FILED PURSUANT TO
RULE 424(b)(4)
REGISTRATION NUMBER
333-92851
[LOGO]
14,285,000
Shares
Class A Common
Stock
divine
interVentures, inc. is offering 14,285,000 shares of its class A common
stock. This is our initial public offering and no public market currently
exists for our shares. Our class A common stock has been approved for
quotation on the Nasdaq National Market under the symbol DVIN,
subject to official notice of issuance.
Investing in our
common stock involves risks.
See Risk
Factors beginning on page 13.
|
|
Per
Share
|
|
Total
|
Public Offering
Price |
|
$9.00 |
|
$128,565,000 |
Underwriting
Discounts and Commissions |
|
$0.63 |
|
$ 8,999,550 |
Proceeds to divine
interVentures, inc. |
|
$8.37 |
|
$119,565,450 |
The
Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
The
underwriters have an option to purchase a maximum of 2,142,750 additional
shares of our class A common stock to cover over-allotments.
Robertson
Stephens
|
Donaldson,
Lufkin & Jenrette
|
The date of this
prospectus is July 11, 2000.
[Inside Front
Cover]
[Red Japanese koi
fish (divine logo) in upper left corner]
[Arrow pointing to
bands of interwoven strands]
The divine Family
Model
The interwoven
strands represent divines community of associated
companies.
|
|
[Bands of
yellow, red and grey interwoven strands labeled infrastructure service
providers (yellow), market makers (red) and do rights
(grey)]
|
|
The following
infrastructure service providers offer products or services to assist
companies in building and managing the technical infrastructure needed to
support business-to-business e-commerce:
|
Brandango
Buzz
divine
closerlook
comScore
dotspot
Emicom
Group
eReliable
Commerce
eXperience
divine
FiNetrics
Host
divine
i-Fulfillment
i-Street
|
Justice
divine
Knowledge
divine
LAUNCHworks
LiveOnTheNet.com
Martin
Partners
Mercantec
mindwrap
NetUnlimited
OpinionWare.com
Outtask.com
Parlano
Perceptual
Robotics
|
PocketCard
salespring
Sequoia
sho
research
Talent
divine
TV
House
ViaChange.com
Web Design
Group
Westbound
Consulting
Xippix
Xqsite
|
|
The following
market makers bring together buyers and sellers to exchange products and
services and share information on the Internet:
|
Aluminium.com
BeautyJungle.com
bid4real.com
BidBuyBuild
CapacityWeb.com
Commerx
|
eFiltration.com
Entrepower
Farms.com
iSalvage.com
The
National
Transportation
Exchange
|
Neoforma.com
OfficePlanIt.com
OilSpot.com
Whiplash
|
|
The following do
rights are for-profit businesses that use the Internet to support social,
cultural or educational purposes:
|
|
iGive.com
|
|
Panthera
Productions
|
|
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.
Until
August 5, 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 dealers obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or
subscriptions.
TABLE OF
CONTENTS
(This page
intentionally left blank)
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 the financial
statements and related notes.
divine
interVentures, inc.
We are an
Internet holding company actively engaged in business-to-business e-commerce
through our community of associated companies, currently consisting of 52
business-to-business e-commerce companies. We foster collaboration among
these companies, 15 of which are currently located together in our
facilities, to provide cross-selling and marketing opportunities and support
business growth and the sharing of information and business expertise. We
finance and assist in the development, management and operation of these
companies. Through associated companies that we established and control, we
offer our associated companies 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 associated 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 infrastructure services and venture capital funding.
Additionally, to capitalize on the international growth in
business-to-business e-commerce, we are expanding into selected
international markets.
We were
formed in May 1999 and began operations on June 30, 1999. We generated
revenues totaling approximately $1,037,000 on a consolidated basis for the
period beginning on May 7, 1999, the date of our inception, and ending on
December 31, 1999, which includes $293,000 from sales of products and
services to associated companies, the operating results of which are not
consolidated with our operating results, and $410,000 from sales of products
and services by our majority-owned associated companies, the operating
results of which are consolidated with our operating results. We generated
revenues totalling approximately $5,215,000 on a consolidated basis for the
three months ended March 31, 2000, which includes $1,509,000 from sales of
products and services to associated companies, the operating results of
which are not consolidated with our operating results. All of our revenues
for the three months ended March 31, 2000 were generated by our
majority-owned associated companies except for $193,000 received by us for
management fees. Our associated companies generate, or expect to generate,
revenues from the sale of products and services, advertising and transaction
fees. Through December 31, 1999, we directly operated, and generated
revenues of $351,000 from, the infrastructure service businesses that are
now operated by associated companies that we established and control, none
of which commenced operations before January 1, 2000. We did not generate
any revenues for the three months ended March 31, 2000, and do not expect to
generate revenues in the future, from directly operating these
infrastructure service businesses, but we expect to generate revenues
indirectly as a result of our interests in the associated companies
providing these services. We also generate revenues from fees paid to us by
venture capital funds that we manage, as well as consulting fees. In
addition, our operating results reflect our share of the earnings or losses
of non-majority owned associated companies in which we own at least 20%, but
not more than 50%, of the outstanding voting power. Our operating results
are only affected by the earnings or losses of associated companies in which
we own less than 20% of the outstanding voting power if the earnings or
losses are distributed to us. To date, we have received no distributions
from any of those associated companies. We had a net loss of approximately
$9,407,000 for the period from our inception through December 31, 1999,
which includes net losses of $509,000 from our majority-owned associated
companies, and had a net loss of approximately $44,185,000 for the three
months ended March 31, 2000, which includes net losses of approximately
$12,945,000 from our majority-owned associated companies.
We
intend to capitalize on the significant growth in the inter-company trade of
goods and services over the Internet, commonly referred to as
business-to-business e-commerce. We believe, based on estimates published in
February 2000 by Forrester Research, an independent industry research firm,
that business-to-business e-commerce will grow to approximately $2.7
trillion by 2004. Today, many new companies, including spin-outs from
traditional businesses, are being formed and funded to develop technologies
and solutions to support the new business-to-business e-commerce market.
Business-to-business e-commerce solutions are being rapidly adopted to
facilitate the continuous exchange of information among business partners
and to large customer audiences and to allow businesses to interact more
efficiently with suppliers, distributors and service providers.
We
acquire interests in and establish three categories of business-to-business
e-commerce companies:
|
|
Infrastructure
Service Providers:
|
|
|
offer products or
services such as consulting, systems integration, web site design,
accounting services and marketing and public relations expertise, to
assist companies in building and managing the infrastructure needed to
support business-to-business e-commerce; and
|
|
|
generate revenues
from sales of products and services, as well as advertising.
|
|
|
create
Internet-based markets which bring together buyers and sellers in
traditional businesses to exchange products and services and share
information; and
|
|
|
generate revenues
from transaction fees, as well as advertising.
|
|
|
use the Internet to
operate for-profit businesses with social, cultural or educational
purposes; and
|
|
|
generate revenues
from advertising, transaction fees and sales of products and
services.
|
We
acquire interests in infrastructure service providers, market makers and do
rights primarily by purchasing their capital stock. We also establish
associated companies when we identify opportunities consistent with our
business strategy and recruit entrepreneurial talent to manage these
companies. After forming these associated companies, we help develop their
business plans, provide them with capital, build their management teams and
hire their initial employees.
From
October 14, 1999 through May 15, 2000, the date of our most recent
acquisition, we have acquired interests in or established the 52
business-to-business e-commerce companies listed below. We classify
companies in which our majority-owned associated companies have interests as
associated companies. We have indicated below our percentage of equity
ownership and voting power in each associated company as of May 15, 2000.
Our equity ownership/voting power percentages have been calculated based on
the issued and outstanding common stock of each associated company, assuming
the issuance of common stock on the conversion or exercise of preferred
stock, but excluding the effect of options and warrants. Except where we
indicate otherwise, our equity ownership and voting power percentages are
the same. We have identified below by marking with an asterisk (*) each
associated company that is a development stage company. A development stage
company is a company that has not yet begun planned principal operations, or
has begun planned principal operations but has not yet generated significant
revenue from those operations. Whether a company is in the development stage
is determined on a case by case basis by that companys management.
There is no specific revenue threshold that is applicable in all cases. A
development stage company will typically be devoting most of its efforts to
activities such as financial planning, raising capital, research and
development, acquiring operating assets and recruiting and training
personnel. Currently, 34 of our 52 associated companies are in the
development stage. We have also identified below by marking with a cross
() each associated company that we established.
Infrastructure
Service Providers
Associated
Company
|
|
Our Equity
Ownership/
Voting Power
Percentage
|
Brandango,
inc.* |
|
65.5%/90.0% |
Buzz divine,
inc.* |
|
80.6%/90.0% |
closerlook,
inc. |
|
42.6% |
comScore,
Inc. |
|
0.9% |
dotspot,
Inc.* |
|
80.6%/90.0% |
Emicom Group,
Inc.* |
|
33.0% |
eReliable Commerce,
Inc.* |
|
47.1% |
eXperience divine,
inc.* |
|
80.8%/90.0% |
FiNetrics,
Inc.* |
|
80.9%/90.0% |
Host divine,
inc.* |
|
80.6%/90.0% |
i-Fulfillment,
Inc.* |
|
48.8% |
i-Street,
Inc.* |
|
63.8%/89.8% |
Justice divine,
inc.* |
|
80.9%/90.0% |
Knowledge divine,
inc.* |
|
80.7%/90.0% |
LAUNCHworks
inc. |
|
39.7% |
LiveOnTheNet.com,
Inc. |
|
76.9% |
Martin Partners,
L.L.C. |
|
25.0% |
Mercantec,
Inc. |
|
40.4% |
mindwrap,
inc. |
|
97.1% |
NetUnlimited,
Inc. |
|
61.4% |
OpinionWare.com,
Inc.* |
|
54.4% |
Outtask.com
Inc.* |
|
28.9% |
Parlano,
Inc.* |
|
70.4%/86.9% |
Perceptual
Robotics, Inc. |
|
33.4% |
PocketCard
Inc.* |
|
37.5% |
salespring,
inc.!!* |
|
80.9%/90.0% |
Sequoia Software
Corporation |
|
8.8% |
sho research,
Inc.* |
|
60.5%/90.0% |
Talent divine,
inc.* |
|
80.8%/90.0% |
TV House
Inc.* |
|
42.0% |
ViaChange.com,
Inc.* |
|
70.0% |
Web Design Group,
Inc. |
|
53.7% |
Westbound
Consulting, Inc. |
|
52.4% |
Xippix,
Inc. |
|
31.5% |
Xqsite,
Inc.* |
|
80.6%/90.0% |
Market
Makers
Associated
Company
|
|
Our Equity
Ownership/
Voting Power
Percentage
|
Aluminium.com,
Inc.* |
|
34.6% |
BeautyJungle.com,
Inc.* |
|
61.0% |
bid4real.com,
inc.* |
|
54.3% |
BidBuyBuild,
Inc.* |
|
35.5% |
CapacityWeb.com,
Inc.* |
|
44.8% |
Commerx,
Inc. |
|
1.0% |
eFiltration.com,
Inc.* |
|
45.2% |
Entrepower,
Inc.* |
|
43.0% |
Farms.com,
Ltd. |
|
41.0% |
iSalvage.com,
Inc.* |
|
36.3% |
The National
Transportation |
|
|
Exchange, Inc. |
|
5.3% |
Neoforma.com,
Inc.* |
|
1.5% |
OfficePlanIt.com,
Inc.* |
|
80.6%/90.0% |
Oilspot.com,
Inc.* |
|
55.6% |
Whiplash,
Inc.* |
|
26.5% |
Do
Rights
Associated
Company
|
|
Our Equity
Ownership/
Voting Power
Percentage
|
iGive.com,
inc. |
|
32.1% |
Panthera
Productions, LLC |
|
62.9% |
For those
companies in which our equity ownership and voting power percentage is
greater than 50%, we generally direct all of their operating activities. For
those companies in which our equity ownership and voting power percentage is
at least 20%, but not more than 50%, we generally have significant
involvement in and influence over their operating activities, with board
representation and rights to participate in material decisions. For those
companies in which our equity ownership and voting power percentage is less
than 20%, we are generally not actively involved in their management or
day-to-day operations, but offer them advisory services and, through
associated companies that we control, infrastructure services.
As of
June 30, 2000, we have paid a total of $344,839,846, including $56,471,429
in the form of outstanding promissory notes in connection with our
acquisitions of interests in 39 associated companies. These amounts include
amounts paid by two companies that we established to acquire interests in
three associated companies using funds we contributed to them, as further
discussed below. We also have provided approximately $6,500,000 of
additional financing to two associated companies. In addition, we have
issued a total of 13,000,000 shares of our series F preferred stock in
connection with three of these acquisitions, which will convert into
2,166,665 shares of class A common stock upon completion of this offering.
Based upon the initial public offering price, these 2,166,665 shares will
have a market value of $19,499,985 upon the completion of this offering. We
currently intend to contribute up to a total of $116,000,000 for start-up
financing over the next three to five years to the 13 associated companies
that we have established to date, approximately $37,000,000 of which we have
paid through May 31, 2000. Two of these associated companies have used
$12,750,000 of this amount to acquire interests in three associated
companies, and there is an outstanding promissory note in the amount of
$250,000 relating to one of those acquisitions. Our future contributions to
each of the associated companies that we have established may be
significantly increased or decreased and accelerated or decelerated based
upon various factors, including the companys development of its
business plans and objectives and its progress toward achievement of its
performance goals, as well as additional funding available to it from
third-party sources.
Of our 52
associated companies, 30 were generating revenues as of March 31, 2000.
However, only closerlook, Commerx, comScore, Farms.com, iGive.com,
LAUNCHworks, LiveOnTheNet.com, Martin Partners, Mercantec, mindwrap, The
National Transportation Exchange, NetUnlimited, Panthera Productions,
Perceptual Robotics, Sequoia, Web Design Group, Westbound Consulting and
Xippix generated sufficient revenues from principal operations so that they
were not classified as development stage companies in 1999. None of these
companies generated any material revenues in 1999 from sales of products or
services to other associated companies. In addition, only two associated
companies, Martin Partners and Web Design Group, neither of which we
established, reported net income for 1999. Only Brandango, eXperience divine
and Talent divine, each of which we established, as well as Martin Partners
and Web Design Group, reported net income for the three months ended March
31, 2000.
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 associated
companies is part of this prospectus.
The
Offering
Class A common
stock offered |
|
14,285,000
shares |
|
|
Common stock to be
outstanding after this offering
and the concurrent private
placements: |
|
|
|
|
Class
A common stock |
|
114,158,942
shares |
|
|
|
|
Class C convertible common stock |
|
23,288,511 shares |
|
|
Total |
|
137,447,453
shares |
|
|
Use of
proceeds of this offering |
|
To repay
promissory notes issued in connection with
acquisitions of interests in associated companies,
purchase the property in Chicago on which our planned
400,000 square foot facility is to be constructed,
purchase Microsoft products and services, fund our
commitment to Skyscraper Ventures and contribute
capital to associated companies that we have
established to date. |
|
|
Use of
proceeds of the concurrent private
placements |
|
To promote Microsoft products and services, open our
Seattle office, purchase services from Level 3, purchase
products and services from Compaq, contribute capital
to associated companies that we have established to
date and acquire interests in and establish associated
companies, and for general corporate and working
capital purposes. |
|
|
Proposed
Nasdaq National Market symbol |
|
DVIN |
The number of shares of our common stock to be outstanding
after this offering and the concurrent private placements is based
on the number of shares outstanding on July 11, 2000. This number
excludes the following:
|
|
978,866
shares of class A common stock issuable upon the exercise of stock
options outstanding on July 11, 2000, with a weighted average
exercise price of $8.46 per share;
|
|
|
3,584,793
shares of class A common stock reserved as of July 11, 2000 for
grants that we may make in the future under our stock incentive
plan; and
|
|
|
4,166,666
shares of class A common stock reserved for issuance under our
employee stock purchase plan.
|
Additionally,
the number of shares reserved for grant under our stock incentive
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 our 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) 50,000,000 shares.
Except where we indicate differently, the information in
this prospectus assumes:
|
|
a
one-for-six reverse stock split of our class A common stock and
class B common stock to be effected before the completion of this
offering;
|
|
|
the
conversion of each share of our class B common stock into one
share of our class A common stock to be effected after the reverse
stock split and upon the completion of this
offering;
|
|
|
the
conversion of each outstanding share of our convertible preferred
stock into one-sixth of a share of our class A common stock, to be
effected upon the completion of this offering; and
|
|
|
no
exercise by the underwriters of their over-allotment
option.
|
Concurrent Private Placements
We have agreed to sell directly to each of the entities listed
in the table below, in private placements concurrent with our
completion of this offering, shares of our class A common stock and
our non-voting class C convertible common stock. Our class C
convertible common stock is convertible, at the option of the
holder, into an equal number of shares of our class A common stock.
Except for our sales to 360networks, BancBoston Capital and CMGI, as
described below the table, we have agreed to sell to each entity a
number of shares having an initial public offering value equal to
the purchase price shown opposite the name of that entity. Except
for our sales to CMGI and Level 3, as described below the table, we
have agreed to sell all of the shares for cash.
Purchaser
|
|
Class of
Common
Stock
|
|
Number of
Shares to be
Purchased
|
|
Purchase
Price
|
360networks, inc. |
|
class
C |
|
4,000,000 |
|
|
$ 20,000,000 |
|
Aon
Corporation |
|
class
C |
|
2,777,777 |
|
|
25,000,000 |
|
BancBoston
Capital, Inc. |
|
class
C |
|
955,181 |
|
|
8,596,629 |
|
CMGI,
Inc. |
|
class
A |
|
1,701,900 |
|
|
15,317,100 |
|
Compaq
Computer Corporation (through its affiliate CPQ Holdings,
Inc.) |
|
class
C |
|
5,555,555 |
|
|
50,000,000 |
|
Hewlett-Packard Company |
|
class
C |
|
2,777,777 |
|
|
25,000,000 |
|
Level 3
Communications |
|
class
C |
|
5,555,555 |
|
|
50,000,000 |
|
marchFIRST,
Inc. |
|
class
C |
|
1,666,666 |
|
|
15,000,000 |
|
Microsoft
Corporation |
|
class
A |
|
5,555,555 |
|
|
50,000,000 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
30,545,966 |
|
|
258,913,729 |
|
Less: Shares to be Purchased for Non-Cash
Consideration |
|
|
|
(4,479,678 |
) |
|
(40,317,100 |
) |
|
|
|
|
|
|
|
|
|
Total Shares to be Purchased For Cash |
|
|
|
26,066,288 |
|
|
$218,596,629 |
|
|
|
|
|
|
|
|
|
|
We estimate
that our net cash proceeds from the concurrent private placements,
after deducting estimated expenses of $175,000, will be
approximately $218,421,629.
360networks. We have agreed to sell to 360networks,
inc. 2,000,000 shares of our class C convertible common stock at
$1.00 per share and 2,000,000 shares of our class C convertible
common stock at the initial public offering price. At the time we
began discussing the terms of our relationship with 360networks and
its purchase of our shares, we had recently completed an offering of
our preferred stock, which was convertible at that time on a
share-for-share basis into our class A common stock, at a price of
$1.00 per share. We agreed to the discounted purchase price for
2,000,000 of the shares to be sold to 360networks primarily because
the terms of the purchase by 360networks were initially discussed in
the context of that valuation, because we were given the opportunity
to purchase shares of stock of 360networks on a discounted basis,
and because 360networks agreed to purchase a fixed number of our
shares at the initial public offering price, regardless of how great
the total obligation of 360networks might ultimately be, in contrast
to the other purchasers, which are committed to purchase a fixed
dollar amount. We expect to account for the difference between the
estimated discount being received by 360networks and the discount
received by us on our purchase of shares of 360networks, as
discussed under Concurrent Private PlacementsStrategic
Relationships, as a preferential distribution of approximately
$14,942,000.
BancBoston Capital. We have agreed to sell to
BancBoston Capital a number of shares of our class C convertible
common stock having an aggregate initial public offering value of
$25,000,000. However, BancBoston, which is an affiliate of
FleetBoston Robertson Stephens Inc., one of the underwriters of this
offering, which uses the brand name Robertson Stephens as shown on
the cover of this prospectus, has agreed that it will not purchase a
number of shares that would cause the underwriters to be deemed to
have received underwriting compensation in excess of the limitation
imposed by a rule of the National Association of
Securities Dealers. Under this rule, the underwriters and their
affiliates, collectively, may not receive shares in excess of 10% of
the number of shares listed for sale on the cover of this
prospectus. For a discussion of this rule, see
UnderwritingPurchases of Our Common Stock by Affiliates
of Underwriters.
CMGI. We have agreed to sell to CMGI a number of shares
of our class A common stock, in addition to the 3,047,387 shares of
class A common stock issuable upon conversion of series E preferred
stock previously purchased by CMGI, so that, after the completion of
this offering but without giving effect to the other concurrent
private placements or to the conversion of our class B convertible
common stock into class A common stock to be effected upon the
completion of this offering, CMGI will own, in the aggregate, 4.9%
of our outstanding class A common stock. CMGI will pay the purchase
price for the shares of our class A common stock purchased in the
concurrent private placement by issuing to us CMGI common stock with
an equivalent value.
Level 3. We have agreed with Level 3 that 50%, or
$25,000,000, of the purchase price for the shares of class C
convertible common stock that it is purchasing in the concurrent
private placement will be paid in the form of a credit to us for
colocation and bandwidth services to be provided by Level 3 to Host
divine.
