of the Board and Chief Executive
___________________________________________ Officer
Andrew J. Filipowski
/s/ Michael P. Cullinane Executive Vice President, Chief Financial
___________________________________________ Officer, Treasurer, Principal Financial and
Michael P. Cullinane Accounting Officer and Director
/s/ Scott Hartkopf President, Chief Operating Officer and
___________________________________________ Director
Scott Hartkopf
/s/ Paul L. Humenansky Executive Vice President and Director
___________________________________________
Paul L. Humenansky
/s/ Robert Bernard Director
___________________________________________
Robert Bernard
/s/ Michael J. Birck Director
___________________________________________
Michael J. Birck
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ James E. Cowie Director
___________________________________________
James E. Cowie
/s/ Andrea Cunningham Director
___________________________________________
Andrea Cunningham
/s/ Thomas Danis Director
___________________________________________
Thomas Danis
/s/ Michael H. Forster Director
___________________________________________
Michael H. Forster
/s/ Arthur P. Frigo Director
___________________________________________
Arthur P. Frigo
/s/ Gian Fulgoni Director
___________________________________________
Gian Fulgoni
/s/ George Garrick Director
___________________________________________
George Garrick
/s/ Craig D. Goldman Director
___________________________________________
Craig D. Goldman
/s/ Arthur W. Hahn Director
___________________________________________
Arthur W. Hahn
/s/ Wade Hansen Director
___________________________________________
Wade Hansen
/s/ Jeffrey D. Jacobs Director
___________________________________________
Jeffrey D. Jacobs
/s/ Gregory K. Jones Director
___________________________________________
Gregory K. Jones
/s/ Steven Neil Kaplan Director
___________________________________________
Steven Neil Kaplan
/s/ Richard P. Kiphart Director
___________________________________________
Richard P. Kiphart
/s/ Ronald D. Lachman Director
___________________________________________
Ronald D. Lachman
/s/ Eric Larson Director
___________________________________________
Eric Larson
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ William Lederer Director
___________________________________________
William Lederer
/s/ Michael Leitner Director
___________________________________________
Michael Leitner
/s/ Lawrence F. Levy Director
___________________________________________
Lawrence F. Levy
/s/ Teresa L. Pahl Director
___________________________________________
Teresa L. Pahl
/s/ John Rau Director
___________________________________________
John Rau
/s/ Bruce Rauner Director
___________________________________________
Bruce Rauner
/s/ Andre Rice Director
___________________________________________
Andre Rice
/s/ Mohanbir S. Sawhney Director
___________________________________________
Mohanbir S. Sawhney
/s/ Alex C. Smith Director
___________________________________________
Alex C. Smith
/s/ Timothy Stojka Director
___________________________________________
Timothy Stojka
/s/ Aleksander Szlam Director
___________________________________________
Aleksander Szlam
/s/ Mark Tebbe Director
___________________________________________
Mark Tebbe
/s/ James C. Tyree Director
___________________________________________
James C. Tyree
/s/ William Wrigley, Jr. Director
___________________________________________
William Wrigley, Jr.
/s/ Robert J. Zollars Director
___________________________________________
Robert J. Zollars
</TABLE>
II-8
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
divine interVentures, inc.
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.
/s/ KPMG LLP
Chicago, Illinois
December 14, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Blueridge Technologies, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
McLean, Virginia
December 14, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
i-Street, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ KPMG LLP
Chicago, Illinois
December 14, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Registration Statement of our report dated April 18, 1999, included herein, and
to all references to our Firm included in this Registration Statement. It should
be noted that we have performed no audit procedures subsequent to April 18,
1999, and have no responsibility for events and circumstances occurring after
that date.
/s/ Arthur Andersen LLP
Boston, Massachusetts
December 14, 1999
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
OpinionWare.com, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/KPMG LLP
Minneapolis, Minnesota
December 14, 1999
<PAGE>
Exhibit 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Outtask.com, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/KPMG LLP
McLean, Virginia
December 14, 1999
<PAGE>
Exhibit 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
PocketCard Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/KPMG LLP
Chicago, Illinois
December 14, 1999
<PAGE>
Exhibit 23.8
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Whiplash, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/KPMG LLP
Chicago, Illinois
December 14, 1999
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAY-07-1999
<PERIOD-END> SEP-30-1999
<CASH> 114,293,555
<SECURITIES> 0
<RECEIVABLES> 1,262,588
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 115,809,813
<PP&E> 247,877
<DEPRECIATION> 7,616
<TOTAL-ASSETS> 116,050,074
<CURRENT-LIABILITIES> 3,963,671
<BONDS> 0
0
113,998
<COMMON> 32,950
<OTHER-SE> 113,286,243
<TOTAL-LIABILITY-AND-EQUITY> 116,050,074
<SALES> 0
<TOTAL-REVENUES> 17,004
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<OTHER-EXPENSES> 1,489,778
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<INCOME-PRETAX> (1,473,863)
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<NET-INCOME> (1,473,863)
<EPS-BASIC> (0.23)
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