Summary
Financial Information
You should read the following historical and unaudited pro
forma financial information along with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and the
related notes included in this prospectus.
|
|
Period from
May 7, 1999
(Inception)
to
December
31, 1999
|
|
Three Months
Ended
March 31, 2000
(unaudited)
|
|
|
(in
thousands, except share and
per share data) |
Statement of Operations Data: |
|
|
|
|
|
|
Revenues |
|
$
1,037 |
|
|
$
5,215 |
|
Total
operating expenses |
|
10,465 |
|
|
46,119 |
|
Net
loss |
|
(9,407 |
) |
|
(44,185 |
) |
Net loss
applicable to common stockholders |
|
(12,927 |
) |
|
(77,416 |
) |
|
|
|
|
|
|
|
Basic and
diluted net loss per share applicable to common
stockholders |
|
$
(4.59 |
) |
|
$
(7.79 |
) |
Shares used
in computing basic and diluted net loss per share |
|
2,816,074 |
|
|
9,941,917 |
|
|
|
March
31, 2000
|
|
|
Actual
|
|
As
Adjusted
for this
Offering
Only
|
|
|
(in
thousands) |
Balance
Sheet Data: |
|
|
|
|
Cash and
cash equivalents |
|
$211,911 |
|
$324,777 |
Working
capital |
|
190,349 |
|
303,214 |
Total
assets |
|
487,260 |
|
600,126 |
Total
stockholders equity |
|
190,260 |
|
521,634 |
The As Adjusted column reflects only the conversion of our
convertible preferred stock and class B common stock into class A
common stock and our sale of 14,285,000 shares of class A common
stock in this offering, and our receipt of estimated net proceeds of
$112,865,450 from this sale, after deducting the underwriting
discounts and commissions and estimated offering expenses. The As
Adjusted column does not reflect our issuance of 7,257,455 shares of
class A common stock and 23,288,511 shares of class C convertible
common stock in the concurrent private placements and our receipt of
the estimated net cash proceeds of $218,421,629 from these private
placements.
For an explanation of the determination of the number of
shares used in computing basic and diluted net loss per share, see
Note 1(l ) of the notes to our consolidated financial
statements.
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. Any of the following risks could materially
adversely affect our business, financial condition or operating
results and could negatively impact the value of your
investment.
Risks
Particular to Us
Our
financial and operating success depends on the financial and
operating success of our associated companies; and our business will
be adversely affected to the extent our associated companies are not
successful.
Many of the risks described in these risk factors may affect
our associated companies and may therefore affect us to the extent
of our interest in the affected associated company. In addition, two
of our associated companies, LAUNCHworks and Emicom Group, provide
capital and infrastructure services to Internet companies through
business models similar to our own and, therefore, may also be
directly affected by the risks particular to us. We have also
entered into a nonbinding letter of intent to acquire an interest in
an entity that plans to operate a business similar to ours in Latin
America, and we may acquire interests in other entities that have
business models similar to ours in the future. These additional
companies also may be directly affected by the risks particular to
us. If any one of our associated companies is harmed or fails as a
result of any of these risks, our business will be adversely
affected, and the adverse effect on us could be material depending
on the size and nature of the business of the affected company and
the amount of capital that we have committed to that company. Any
adverse impact on us will be magnified to the extent that multiple
associated companies are harmed or fail.
We have
been in business for only one year and our associated 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 associated companies and
analyzed and engaged in discussions with other potential associated
companies. Because we have only recently begun operating and because
many of our associated 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. For example, 34 of our 52
associated companies are in the development stage. We cannot be
certain that our business strategy or the business strategies of our
associated companies will be successful, because these strategies
are new and unproven. As early stage companies, we and our
associated companies will be particularly susceptible to the risks
and uncertainties described in these risk factors and will be more
likely to incur the expenses associated with addressing them.
Because we have interests in numerous early-stage companies, we are
exposed not only to our own start-up risks, but to the start-up
risks associated with each of our associated companies. This
exposure will increase as we continue to acquire interests in and
establish new associated companies. In the future, we may acquire
greater percentage equity interests in companies, including
acquiring whole companies, and we may acquire interests in larger
companies than has typically been the case with our acquisitions to
date, further increasing our exposure to these risks.
Our
stockholders may have difficulty evaluating the success of
individual associated companies because we will generally not be
required to provide separate financial statements for
them.
We will not be required to provide separate financial
statements for our associated companies for periods after their
acquisition by us, except under very limited circumstances. For
periods before their acquisition by us, we will only be required to
provide separate financial statements where at least one of three
conditions specified by the SEC is met: (1) our proportionate share
of the total assets of the associated company exceeds 20% of our
consolidated total assets, (2) our equity in the pre-tax income or
loss of the associated company exceeds 20% of our consolidated
pre-tax income or loss or (3) the amount paid by us as consideration
for the
associated company interest exceeds 20% of our consolidated total
assets. Therefore, our stockholders may not be able to assess the
impact of the risks described in these risk factors on the
individual associated companies. Further, our stockholders may have
difficulty evaluating the success of our individual associated
companies and, accordingly, the success of our business strategy. In
addition, we recognize revenues, expenses and other income from our
associated companies, each of which has a different cost structure
and revenue model, and we generate expenses independent of our
associated companies. Our total revenues, expenses and other income
may therefore correlate to a lesser extent than those of other
companies. As a result, our operating results may be difficult for
investors and securities analysts to interpret.
We expect
to incur increasing losses for the foreseeable future, and we
and our associated companies may never become
profitable.
We incurred a net loss of approximately $9,407,000 for the
period from our inception on May 7, 1999 through December 31, 1999
and approximately $44,185,000 for the three months ended March 31,
2000. We expect to incur increasing losses for the foreseeable
future. Our current associated companies are, and we expect that our
future associated companies will be, in the early stages of
development and will have limited or no revenues. Because
business-to-business e-commerce companies, even if successful,
typically generate significant losses while they grow, we do not
expect our associated companies to generate income for us for the
foreseeable future, and they may never generate income. Further, the
income, if any, generated by associated companies will be offset by
the losses of our other associated companies. Moreover, our
continuing acquisitions of interests in, and establishment of, early
stage associated companies may further delay or prevent our
profitability.
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:
|
|
acquire
interests in and establish new associated companies;
|
|
|
build the
operations of our current and new associated
companies;
|
|
|
hire
additional employees;
|
|
|
expand our
information technology systems; and
|
|
|
lease and
purchase more space, including our planned 400,000 square foot
facility in Chicago, to accommodate our operations and to sublease
to some of our associated companies and other business-to-business
e-commerce companies. We have exercised an option to purchase the
property on which the Chicago facility is to be constructed for
$9,750,000 plus costs and expenses incurred by the current owner.
We intend to arrange for the construction of the facility, which
we expect to be funded principally through third-party
financing.
|
Through June 30, 2000, we have paid a total of $344,839,846,
including $56,471,429 in the form of outstanding promissory notes,
in connection with our acquisitions of interests in 39 of our
associated companies. These amounts include amounts paid by two of
the associated companies that we established to acquire interests in
three associated companies using funds we contributed to them, as
further discussed below. We have also provided approximately
$6,500,000 of additional financing to two associated companies in
which we have acquired interests. In addition, we have issued a
total of 13,000,000 shares of our series F preferred stock in
connection with three of these acquisitions, which will convert into
2,166,665 shares of class A common stock in connection with this
offering. We currently intend to contribute up to a total of
$116,000,000 for start-up financing over the next three to five
years to associated companies that we have established to date,
approximately $37,000,000 of which we have paid through May
31, 2000. Two of these associated companies have used $12,750,000 of
this amount to acquire interests in three associated companies, and
there is an outstanding promissory note in the amount of $250,000
relating to one of these acquisitions. Our future contributions to
each of the associated companies that we have established may be
significantly increased or decreased and accelerated or decelerated
based upon various factors, including the companys development
of its business plans and objectives and its progress toward
achievement of its performance goals, as well as additional funding
available to it from third-party sources. Given the early stages of
our associated companies and the high speed at which they expect to
develop, their business plans and objectives are subject to rapid
and substantial change.
We are currently in active discussions with over 50 potential
associated companies, but do not have plans to acquire interests in
or establish a specific number of new associated companies or to
commit a target amount of capital to these transactions. Instead, we
continuously seek to identify opportunities suitable for our
business strategy, employing our associated company evaluation
criteria and considering our available funds and the condition of
the capital markets. Costs associated with building our associated
companies and developing the infrastructure we will need to support
them will vary based upon many factors, including the number of
companies and the size, nature and state of development of each
company. Therefore, we cannot now determine the amount by which our
expenses will increase as we grow.
In the
future, we may change our business plans and our operational
structure, and, if we do not complete this offering, we expect to
implement cost-reduction measures, including laying off
employees.
We continually analyze our business plans and internal
operations and the operations and business plans of each of our
associated companies in light of market developments. As a result of
this ongoing analysis, we may decide to make substantial changes in
our business plan and organization and in the business plans and
organizations of the associated companies that we control. We
recently decided to change the organizational structure of our
associated company development group, which is principally
responsible for making acquisition and funding recommendations to
our senior management. We reorganized that group into three areas:
(1) market makers; (2) infrastructure companies; and (3) business
services (which combine with the infrastructure companies to form
the infrastructure service provider category). In this process, we
decided to eliminate 29 positions within this group, laying off 28
employees and moving one employee to another position within our
organization. The total expense associated with these layoffs was
approximately $456,000, which consisted of severance pay, accrued
vacation, continuation of employee benefits and forgiveness of
interest receivables from employee loans. We have expensed an
additional approximately $502,000 related to acceleration of
unearned stock-based compensation related to these terminated
employees. In the future, as we continue our internal analysis and
as market conditions and our available capital change, we may decide
to make additional organizational changes and/or alter some of our
overall business plans.
We continually examine all of our associated companies to
assess their potential for financial success as part of our
organization, whether on a stand-alone basis or otherwise. This
examination includes consideration of each associated companys
development of its business plans and objectives and progress toward
achievement of its performance goals. Based on this examination, we
expect to make future funding decisions with respect to existing and
new associated companies, including whether to adjust our currently
intended contributions to the associated companies we established.
We may determine not to provide any future capital to particular
associated companies, including associated companies that we
control, and those companies may need to obtain third-party
financing, if available, to continue operations as currently
anticipated, if at all. In some cases, these companies may elect, or
be forced, to lay off employees or take other measures to reduce
costs. In addition, we may decide in the future to combine,
restructure or alter the business plans of associated companies that
we control to enhance their potential value in the public markets or
their value to potential acquirers. We expect that we will apply
these same principles, and a consideration of our available cash and
other resources, in making decisions with respect to future
acquisitions of interests in associated companies.
If we do not complete this offering, we expect to take steps
to reduce our costs, and also to seek alternative sources of
capital. Our cost reduction measures would include laying off
additional employees, including in our associated company
development group and at associated companies that we control. We
would also decrease or eliminate our currently intended capital
contributions to the associated companies we established, as well as
to other associated companies. Further, we would significantly scale
back, or terminate entirely, our program of acquiring interests in,
and establishing, new associated companies. In addition, we would
scale back, postpone or cancel our plan to construct an
approximately 400,000 square foot facility in Chicago.
If our
management fails to properly identify associated companies in which
to acquire interests or to establish and effectively complete these
transactions, you may lose all or part of your
investment.
Our success depends on our ability to identify opportunities
to acquire interests in and establish desirable infrastructure
service providers, market makers and do rights and to successfully
negotiate the terms of any acquisitions we make. Our management will
have sole and absolute discretion in identifying and selecting
associated companies in which to acquire interests or to establish
and in structuring, negotiating, undertaking and divesting of
interests in our associated companies. We may combine, reorganize,
alter the business plan of or sell any of our associated companies
at any time, as our management determines is appropriate. You will
not be able to evaluate the merits of the acquisition of an interest
in, or the establishment of, or the reorganization or change in
business plans of, any particular associated company before we take
any of these actions. In addition, in making decisions to acquire
interests in or establish associated companies, we will rely, in
part, on financial projections developed by our management and the
management of potential associated companies. These projections will
be based on assumptions and subjective judgments. The actual results
of our associated companies may differ significantly from these
projections.
We may be unable to acquire an interest in companies that we
identify for many reasons, including:
|
|
our
inability to interest companies in joining our collaborative
network;
|
|
|
our
inability to agree on the terms of an acquisition or to acquire a
controlling interest in the company; and
|
|
|
incompatibility between us and management of the
company.
|
We estimate that, after this offering and the concurrent
private placements, we will have approximately $276,000,000 of cash
and cash equivalents, including cash and cash equivalents held by
our associated companies, available for acquiring interests in and
establishing new associated companies, as well as to provide
additional funding for existing associated companies and for general
corporate and working capital purposes. If we cannot continue to
acquire controlling interests in and establish emerging
business-to-business e-commerce companies with this capital, our
strategy to build a collaborative network of associated companies
will not succeed. Further, we expect that, even if we can identify,
acquire and establish associated companies, we will not be
profitable for the forseeable future and may never become
profitable.
We will
not be able to successfully execute our business strategy if we are
deemed to be an investment company under the Investment Company Act
of 1940.
U.S. companies that have more than 100 shareholders or are
publicly traded in the U.S. and 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. 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 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 associated companies, we cannot feasibly
operate our business as a registered investment company.
If 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 associated
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
strategy.
In addition, our associated companies that are not U.S.
companies with business models similar to ours, Emicom Group and
LAUNCHworks, may become subject to regulation under the Investment
Company Act in the future if they have more than 100 U.S.
shareholders or become publicly traded in the U.S. and are, or hold
themselves out as being, engaged primarily in the business of
investing, reinvesting or trading in securities. These companies
could not feasibly operate as registered investment companies. We
also may acquire interests in other companies with business models
that could subject them to regulation under the Investment Company
Act. Specifically, we have entered into a letter of intent to
acquire an interest in a company to be formed in Latin America with
a business model similar to ours. If any associated companies become
subject to regulation under the Investment Company Act, they will be
subject to the risks, uncertainties and operating restrictions
described in this and other risk factors.
We may have to sell, buy or retain assets when we would not otherwise
wish to in order to avoid regulation as an 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, or retain existing, income-generating or
loss-generating assets which we would not otherwise have acquired or
retained and may need to forego opportunities to acquire interests
in attractive companies that would benefit our business. If we were
forced to sell, buy or retain assets in this manner, we would be
prevented from successfully executing our business strategy. In
addition, if we dispose of our interests in associated companies,
the strength of our collaborative network will be adversely
affected. If any of our associated companies with business models
similar to ours become subject to regulation under the Investment
Company Act, they will be subject to the risks and uncertainties
described in this risk factor and we may be forced to dispose of our
interests in those companies.
We may
sell our associated company interests for less than their
maximum value or at a loss.
Our ability to sell associated company interests to generate
income or to avoid regulation under the Investment Company Act may
be limited, especially where there is no public market for an
associated companys stock. Market, regulatory, contractual and
other conditions largely beyond our control will affect:
|
|
our ability
to sell our interests in associated companies;
|
|
|
the timing
of these sales; and
|
|
|
the amount
of proceeds from these sales.
|
If we divest all or part of our interest in an associated
company, we may not receive maximum value for the interest, and we
may sell it for less than the amount we paid to acquire it. Even if
an associated company has publicly-traded stock, we may be unable to
sell our interest in that company at then-quoted market
prices.
Our
business strategy may not be successful if valuations of
Internet-related companies decline.
Our strategy involves helping our associated companies grow
and access the public capital markets. Therefore, our success is
dependent on acceptance by these markets of Internet-related
companies in general and of initial public offerings of those
companies in particular. Weak capital markets for initial public
offerings of Internet-related companies may delay or prevent our
associated companies from going public.
Intense
competition from other capital providers to acquire interests in
business-to-business e-commerce companies could result in lower
returns or losses on acquisitions.
We face intense competition from traditional venture capital
firms, companies with business strategies similar to our own,
corporate strategic investors and other capital providers to develop
and acquire interests in
business-to-business e-commerce companies. Competitors with business
strategies similar to our own include publicly-held CMGI, Internet
Capital Group and Safeguard Scientifics, as well as private
companies, including Idealab! and our associated companies Emicom
Group and LAUNCHworks. In addition, we may face competition from an
emerging group of online service providers that facilitate
relationships between entrepreneurs and venture capitalists, such as
vcapital.com and Garage.com. Further, several professional service
firms have recently announced their intention to provide capital and
services to e-commerce companies. Many of our competitors have more
experience identifying and acquiring interests in
business-to-business e-commerce companies and have greater financial
and management resources, brand name recognition and industry
contacts than we do.
This intense competition, and the impact it has on the
valuation of business-to-business e-commerce companies, could limit
our opportunities to acquire interests in associated 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, including venture capital firms,
private companies with business strategies similar to ours and
corporate strategic investors, may have a competitive advantage over
us because they have more flexibility than we do in structuring
acquisitions in companies because they do not need to acquire
majority or controlling interests in companies to avoid regulation
under the Investment Company Act.
Our losses
will be increased, or our earnings, if we have them in the future,
will be reduced, by amortization charges.
|
Our
losses will be increased, or our earnings, if we have them in the
future, will be reduced, by amortization charges associated with
completed and future acquisitions of interests in associated
companies and acquisitions of assets.
|
Our amortization of identifiable intangible assets and
goodwill will increase our losses or reduce our earnings, if we have
them in the future. After we complete an acquisition of a greater
than 50% voting interest in an associated company, we must amortize
any identifiable intangible assets and goodwill associated with the
acquired company over future periods. We also must amortize any
identifiable intangible assets that we acquire directly. After we
complete an acquisition of a voting interest in an associated
company of at least 20%, but not more than 50%, we must amortize our
net excess investment over the equity in the net assets of the
acquired company over future periods. We expect that, typically, we
will amortize these amounts over one to three years. Our
amortization of these amounts will increase our losses or reduce our
earnings, if we have them in the future, in the affected periods.
Through December 31, 1999, we recognized total identifiable
intangible assets and goodwill of approximately $18,435,000 and
related amortization expense of approximately $595,000. We also
recognized approximately $21,719,000 in our net excess investment
over the equity in the net assets of acquired companies and related
amortization expense of approximately $742,000.
From January 1, 2000 to March 31, 2000, we recorded total
identifiable intangible assets and goodwill of approximately
$25,934,000 and related amortization expense of approximately
$3,415,000 in connection with acquisitions of interests in
consolidated associated companies. We also recognized approximately
$87,583,000 in our net excess investment over the equity in the net
assets of associated companies and related amortization expense of
approximately $6,231,000 during this period. In April 2000, we
recognized approximately $35,770,000 in our net excess investment
over the equity in the net assets of associated
companies.
We expect to amortize our identifiable intangible assets and
goodwill and our net excess investment over the equity in net assets
in associated companies as follows: 2000$56,178,000 (including
a total of $9,646,000 amortized in the first three months of 2000);
2001$62,589,000; 2002$61,253,000; 2003$6,565,000.
As we continue to complete acquisitions, the amortization amounts
relating to both (1) identifiable intangible assets and goodwill and
(2) our net excess investment over the equity in net assets in
associated companies and, accordingly, the negative impact on our
earnings will increase. Further, we may complete larger transactions
in
the future than we have completed to date, which could result in
higher amortization charges and a greater adverse effect on future
earnings.
|
Our
losses will be increased, or our earnings, if we have them in the
future, will be reduced, by charges associated with our issuances
of options and preferred stock.
|
Our amortization of stock-based compensation expenses will
increase our losses or reduce our earnings, if we have them in the
future. Through April 30, 2000, we granted options to purchase a
total of 7,051,522 shares of our class A common stock, and issued
116,665 shares of restricted stock, under our 1999 Stock Incentive
Plan to our employees, non-employee directors and consultants,
including options to purchase 3,533,904 shares during 1999. As of
April 30, 2000, options to purchase 8,000 shares had been cancelled
and 22,510 shares of restricted stock issued upon exercise of
options had been forfeited. The options and restricted stock were
granted with exercise prices lower than the fair value of our class
A common stock at the dates of grant. In connection with the options
and restricted stock, we recorded unearned stock-based compensation
of approximately $27,408,000 in 1999, approximately $81,508,000 in
the first quarter of 2000 and approximately $5,955,000 in April
2000. The total unearned stock-based compensation will be amortized
as stock-based compensation expense in our consolidated financial
statements over the vesting period of the applicable options or
shares, generally four years in the case of options granted to
employees and one year in the case of options granted to
non-employee directors and restricted stock issued to employees. In
1999, we amortized approximately $747,000 of stock-based
compensation expense, and, for the three months ended March 31,
2000, we amortized approximately $7,150,000 of this stock-based
compensation expense. We expect to amortize the unearned stock-based
compensation as follows: 2000$34,141,000 (including a total of
$7,150,000 amortized in the first three months of 2000);
2001$27,426,000; 2002$26,614,000; 2003$24,669,000;
and 2004$1,274,000, which will increase our losses or reduce
our earnings, if we have them in the future, in those years. These
types of charges may increase in the future.
In March 2000, we issued an option to purchase 166,666 shares
of our class A common stock with an exercise price of $6.00 per
share to one of our non-employee directors, of which 125,000 shares
relate to a consulting agreement between that director and us.
Additionally, in February and March 2000, we issued options to
purchase 108,295 shares of our class A common stock with exercise
prices ranging from $10.50 to $13.50 per share to consultants. These
options issued to a non-employee director and to consultants are
included in the options discussed in the preceding paragraph. We
will record a total future expense of approximately $6,893,000
relating to the portion of these options issued for consulting
services. We will recognize this total future expense over the
three-or-four year vesting period of the consulting agreements,
which will increase our losses or reduce our earnings, if we have
them in the future, in those years. We will continue to revalue the
services on a quarterly basis based upon our future publicly traded
stock price and adjust our expense incurred accordingly. The future
value of these potential additional charges cannot be estimated at
this time, because the charges will be based on the future fair
value of our class A common stock. In the future we may incur
similar charges in connection with other stock option awards to
consultants, including members of our advisory board, which will
reduce our earnings, or increase our losses, in the affected
periods. These types of charges may increase in the
future.
During January 2000, our employees acquired interests in 13
companies that we established in October and November 1999. For
financial reporting purposes, the deemed fair value of the
employees share of these companies was approximately
$24,225,000 more than the total amount contributed by the employees.
Therefore, we have recorded that amount as unearned stock-based
compensation expense for the first quarter of 2000. The total
unearned stock-based compensation will be amortized as stock-based
compensation expense in our financial statements ratably over four
years, which represents the vesting period of the shares issued. We
amortized approximately $1,514,000 of this stock-based compensation
expense for the three months ended March 31, 2000. We expect to
amortize a total of $6,056,000 in 2000 (including $1,514,000
amortized in the first three months of 2000) and $6,056,000 in each
of 2001, 2002 and 2003, which will increase our losses or reduce our
earnings, if we have them in the future, in those periods. These
types of charges may increase in the future.
The following table summarizes the unearned stock-based compensation
charges as of April 30, 2000 that we expect to amortize over the
next five years:
Year
|
|
Unearned
Stock-Based
Compensation
Charge
|
2000 |
|
$40,197,000 |
* |
2001 |
|
33,482,000 |
|
2002 |
|
32,670,000 |
|
2003 |
|
30,725,000 |
|
2004 |
|
1,274,000 |
|
*Includes $8,664,000 amortized in the first
three months of 2000.
The unearned stock-based compensation charges shown in the
table above do not reflect potential additional charges associated
with options granted to consultants, as discussed above. The future
value of these potential charges cannot be estimated at this time
because the charges will be based on the future value of our
stock.
In connection with the issuance of our series E convertible
preferred stock on March 14, 2000, we recorded a non-cash preferred
stock dividend of $18,284,327, which relates to the deemed
beneficial conversion feature associated with that preferred
stock.
In connection with the issuance of our series F convertible
preferred stock on February 11, 2000, we recorded a non-cash
preferred stock dividend of $7,530,000, which relates to the deemed
beneficial conversion feature associated with that preferred
stock.
|
Our
losses will be increased, or our earnings, if we have them in the
future, will be reduced, by the sum of the amortization charges
described above.
|
The following table summarizes the fixed charges as of March
31, 2000 that we currently expect to incur over the next five years
for amortization of (1) identifiable intangible assets and goodwill,
(2) our net excess investment over our equity in the net assets of
associated companies and (3) unearned stock-based
compensation:
|
|
Year
|
Amortization of:
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
Identifiable Intangible Assets and Goodwill |
|
14,570,000 |
|
14,776,000 |
|
14,181,000 |
|
750,000 |
|
|
Our Net
Excess Investment |
|
41,608,000 |
|
47,813,000 |
|
47,072,000 |
|
5,815,000 |
|
|
Unearned
Stock-Based Compensation |
|
40,197,000 |
|
33,482,000 |
|
32,670,000 |
|
30,725,000 |
|
1,274,000 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
96,375,000 |
|
96,071,000 |
|
93,923,000 |
|
37,290,000 |
|
1,274,000 |
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These
unearned stock-based compensation charges do not reflect potential
additional charges associated with options granted to consultants,
as discussed above. The future value of these potential charges
cannot be estimated at this time because the charges will be based
on the future value of our stock.
|
As discussed above, these charges will increase our losses or
reduce our earnings, if we have any in the future, in the affected
periods.
We may not
be able to secure additional financing when we need it in the future
to support our growth.
In the future, we expect to need to access the public and
private equity or debt markets periodically to obtain the funds we
need to acquire interests in and establish new associated companies
and to otherwise support our operations and continued growth and the
operations and growth of our associated companies. For
example, we expect that the substantial majority of the cost of
acquiring the land and constructing and developing our planned
400,000 square foot facility in Chicago, currently estimated to be
between $60,000,000 and $80,000,000, will be funded through
third-party financing. Our future capital requirements will depend
in large part on the number of associated companies in which we
acquire interests and which we establish, the amounts of capital we
provide to these companies and the timing of these payments. Our
plans and the related capital requirements will be dependent on
various factors, such as developments in our markets and the
availability of acquisition and entrepreneurial opportunities. We
may not be able to obtain financing on acceptable terms, or at all,
when we need it. If we require, but are unable to obtain, additional
financing in the future on acceptable terms, or at all, we will not
be able to continue our business strategy, respond to changing
business or economic conditions, withstand adverse operating results
or compete effectively.
Our
management has not previously actively managed, operated or promoted
Internet companies, and if they cannot do so effectively, our
business strategy will fail.
Our strategy involves helping associated companies grow and
access the public capital markets by providing them with management
and operational support. Our senior 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. In
addition, we may acquire interests in or establish
business-to-business e-commerce companies focused on industries in
which our senior management has little experience. If our senior
management cannot effectively manage, operate and promote our
associated companies, they may not become profitable or gain access
to the public capital markets, and we may be unable to convince new
companies to join our network.
Our
success is dependent on the retention of Andrew J.
Filipowski.
We believe that Andrew J. Filipowski, our Chairman and Chief
Executive Officer, is critical to our success. If we lost the
services of Mr. Filipowski, our ability to attract associated
companies, promote our business and that of our associated companies
and raise additional capital would be severely limited, and our
business could fail. We do not maintain key man life insurance on
Mr. Filipowski.
Our key
personnel have entered into non-compete agreements which could
prevent us from engaging in certain activities and acquiring
interests in some companies.
Andrew J. Filipowski, Michael P. Cullinane, our Executive Vice
President, Chief Financial Officer and Treasurer and a director, and
Paul L. Humenansky, our Executive Vice President and a director,
have entered into consulting and non-compete agreements with
PLATINUM technology International, inc., now a
wholly-owned subsidiary of Computer Associates International, Inc.
These agreements 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, in the
development, manufacture, marketing or distribution of any products
or services offered by PLATINUM as of March 29, 1999,
or any products or services offered by PLATINUM after that date and
in which they had actively participated. PLATINUM was, as of March
29, 1999, and continues to be, engaged in the business of
developing, marketing and supporting software products for managing
information technology infrastructures and providing related
professional services. As of March 29, 1999, PLATINUM also offered
products and services for the creation, deployment and management of
web content.
Under the agreements, 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, as described above; and
|
|
|
soliciting,
or assisting another person to solicit or attempt to solicit,
persons or entities that were current 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.
|
Larry S. Freedman, our Executive Vice President, General Counsel and
Secretary, has entered into a consulting and non-compete agreement
with Computer Associates, the parent of PLATINUM, containing terms
substantially similar to those of Messrs. Filipowski, Cullinane and
Humenansky. This agreement terminates on June 29, 2001.
To manage our business effectively with respect to these
agreements, we have consulted with PLATINUM and Computer Associates
before making any acquisition to confirm that it would not result in
a breach of these agreements. If the relevant parties to these
agreements were to deem our activities or those of any proposed
associated company to be prohibited by these consulting and
non-compete agreements, we might not be able to conduct those
activities or acquire interests in that associated company. To date,
neither PLATINUM nor Computer Associates has raised any objection to
any of our acquisitions or business activities or those of our
associated companies, including the web design and deployment
operations of Xqsite. In the future, however, these consulting and
non-compete agreements could limit our business opportunities, which
could impair our success. Sanjay Kumar, one of our directors, is the
President and Chief Operating Officer and a director of Computer
Associates. Mr. Kumar could have conflicting fiduciary obligations
to us and Computer Associates as to enforcement of the non-compete
agreements.
There are
numerous conflicts of interest among associated companies and our
officers, directors and stockholders.
To further our business strategies, we have adopted policies
of (1) encouraging our directors to present acquisition and other
business opportunities to us in which they may already have a
financial interest and with which they are therefore familiar, (2)
entering into strategic transactions and relationships with
companies with which our directors are affiliated and (3) creating
incentives for our employees, including our senior management, by
offering them equity not only in us, but also directly in various
associated companies. The implementation of these policies presents
numerous conflicts of interest which are discussed below. We intend
to continue to follow these policies and, therefore, continue to
enter into conflict of interest transactions and
relationships.
|
We
provide our employees with 20% of the initial equity of associated
companies that we establish, and we intend to cause these
companies to issue options to purchase shares of common stock
representing up to 20% of the outstanding equity in these
companies to their employees and service providers, including our
employees.
|
When we establish an associated company, we generally provide
to all of our employees, including our executive officers, as of
December 31, 1999, approximately 20% of the initial outstanding
equity, subject to vesting, of that associated company. These
employees were given the opportunity to purchase common stock of
each of the
associated companies that we have established to date: Brandango,
Buzz divine, dotspot, eXperience
divine,
FiNetrics, Host divine, Justice divine, Knowledge divine,
OfficePlanIt.com, salespring, sho research, Talent divine and
Xqsite. These stock issuances could encourage our employees,
including our executive officers, to focus their attention and
resources disproportionally on those associated companies in which
they have interests, particularly the associated companies that they
believe have the greatest potential for completing public offerings
in the near future. In addition, the president of sho research was
allowed to purchase 20% of that company, and three key employees of
Brandango were allowed to purchase an aggregate of approximately 15%
of that company. Except for these issuances, none of the stock of
any of the associated companies that we have established to date was
issued to employees of that company or of any other associated
company. Also, for each associated company that we establish, we
intend to cause that company to issue options to purchase shares of
common stock representing up to 20% of its outstanding equity to
employees and service providers of that company, including our
employees. We have not yet determined specifically how these options
will be allocated, but currently expect that the majority of these
options will be granted to employees of that associated company. As
a result of these issuances of stock and options, we may have as
little as 50% of the economic interest in associated companies that
we establish, even if we have contributed substantially all of their
operating capital. Additionally, some of these associated companies
may seek third-party financing, which, if
obtained, could further reduce our equity interests in these
companies. They may also enter into business combination
transactions that could similarly reduce our equity
interests.
|
Some
of our executive officers and directors and their affiliates have
management positions with, and economic interests in, several of
the associated companies in which we have acquired interests,
which may create conflicts with our interests.
|
The following executive officers and members of our Board of
Directors have management positions with, or economic interests
(determined as of May 15, 2000) in, our associated
companies:
|
|
Mr.
Filipowski is a director of BeautyJungle.com and beneficially owns
approximately 2.1% of BeautyJungle.com. We beneficially own
approximately 61.0% of BeautyJungle.com.
|
|
|
Mr.
Filipowski and Scott Hartkopf, our President and a director, are
directors of closerlook, inc. We beneficially own approximately
42.6% of closerlook.
|
|
|
Mr.
Filipowski is the chairman of the board of directors of iGive.com
and, at the time we acquired an interest in i-Give.com, converted
$800,000 of personal loans previously made by him to iGive.com
into iGive.coms common stock. Mr. Filipowski beneficially
owns approximately 14.6% of iGive.com. We beneficially own
approximately 32.1% of iGive.com.
|
|
|
Messrs.
Filipowski and Humenansky are directors of OpinionWare.com and
beneficially own a total of approximately 10.4% of the equity of
OpinionWare.com. In addition, Mr. Filipowskis son
beneficially owns less than 1% of its equity. We beneficially own
approximately 54.4% of OpinionWare.com.
|
|
|
Mr.
Filipowski is a director of Panthera Productions, beneficially
owns, through his shared control over a charitable foundation,
14.9% of Panthera and has personally loaned Panthera approximately
$306,000. We beneficially own approximately 62.9% of
Panthera.
|
|
|
Mr.
Filipowski is a director of Perceptual Robotics and beneficially
owns approximately 2.3% of its equity. We beneficially own
approximately 33.4% of Perceptual Robotics. Perceptual Robotics
beneficially owns 166,666 shares of our class A common
stock.
|
|
|
Mr.
Filipowski is a director of Sequoia and beneficially owns less
than 1% of its equity. We beneficially own approximately 8.8% of
Sequoia. Mr. Humenansky and an entity controlled by Mr. Freedman
participated in the directed share program of the initial public
offering of Sequoia. Mr. Humenansky purchased 1,000 shares for
$8,000, and the entity controlled by Mr. Freedman purchased 500
shares for $4,000.
|
|
|
Messrs.
Filipowski, Humenansky and Cullinane; and James E. Cowie, Thomas
P. Danis, Arthur P. Frigo, Jeffrey D. Jacobs and Lawrence F. Levy,
five of our directors, collectively, beneficially own
approximately 22.2% of the equity of Platinum Venture Partners II,
L.P., which beneficially owns approximately 3.6% of The National
Transportation Exchange. Additionally, Messrs. Filipowski,
Humenansky and Cullinane, collectively, beneficially own
approximately 31.0% of the equity of Platinum Venture Partners,
Inc., which owns a 1.0% limited partnership interest in Platinum
Venture Partners II. We beneficially own approximately 5.3% of The
National Transportation Exchange.
|
|
|
Gian
Fulgoni and George Garrick, two of our directors, are directors of
bid4real.com and beneficially own, collectively, a total of
approximately 2.3% of bid4real.com. We beneficially own
approximately 54.3% of bid4real.com.
|
|
|
Mr. Fulgoni
is the founder and chairman of comScore and beneficially owns
approximately 20.7% of comScore. Mr. Garrick beneficially owns
1.2% of comScore. We beneficially own approximately 0.9% of
comScore.
|
|
|
Craig D.
Goldman, one of our directors, beneficially owns less than 1% of
LAUNCHworks. We beneficially own approximately 39.7% of
LAUNCHworks. Giving effect to the exercise of warrants that we
hold, we would beneficially own approximately 50.9% of
LAUNCHworks.
|
|
|
Steven
Kaplan and Mohanbir Sawhney, two of our directors, are members of
CapacityWeb.coms advisory board. Michigan & Oak, LLC, a
venture advisory firm of which Messrs. Kaplan and Sawhney are
principals, beneficially owns approximately 3.8% of
CapacityWeb.com. We beneficially own approximately 44.8% of
CapacityWeb.com. In addition, Michigan & Oak is entitled to a
finders fee of approximately $225,000, 5% of the amount paid by us
for our interest in CapacityWeb.com. Michigan & Oak will be
entitled to similar fees on other transactions which it brings to
us.
|
|
|
Tim Stojka,
one of our directors, is the Chief Executive Officer of Commerx
and beneficially owns approximately 14.7% of Commerx. We
beneficially own approximately 1.0% of Commerx.
|
|
|
Messrs.
Filipowski, Cullinane, Hartkopf and Freedman are directors and
executive officers of mindwrap. Mr. Humenansky and Lynn Wilson,
our Executive Vice President and Chief Operating Officer, are also
directors of mindwrap. We beneficially own approximately 97.1% of
mindwrap.
|
|
|
Robert Jay
Zollars, one of our directors, is the Chairman, President and
Chief Executive Officer of Neoforma.com and beneficially owns
approximately 7.6% of Neoforma.com. Mr. Filipowski is a director
of Neoforma.com and beneficially owns less than 1% of its equity.
We beneficially own approximately 1.5% of Neoforma.com. Messrs.
Cullinane, Humenansky and Hartkopf and an entity controlled by Mr.
Freedman participated in the directed share program of the initial
public offering of Neoforma.com. These persons purchased the
following number shares at the following total prices: Mr.
Cullinane250 shares, $3,250; Mr. Humenansky250 shares,
$3,250; Mr. Hartkopf2,500 shares, $32,500; and Mr.
Freedmans entity250 shares, $3,250.
|
|
|
Each of
Messrs. Filipowski, Cullinane, Humenansky, Hartkopf, Freedman and
Wilson is a director and/or executive officer of one or more of
the following associated companies that we established: Brandango,
Buzz divine, dotspot, eXperience divine, Host divine, Knowledge
divine, OfficePlanIt.com, salespring, sho research, Travel divine
and Xqsite. We beneficially own approximately 81% of each of these
associated companies, with the exception of Brandango, of which we
beneficially own approximately 66%, and sho research, of which we
beneficially own approximately 60%.
|
These individuals may have conflicting fiduciary obligations
to our stockholders and the stockholders of the associated companies
in which they hold management positions. In addition, they may have
conflicts between our interests and their personal financial
interests in these associated companies, although they do not vote
as directors on transactions involving entities in which they hold
interests. In the future, we may acquire interests in other
companies in which our directors and executive officers have
management and economic interests.
|
Members of our Board of Directors are executive
officers and directors of companies and equity investment firms
that may compete with us to acquire interests in, and, in some
cases, provide services to, business-to-business e-commerce
companies.
|
The following members of our Board of Directors are executive
officers and/or directors of companies, equity investment firms and
other capital providers that may regularly compete with us to
acquire interests in, and, in some cases, provide services to,
business-to-business e-commerce companies:
|
|
Robert
Bernard is the Chairman and Chief Executive Officer of marchFIRST,
Inc., an information technology firm, which recently formed a
venture capital fund to invest in e-commerce businesses and
technologies and established a new practice to help large
corporate clients create Internet spin-offs.
|
|
|
Mr. Cowie
is a General Partner of Frontenac Company, a Chicago-based private
equity firm.
|
|
|
Mr.
Cullinane is a director of Volatus Technology Group, Inc., an
Indiana-based provider of capital and infrastructure
services.
|
|
|
Michael M.
Forster is a Senior Partner of Operations of Internet Capital
Group, a provider of capital and services to Internet
businesses.
|
|
|
Mr. Goldman
is a director of CMGI, a provider of capital and services to
Internet businesses.
|
|
|
Joseph D.
Gutman is a Managing Director of Goldman Sachs & Co., an
investment banking firm which directly and through affiliates
makes private equity investments.
|
|
|
David
Hiller is the Senior Vice President/Development of the Tribune
Company, which has a strategic investment unit known as Tribune
Ventures, a provider of capital to new media and broadband
communications businesses.
|
|
|
Messrs.
Kaplan and Sawhney are principals of Michigan & Oak, LLC, a
venture advisory firm.
|
|
|
Richard P.
Kiphart is a General Partner and head of the Corporate Finance
Department of William Blair & Company, an investment banking
firm which directly and through affiliates makes private equity
investments.
|
|
|
Mr. Kumar
is a principal of JK&B Management, L.L.C., a Chicago-based
private equity fund.
|
|
|
Ronald D.
Lachman is the co-founder and President of Lachman Goldman
Ventures, a company which funds and builds management teams for
networking and software related companies.
|
|
|
Eric C.
Larson is the Managing Partner of Bank One Equity Capital, a
private equity investment unit of Bank One
Corporation.
|
|
|
William A.
Lederer is the founder and President of Minotaur Capital
Management, an Illinois-based investment firm.
|
|
|
Bruce V.
Rauner is a principal of GTCR Golder Rauner, L.L.C., a
Chicago-based company that manages private equity
funds.
|
|
|
Alex C.
Smith is the Vice President of Dell Ventures, a venture capital
division of Dell USA L.P., which holds the greatest number of
shares of our class A common stock and is a subsidiary of Dell
Computer Corporation. Thomas J. Meredith is the Senior Vice
President and Chief Financial Officer of Dell Computer
Corporation.
|
|
|
James C.
Tyree is the Chairman and Chief Executive Officer of Mesirow
Financial, which has a private equity investment unit.
|
In addition, many of our other directors are executive
officers of other companies that may, from time-to-time, compete
with us to make particular acquisitions or provide particular
services.
|
Our
executive officers and directors have interests in entities that
provide products or services to, or have other economic
arrangements with, us or our associated companies, which may
result in business being conducted with these entities on terms
less favorable to us or our associated companies than could be
obtained in transactions with unaffiliated
parties.
|
The following executive officers, directors and nominee for
directorships have interests in entities that provide products or
services to, or have other economic arrangements with, us or our
associated companies:
|
|
Mr.
Filipowski is a manager of Blackhawk, LLC. He also owns 33.3% of
Blackhawk. From July 1999 through July 2000, we have paid, or are
obligated to pay, Blackhawk $50,000 a month for an option to lease
a 400,000 square foot facility in Chicago or purchase the property
on which the facility is to be constructed. We have exercised our
option to purchase the property for $9,750,000 plus all costs and
expenses of Blackhawk associated with the property, for a total of
approximately $12,000,000. We can complete this purchase at any
time before July 31, 2000. Based on our most recent internal
discussions regarding plans for the facility, we currently
estimate that our budget for the land acquisition and construction
and the development of the facility will total between
$60,000,000 and $80,000,000. However, this budget may change as we
finalize plans for the facility. We expect that the majority of
the construction and development costs will be funded through
third-party financing and that approximately $14,000,000 of this
amount will be reimbursed to us through tax-increment financing.
We currently anticipate that the facility will be ready for
occupancy by summer 2001. However, the timing of our development
of the facility, as well as the scale and final design of the
facility, will depend on the anticipated space needs of us and
other projected users of the facility, issues relating to access
to the property and the availability of third-party
financing.
|
|
|
Mr.
Filipowski owns 33.3% and is a manager of Habitat-Kahney, LLC. On
January 7, 2000, we entered into a ten year lease with
Habitat-Kahney for additional office space in Chicago, Illinois.
Our rent under this lease is $730,080 per year, with an increase
of 2% for each year of the lease.
|
|
|
Messrs.
Filipowski, Cullinane and Humenansky beneficially own a total of
approximately 8.3% of Platinum Entertainment. Additionally,
Messrs. Filipowski, Cullinane, Humenansky, Cowie, Danis, Frigo,
Fulgoni, Jacobs and Levy have economic interests in Platinum
Venture Partners I and/or Platinum Venture Partners II, which,
collectively, beneficially own a total of approximately 5.8% of
Platinum Entertainment. On December 30, 1999, LiveOnTheNet.com,
one of our associated companies, entered into a license agreement
with Platinum Entertainment to use Platinum Entertainments
library of digital music and video, interview and other
performance content. LiveOnTheNet.com has paid $2,000,000 to
Platinum Entertainment for the initial term of the license, the
length of which is based on website use and downloads, and may
renew the license for two additional terms at the same license
fee.
|
|
|
Mr. Bernard
is the Chairman and Chief Executive Officer of marchFIRST. On
January 21, 2000, we entered into a contract under which
marchFIRST provides us with information technology consulting
services when we need them. We have paid marchFIRST approximately
$1,100,000, and owe them an additional approximately $1,000,000,
for consulting services through June 30, 2000. We expect to incur
approximately $1,100,000 of additional expenses for marchFIRST
consulting services through September 2000. We have agreed to sell
to marchFIRST, concurrent with our completion of this offering,
for cash in a private placement, a number of shares of our class C
convertible common stock having an aggregate initial public
offering value of $15,000,000.
|
|
|
Peter Bynoe
is a partner of Piper Marbury Rudnick & Wolfe, which provides
legal services to some of our associated companies under an
exclusive agreement with Justice divine, one of our associated
companies. Piper Marbury also provides legal services to other
companies that are customers of Justice divine but are not part of
our network of associated companies. Piper Marbury bills companies
directly for these services. The total cost for these services
through April 30, 2000 was approximately $263,000, including
approximately $226,000 for services for associated companies.
Justice divine does not recognize the fees paid to Piper Marbury
as revenues, but receives a management fee from each company based
on the charges to that company. In addition, partners in Piper
Marbury purchased for a total of $700,000, 700,000 shares of our
series C preferred stock, which will convert into 116,666 shares
of class A common stock in connection with the completion of this
offering.
|
|
|
Mr. Danis
is the Managing Director of Aon Risk Services of Southern
California and is a Managing Director of Aon Risk Services
Mergers and Acquisitions Group. Through June 2000, Teresa L. Pahl
was the Chairman of Aon Enterprise Insurance Services, Inc., an
affiliate of Aon Risk Services of Missouri, and an Executive Vice
President of Aon Group, Inc., a subsidiary of Aon Corporation. We
have paid Aon Risk Services of Missouri approximately $241,000
through June 30, 2000 as broker with respect to our directors and
officers liability insurance. We have agreed to sell to Aon
Corporation, concurrent with our completion of this offering, for
cash in a private placement at the initial public offering price,
a number of shares of our class C convertible common stock having
an aggregate initial public offering value of $25,000,000. We have
also entered into a non-binding memorandum of understanding with
Aon to develop an insurance services component of FiNetrics, as
well as a reinsurance business, which may include Aon acquiring an
ownership interest in FiNetrics.
|
|
|
Arthur Hahn
is a partner of Katten Muchin Zavis, one of our legal counsel.
Katten Muchin Zavis has provided us with legal services since our
inception. The cost to us for these services from our inception
through May 31, 2000 was approximately $5,200,000. We paid
$400,000 of this total billed amount by issuing Katten Muchin
Zavis 400,000 shares of our series C preferred stock, which will
convert into 66,666 shares of our class A common stock in
connection with the completion of this offering. Mr. Hahn
transferred to Katten Muchin Zavis 20,833 of the shares of our
class A common stock acquired by him for $0.006 per share in his
capacity as a director and a 50% beneficial interest in the option
to purchase 8,333 shares of our class A common stock that was
granted by us to him, which option was subsequently exercised by
Mr. Hahn on his own behalf and on behalf of Katten Muchin Zavis.
As a result, Katten Muchin Zavis will own 91,665 shares of class A
common stock upon the completion of this offering. Additionally,
KMZ-DI Investors, an entity owned by partners in Katten Muchin
Zavis, and partners in Katten Muchin Zavis as individuals,
including Mr. Hahn, collectively purchased for a total of
$2,350,000, 2,350,000 shares of our series C preferred stock,
which will convert into 391,666 shares of class A common stock in
connection with the completion of this offering.
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Mr.
Kiphart, one of our directors, is a principal of William Blair
& Company, one of the underwriters of this offering. William
Blair is receiving a fee as agent of Skyscraper Ventures, L.P. in
connection with its capital raising efforts. This fee will be
equal to 1.75% of the total capital raised for the fund by William
Blair.
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Michael
Leitner is the Vice President, Corporate Development of
360networks, inc. We have agreed to sell to 360networks, for cash
in a private placement concurrent with our completion of this
offering, 2,000,000 shares of our class C convertible common stock
at a price of $1.00 per share and 2,000,000 shares of our class C
convertible common stock at the initial public offering price, for
a total purchase price of $20,000,000. Based upon the inital
public offering price, these shares will have a market value of
$36,000,000 upon completion of this offering. On April 26, 2000,
360networks sold us 93,545 subordinated voting shares at a price
of $5.00 per share and 280,636 subordinated voting shares at a
price of $13.23 per share, which represents the 360networks
initial public offering price less underwriting discounts, for a
total purchase price of $4,180,539. These shares had a market
value of approximately $5,239,000 at the time of completion of
360networks initial public offering. We expect to account
for the difference between the estimated discount being received
by 360networks and the discount received by us on our purchase of
shares of 360networks, as a preferential distribution of
approximately $14,942,000. We have also entered into a non-binding
memorandum of understanding with 360networks that provides that
360networks will be a preferred supplier of bandwidth and switched
data services to us and our associated companies in markets where
360networks has an established presence and provides the lowest
industry rates. This memorandum of understanding requires
360networks to provide us with a 5% discount to the lowest
comparable competitive rates, but does not, however, require us to
purchase minimum amounts of these services. We cannot currently
quantify the amount of bandwidth and switched data services, if
any, that we and our associated companies will purchase from
360networks under this memorandum of understanding, in part,
because we have a commitment to purchase similar services from
Level 3.
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Mr. Leitner
also serves as a Senior Director of Corporate Development of
Microsoft. On January 28, 2000, we entered into an Alliance
Agreement with Microsoft, which was amended on March 29, 2000,
under which we agreed to incorporate Microsoft products,
technologies and services into our systems and the web application
hosting services that we provide to our associated companies.
Under this agreement, we are obligated to purchase approximately
$15,300,000 of Microsoft software and services over the next four
years and have committed to use commercially reasonable efforts to
encourage our associated companies to migrate to Microsoft
software solutions, including expending $4,000,000 to promote
these solutions. In addition, under this agreement, we have agreed
to use commercially reasonable efforts to establish and staff an
office in Seattle within 60 days after the completion of this
offering and to develop a Seattle-based incubator habitat by May
2001, and have
committed to contribute at least $50,000,000 in capital for our
Seattle operations for projects and acquisitions. We have also
agreed to sell to Microsoft, concurrent with our completion of
this offering, for cash in a private placement at the initial
public offering price, a number of shares of our class A common
stock having an aggregate initial public offering value of
$50,000,000.
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Messrs.
Smith and Meredith are affiliated with Dell Computer Corporation.
We have paid approximately $5,600,000 to Dell for purchases of
computers and servers through June 30, 2000. We expect these
purchases to continue as we grow.
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Aleksander
Szlam, one of our directors, is the Chairman and Chief Executive
Officer of eShare Technologies, Inc. Brandango, one of our
associated companies, has entered into a license agreement with
eShare to use eShares software programs and receive related
support and maintenance services. Brandango has agreed to pay
$1,700,000 for the license and support and maintenance through
March 1, 2001. Future payments for support and maintenance will be
mutually agreed to by the parties.
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We expect to continue to enter into transactions with
businesses in which our executive officers and directors have
interests. These current and future transactions may be on terms
less favorable to us than could be obtained in transactions with
unaffiliated parties. In addition, we may enter into transactions
which we would not have entered into in the absence of our
relationship with the affiliated party. Further, our executive
officers and directors may have conflicts between our interests and
their personal financial and other interests in the other parties to
those transactions.
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We
manage a venture capital fund which will invest in start-up and
early-stage companies, and we may have conflicts in allocating
opportunities between us and the fund when acquiring interests in
these companies.
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Through Skyscraper Management, L.L.C., our wholly-owned
subsidiary, we manage Skyscraper Ventures, L.P. (formerly known as
Big Shoulders interTech Fund, L.P.) as general partner, and we also
have a limited partnership interest. Skyscraper Ventures is a
venture capital fund which generally will invest in start-up and
early-stage companies located in Illinois and generally will make
initial investments of between $250,000 and $3,500,000 in each
company. The fund may, however, make larger or smaller investments
in these companies and investments in companies outside
Illinois.
We may have conflicts of interest in allocating opportunities
to acquire interests in technology and
e-commerce companies between us and the fund. In general, we intend to
allocate all opportunities involving Illinois-based companies which
require an initial investment of $3,500,000 or less to the fund,
although we are not obligated to do so. The fund will form an
advisory board consisting of representatives of some limited
partners of the fund to assist us in managing these conflicts of
interest. We are not entitled to representation on the funds
advisory board, and none of the advisory boards members will
be affiliated with us. Specifically, the fund has established the
following policies concerning conflicts of interest:
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The fund
must obtain the approval of its advisory board before investing in
a company in which we or any of our affiliates have previously
acquired an interest.
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The fund
must obtain the approval of its advisory board before investing
jointly with us in a company in which none of the fund, us or any
of our affiliates has an interest if the economic terms of the
joint investment are not substantially similar, although no
approval is required if the funds investment is made on the
same terms and conditions as any unaffiliated third party
participating in the joint investment.
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We must
provide notice to the funds advisory board before acquiring
an interest in a company in which the fund has previously
invested, although no approval of the funds advisory board
is required.
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We must
provide notice to the funds advisory board before permitting
a company in which we or our affiliates hold 25% or more of the
equity interests to acquire 50% or more of the equity interests of
a company in which the fund has an interest, although no approval
of the funds advisory board is required.
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As a result,
we may forego acquiring interests in some companies that would
otherwise meet our acquisition criteria and allocate these
opportunities to the fund. You will not have the opportunity to
evaluate the merits of any particular opportunity before we make
these determinations, and you must rely on our management to manage
the conflicts of interest appropriately.
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We
have entered into an agreement with some of our stockholders who
have representatives on our Board of Directors that limits the
obligations of these stockholders and their representatives to
present us with business opportunities.
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Under an agreement with Frontenac VII Limited Partnership,
Frontenac Masters VII Limited Partnership, First Chicago Investment
Corporation, Cross Creek Partners X, LLC, Mesirow Capital Partners
VII, Dell USA, CBW/SK divine Investments, Microsoft and the other
holders of our series D and D-1 preferred stock, we have agreed that
neither these stockholders nor representatives on our Board of
Directors who are affiliated with them 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 director representatives
solely in, and as a direct result of, their capacity as our
directors. As a result, we may be denied opportunities to establish
or acquire interests in prospective associated companies that would
otherwise be available.
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CMGI,
one of our shareholders, may compete with us to acquire interests
in, and provide services to, business-to-business e-commerce
companies.
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CMGI, one of our competitors, purchased 18,284,327 shares of
our convertible preferred stock on March 14, 2000, which will
convert into 3,047,387 shares of class A common stock upon
completion of this offering, for $18,284,327. In addition, we have
agreed to sell to CMGI, concurrent with the completion of this
offering, in a private placement at the initial public offering
price, a number of shares of our class A common stock so that, at
that time but without giving effect to our other concurrent private
placements or to the conversion of our class B common stock into
class A common stock to be effected upon the completion of this
offering, CMGI will own 4.9% of our class A common stock, in
exchange for a number of shares of CMGI common stock with an
equivalent value on the date we complete this offering. We expect to
issue approximately 1,701,900 shares of our class A common stock to
CMGI in this concurrent private placement. CMGI competes with us to
acquire interests in, and provides services to, business-to-business
e-commerce companies. Under the written agreement providing for the
stock issuances to CMGI, we and CMGI have each agreed to attempt to
use and promote the products and services of the others
associated companies. These transactions may be on terms less
favorable than could be obtained with unaffiliated third parties. In
addition, one of our directors, Craig D. Goldman, is also a director
of CMGI. Also, Gregory Jones and David Tolmie, two of our directors,
are chief executive officers of companies that have been acquired by
CMGI. As a result of CMGIs ownership of our stock and the
service of Messrs. Goldman, Jones and Tolmie on our Board of
Directors, CMGI may have the opportunity to influence our business
in a way that may benefit CMGI.
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We
may have conflicts with associated companies with business models
similar to our own.
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Two of our associated companies, LAUNCHworks and Emicom Group,
provide capital and infrastructure services to Internet companies
through business models similar to our own. We own approximately
39.7% of LAUNCHworks as of May 15, 2000, which is located in Canada,
and we will own approximately 33.0% of Emicom Group, which is
located in Israel. We may acquire interests in additional companies
with business models similar to our own in the future. These
companies may compete with us and each other to acquire interests
in, and provide services to, business-to-business e-commerce
companies. There may be conflicts in allocating opportunities
between us and these companies.
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We
cannot assure you that our conflicts of interest policy will
address all potential conflicts of interest
adequately.
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We have established a policy to address conflicts of interest
that arise between us and our directors, officers and affiliates and
entities in which these persons have an interest. Under this policy,
we intend that any future transactions between us and these persons
and entities will be on terms no less favorable to us than can
be obtained on an arms length basis from unaffiliated third
parties. Further, any of these transactions which we do not consider
to be in the ordinary course of business will be subject to approval
by the conflicts committee or the acquisition committee of our Board
of Directors. However, this conflicts policy cannot guarantee that
every contract or other transaction involving a conflict of interest
will be on terms as favorable to us as would have existed in the
absence of the conflict of interest. Further, this policy cannot
guarantee that we will not enter into transactions which we would
not otherwise have entered into absent our relationship with the
affiliated party. In addition, an amendment to the Delaware General
Corporation Law, which became effective on July 1, 2000, expressly
permits a corporation to waive in advance the corporations
interest or expectations in business opportunities or classes or
categories of business opportunities that are presented to the
corporation or to one or more of its officers, directors, or
stockholders, as those opportunities may be defined by the
corporation. Our Board of Directors may consider and take actions as
permitted by this new statutory provision. If we waive an
opportunity in accordance with this provision, a director would not
be required to present the waived opportunity to us, even if
pursuing the opportunity could be in our best interest, and instead
could present it to other businesses, including the directors
own business.
We
currently have 43 members of our Board of Directors, which could
make it difficult for them to conduct business
efficiently.
We currently have 43 members of our Board of Directors and one
nominee for election to our Board of Directors, whose election is
contingent upon completion of this offering. Our bylaws currently
authorize us to have up to 59 directors. This large number of
directors could make it difficult for us to convene board meetings,
establish a quorum to conduct board meetings and make unanimous
written decisions when required. It could also make it difficult for
us to make significant decisions in a rapid or timely manner and
otherwise conduct business efficiently. In addition, of our 43
directors, only eight: (1) are not our executive officers, (2) do
not have management positions with, or economic interests in, our
associated companies, (3) are not executive officers and directors
of companies and equity investment firms that may compete with us to
acquire interests in, and provide services to, business-to-business
e-commerce companies, and (4) do not have interests in entities that
provide products or services to, or have other economic arrangements
with, us or our associated companies.
If we fail
to expand our controls and integrate new personnel to support our
anticipated growth, our business will suffer.
We are rapidly expanding our controls and integrating new
personnel to support our growth, which makes it difficult to
maintain our standards, controls and procedures. In addition, to the
extent that we are responsible for the internal controls of our
associated companies, our systems will be under additional strain.
We are still in the process of developing and implementing our
operating and financial systems, including our internal systems and
controls, and have recently begun integrating our initial associated
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 associated companies
and provide management and other necessary services to our existing
associated companies. To continue to develop our business, we and
our associated companies must rapidly hire or redeploy a substantial
number of new employees. Since we were founded in May 1999, our
employee base had grown to 265 employees as of March 31, 2000, and
the employee base of our majority-owned consolidated associated
companies had grown to a total of 758 employees as of that date. We
and our majority-owned consolidated associated companies plan to
hire additional employees in the near future, including over 150
additional employees for our majority-owned consolidated associated
companies by December 31, 2000. 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 associated companies and
manage expanded operations.
Geographic expansion could disrupt our business and that of our
associated companies and distract our management from our ongoing
business.
We are developing facilities in geographic markets outside of
the midwestern United States to house associated companies and
provide infrastructure and support services. In this regard, we have
begun operations in Austin, Texas and, through our purchase of an
interest in LAUNCHworks, Calgary, Alberta, Canada. Also, under our
Alliance Agreement with Microsoft, we are required to establish and
staff a Seattle office within 60 days after the completion of this
offering and to develop an incubator habitat facility in Seattle by
May 2001. This expansion could disrupt our business and that of our
associated companies and distract our management from our ongoing
business, as resources and attention are focused on new facilities
and geographic markets. Additionally, we may be unable to recruit or
retain qualified management and other key personnel for our new
facilities and may fail to acquire interests in or establish
associated companies, or build a network of associated companies, in
new markets. We could face significantly greater competition from
other providers of capital and services to e-commerce companies in
these markets than we face in the historically underserved
midwestern market. We will also suffer additional operating losses
if the revenues generated by new facilities are not adequate to
offset the expense of maintaining them.
If we or
our associated companies expand internationally, we or they may face
difficulties managing remote facilities and will be subject to other
challenges, including foreign regulatory requirements and technology
standards.
We recently established operations outside of North America by
acquiring an interest in Emicom Group, a provider of capital and
infrastructure services located in Israel. We and our associated
companies expect to develop additional international operations. For
example, we have entered into a non-binding letter of intent, which
terminates on July 15, 2000, to acquire an interest in a company
that plans to provide capital and strategic services to Internet and
related companies throughout Latin America. The company will be
formed by Consultores Asset Management, S.A., an investor in and
developer of Internet companies. We are also contemplating expanding
our operations to the Far East, but have not yet determined a
timetable for this expansion. Our entry, or the entry of our
associated companies, into international markets will require
significant management attention and financial resources, which
could harm our or their ability to effectively manage existing
business. We and our associated companies will also be subject to
the following challenges associated with conducting international
business:
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difficulties of managing remote offices;
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burdens of
complying with foreign laws and regulatory
requirements;
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reduced
protection of proprietary rights;
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problems in
meeting different technology standards;
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increased
tax burdens; and
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exposure to
general foreign economic declines, currency fluctuations and
political instability.
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If we are
unable to facilitate collaboration among our associated companies,
our strategy will not be successful and our associated companies may
fail.
Our business strategy is dependent on our ability to
facilitate collaboration among our associated companies, including
joint marketing, cross-selling and sharing of business information
and technical expertise. If we are unable to promote this
collaboration, our associated companies will not fully realize the
benefits of being part of our network, possibly slowing their
growth. As a result, we may have difficulty attracting new companies
to our network.
The
hosting and other network services which we provide to our
associated companies may fail or work improperly due to physical
damage, failure of third-party services or other unexpected
problems.
We provide hosting and other information technology services,
including data warehousing and web server and network facilities, to
support our associated companies operations. Currently, all
associated companies that we established, as well as six associated
companiesCapacityWeb.com, eFiltration.com, Entrepower,
mindwrap, Viachange.com and Whiplashin which we acquired
interests, depend on us for hosting services and maintenance of
their computer systems. We provide these services through associated
companies that we control, which currently rely on third-parties for
various ancillary services, such as Internet access, and may in the
future rely on third parties for server facilities and other hosting
services. An unexpected event, such as a power or telecommunications
failure, fire or flood, physical or electronic break-in, or computer
virus at any of our facilities or server facilities, or those of any
third parties on which we rely, could cause a loss of our, and our
associated companies, critical data and prevent us from
offering services to our associated companies. If our hosting and
information technology services were interrupted, our business and
the businesses of associated companies using these services would be
disrupted, which could result in decreased revenues, lost customers
and impaired business reputation for us and them. As a result, we
could experience greater difficulty attracting associated companies
to join our network. Our business interruption insurance may not
adequately compensate us or our associated companies for losses that
may occur. A failure by us or any third parties on which we rely to
provide these services satisfactorily would impair our ability to
support our operations and those of our associated companies and
could subject us to legal claims.
Risks
Particular to Our Associated Companies and the Business-to-Business
E-Commerce Industry
Our
associated companies depend on the Internet and the wide-spread
acceptance of the business-to-business e-commerce market, which is
uncertain.
Our current associated companies rely, and our future
associated companies will rely, on the Internet for the critical
aspects of their businesses. The development of the
business-to-business 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
associated companies may not grow, become profitable or go
public.
Our success also depends on the development and widespread
acceptance of the business-to-business e-commerce market. The
following factors could prevent this acceptance:
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the
unwillingness of companies to shift from traditional business
processes, which are not based on the Internet, to e-commerce
processes;
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a lack of
the necessary network infrastructure for substantial growth in the
use of e-commerce;
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increased
government regulation or taxation of e-commerce;
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insufficient availability of telecommunication services or
changes in telecommunication services, resulting in slower
response times for users of e-commerce; and
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concern and
adverse publicity about the security of e-commerce
transactions.
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We and our
associated companies will not be successful if businesses who do not
currently conduct a substantial amount of their business on the
Internet do not shift, to a large degree, to e-commerce from their
traditional methods of exchanging goods and services.
Our
associated companies face intense competition in their product and
service markets, and if they cannot compete effectively, they will
fail.
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. Further, our
associated companies competitors may develop Internet products
or services that are superior to, or have greater market acceptance
than, the solutions offered by our associated companies. Many of our
associated companies competitors have greater brand
recognition and greater financial, marketing and other resources
than our associated companies. This may place our associated
companies at a disadvantage in responding to their competitors
pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives. If our associated
companies are unable to compete successfully against their
competitors, they will fail. In addition, our associated companies
may compete with each other for business-to-business e-commerce
opportunities. If this type of competition develops, it may deter
companies from joining
our network and limit our business opportunities. Further, we may
acquire interests in companies that compete with our current
associated companies, which may deprive them of some of the
competitive benefits of being part of our network.
Our
associated companies may fail if they do not adapt to the rapidly
changing e-commerce marketplace.
If our associated companies fail to adapt to the rapid changes
in technology and customer and supplier demands, they may not
generate revenues or become or remain profitable. Therefore,
although we expect all of our current associated companies to
generate revenues by the end of 2000, they may not do so. Further,
even if they generate revenues by the end of 2000, we do not expect
that the majority of them will become profitable by that
time.
The e-commerce market is characterized by:
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rapidly
changing technology;
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evolving
industry standards;
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frequent
new product and service introductions;
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shifting
distribution channels; and
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changing
customer demands.
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Our future
success will depend on our associated companies ability to
adapt to this rapidly evolving marketplace. They may not be able to
adapt their products and services adequately or economically,
develop new products and services or establish and maintain
effective distribution channels for their products and services. If
our associated companies are unable to meet these challenges, they
may be unable to sell their products and services and generate
revenues. Therefore, their businesses may become or remain
unprofitable.
Our
associated companies may not be able to attract a loyal base of
customers to their web sites or develop relationships with
distribution partners, which will negatively affect their ability to
generate revenues.
Our success depends on the ability of our associated companies
to deliver compelling Internet content, products or services to
their targeted customers. 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 associated companies to distinguish the
content on their web sites sufficiently to attract a loyal base of
users. If any associated 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 associated 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 customers to visit
our associated 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 associated companies.
Many of
our associated companies may grow rapidly and may be unable to
manage their growth.
We expect many of our associated companies to grow rapidly.
Rapid growth often places considerable operational, managerial and
financial strain on a business. To successfully manage rapid growth,
our associated companies must accurately project their rate of
growth and:
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rapidly
improve, upgrade and expand their business
infrastructures;
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deliver
products and services on a timely basis;
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maintain
levels of service expected by clients and customers;
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maintain
appropriate levels of staffing;
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maintain
adequate levels of liquidity; and
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expand and
upgrade their technology, transaction processing systems and
network hardware or software or find third parties to provide
these services.
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Our business will suffer if our associated companies are unable to
successfully manage their growth. In addition, many of our
associated 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, making it difficult for us to monitor these
companies and assess our financial position.
Our
associated companies growth depends on their ability to
attract and retain their key personnel.
We generally direct all of the operating activities of
associated companies in which our equity ownership and voting power
percentage is greater than 50%. We have significant involvement in
and influence over the operating activities of associated companies
in which our equity ownership and voting power percentage is at
least 20%, but not more than 50%, in part through board
representation and rights to participate in material decisions.
However, the growth of our associated companies, even those that we
have established and those in which our voting power percentage is
greater than 50%, will depend on their ability to attract and retain
their own senior management personnel to oversee the day-to-day
operation of their businesses. As they grow, our associated
companies will also need to continue to hire additional technical,
marketing, financial and other key personnel, unless they rely on us
or other associated companies or third parties to provide these
services. A shortage in the availability of required personnel could
limit the ability of our associated companies to grow, sell their
existing products and services and launch new products and
services.
Our
associated 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 associated company interests.
We may not be able to control significant business decisions
of our associated companies. We currently have no control over each
of Commerx, comScore, The National Transportation Exchange,
Neoforma.com or Sequoia. We have at least 25%, but less than 50%, of
the voting power of each of Aluminium.com, BidBuyBuild,
CapacityWeb.com, closerlook, eFiltration.com, Entrepower, eReliable
Commerce, Farms.com,
i-Fulfillment, iGive.com, iSalvage.com, LAUNCHworks, Martin Partners,
Mercantec, Outtask.com, Perceptual Robotics, PocketCard, TV
House, Whiplash and Xippix and, therefore, do not have complete
control over any of them. We currently have no control over
Emicom Group but we expect to own approximately 33% of the voting
power of Emicom Group after it completes its current private
placement. We expect to continue to acquire less than majority
voting interests in associated companies. Further, we may not
maintain our current ownership or control levels in our associated
companies, including associated companies that we established, if we
sell portions of our interests or our associated companies issue
additional equity to other parties.
Our ownership of interests in associated companies over which
we do not exercise complete control involves additional risks that
could cause the performance of our interests and our operating
results to suffer, including:
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management
of an associated company having economic or business interests or
objectives that are different than ours; and
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associated
companies not taking our advice with respect to the financial or
operating difficulties that they encounter.
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Our inability to control our associated companies completely
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 completely control them, our associated companies may not
collaborate with each other, may not act in ways that are consistent
with our business strategy and may compete with us or other
associated companies. These factors could hamper our ability to
maximize returns on our interests, and cause us to recognize losses
on our interests in associated companies.
If we are
unable or unwilling to provide our associated companies with the
significant additional financing they will need, our interests in
them may be diluted or they may fail.
Most of our current associated companies are, and we expect
that our future associated companies will be, in the early stages of
their development. Our associated companies, including the
associated companies that we
established, will require significant amounts of additional capital to
compete successfully, meet their business objectives and produce
revenues and profits. We are currently unable to predict the future
capital needs of any of our associated companies, and we may decide
not to provide the additional capital that our associated companies,
including the associated companies that we established, require or
may not be given the opportunity to provide it. If our associated
companies receive capital from other sources, our ownership interest
in them may be diluted. If our associated companies are unable to
obtain additional capital, they may fail.
Our
associated companies may be at a competitive disadvantage 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.
Because all of our associated companies operate or will
operate their businesses through web sites and rely on hardware and
software to conduct e-commerce, proprietary rights, particularly in
the form of trade secrets, copyrights and patents, will be critical
to the success and competitive position of all of our associated
companies. The actions that our associated 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 our associated companies may be unable to
control the dissemination of their content and products and use of
their services due to the global nature of the Internet. A
substantial majority of our associated companies license content and
technology which they include in their product or service offerings
from third parties, and they could become subject to infringement
actions as a result. In addition, third parties may claim that our
associated 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
associated 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 associated companies to costly litigation and the
diversion of their technical and management personnel. If our
associated 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
associated companies operations may be disrupted by
technological problems unrelated to our hosting and information
technology services.
Our associated companies businesses will depend on the
efficient and uninterrupted operation of their computer and
communications hardware systems to enable them to continuously
provide their products and services over the Internet. Our
associated companies that do not rely completely on us for hosting
and information technology services are dependent, to some extent,
on other third parties for technological support. Service
interruptions could result from natural disasters, power loss,
telecommunications failures and similar events or from other systems
failures, bugs or capacity constraints. These interruptions could
cause a complete shut-down of our associated companies
businesses, which could result in lost revenues or
customers.
If the
Internet does not continue to be a reliable commercial medium, our
associated 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. In
addition, there have been several recent incidents in which
individuals have intentionally caused service disruptions of major
e-commerce web sites. If these outages, delays or service
disruptions frequently occur in the future, usage of our associated
companies products and services could grow more slowly than
anticipated or decline, and they may lose revenues and
customers.
Concerns
regarding security of transactions or the transmission of
confidential information over the Internet or security problems
experienced by our associated companies may prevent them from
expanding their businesses or subject them to legal
exposure.
If an associated company does not offer sufficient security
features in its online product and service offerings, its 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
associated companies, the infrastructure of each of them will be
potentially vulnerable to physical or electronic break-ins, computer
viruses or similar problems. If a person circumvents the security
measures of our associated companies, that person could
misappropriate proprietary information or disrupt or damage the
operations of the associated company. Security breaches that result
in access to confidential information could damage the reputation of
any one of our associated companies and expose it to a risk of loss
or liability. All of our associated companies will be required to
make significant expenditures, either for internal development
efforts or payments to us or other third parties providing
security-related services, to protect against or remedy security
breaches. Additionally, as e-commerce becomes more widespread, our
associated companies customers may become more concerned about
security. If our associated 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 associated companies.
Because of the Internets popularity and increasing use,
new laws and regulations directed specifically at e-commerce 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
users hard drive to gather information, and related privacy
issues; pricing; taxation; telecommunications over the Internet;
content; copyrights; distribution; domain name piracy; and quality
of products and services. In particular, states may impose
discriminatory, multiple or special taxes on the Internet if the
current moratorium on the application of these taxes, due to end on
October 21, 2001, is not extended. If the moratorium ends, federal
taxes may also be imposed on e-commerce. These state and federal
taxes could cause a decrease in the volume of business-to-business
e-commerce. Additionally, new laws or regulations could be enacted
which could burden the companies that provide the infrastructure on
which the Internet is based, slowing the Internets rapid
expansion and its availability to new users. The enactment of any
additional laws or regulations, including international laws and
regulations, could impede the growth of the Internet and
business-to-business e-commerce or reduce the effectiveness of our
associated companies technology, which could decrease the
revenue of our associated companies and place additional financial
burdens on our business and the businesses of our associated
companies.
Risks
Relating to the Offering
You should
read this entire prospectus carefully and should not consider any
statement about us in published news reports without carefully
considering the risks and other information contained in this
prospectus.
In an article in The Chicago Sun-Times dated May 27,
2000, information regarding our business and this offering was
published. Some of the information in the article was attributed to
oral statements made by Mr. Filipowski, our Chief Executive Officer,
during an interview with The Chicago Sun-Times. While some of
the factual statements about us in the article are disclosed in this
prospectus, the article also includes statements regarding our
liquidity and financial condition that are inconsistent with those
disclosed in this prospectus. In a Chicago Sun-Times article
dated June 6, 2000 referencing the May 27, 2000 article, the
following statement is attributed to Mr. Filipowski: divine,
which backs more than 50 tech companies, [has] more than $100
million, enough to last 20 months without a cash infusion. The
May 27, 2000 statements are also repeated in a May 30, 2000
Chicago Sun-Times article, which references a burn
rateour use of cash in operating activitiesof
$5,000,000 per month. The statements made by Mr. Filipowski do not
accurately reflect our financial condition. As of May 31, 2000, we
had cash and cash equivalents of approximately $132,052,000. Our burn
rate averaged approximately $11,628,000 for the first three months of
2000 and averaged approximately $13,391,000 for April and May 2000.
We are unable to accurately project our future burn rate, because it
will be based upon many factors, including revenue growth of us and
our consolidated associated companies, employee hiring and retention
decisions and the implementation of, and any changes in, business
plans. Additionally, according to the May 30 article,
Filipowski expects the Company to begin making
money in eight months. This statement made by Mr.
Filipowski also does not accurately reflect our financial condition.
We cannot now determine when we will begin making moneyor
become cash flow positivebut do not expect to be cash flow
positive in eight months or for the foreseeable future after that
time. The statements of Mr. Filipowski have been repeated, sometimes
in slightly altered forms, in several other press articles. You
should make your investment decision only after carefully evaluating
all of the information in this prospectus, including the risks
described in this section and throughout the prospectus.
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 for
your class A common stock, which could adversely affect our stock
price.
Provisions in our certificate of incorporation and by-laws and
Delaware law 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. These provisions are:
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the
classification of our Board of Directors into three classes
serving staggered three-year terms;
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the ability
of our Board of Directors to issue shares of preferred stock with
rights as they deem appropriate without stockholder
approval;
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a
requirement that special meetings of our Board of Directors may be
called only by our Chairman, President or a majority of our Board
of Directors;
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a
prohibition against action by written consent of our
stockholders;
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a
requirement that our stockholders comply with advance notice
provisions to bring director nominations or other matters before
meetings of our stockholders; and
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adoption of
a provision of Delaware law that prohibits us from entering into
some business combinations with interested stockholders without
the approval of our Board of Directors.
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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.
You will
suffer immediate dilution in the value of your shares and may suffer
further dilution in the future.
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You
will suffer immediate dilution in the value of your shares because
we recently sold a large number of shares of our capital stock at
a price lower than our public offering price.
|
As of July 1, 2000, giving effect to the conversion of all
outstanding shares of our convertible preferred stock into common
stock, we had 92,616,487 outstanding shares of our common stock,
which had been issued at an average price per share of $5.65. These
shares include (1) 32,833,325 shares of our class A common stock
which we will issue upon conversion of 197,000,000 shares of our
series D and D-1 preferred stock which we sold for total
consideration of $197,000,000; (2) 3,047,387 shares of our class A
common stock which we will issue upon conversion of 18,284,327
shares of our series E preferred stock which we sold for a total
consideration of $18,284,327; (3) 5,767,650 shares of our class A
common stock which we issued at prices ranging from $4.50 to $13.50
per share under our stock incentive plan, upon the exercise of
outstanding options or otherwise; and (4) 2,166,665 shares of our
class A common stock which we will issue upon conversion of
13,000,000 shares of our series F preferred stock which we issued in
February 2000 in exchange for interests in three associated
companies. In addition, we have agreed to sell to 360networks
2,000,000 shares of our class C convertible common stock for $1.00
per share. Giving effect to this offering and the concurrent
private placements, investors purchasing shares in this offering
will incur immediate and substantial dilution in net tangible book
value per share of $3.62.
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There are options outstanding to purchase our class A common
stock with exercise prices ranging from $4.50 to $13.50 per share,
which will cause you to suffer further dilution in the value of
your shares in the future.
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From October 1, 1999 through July 1, 2000, we granted options
to purchase 7,151,995 shares of our class A common stock, and issued
116,665 shares of restricted stock, under our 1999 Stock Incentive
Plan to our directors, officers and employees with exercise prices
ranging from $4.50 to $13.50 per share. As of
July 1, 2000, options to purchase 20,120 shares had been cancelled,
502,024 shares of restricted stock issued upon exercise of options
had been repurchased and options to purchase 978,866 shares of our
class A common stock were outstanding. Additionally, beginning on
the date of this prospectus, under our employee stock purchase plan,
we will grant initial options to purchase shares of our class A
common stock to our employees who elect to participate in the plan.
These initial options will be exercisable at a price which will be
no greater than 85% of our initial public offering price and may be
lower than that price, depending on the trading price of our class A
common stock in the future. To the extent that our outstanding
options are exercised, you will suffer dilution in addition to the
dilution described above.
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We
may issue shares in connection with our acquisitions of interests
in associated companies, which could cause you to suffer further
dilution in the value of your shares.
|
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 associated companies. We may
also issue these shares or convertible securities as consideration
in our acquisitions of interests of associated companies. These
issuances may cause further dilution to our
stockholders.
The market
price of our class A common stock may fluctuate widely, and this
volatility could result in stockholder lawsuits.
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 that the market price of our class A common
stock could fluctuate widely and could possibly trade at a price
below the initial public offering price because of announcements of
acquisitions of interests in business-to-business
e-commerce companies or strategic relationships by us, our inability
to avoid regulation under the Investment Company Act or because of
any of the following factors, which are, in large part, beyond our
control:
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announcements of acquisitions of interests in
business-to-business e-commerce companies or strategic
relationships by our competitors;
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announcements of new services, products, technological
innovations, acquisitions or strategic relationships by associated
companies that we do not control or other companies;
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trends or
conditions in the Internet industry;
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changes in
valuation estimates by securities analysts and in analyst
recommendations;
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variations
in the operating results of our associated companies;
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changes in
the stock prices of our associated companies that are publicly
traded;
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changes in
market valuations of other capital and service providers for
Internet companies;
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the
receptivity of the capital markets to initial public offerings of
Internet companies; and
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general
political, economic and market conditions.
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Any of these
factors may cause a decrease in 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 or, in some cases, exceed these
expectations, even if minor, could cause the market price of our
class A common stock to decline. In addition, the market price of
our class A common stock may fluctuate widely because we depend on
e-commerce companies for our revenue. 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, as have been other public companies with models similar
to ours, because we may be valued in the future on the basis of a
number of minority interests we hold in public Internet companies.
Therefore, fluctuations in the valuations of any of our associated
companies may cause our valuation to fluctuate. 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 companys 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 managements attention and resources
could be diverted from our business.
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.
When we complete this offering and the concurrent private placements,
we will have 114,158,942 outstanding shares of class A common stock
and 23,288,511 outstanding shares of non-voting class C convertible
common stock. The 14,285,000 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, subject, in the case of approximately
1,800,000 shares reserved for sale in this offering to employees,
vendors, service providers, customers and other persons who have
business or other relationships with us, our officers or directors
or our associated companies, to 60 day lock-up agreements and
subject, in the case of an aggregate of 1,500,000 shares we expect
to be purchased by one of our executive officers, by a greater than
10% stockholder and by affiliates of one of our directors, to the
180-day lock-up agreements described below. The remaining total of
123,162,453 shares will be restricted shares, which 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 978,866 shares of class A common stock will be
issued and outstanding, all of which will be exercisable in
full.
Our directors and executive officers and holders of
substantially all of our outstanding stock have agreed with the
underwriters that, for a period of 180 days, they will not offer to
sell, contract to sell, or otherwise sell, dispose of, loan, pledge
or grant any rights with respect to any shares of common stock, any
options or warrants to purchase any shares of common stock or any
securities convertible into or exchangeable for shares of common
stock, other than shares purchased by them in the open market and
shares subject to the 60-day lock-up agreements described above,
without the prior written consent of FleetBoston Robertson Stephens
Inc., which uses the brand name Robertson Stephens. Robertson
Stephens may release all or any portion of the shares subject to
these lock-up agreements at any time. Mr. Filipowski, our Chairman
and Chief Executive Officer, Dell USA L.P., which owns approximately
18% of our class A common stock before this offering and the
concurrent private placements, and two entities affiliated with
James Cowie, one of our directors, have indicated that they intend
to purchase an aggregate of 1,500,000 shares in this offering. These
shares will be subject to the 180-day lock-up agreements. Any early
waiver of the lock-up agreements by the underwriters could permit
sales of a substantial number of shares and could adversely affect
the trading price of our class A
common stock. Those entities that have agreed to purchase shares in
the concurrent private placements have agreed with us under the
terms of their purchase agreements that they will not, directly or
indirectly, sell, offer to sell, contract to sell, assign, transfer
or otherwise dispose of, or engage in any other transaction which
reduces the risk of ownership of, those shares for a period of 12
months after the date of the completion of the concurrent private
placements.
Under Rule 144, from September 2000 through July 2001,
110,647,561 restricted shares of our class A common stock, including
the 23,288,511 shares of our class A common stock issuable upon
conversion of our class C convertible common stock, will become
eligible for sale, subject to volume and manner of sale limitations
and the underwriters lock-up agreements. These shares exclude
the shares which will be eligible for sale in the public market
under Rule 701 under the Securities Act, as described below. We are
unable to estimate accurately the number of restricted shares that
will actually be sold under Rule 144 because these sales will depend
in part on the market price of our class A common stock, the
personal circumstances of the sellers and other factors.
Beginning 90 days after the date of this prospectus, 5,489,931
shares of our common stock sold by us in August 1999, and 5,767,650
shares issued under our stock incentive plan, upon exercise of
options or otherwise, 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
and, in the case of our affiliates, to the volume and manner of sale
limitations of Rule 144. The 5,767,650 shares issued under our stock
incentive plan are also subject to restrictions on transfer under
restricted stock agreements. These shares generally vest and become
eligible for public resale in four equal annual installments from
the option grant date in the case of shares issued upon exercise of
options granted to employees and generally vest and become eligible
for public resale on the first anniversary of the award date in the
case of restricted stock issued to employees and shares issued upon
exercise of options granted to non-employee directors.
The following table schedules the number of our outstanding
shares, giving effect to this offering and the concurrent private
placements, that will be freely tradable at the times shown, subject
to the volume and manner of sale restrictions of Rule 144 and
subject in the case of 5,767,650 shares to restrictions on transfer
imposed by restricted stock agreements under our stock incentive
plan. The table only reflects shares that are currently issued and
outstanding and does not reflect shares which we may issue in the
future, including under our 2000 employee stock purchase plan or
upon exercise of existing or new options. Although our stockholders
have agreed to restrictions on the resale of their shares under the
lock-up agreements described above, Robertson Stephens may release
the restrictions on these shares, in whole or in part, at any time.
We have, therefore, shown below the cumulative number of shares that
would be freely tradeable at various times assuming that (1) the
underwriters release all of the shares from the restrictions on
resale and (2) the underwriters do not release any shares from the
restrictions on resale:
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Cumulative Number of
Shares Freely Tradeable
|
Date
|
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Assuming
Underwriters
Waive Lock-Ups
|
|
Assuming
Underwriters
Do Not Waive
Lock-Ups
|
Date of
this prospectus |
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14,285,000 |
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10,985,000 |
60 days
after the date of this prospectus |
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19,022,435 |
|
12,785,000 |
90 days
after the date of this prospectus |
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46,150,523 |
|
12,785,000 |
180 days
after the date of this prospectus |
|
68,562,445 |
|
68,562,445 |
270 days
after the date of this prospectus |
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106,901,487 |
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106,901,487 |
One year
after the date of this prospectus |
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137,447,453 |
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137,447,453 |
Additionally, beginning six months after we complete this
offering, the holders of 37,582,612 shares of our class A common
stock will be entitled to demand registration rights, which allows
them to require us to file a registration statement under the
Securities Act covering the resale of all or a portion of their
shares, and
piggyback registration rights, which allow them to request us to
register their shares for resale if we propose to register our
issuance and sale of our common stock or the resale of our common
stock by other stockholders. The holders of an additional 48,799,794
shares will be entitled only to piggyback registration rights.
Immediately after the effectiveness of the registration statement of
which this prospectus is a part, we plan to file a registration
statement to cover the issuance of shares in the future under our
stock incentive plan and employee stock purchase plan.
We will
have broad discretion in using a substantial portion of the proceeds
of this offering and the concurrent private placements and may not
use them in a manner that our stockholders would
prefer.
We have not identified specific uses for a substantial portion
of the proceeds from this offering and the concurrent private
placements, and we will have broad discretion in how we use them.
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.
We may be
liable for up to approximately $259,000,000 plus interest to
stockholders who purchased our class A common stock and class C
convertible common stock in the private placements conducted
concurrently with this offering.
We have agreed to sell, in private placements concurrent with
the completion of this offering, approximately 7,257,455 shares of
our class A common stock and approximately 23,288,511 shares of our
class C convertible common stock. These concurrent private
placements are being made in reliance upon an exemption from
registration under the Securities Act. This exemption requires,
among other things, that there be no general solicitation of
investors with respect to the sales of these securities. The
existence of this offering and this prospectus could be deemed to be
general solicitation with respect to the concurrent private
placements. If these concurrent private placements were not exempt
from registration, purchasers in the concurrent private placements
would have a right under the Securities Act to rescind their
purchases and recover the consideration paid for the securities,
with interest, or, if they no longer own the securities, to receive
damages. This right may be exercised at any time within one year
after the violation on which it is based. If the concurrent private
placements were not exempt from registration and purchasers in the
concurrent private placements were to exercise their right to
rescind their purchases or otherwise to recover damages, we would be
liable to them for a total of up to approximately $259,000,000, plus
interest. In that case, we may not have, or be able to obtain,
sufficient cash to satisfy this liability.
(This page
intentionally left blank)
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,
plan, estimate 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:
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our need to
continue to identify and acquire interests in suitable associated
companies;
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the intense
competition among capital providers to acquire interests in
business-to-business
e-commerce companies;
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existing
and future regulations affecting our business, the businesses of
our associated companies or the Internet generally;
and
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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.
CONCURRENT PRIVATE PLACEMENTS
We have agreed to sell directly to each of the entities listed
in the table below, in private placements concurrent with our
completion of this offering, shares of our class A common stock and
our non-voting class C convertible common stock. Except for our
sales to 360networks, BancBoston and CMGI, as described below the
table, we have agreed to sell to each entity a number of shares
having an initial public offering value equal to the purchase price
shown opposite the name of that entity. Except for our sales to CMGI
and Level 3, as described below the table, we have agreed to sell
all of the shares for cash.
Purchaser
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Class of
Common
Stock
|
|
Number of
Shares to be
Purchased
|
|
Purchase
Price
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360networks, inc. |
|
class
C |
|
4,000,000 |
|
|
$ 20,000,000 |
|
Aon
Corporation |
|
class
C |
|
2,777,777 |
|
|
25,000,000 |
|
BancBoston
Capital, Inc. |
|
class
C |
|
955,181 |
|
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8,596,629 |
|
CMGI,
Inc. |
|
class
A |
|
1,701,900 |
|
|
15,317,100 |
|
Compaq
Computer Corporation |
|
class
C |
|
5,555,555 |
|
|
50,000,000 |
|
Hewlett-Packard Company |
|
class
C |
|
2,777,777 |
|
|
25,000,000 |
|
Level 3
Communications |
|
class
C |
|
5,555,555 |
|
|
50,000,000 |
|
marchFIRST,
Inc. |
|
class
C |
|
1,666,666 |
|
|
15,000,000 |
|
Microsoft
Corporation |
|
class
A |
|
5,555,555 |
|
|
50,000,000 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
30,545,966 |
|
|
258,913,729 |
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Less: Shares to be Purchased for Non-cash
Consideration |
|
|
|
(4,479,678 |
) |
|
(40,317,100 |
) |
|
|
|
|
|
|
|
|
|
Total Shares to be Purchased for Cash |
|
|
|
26,066,288 |
|
|
$218,596,629 |
|
|
|
|
|
|
|
|
|
|
We estimate
that our net cash proceeds from the concurrent private placements,
after deducting estimated expenses of $175,000, will be
approximately $218,421,629.
360networks. We have agreed to sell to 360networks,
inc. 2,000,000 shares of our class C convertible common stock at
$1.00 per share and 2,000,000 shares of our class C convertible
common stock at the initial public offering price. At the time we
began discussing the terms of our relationship with 360networks and
its purchase of our shares, we had recently completed an offering of
our preferred stock, which was convertible at that time on a
share-for-share basis into our class A common stock, at a price of
$1.00 per share. We agreed to the discounted purchase price for
2,000,000 of the shares to be sold to 360networks primarily because
the terms of the purchase by 360networks were initially discussed in
the context of that valuation, because we were given the opportunity
to purchase shares of stock of 360networks on a discounted basis,
and because 360networks agreed to purchase a fixed number of our
shares at the initial public offering price, regardless of how great
the total obligation of 360networks might ultimately be, in contrast
to the other purchasers, which are committed to purchase a fixed
dollar amount. We expect to account for the difference between the
estimated discount being received by 360networks and the discount
received by us on our purchase of shares of 360networks, as
discussed below under Strategic Relationships, as
a preferential distribution of approximately
$14,942,000.
BancBoston Capital. We have agreed to sell to
BancBoston Capital, which is an affiliate of FleetBoston Robertson
Stephens, Inc., one of the underwriters of this offering, which uses
the brand name Robertson Stephens, a number of shares of our class C
convertible common stock having an aggregate initial public offering
value of $25,000,000. However, BancBoston will not purchase a number
of shares that would cause the underwriters to be deemed to have
received underwriting compensation in excess of the limitation
imposed by a rule of the National Association of Securities Dealers.
Under this rule, the underwriters and their affiliates,
collectively, may not receive shares in excess of 10% of the number
of shares listed for sale on the cover of this prospectus. For a
discussion of this rule, see UnderwritingPurchases of
Our Common Stock by Affiliates of Underwriters.
CMGI. We have agreed to sell to CMGI a number of shares
of our class A common stock in addition to the 3,047,387 shares of
series E preferred stock previously purchased by CMGI so that, after
the completion of this offering but without giving effect to the
other concurrent private placements or the conversion of our class B
convertible common stock into class A common stock to be effected
upon the completion of this offering, CMGI will own, in the
aggregate, 4.9% of our outstanding class A common stock. CMGI will
pay the purchase price for the shares of our class A common stock
purchased in the concurrent private placement by issuing to us CMGI
common stock with an equivalent value, based on the trading price of
the CMGI common stock over a five-day trading period ending on the
trading day that is three trading days before the date we complete
this offering. Under our agreement with CMGI, we have agreed for a
one-year period not to, directly or indirectly, sell, offer to sell,
contract to sell, assign, transfer or otherwise dispose of, or
engage in any other transaction that reduces the risk of, ownership
of the shares of CMGI common stock we are acquiring in this
transaction.
Level 3. We have agreed with Level 3 that 50%, or
$25,000,000, of the purchase price for the shares of class C
convertible common stock that it is purchasing in the concurrent
private placement, will be paid in the form of a credit to us for
colocation and bandwidth services to be provided by Level 3 to Host
divine.
The concurrent private placements are conditional upon the
completion of our initial public offering. Each of the agreements
requiring a party to purchase shares in a concurrent private
placement, other than the agreement with CMGI, may be terminated by
us or the other party if we have not completed an initial public
offering providing us with gross proceeds of at least $120,000,000
before a specified date, which in the case of our agreements with
Aon and Level 3 is July 29, 2000, in the case of our agreement with
BancBoston is July 31, 2000, in the case of our agreements with
360networks, Compaq, Hewlett-Packard and Microsoft is March 29, 2001
and in the case of our agreement with marchFIRST is March 31, 2001.
The agreement requiring CMGI to purchase in a concurrent private
placement may be terminated by us or CMGI if we have not completed,
before March 15, 2001, an initial public offering with net proceeds
to us of at least $50,000,000 and with an initial public offering
price of at least $8.40 per share (or $18.00 per share if the
initial public offering occurs after December 31, 2000).
Lock-Up
Arrangements
Each of the entities intending to purchase our common stock in
the concurrent private placements has agreed with us, under the
purchase agreement relating to its acquisition of stock in the
concurrent private placement, to restrictions on transfer of the
stock. Specifically, each has agreed that it will not, directly or
indirectly, sell, offer to sell, contract to sell, assign, transfer
or otherwise dispose of, or engage in any other transaction that
reduces the risk of ownership of, any of the shares it acquires in
the concurrent private placements until the 12-month anniversary of
the completion of the concurrent private placements. None of the
entities intending to purchase our common stock in the concurrent
private placements, other than CMGI, will have any registration
rights with respect to that stock. CMGI will have piggyback
registration rights and, beginning one year after its purchase of
stock in the concurrent private placement, demand registration
rights with respect to that stock. No underwriters or placement
agents have been involved in the concurrent private
placements.
Strategic
Relationships
We have entered into agreements or memoranda of understanding
with the following entities intending to purchase our common stock
in the concurrent private placements:
CMGI. In connection with our concurrent private
placement to CMGI, we and CMGI have each agreed to attempt to use
and promote the products and services of the others associated
companies.
Compaq. In connection with our concurrent private placement
to Compaq, we have agreed to purchase a minimum of $5,000,000 of
computer equipment and software, storage solutions and professional
services from Compaq over four years and to designate Compaq as a
preferred or approved supplier of this hardware, software, solutions
and services. We also have agreed to recommend and promote Compaq
products and solutions to our affiliates and to customers of Host
divine.
Hewlett-Packard. In connection with our concurrent
private placement to Hewlett-Packard, we have entered into an
agreement to designate Hewlett-Packard as a preferred supplier of
computer and storage solution hardware and software and related
products and services for our internal use and for hosted services
provided by Host divine to associated companies. We also have agreed
to recommend and promote Hewlett-Packard products and solutions to
our affiliates and to customers of Host divine.
Level 3. In connection with our concurrent private
placement to Level 3, we have agreed to purchase a minimum of
$100,000,000 of colocation and bandwidth services from Level 3 over
a four-year period.
Microsoft. In connection with our concurrent private
placement to Microsoft, we have committed to engage in product
development efforts for web site and application hosting products
based on Microsoft solutions, to expend $4,000,000 to promote the
Microsoft solutions, to open an office in Seattle within 60 days of
our completion of this offering and to dedicate at least $50,000,000
of capital to our Seattle operations for projects and
acquisitions.
Aon. In connection with our concurrent private
placement to Aon, we have entered into a non-binding memorandum of
understanding under which we expect to collaborate with Aon to
develop an insurance brokerage, production and consulting component
of FiNetrics and an insurance/reinsurance facility. This transaction
may include Aon acquiring a minority interest in FiNetrics. The
relationship and transactions with Aon are conditioned upon the
execution of definitive agreements.
360networks. In connection with our concurrent private
placement to 360networks, we have entered into a non-binding
memorandum of understanding under which we expect to name
360networks as a preferred telecommunication services provider for
us and our associated companies and to purchase bandwidth and
switched data services from 360networks in markets where 360networks
has an established presence and provides the lowest industry rates.
This memorandum of understanding requires 360networks to provide us
with a 5% discount to the lowest comparable competitive rates, but
does not, however, require us to purchase minimum amounts of these
services. We cannot currently quantify the amount of bandwidth and
switched data services, if any, that we and our associated companies
will purchase from 360networks under this memorandum of
understanding, in part because we also have a commitment to purchase
similar services from Level 3. In connection with this concurrent
private placement, we also agreed to purchase 374,181 subordinated
voting shares of 360networks, in a private placement concurrent with
360networks initial public offering. Of these shares, we
agreed to purchase 93,545 shares at a purchase price of $5.00 per
share and 280,636 shares at the 360networks initial public
offering price, less underwriting discounts, of $13.23 per share. On
April 26, 2000, we completed our purchase of these shares for a
total purchase price of $4,180,539, at which time these shares had
an aggregate market value of $5,238,534. These shares are subject to
restrictions on transfer under federal securities laws and under a
360-day lock-up agreement with the underwriters of 360networks
initial public offering.
The following table summarizes our currently expected future capital
commitments with respect to the strategic relationships we are
entering into in connection with our concurrent private
placements:
Purchaser
|
|
Commitment
|
|
Amount
|
|
Time
Period
|
Compaq |
|
Purchase
computer
equipment |
|
$ 5,000,000 |
|
|
4
years |
(1) |
|
|
Level
3 |
|
Purchase
co-location
and bandwidth services |
|
$100,000,000 |
(2) |
|
4
years |
|
|
|
Microsoft |
|
Purchase
software
products, consulting
services and product
support services |
|
$ 15,300,000 |
|
|
4
years |
|
|
|
|
|
Open
Seattle facility |
|
$ 1,500,000 |
|
|
Within
60 days
from the date of
this offering |
|
|
|
|
|
Promote
Microsoft solutions |
|
$ 4,000,000 |
|
|
4
years |
|
|
|
|
|
Fund
projects and
acquisitions for
Seattle operations |
|
$ 50,000,000 |
|
|
None
specified |
|
(1)
|
$2,500,000 of equipment must be purchased within the
first 18 months.
|
(2)
|
$25,000,000 of the commitment is to be satisfied by a
service credit issued to us by Level 3 in connection with the
concurrent private placement.
|
Proceeds From This Offering
We estimate that our net proceeds from the sale of
the class A common stock in this offering will be approximately
$112,865,450. If the underwriters exercise their over-allotment
option in full, our net proceeds will be approximately
$130,800,268. Our net proceeds are what we expect to receive
from this offering after deducting the underwriting discounts
and commissions and estimated offering expenses payable by us.
We intend to use these proceeds for the following
purposes:
|
|
$56,471,429 to repay promissory notes issued by us in
connection with our acquisitions of interests in associated
companies, all of which are payable within the next 12 months,
and which bear interest at the following rates:
|
Aggregate Note Amount
|
|
Interest Rate
|
$
250,000 |
|
Prime
Rate |
$
6,250,000 |
|
6.0% |
$16,100,000 |
|
8.0% |
$33,871,429 |
|
8.5% |
|
|
approximately $12,000,000 to purchase the property in
Chicago on which our planned 400,000 square foot facility is
to be constructed;
|
|
|
approximately $3,825,000 to purchase products and
services from Microsoft under our Alliance Agreement over the
next 12 months;
|
|
|
up to
$7,700,000 to fund our commitment to Skyscraper Ventures;
and
|
|
|
up to
$33,000,000 to contribute to associated companies that we have
established to date to fund, in part, our current intended
contributions to those companies.
|
We estimate that, if the underwriters exercise their
over-allotment option in full, we will have an additional
$17,934,818 of net proceeds from this offering, which we intend
to use to acquire interests in and establish new associated
companies (including companies in the Seattle area under our
Alliance Agreement with Microsoft), to provide additional
funding to associated companies and for corporate and general
working capital purposes. The amount and timing of these
expenditures will depend upon various factors, such as
developments in our markets or those of our associated companies
and the availability of acquisition and entrepreneurial
opportunities.
The previous paragraphs describe our current
estimates of our use of the net proceeds of this offering based
on our current plans and estimates of anticipated expenses. Our
actual expenditures may vary from these estimates. We may also
find it necessary or advisable to reallocate the net proceeds
within the uses outlined above or to use portions of the net
proceeds for other 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.
Proceeds From Our Concurrent Private Placements
We estimate that our net cash proceeds from the
concurrent private placements will be approximately
$218,421,629. We intend to use the net cash proceeds of the
concurrent private placements for the following
purposes:
|
|
approximately $1,000,000 to promote Microsoft solutions
under our Alliance Agreement over the next 12
months;
|
|
|
approximately $1,500,000 to open a Seattle office
within 60 days after the completion of this offering, as
required by our Alliance Agreement with Microsoft;
|
|
|
approximately $9,375,000 to purchase colocation and
bandwidth services from Level 3 over the next 12
months;
|
|
|
approximately $1,667,000 to purchase computer
equipment, storage solutions and professional services from
Compaq over the next 12 months; and.
|
|
|
approximately $46,000,000 to contribute to associated
companies that we have established to date to fund our
remaining current intended contributions to these
companies.
|
We estimate that the remaining net proceeds of the
concurrent private placements will total approximately
$158,879,629, which we intend to use to acquire interests in and
establish new associated companies (including companies in the
Seattle area under our Alliance Agreement with Microsoft) to
provide additional funding to associated companies and for
general corporate and working capital purposes. The amounts and
timing of these expenditures will depend upon various factors,
such as developments in our markets or those of our associated
companies and the availability of acquisition and
entrepreneurial opportunities. Accordingly, our management will
have broad discretion as to the allocation of a substantial
portion of the net proceeds of the concurrent private
placements.
The previous paragraphs describe our current
estimates of our use of the net proceeds of the concurrent
private placements based on our current plans and estimates of
anticipated expenses. Our actual expenditures may vary from
these estimates. We may also find it necessary or advisable to
reallocate the net proceeds within the uses outlined above or to
use portions of the net proceeds for other purposes.
Pending these uses, we will invest the net proceeds
of the concurrent private placements primarily in cash
equivalents or direct or guaranteed obligations of the United
States.
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, associated 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.
The table below shows our cash and cash equivalents
and total capitalization (long-term debt, redeemable preferred
stock and stockholders equity) as of March 31, 2000:
|
|
on an
as adjusted basis to reflect (1) the conversion of our
convertible preferred stock into 81,107,241 shares of our
class A common stock and the conversion of our class B
convertible common stock into 2,037,496 shares of our class A
common stock, each to be effected upon completion of this
offering; (2) our issuance and sale in this offering of
14,285,000 shares of our class A common stock, and our receipt
of $112,865,450 of net proceeds from this offering, after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us; and (3) our
issuance of 7,257,455 shares of our class A common stock and
23,288,511 shares of our class C convertible common stock in
the concurrent private placements and our receipt of the
estimated net proceeds from these private placements, as if
all these events had occurred on March 31, 2000.
|
|
|
on an
as adjusted basis to reflect only (1) the conversion of our
convertible preferred stock into 81,107,241 shares of our
class A common stock and the conversion of our class B
convertible common stock into 2,037,496 shares of our class A
common stock, each to be effected upon completion of this
offering; and (2) our issuance and sale in this offering of
14,285,000 shares of our class A common stock and our receipt
of $112,865,450 of net proceeds from this offering, after
deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, as if all these
events had occurred on March 31, 2000.
|
You should read this table along with our
consolidated financial statements and the related notes included
in this prospectus.
|
|
As
of March 31, 2000
|
|
|
Actual
|
|
As
Adjusted
for this
Offering
and the
Concurrent
Private
Placements
|
|
As Adjusted
for this
Offering but
Excluding
the
Concurrent
Private
Placements
|
|
|
(in
thousands, except share data) |
Cash
and cash equivalents |
|
$ 211,911 |
|
|
$ 543,199 |
|
|
$ 324,777 |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
811 |
|
|
811 |
|
|
811 |
|
Redeemable preferred stock, $.001 par value,
232,000,000 shares authorized and
215,284,327 shares issued and
outstanding, actual; no shares authorized and no
shares issued and outstanding, as
adjusted for this offering and the concurrent private
placements and as adjusted only
for this offering |
|
218,508 |
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 346,000,000
shares authorized, 272,860,725
shares issued and
271,360,725 shares outstanding, actual; and 50,000,000
shares authorized and no
shares issued and outstanding, as adjusted for this
offering and the
concurrent private placements and as adjusted only for this
offering |
|
271 |
|
|
|
|
|
|
|
Class A common stock, $.001 par value, 900,000,000
shares authorized and
9,602,447 shares issued
and outstanding, actual; 2,500,000,000 shares
authorized and 114,289,639
shares issued and outstanding, as adjusted for this
offering and the
concurrent private placements; and 2,500,000,000 shares
authorized and 107,032,184
shares issued and outstanding, as adjusted only for
this offering |
|
10 |
|
|
114 |
|
|
107 |
|
Class B convertible common stock, $.001 par value,
100,000,000 shares
authorized and 2,037,496
shares issued and outstanding, actual; and
100,000,000 shares
authorized and no shares issued and outstanding, as
adjusted for this offering
and the concurrent private placements and as
adjusted only for this
offering |
|
2 |
|
|
|
|
|
|
|
Class C convertible common stock, $.001 par value,
no shares authorized, issued
and outstanding, actual;
100,000,000 shares authorized and 23,288,511 shares
issued and outstanding, as
adjusted for this offering and the concurrent private
placements; and
100,000,000 shares authorized and no shares issued and
outstanding, as adjusted
only for this offering |
|
|
|
|
23 |
|
|
|
|
Additional paid-in capital |
|
419,236 |
|
|
1,009,494 |
|
|
750,786 |
|
Unearned stock-based compensation |
|
(123,730 |
) |
|
(123,730 |
) |
|
(123,730 |
) |
Accumulated deficit |
|
(82,631 |
) |
|
(82,631 |
) |
|
(82,631 |
) |
Accumulated other comprehensive income |
|
6,779 |
|
|
6,779 |
|
|
6,779 |
|
Notes
receivable from stock option exercises |
|
(29,677 |
) |
|
(29,677 |
) |
|
(29,677 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
190,260 |
|
|
780,372 |
|
|
521,634 |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ 409,579 |
|
|
$ 781,183 |
|
|
$ 522,445 |
|
|
|
|
|
|
|
|
|
|
|
The as adjusted cash and cash equivalents do not
reflect our intended uses of the proceeds of this offering,
including our repayment of outstanding promissory notes issued
by us in connection with our acquisitions of interests in
associated companies, which were in an aggregate principal
amount of $38,660,949 at March 31, 2000. The as adjusted numbers
of issued and outstanding shares of our class A common stock
excludes:
|
|
754,747
shares issuable upon the exercise of stock options outstanding
on March 31, 2000 with a weighted average exercise price of
$6.90 per share;
|
|
|
3,930,255 shares reserved as of March 31, 2000 for
grants that we may make in the future under our stock
incentive plan; and
|
|
|
4,166,666 shares reserved for issuance under our
employee stock purchase plan; and
|
|
|
250,000
shares issuable upon conversion of preferred stock issued in
connection with an interest in an associated company, which
shares are being held in escrow and will be released only upon
achievement of revenue thresholds by that associated company;
these shares are not considered to be outstanding for
financial statement purposes but are otherwise considered to
be outstanding.
|
Our
Pro Forma Net Tangible Book Value
As of March 31, 2000, after giving effect to the
conversion of all outstanding shares of our convertible
preferred stock and our class B convertible common stock into
shares of our class A common stock, our pro forma net tangible
book value was approximately $368,408,951 or $3.97 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 price at which we sell
each share of our class A common stock to investors in this
offering; and (2) the pro forma net tangible book value per
share of common stock immediately following (A) the completion
of this offering only or (B) the completion of both this
offering and the concurrent private placements.
Dilution Attributable to this Offering
Only
As of March 31, 2000, after giving effect to an
increase in our as adjusted pro forma net tangible book value to
reflect our receipt of $112,865,450 of estimated net proceeds
from the sale of 14,285,000 shares of class A common stock in
this offering, following the deduction of underwriting discounts
and commissions and estimated offering expenses payable by us,
and the addition of those 14,285,000 shares of class A common
stock, our pro forma net tangible book value would have been
$481,274,401, or $4.50 per share of common stock. This
represents an immediate increase in net tangible book value of
$0.53 per share to existing stockholders and an immediate and
substantial dilution of $4.50 per share to new investors
purchasing shares of class A common stock in this offering. The
following table illustrates this per share dilution:
Initial
public offering price per share |
|
|
|
$9.00 |
|
|
|
|
|
Pro
forma net tangible book value per share as of March 31, 2000
without giving
effect to this offering or the
concurrent private placements |
|
$3.97 |
|
|
Increase per share attributable to investors in this
offering |
|
0.53 |
|
|
|
|
|
Pro
forma net tangible book value per share as of March 31, 2000
after giving effect
to this offering |
|
|
|
4.50 |
|
|
|
|
|
Dilution in pro forma net tangible book value per share
to investors in this offering |
|
|
|
$4.50 |
|
|
|
|
|
Dilution Attributable to Both this Offering and the
Concurrent Private Placements
As of March 31, 2000, after giving effect to (1) an
increase in our as adjusted pro forma net tangible book value to
reflect our receipt of $112,865,450 of estimated net proceeds
from the sale of 14,285,000 shares of class A common stock in
this offering, following the deduction of underwriting discounts
and commissions and estimated offering expenses payable by us,
and the addition of those 14,285,000 shares of class A common
stock, and (2) an increase in our as adjusted pro forma net
tangible book value to reflect our receipt of $258,738,729 of
estimated net proceeds from the issuance of 30,545,966 shares in
the concurrent private placements, based on the initial public
offering price of $9.00 per share, our pro forma net tangible
book value would have been $740,013,130, or $5.38 per share of
common stock. This represents an immediate increase in net
tangible book value of $1.41 per share to existing stockholders
and an immediate and substantial dilution of $3.62 per share to
new investors purchasing shares of class A common stock in this
offering. The following table illustrates this per share
dilution:
Initial
public offering price per share |
|
|
|
$9.00 |
|
|
|
|
|
Pro
forma net tangible book value per share as of March 31, 2000
without giving
effect to this offering or the
concurrent private placements |
|
$3.97 |
|
|
Increase per share attributable to investors in this
offering and the concurrent private
placements |
|
1.41 |
|
|
|
|
|
Pro
forma net tangible book value per share as of March 31, 2000
after giving effect
to this offering and the
concurrent private placements |
|
|
|
5.38 |
|
|
|
|
|
Dilution in pro forma net tangible book value per share
to investors in this offering |
|
|
|
$3.62 |
|
|
|
|
|
Dilution Attributable to this Offering and the
Concurrent Private PlacementsCash Only
As of March 31, 2000, after giving effect to (1) an
increase in our as adjusted pro forma net tangible book value to
reflect our receipt of $112,865,450 of estimated net proceeds
from the sale of 14,285,000 shares of class A common stock in
this offering, following the deduction of underwriting discounts
and commissions and estimated offering expenses payable by us,
and the addition of those 14,285,000 shares of class A common
stock, and (2) an increase in our as adjusted pro forma net
tangible book value to reflect our receipt of $218,421,629 of
estimated net cash proceeds from the concurrent private
placements, based on the initial public offering price of our
class A common stock, and the addition of 26,066,288 shares of
our common stock being sold for cash in the concurrent private
placements, our pro forma net tangible book value would have
been $699,696,030, or $5.26 per share of common stock. This
represents an immediate increase in net tangible book value of
$1.29 per share to existing stockholders and an immediate and
substantial dilution of $3.74 per share to new investors
purchasing shares of class A common stock in this offering. The
following table illustrates this per share dilution:
Initial
public offering price per share |
|
|
|
$9.00 |
|
|
|
|
|
Pro
forma net tangible book value per share as of March 31, 2000
without giving
effect to this offering or the
concurrent private placements |
|
$3.97 |
|
|
Increase per share attributable to investors in this
offering and the concurrent private
placementscash
only |
|
1.29 |
|
|
|
|
|
Pro
forma net tangible book value per share as of March 31, 2000
after giving effect
to this offering and the
concurrent private placementscash only |
|
|
|
5.26 |
|
|
|
|
|
Dilution in pro forma net tangible book value per share
to investors in this offering |
|
|
|
$3.74 |
|
|
|
|
|
The following table shows the differences, on a
pro forma basis as of July 11, among existing stockholders,
investors in the concurrent private placements and investors in
this offering, with respect to the number of shares of common
stock purchased from us, the total consideration received by us
and the average price paid per share, before deducting
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.
|
|
Shares Purchased
|
|
Total Consideration
|
|
Average
Price
Per Share
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
Existing stockholders |
|
92,616,487 |
|
67.4 |
% |
|
$523,134,989 |
|
57.5 |
% |
|
$ 5.65 |
Investors in the concurrent private
placements |
|
30,545,966 |
|
22.2 |
|
|
258,913,729 |
|
28.4 |
|
|
8.48 |
Investors in this offering |
|
14,285,000 |
|
10.4 |
|
|
128,565,000 |
|
14.1 |
|
|
9.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
137,447,453 |
|
100.0 |
% |
|
$910,613,718 |
|
100.0 |
% |
|
$ 6.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
These calculations do not give effect
to:
|
|
978,866
shares of class A common stock issuable upon the exercise of
stock options outstanding on July 11, 2000, with a weighted
average exercise price of $8.46 per share;
|
|
|
3,701,458 shares of class A common stock reserved as of
July 11, 2000 for grants that we may make in the future under
our stock incentive plan; and
|
|
|
4,166,666 shares of class A common stock reserved for
issuance under our employee stock purchase plan.
|
In this section, we present our selected financial
data. You should read carefully the consolidated financial
statements in this prospectus, including the notes to the
consolidated financial statements and Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The selected data in this section are not
intended to replace our consolidated financial statements. We
derived our consolidated statement of operations data for the
period from May 7, 1999, our inception, to December 31, 1999 and
our consolidated balance sheet data as of December 31, 1999 from
our audited consolidated financial statements included in this
prospectus. Those statements were audited by KPMG LLP,
independent public accountants. We derived our consolidated
statement of operations data for the three months ended March
31, 2000 and our consolidated balance sheet data as of March 31,
2000 from our unaudited consolidated financial statements
included in this prospectus. Our results of operations for these
periods are not necessarily indicative of the results we may
achieve in the future.
|
|
Period from
May 7, 1999
(Inception) to
December 31, 1999
|
|
Three Months
Ended
March 31, 2000
(unaudited)
|
|
|
(in
thousands, except share and
per share data) |
Consolidated Statement of Operations
Data: |
|
|
|
|
|
|
Revenues |
|
$ 1,037 |
|
|
$ 5,215 |
|
Total
operating expenses |
|
10,465 |
|
|
46,119 |
|
Net
loss |
|
(9,407 |
) |
|
(44,185 |
) |
Net
loss applicable to common stockholders |
|
(12,927 |
) |
|
(77,416 |
) |
|
|
Basic
and diluted net loss per share applicable to common
stockholders |
|
$
(4.59 |
) |
|
$ (7.79 |
) |
Shares
used in computing basic and diluted net loss per
share |
|
2,816,074 |
|
|
9,941,917 |
|
|
|
December 31, 1999
|
|
March 31, 2000
(unaudited)
|
|
|
(in
thousands) |
Consolidated Balance Sheet Data: |
|
|
|
|
Cash
and cash equivalents |
|
$162,841 |
|
$211,911 |
Working
capital |
|
138,279 |
|
190,349 |
Total
assets |
|
238,872 |
|
487,260 |
Total
stockholders equity |
|
205,234 |
|
190,260 |
For an
explanation of the determination of the number of shares used in
computing basic and diluted net loss per share, see Note 1(l
) of the notes to our consolidated financial
statements.
MANAGEMENTS 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.
We were incorporated on May 7, 1999 and began
operations on June 30, 1999. We are an Internet holding company
actively engaged in business-to-business e-commerce through our
community of associated companies. Through September 1999, we
engaged in start-up and organizational activities, including
building our management team, raising our initial capital,
hiring technical and operational personnel and marketing our
business. We also analyzed and engaged in discussions with
potential associated companies, but we did not establish or
acquire interests in any associated companies. Since September
30, 1999, we have continued to build our organization and have
acquired interests in 39 associated companies for cash
consideration in the amount of $344,839,846, including
$56,471,429 in the form of outstanding promissory notes as of
June 30, 2000. These amounts include amounts paid by two
companies that we established to acquire interests in three
associated companies using funds we contributed to them, as
further discussed below. We have also provided approximately
$6,500,000 of additional financing to two associated companies.
In addition, we have issued a total of 13,000,000 shares of our
series F preferred stock in connection with three of these
acquisitions, which will convert into 2,166,665 shares of class
A common stock upon completion of this offering. We have also
established 13 associated companies, to which we had contributed
approximately $37,000,000 through May 31, 2000. Two of these
associated companies have used $12,750,000 of this amount to
acquire interests in three associated companies including
$250,000 in repayment of a promissory note relating to one of
these acquisitions. There remains an outstanding obligation of
$250,000 under that promissory note.
We generate revenues principally through our
majority-owned associated companies, the operating results of
which are consolidated with our operating results. Our
associated companies generate, or expect to generate, revenues
from the sale of products and services, advertising and
transaction fees. We also generate revenues from fees paid to us
by venture capital funds that we manage, as well as consulting
fees.
We generated revenues totalling $1,037,000 through
December 31, 1999. These revenues included approximately
$275,000 in management fees as the general manager of Platinum
Venture Partners I and II. These revenues also included
approximately $272,000 related to software sales contracts and
maintenance contracts of mindwrap. Other sources of revenues
included $135,000 in web-based advertising revenues and other
revenues from infrastructure services, such as public relations,
consulting and facilities management. Through December 31, 1999,
we directly operated, and generated revenues of approximately
$351,000 from, the infrastructure services businesses that are
now operated by associated companies that we established and
control.
We generated revenues totalling $5,215,000 for the
three months ended March 31, 2000, of which approximately
$2,922,000 was generated by consolidated associated companies
that we established and control, approximately $2,100,000 was
generated by consolidated companies in which we acquired
interests and approximately $193,000 was generated directly by
us. The total revenues included approximately $777,000 from the
sale of products, of which $499,000 related to software sales
contracts and maintenance contracts and $276,000 related to
sales of computer hardware and software. The total revenues also
included approximately $4,438,000 from the sale of services, of
which $3,130,000 was from consulting services and $1,112,000 was
from web-based advertising.
Our operating results also reflect our share of the
earnings or losses of associated companies in which we own at
least 20%, but not more than 50%, of the outstanding voting
power. We anticipate that the majority of
these associated companies will experience net losses in future
periods, but the amounts of these losses are not currently
determinable. Additionally, our losses will be increased, or our
earnings, if we have them in the future, will be reduced, by
amortization of identifiable intangible assets and goodwill
associated with our acquisition of consolidated associated
companies and amortization of the net excess investment over our
equity in the net assets of associated companies in which we own
at least 20%, but not more than 50%, of the outstanding voting
power. At December 31, 1999, the net identifiable intangible
assets and goodwill totalled $17,840,000 and the net excess
investment totalled $20,977,000. At March 31, 2000, the
identifiable intangible assets and goodwill totalled $40,359,000
and the net excess investment totalled $102,329,000. We intend
to amortize these amounts over a maximum of three
years.
We expect to continue to acquire interests in
associated companies, and we expect that the amount of cash that
we will use for acquisitions will increase substantially in
future periods. We also expect to expend substantial funds in
future periods to fund associated companies that we have
established. We are currently in active discussions with
over 50 potential associated companies, but do not have plans to
acquire interests in or establish a specific number of new
associated companies or to commit a target amount of capital to
these transactions. Instead, we continuously seek to identify
opportunities suitable for our business strategy, employing our
associated company evaluation criteria and considering our
available funds and conditions in the capital markets. Our costs
in connection with building associated companies and developing
the infrastructure that we will need to support them will vary
based upon many factors, including the size, nature and state of
development of each company.
Because we acquire significant interests in
business-to-business 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 associated companies may report net losses in the
future, we may record net income in certain periods due to
one-time transactions incidental to our ownership interests in,
and advances to, associated companies. These one-time
transactions may include dispositions of, or changes to, our
associated company ownership interests, dispositions of our
holdings of available-for-sale securities and impairment
charges.
We and the substantial majority of our associated
companies are in the early stages of development. Our associated
companies are increasing their spending as they continue to
market themselves, develop their various products and services
and implement infrastructure such as web site development and
hiring key employees. The net losses incurred by these
associated companies are generally increasing along with the
level of these expenditures. We anticipate that this trend will
continue as our associated companies continue to develop and as
we acquire interests in additional companies that are in the
early stages of development.
On a continuous basis, but no less frequently than
at the end of each quarterly reporting period, we will evaluate
the carrying value for financial statement purposes of our
interests in, and advances to, each of our associated companies
for impairment. We will base these evaluations on achievement of
business plan objectives and milestones by the associated
company, the fair value of each ownership interest and advance
relative to its carrying value, the financial condition and
prospects of the associated company and other relevant factors.
The business plan objectives and milestones that 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 associated companys web
community and the number of visitors to the associated
companys web site per month. For financial statement
purposes, the fair value of our ownership interests in, and
advances to, privately held associated companies will generally
be determined based on the prices paid by third parties for
ownership interests in the associated companies, to the extent
third party ownership interests exist, or based on the
achievement of business plan objectives and the milestones
described above.
The presentation and content of our financial
statements is largely a function of the presentation and content
of the financial statements of our associated companies. We
assume responsibility for the presentation
and content of our financial statements, and each of our
associated companies assumes responsibility for the presentation
and content of its financial statements. To the extent any of
our associated companies change the presentation or content of
its financial statements, as may be required upon changes in
accounting standards, the presentation and content of our
financial statements may also change.
Our associated companies provide ongoing services,
including technological support, facilities usage and
professional services, to other of our associated companies at
mutually agreed upon prices, which we believe to be
substantially equivalent to prices that could be obtained
through arms-length negotiations. To the extent that these
transactions occur between consolidated associated companies,
they are not reflected in our consolidated operating results. To
the extent that these transactions occur between a consolidated
associated company and an associated company in which we own at
least 20%, but not more than 50%, of the outstanding voting
power, our consolidated statement of operations reflects the
entire revenue or expense of the consolidated company. The
income or expense of the associated company in which we own at
least 20%, but not more than 50%, of the outstanding voting
power is included in the results of operations of that
associated company, and we recognize a portion that is equal to
our ownership interest in that associated company. Our
consolidated revenue for the period beginning on May 7, 1999,
our inception, through December 31, 1999 included $293,000, and
our consolidated revenue for the three months ended March 31,
1999 included $1,509,000, of revenue generated by our
consolidated associated companies from sales of products or
services to associated companies in which we own at least 20%,
but not more than 50%, of the outstanding voting
power.
Management of Venture Capital Funds
We receive management fees from venture capital
funds that we manage. As the 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 the general partner of Platinum Venture Partners II, we
receive an annual management fee, payable in advance in
quarterly installments, of 2 1
/2% of,
through December 31, 2000, the aggregate partner commitments or,
beginning January 1, 2001, the fair market value of the
partnership, 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, which represented a significant portion of our
fourth quarter revenues. We received approximately $193,000 on
January 1, 2000 for first quarter 2000 management fees,
approximately $214,000 on April 1, 2000 for second quarter 2000
management fees and approximately $204,000 on July 1, 2000 for
third quarter 2000 management fees, which we expect will
represent a substantially lower percentage of our revenues for
those periods. We expect to receive a total of approximately
$204,000 in management fees from Platinum Venture Partners I and
II for the remainder of 2000. We have made no capital
contribution to either of these funds and have no interest in
their profits and losses. Because Platinum Venture Partners I
has invested all of its raised capital and Platinum Venture
Partners II has invested substantially all of its raised
capital, we only devote a limited amount of resources to
managing their operations, including recordkeeping, auditing and
managing any dispositions of investments by the funds. In
addition, we will make investment decisions for the remaining
available capital for Platinum Venture Partners II. We also
provide some strategic and operational support to the
funds portfolio companies. We account for our general
partnership interests in these funds under the equity method of
accounting because we have influence over the operating and
financial policies of the partnerships.
Through Skyscraper Management, L.L.C., our
wholly-owned subsidiary, we manage Skyscraper Ventures, L.P., as
general partner. Skyscraper Ventures is a venture capital fund
which will generally make investments of $3,500,000 or less in
start-up and early-stage companies located in Illinois, but
which may make larger or smaller investments in these companies
and investments in companies outside Illinois. On February 10,
2000, we became the general partner and were admitted as a
limited partner and one other investor, an affiliate of Mesirow
Financial, was admitted as a limited partner. The two initial
investors in the fund committed to contribute a total of
$14,000,000 to the fund, of which we have committed to
contribute $9,860,000 as a limited partner and $140,000 as
general partner. As of July 1, 2000, we had contributed
approximately
$2,300,000 to the fund. We are obligated to contribute 1% of the
total commitments to the fund as general partner. The fund is
seeking $75,000,000 to $125,000,000 in total commitments and may
admit additional limited partners for a period of nine months
after February 10, 2000. The fund may draw down its commitments
from investors for a period of four years and will terminate no
later than ten years from the date on which the last investor
was admitted as a limited partner, unless we extend the fund for
up to three additional one-year periods.
We currently account for our ownership interest in
Skyscraper Ventures under the consolidation method of accounting
and will continue to do so as long as our aggregate general and
limited partner ownership interest in Skyscraper Ventures is in
excess of 50%. Once our aggregate general and limited ownership
interest is reduced to 50% or less, we will account for our
ownership interest under the equity method of accounting. We may
be removed as general partner of Skyscraper Ventures for cause
upon the written notice of a two-thirds interest of the limited
partners of Skyscraper Ventures.
With respect to each interest in a company acquired
by the fund, we are 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 contributed capital, we are
obligated to contribute an amount equal to the deficiency, but
not to exceed an amount equal to the distributions received by
us with respect to our 20% share. We are also 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.
This management fee will then be reduced in 10% increments each
year until the termination of the fund.
We may have conflicts of interest in allocating
opportunities to acquire interests in technology and
e-commerce companies between us and the fund. In general, we
intend to allocate all opportunities involving Illinois
companies which require an initial investment of $3,500,000 or
less to the fund. However, our management has sole and absolute
discretion in allocating these opportunities, and we are not
obligated to allocate these opportunities to the fund. See
Risk Factors
for a description of our policies concerning these and other
conflicts of interest.
Effect
of Various Accounting Methods on the Consolidated Financial
Statements
The various interests that we acquire in our
associated companies are accounted for under three methods:
consolidation, equity method or cost method. We determine the
method of accounting for our associated company interests on a
case by case basis based upon our ownership percentage in each
associated company, as well as our degree of influence over each
associated company.
Consolidation. Associated companies in which
we own, directly or indirectly, more than 50% of the outstanding
voting power are accounted for under the consolidation method of
accounting. Under this method, an associated companys
results of operations are reflected within our consolidated
statement of operations. Earnings or losses attributable to
other stockholders of a consolidated associated company are
identified as minority interest in our consolidated
statement of operations. Minority interest adjusts our
consolidated net results of operations to reflect only our share
of the earnings or losses of a consolidated associated
company.
Equity Method. Associated companies in which
we own 50% or less of the outstanding voting power, but over
which we exercise significant influence, are accounted for under
the equity method of accounting. Whether or not we exercise
significant influence with respect to an associated company
depends on an evaluation of several factors including, among
other things, representation on the associated companys
board of directors, ownership percentage and voting rights
associated with our holdings in the associated company. With
respect to our current associated companies, if we own at least
20%, but not more than 50%, of the outstanding voting power of
an associated company, we account for our interests under the
equity method. Under the equity method of accounting, an
associated companys results of operations are not
reflected within our consolidated operating results. However,
our share of the earnings or losses of that associated company
is identified as equity in income (loss) of associated
companies in our consolidated statement of
operations.
The net effect of an associated companys
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 an
associated company is reflected in the net results of operations
in our consolidated statement of operations. However, the
presentation of the consolidation method differs dramatically
from the equity method of accounting. The consolidation method
presents associated company results in the applicable line items
within our consolidated financial statements. In contrast, the
equity method of accounting presents associated company results
in a single category, equity in income (loss) of
associated companies within our consolidated statement of
operations.
Cost Method. Associated 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 associated 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 in accordance with
Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities.
The presentation of our consolidated financial
statements may differ from period to period if our ownership in
any of our associated 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 associated company.
Associated Company Interests
The table below shows (1) the name of each
associated company in which we have acquired an interest, (2)
the date of acquisition, (3) the cash consideration paid by us,
(4) the principal amount of any promissory note initially issued
in connection with the acquisition to the associated company,
(5) the number of shares, if any, of our class A common stock
issuable upon conversion of series F preferred stock issued by
us in connection with the acquisition, (6) our percentage of
equity ownership and voting power in the associated company as
of May 15, 2000 and (7) our method of accounting for our
interest in it. Our equity ownership/voting power percentages
have been calculated based on the issued and outstanding common
stock of each associated company, assuming the issuance of
common stock on the conversion or exercise of preferred stock,
but excluding the effect of options and warrants. Except where
we indicate otherwise, our equity ownership and voting power
percentages are the same.
Associated Company
|
|
Date
of
Acquisition
|
|
Cash
Consideration
|
|
Promissory
Notes
|
|
Shares of
Class A
Common
Stock
|
|
Our
Equity Ownership/
Voting Power
Percentage
|
|
Accounting
Method
|
Aluminium.com, Inc. |
|
3/10/00 |
|
$19,250,000 |
|
|
|
|
|
|
34.6% |
|
|
Equity |
BeautyJungle.com, Inc. |
|
1/11/00 |
|
$18,000,000 |
|
|
|
|
|
|
61.0% |
|
|
Consolidation |
bid4real.com, inc. |
|
1/24/00 |
|
$ 7,000,000 |
|
|
|
|
|
|
54.3% |
|
|
Consolidation |
BidBuyBuild, Inc. |
|
2/11/00 |
|
$ 3,000,000 |
|
$ 3,000,000 |
(1) |
|
|
|
35.5% |
(2) |
|
Equity |
CapacityWeb.com, Inc. |
|
2/11/00 |
|
$ 4,500,000 |
|
|
|
|
|
|
44.8% |
|
|
Equity |
closerlook, inc. (3) |
|
2/1/00 |
|
$13,000,000 |
|
|
|
|
333,333 |
|
42.6% |
|
|
Equity |
Commerx, Inc. |
|
11/19/99 |
|
$ 2,500,000 |
|
|
|
|
|
|
1.0% |
|
|
Cost |
comScore, Inc. |
|
10/29/99 |
|
$ 200,208 |
|
|
|
|
|
|
0.9% |
|
|
Cost |
eFiltration.com, Inc. |
|
2/11/00 |
|
$ 5,000,000 |
|
$ 5,000,000 |
|
|
|
|
45.2% |
|
|
Equity |
Emicom
Group, Inc. |
|
4/3/00 |
|
$ 2,000,000 |
|
$24,871,429 |
|
|
|
|
33.0% |
(4) |
|
Equity |
Entrepower, Inc. |
|
11/23/99 |
|
$ 867,000 |
|
|
|
|
|
|
43.0% |
|
|
Equity |
eReliable Commerce, Inc. |
|
3/15/00 |
|
$ 4,725,000 |
|
|
|
|
|
|
47.1% |
|
|
Equity |
Farms.com, Ltd. |
|
4/28/00 |
|
$16,100,000 |
|
$16,100,000 |
|
|
|
|
41.0% |
(5) |
|
Equity |
i-Fulfillment, Inc. |
|
1/28/00 |
|
$ 1,000,000 |
|
$ 9,000,000 |
(1) |
|
|
|
48.8% |
|
|
Equity |
Associated Company
|
|
Date
of
Acquisition
|
|
Cash
Consideration
|
|
Promissory
Notes
|
|
Shares of
Class A
Common
Stock
|
|
Our
Equity Ownership/
Voting Power
Percentage
|
|
Accounting
Method
|
iGive.com, inc. |
|
2/11/00 |
|
$ 4,000,000 |
|
|
|
|
|
|
|
32.1% |
|
|
Equity |
iSalvage.com, Inc. |
|
2/3/00 |
|
$ 6,500,000 |
|
|
|
|
|
|
|
36.3% |
|
|
Equity |
i-Street, Inc. (6) |
|
11/23/99 |
|
$ 500,000 |
|
|
|
|
|
|
|
63.8%/89.8% |
|
|
Consolidation |
LAUNCHworks inc.. |
|
2/25/00 |
|
$11,428,571 |
|
|
|
|
|
|
|
39.7% |
(7) |
|
Equity |
LiveOnTheNet.com, Inc. (8) |
|
12/8/99 |
|
$ 7,500,000 |
|
|
$ 7,500,000 |
(1) |
|
|
|
76.9% |
|
|
Consolidation |
Martin
Partners, L.L.C. |
|
2/8/00 |
|
$ 1,670,883 |
|
|
|
|
|
|
|
25.0% |
|
|
Equity |
Mercantec, Inc. |
|
2/11/00 |
|
$12,000,000 |
|
|
$11,500,000 |
(1) |
|
|
|
40.4% |
(9) |
|
Equity |
mindwrap, inc. |
|
11/19/99 |
|
$ 4,905,000 |
(10) |
|
|
|
|
|
|
97.1% |
|
|
Consolidation |
The
National Transportation
Exchange, Inc. |
|
10/29/99 |
|
$ 5,862,665 |
|
|
|
|
|
|
|
5.3% |
|
|
Cost |
Neoforma.com, Inc. |
|
10/14/99 |
|
$ 6,000,000 |
|
|
|
|
|
|
|
1.5% |
|
|
Cost |
NetUnlimited, Inc. (11) |
|
3/24/00 |
|
$ 5,000,000 |
|
|
|
|
|
|
|
61.4% |
|
|
Consolidation |
Oilspot.com, Inc. |
|
2/10/00 |
|
$ 2,500,000 |
|
|
$ 2,500,000 |
(1) |
|
|
|
55.6% |
|
|
Consolidation |
OpinionWare.com, Inc. |
|
12/8/99 |
|
$ 7,000,000 |
|
|
|
|
|
|
|
54.4% |
|
|
Consolidation |
Outtask.com Inc. |
|
12/10/99 |
|
$ 4,000,000 |
|
|
$ 3,000,000 |
(1) |
|
|
|
28.9% |
(12) |
|
Equity |
Panthera Productions, LLC |
|
3/30/00 |
|
$ 2,700,000 |
|
|
|
|
|
|
|
62.9% |
|
|
Consolidation |
Parlano, Inc. |
|
2/11/00 |
|
$15,000,000 |
|
|
|
|
|
1,666,666 |
|
70.4%/86.9% |
|
|
Consolidation |
Perceptual Robotics, Inc. |
|
2/14/00 |
|
$10,000,000 |
|
|
|
|
|
166,666 |
|
33.4% |
|
|
Equity |
PocketCard Inc. |
|
11/23/99 |
|
$ 5,000,000 |
|
|
$10,000,000 |
(1) |
|
|
|
37.5% |
|
|
Equity |
Sequoia
Software Corporation |
|
11/23/99 |
|
$ 6,916,648 |
|
|
|
|
|
|
|
8.8% |
|
|
Cost |
TV
House, Inc. |
|
3/8/00 |
|
$ 2,500,000 |
|
|
$ 2,500,000 |
|
|
|
|
42.0% |
|
|
Equity |
ViaChange.com, Inc. |
|
1/31/00 |
|
$ 3,000,000 |
|
|
$ 2,000,000 |
(1) |
|
|
|
70.0% |
|
|
Consolidation |
Web
Design Group, Inc. (13) |
|
2/11/00 |
|
$ 7,000,000 |
|
|
|
|
|
|
|
53.7% |
|
|
Consolidation |
Westbound Consulting, Inc.
(13) |
|
2/11/00 |
|
$ 500,000 |
|
|
$ 500,000 |
|
|
|
|
52.4% |
|
|
Consolidation |
Whiplash, Inc. (14) |
|
11/8/99 |
|
$ 2,000,000 |
|
|
$ 4,000,000 |
(1) |
|
|
|
26.5% |
|
|
Equity |
Xippix,
Inc. |
|
2/4/00 |
|
$ 6,242,442 |
|
|
$ 4,000,000 |
(1) |
|
|
|
31.5% |
|
|
Equity |
(1)
|
Of the
amounts shown under Promissory Notes in the table, we have
repaid the following as of June 30, 2000:
BidBuyBuild$3,000,000; i-Fulfillment$9,000,000;
LiveOnTheNet.com$7,500,000; Mercantec$6,500,000;
Oilspot.com$1,000,000; Outtask.com$3,000,000;
PocketCard$10,000,000; ViaChange.com$2,000,000;
Whiplash$4,000,000; and
Xippix$4,000,000.
|
(2)
|
We also
hold warrants to purchase shares of common stock of
BidBuyBuild. Giving effect to the exercise of these warrants,
we would hold 37.7% of both the equity and voting power of
BidBuyBuild.
|
(3)
|
250,000
of the shares of our class A common stock issuable upon
conversion of preferred stock issued to closerlook and
$1,500,000 in cash are being held in escrow and will be
released to closerlook only upon achievement of revenue
thresholds. Further, if closerlook achieves an additional
revenue threshold, we will be obligated to pay an additional
$3,000,000 in cash for our interest in closerlook.
|
(4)
|
Our
current equity ownership and voting power percentage is 7.6%,
which will be increased to 33.0% when Emicom completes the
private financing it is currently conducting. The cash
consideration and promissory note shown in the table reflect
payment for a 33.0% equity interest in Emicom. Beginning March
24, 2002, Emicom will have a right to cause us to purchase all
of its outstanding common stock, which right will terminate
under certain circumstances, including Emicoms
completion of an initial public offering.
|
(5)
|
We also
hold warrants to purchase shares of common stock of Farms.com.
Giving effect to the exercise of these warrants, we would hold
45.7% of both the equity and the voting power of
Farms.com.
|
(6)
|
Excludes 500,000 shares of series B-2 preferred stock,
which are non-voting, non-convertible and redeemable at
i-Streets option at any time before March 24, 2003,
issued to us in exchange for $1,500,000 in additional
financing we provided to i-Street in March 2000.
|
(7)
|
We also
hold warrants to purchase shares of common stock of
LAUNCHworks. Giving effect to the exercise of these warrants,
we would hold 50.9% of both the equity and voting power of
LAUNCHworks.
|
(8)
|
Excludes 5,000 shares of series A preferred stock,
which are non-voting, non-convertible and redeemable at
LiveOnTheNets Option at any time before February 17,
2001 with respect to 4,523 of the shares and April 18, 2001
with respect to 477 of the shares. These shares were issued to
us in exchange for $5,000,000 in additional financing we
provided to LiveOnTheNet in February and April
2000.
|
(9)
|
We also
hold warrants to purchase shares of common stock of Mercantec.
Giving effect to the exercise of these warrants, we would hold
42.7% of both the equity and voting power of
Mercantec.
|
(10)
|
Includes $405,000 in brokerage fees paid in connection
with the acquisition.
|
(11)
|
Our
interest in NetUnlimited was acquired by, and is owned
through, Host divine.
|
(12)
|
Gives
effect to Outtask.coms redemption, on May 19, 2000, of
347,222 of the shares of Outtask.com that we originally
acquired for approximately $300,000.
|
(13)
|
Our
interests in Web Design Group and Westbound Consulting were
acquired by, and are owned through, Xqsite. Xqsite has repaid
$250,000 under a promissory note issued by it in connection
with its acquisition of Westbound.
|
(14)
|
On June
16, 2000, we obtained additional equity of Whiplash in
exchange for cash in the amount of $1,250,000 and a promissory
note in the amount of $1,250,000, increasing our equity
ownership and voting power percentages to 31.0%. We also hold
warrants to purchase shares of common stock of Whiplash.
Giving effect to the exercise of these warrants, we would hold
33.0% of both the equity and voting power of Whiplash as of
June 16, 2000.
|
Of the 39 associated companies listed in the table
above, 21 were generating revenues as of March 31, 2000.
However, only closerlook, Commerx, comScore, Farms.com,
iGive.com, LAUNCHworks, LiveOnTheNet.com, Martin Partners,
Mercantec, mindwrap, The National Transportation Exchange,
NetUnlimited, Panthera Productions, Perceptual Robotics,
Sequoia, Web Design Group, Westbound Consulting and Xippix
generated sufficient revenues from principal operations so that
they were not classified as development stage companies in 1999.
In addition, only two of these companies, Martin Partners and
Web Design Group reported net income for 1999 and for the three
months ended March 31, 2000. None of our other associated
companies listed in the table above reported net income for
either of these periods.
The table below shows (1) the name of each
associated company that we have established, (2) the date of its
establishment, (3) our current maximum intended capital
contribution to the associated company, (4) our percentage of
equity ownership and voting power in the associated company (as
of May 15, 2000) and (5) our method of accounting for our
interest in it. Our current maximum intended capital
contribution for each associated company represents the amount
up to which we currently intend to contribute to that associated
company over the next three to five years. We may, however,
contribute significantly more or less than the listed amount to
any particular associated company. Our current equity
ownership/voting power percentages have been calculated based on
the issued and outstanding common stock of each associated
company, assuming the issuance of common stock on the conversion
or exercise of preferred stock, but excluding the effect of
options.
Associated Company
|
|
Date
of
Incorporation
|
|
Current
Maximum
Intended
Capital
Contribution
|
|
Our
Current
Equity Ownership/
Voting Power
Percentage
|
|
Accounting
Method
|
Brandango, inc. |
|
10/26/99 |
|
$10,000,000 |
|
65.5%/90.0% |
|
|
Consolidation |
|
Buzz
divine, inc. |
|
10/26/99 |
|
$10,000,000 |
|
80.6%/90.0% |
|
|
Consolidation |
|
dotspot, Inc. |
|
10/26/99 |
|
$10,000,000 |
|
80.6%/90.0% |
|
|
Consolidation |
|
eXperience divine, inc. |
|
10/26/99 |
|
$10,000,000 |
|
80.8%/90.0% |
|
|
Consolidation |
|
FiNetrics, Inc. |
|
11/3/99 |
|
$10,000,000 |
|
80.9%/90.0% |
(1) |
|
Consolidation |
(1) |
Host
divine, inc. |
|
10/26/99 |
|
$10,000,000 |
|
80.6%/90.0% |
|
|
Consolidation |
|
Justice
divine, inc. |
|
10/26/99 |
|
$10,000,000 |
|
80.9%/90.0% |
|
|
Consolidation |
|
Knowledge divine, inc. |
|
10/26/99 |
|
$ 3,000,000 |
|
80.7%/90.0% |
|
|
Consolidation |
|
OfficePlanIt.com, Inc. |
|
11/23/99 |
|
$10,000,000 |
|
80.6%/90.0% |
|
|
Consolidation |
|
salespring, inc.!! |
|
10/26/99 |
|
$10,000,000 |
|
80.9%/90.0% |
|
|
Consolidation |
|
sho
research, Inc. |
|
10/26/99 |
|
$ 3,000,000 |
|
60.5%/90.0% |
|
|
Consolidation |
|
Talent
divine, inc. |
|
10/26/99 |
|
$10,000,000 |
|
80.8%/90.0% |
|
|
Consolidation |
|
Xqsite,
Inc. |
|
10/26/99 |
|
$10,000,000 |
|
80.6%/90.0% |
|
|
Consolidation |
|
(1)
|
FiNetrics has entered into a non-binding letter of
intent to combine with BrightLane.com, an online business
center that provides administrative business services. This
combination would reduce our equity ownership percentage in
FiNetrics to approximately 45% and our voting power percentage
in FiNetrics to approximately 75%.
|
All of the associated companies listed in the table
above, other than Justice divine and OfficePlanIt, were
generating revenues as of March 31, 2000, but only Brandango,
eXperience divine and Talent divine earned net income for the
three months ended March 31, 2000. Each of the associated
companies listed in the table above commenced separate
operations as of January 1, 2000. Before that date, we directly
offered the services provided by these associated
companies.
Results of Operations
|
Three Months Ended March 31,
2000
|
During the three months ended March 31, 2000, we
acquired controlling majority voting interests in
BeautyJungle.com, bid4real.com, NetUnlimited, Oilspot.com,
Panthera Productions, Parlano, Inc., ViaChange.com, Web Design
Group and Westbound Consulting for total consideration of
$65,700,000, including $5,000,000 in the form of promissory
notes. In addition, we have issued a total of 10,000,000 shares
of our Series F preferred stock, with a fair value of $4.80 per
share, and which will convert into 1,666,666 shares of class A
common stock upon completion of this offering, in connection
with our acquisition of Parlano. We also acquired significant
minority ownership interests in 15 new associated companies,
which we account for under the equity method of accounting, for
total consideration of $139,816,896, including $35,000,000 in
the form of promissory notes. In addition, we have issued a
total of 3,000,000 shares of our Series F preferred stock, with
a fair value of $4.80 per share, and which will convert into
499,999 shares of class A common stock upon completion of this
offering, in connection with our acquisitions of closerlook and
Perceptual Robotics.
We generated revenues totalling $5,215,000 for the
three months ended March 31, 2000, of which approximately
$2,922,000 was generated by consolidated associated companies
that we established and control, approximately $2,100,000 was
generated by consolidated companies in which we acquired
interests, and approximately $193,000 was generated directly by
us as management fees. The total revenues included approximately
$777,000 from the sale of products, including $499,000 related
to software sales contracts and maintenance contracts and
$276,000 related to sales of computer hardware and software. The
total revenues also included approximately $4,438,000 from the
sale of services, including $3,130,000 from consulting services
and $1,112,000 from web-based advertising.
For the three months ended March 31, 2000, cost of
revenues were approximately $4,407,000, exclusive of $485,000 of
amortization of stock-based compensation. These costs included
approximately $527,000 of direct costs of providing products,
which consisted of approximately $310,000 for our majority-owned
associated companies in which we acquired interests and
approximately $217,000 for our associated companies that we
established. Direct costs of providing products consisted
principally of costs of computer hardware and software and
salary expense paid to sales persons. Cost of revenues also
included approximately $3,880,000 of direct costs of providing
services, which consisted of approximately $1,256,000 for our
majority-owned associated companies that we established and
approximately $2,624,000 for our majority-owned associated
companies in which we acquired interests.
The types of revenues to which the cost of revenues
for the three months ended March 31, 2000 were attributed
included web-based advertising ($2,297,000 cost of revenues),
product sales ($569,000 cost of revenues), public relations
revenues ($435,000 cost of revenues), software and related
maintenance revenues
($334,000 cost of revenues), web consulting ($248,000 cost of
revenues), and other infrastructure service revenues such as
venture capital fund management, recruiting fees and facilities
management ($524,000 cost of revenues).
|
Selling, General and Administrative
Expenses
|
For the three months ended March 31, 2000, we
incurred selling, general and administrative expenses of
approximately $31,451,000, exclusive of $8,107,000 of
amortization of stock-based compensation. These expenses
consisted primarily of approximately $12,309,000 of employee
benefits and related compensation, approximately $5,181,000 of
marketing costs, approximately $2,235,000 of travel and business
development costs, approximately $1,807,000 of fees for
professional services, including legal, consulting and
accounting, and approximately $1,534,000 of facility costs,
consisting primarily of rent expense. Selling, general and
administrative expenses also included amortization of
identifiable intangible assets and goodwill in connection with
our acquisitions of associated companies, which totalled
approximately $3,415,000.
|
Research and Development Expenses
|
For the three months ended March 31, 2000, we
incurred research and development expenses of approximately
$1,596,000, exclusive of $73,000 of amortization of stock-based
compensation. These expenses consisted primarily of
approximately $816,000 of web production and development costs
and approximately $466,000 of employee benefits and related
compensation.
For the three months ended March 31, 2000, we
incurred a non-cash expense of approximately $7,150,000 related
to the issuance of 116,665 shares of restricted stock under our
1999 Stock Incentive Plan and grants of options to purchase
6,788,753 shares of our class A common stock exclusive of
cancelled options to purchase 2,340 shares, to employees,
directors and consultants with exercise prices lower than the
fair value of the class A common stock on the dates of grant. Of
the options underlying the stock-based compensation, options to
purchase 3,254,849 shares were granted during the three months
ended March 31, 2000. The total unearned stock-based
compensation related to these options and restricted stock at
March 31, 2000 was approximately $101,019,000 and will be
amortized over the vesting periods of the related options,
generally four years in the case of options granted to employees
and consultants and one year in the case of options granted to
non-employee directors and restricted stock issued to
employees.
For the three months ended March 31, 2000, we also
incurred a non-cash expense of approximately $1,514,000 related
to our issuance to our employees of shares of common stock of
our majority-owned associated companies that we established.
These shares were sold at prices lower than their fair value.
The total unearned stock-based compensation related to these
shares at March 31, 2000 was approximately $22,711,000 and will
be amortized over the four-year vesting period of the shares
issued.
|
Other Income and Expenses
|
Other income consisted of interest income of
approximately $3,713,000 earned from investment of our available
cash balances. Other expense consisted of interest expense of
approximately $302,000. Interest expense was incurred primarily
from notes payable to associated companies.
We have recorded no income tax benefit or loss for
the three months ended March 31, 2000. Because we have no
history of taxable income through March 31, 2000, the tax
benefit associated with our net loss has been fully reserved. At
March 31, 2000, we had approximately $20,370,000 of net
operating loss carryforwards, which are available to reduce
future federal income taxes, if any. Net operating loss
carryforwards of $5,770,000 will expire in 2019 and net
operating loss carryforwards of $14,600,000 will expire in 2020,
respectively.
Minority interest of approximately $4,187,000
represents the non-controlling stockholders share of our
consolidated associated companies net loss for the three
months ended March 31, 2000.
|
Equity in Losses of Associated Companies
|
Equity in losses of associated companies resulted
from our minority ownership interests in 20 companies that we
account for under the equity method. Equity in losses of
associated companies includes our proportionate share of equity
method associated companies losses, which totalled
approximately $4,647,000 in net losses for the three months
ended March 31, 2000. Equity in losses of associated companies
also includes amortization of our net excess investment over the
equity in the net assets of these associated companies, which
totalled approximately $6,231,000 for the three months ended
March 31, 2000.
We reported a net loss of approximately $44,185,000
for the three months ended March 31, 2000, principally due to
selling, general and administrative expenses that we incurred in
addition to our equity loss in associated companies, partially
offset by our revenues and interest income.
In connection with the issuance of our series E
convertible preferred stock on March 14, 2000, we recorded a
non-cash preferred stock dividend of $18,284,327, which relates
to the deemed beneficial conversion feature associated with that
preferred stock.
In connection with the issuance of our series F
convertible preferred stock on February 11, 2000, we recorded a
non-cash preferred stock dividend of $7,530,000, which relates
to the deemed beneficial conversion feature associated with that
preferred stock.
|
Period from May 7, 1999 (Inception) to December
31, 1999
|
We were incorporated in the state of Delaware on May
7, 1999 and had no substantive operations through June 30, 1999.
From June 30, 1999 to December 31, 1999, we engaged in our
initial organization, infrastructure building and marketing
activities. During this period, we acquired a controlling
majority voting interest in i-Street, LiveOnTheNet.com and
mindwrap. We also acquired significant minority ownership
interests in five associated companies accounted for under the
equity method and ownership interests in five associated
companies accounted for under the cost method.
For the period ended December 31, 1999, we generated
revenues of approximately $1,037,000. These revenues included
approximately $275,000 in management fees as general partner of
Platinum Venture Partners I and II. These revenues also included
approximately $272,000 related to software sales contracts and
maintenance contracts of mindwrap. Other sources of revenues
included $135,000 in web-based advertising, and other
infrastructure service revenues such as public relations,
consulting and facilities management.
For the period ended December 31, 1999, cost of
revenues were approximately $1,027,000, exclusive of $5,000 of
amortization of stock-based compensation. These costs included
approximately $234,000 of direct costs of providing products,
which consisted of approximately $111,000 for our majority-owned
associated companies and approximately $123,000 for
infrastructure service activities that are now performed by
associated companies that we established. Direct costs of
providing products consisted principally of costs of computer
hardware and salary expense paid to sales persons. Cost of
revenues also included approximately $794,000 of direct costs of
providing services, which consisted of approximately $376,000
for our majority-
owned associated companies, approximately $209,000 for
infrastructure service activities that are now performed by
associated companies that we established and approximately
$209,000 for the management of Platinum Venture Partners I and
II.
The types of revenues to which the cost of revenues
for the period ended December 31, 1999 were attributed included
web-based advertising ($160,000 cost of revenues), management
fees ($236,000 cost of revenues), software and related
maintenance revenues ($165,000 cost of revenues), and other
infrastructure service revenues such as public relations,
consulting, and facilities management ($466,000 cost of
revenues).
|
Selling, General and Administrative
Expenses
|
For the period ended December 31, 1999, we incurred
selling, general and administrative expenses of approximately
$8,557,000, exclusive of $741,000 of amortization of stock-based
compensation. These expenses consisted primarily of
approximately $3,851,000 of employee benefits and related
compensation, approximately $1,449,000 of travel and business
development costs, approximately $865,000 of fees for
professional services, including legal, consulting and
accounting, and approximately $332,000 of facility costs
consisting primarily of rent expense. Selling, general and
administrative expenses also included amortization of
identifiable intangible assets and goodwill in connection with
our acquisitions of associated companies which totalled
approximately $595,000 for the period ended December 31,
1999.
|
Research and Development Expenses
|
For the period ended December 31, 1999, we incurred
research and development expenses of approximately $133,000,
exclusive of $2,000 of amortization of stock-based compensation.
These expenses were related to software development activities
of our majority-owned associated companies.
For the period ended December 31, 1999, we incurred
a non-cash expense of approximately $747,000. This expense
relates to grants of options to purchase 3,533,904 shares of our
class A common stock granted to employees and directors with
exercise prices lower, for financial statement purposes, than
the deemed fair value of the class A common stock on the dates
of grant. The total unamortized stock-based compensation at
December 31, 1999 was approximately $26,661,000.
|
Other Income and Expenses
|
Other income consisted of interest income of
approximately $1,589,000 earned from investment of our available
cash balances. Other expense consisted of interest expense of
approximately $205,000. Interest expense was incurred
principally from notes payable to associated
companies.
We recorded no income tax benefit or loss for the
period ended December 31, 1999. Because we have no history of
taxable income through December 31, 1999, the tax benefit
associated with our net loss has been fully reserved. At
December 31, 1999, we had approximately $5,770,000 of net
operating loss carryforwards, which are available to reduce
future Federal income taxes, if any. These net operating loss
carryforwards expire at the end of 2019.
Minority interest of approximately $51,000
represents the non-controlling stockholders share of our
consolidated associated companies net loss for the period
ended December 31, 1999.
|
Equity in Losses of Associated Companies
|
Equity in losses of associated companies resulted
from our minority ownership interests in Entrepower,
OpinionWare.com, Outtask.com, PocketCard, and Whiplash, which
are accounted for under the equity method. Equity in losses of
associated companies includes our proportionate share of equity
method associated companies losses, which totalled
approximately $672,000 for the period ended December 31, 1999.
Equity in losses of associated companies also includes
amortization of our net excess investment over the equity in the
net assets of these associated companies, which totalled
approximately $742,000 for the period ended December 31,
1999.
We reported a net loss of approximately $9,407,000
for the period ended December 31, 1999, principally due to
selling, general and administrative expenses we incurred, in
addition to our equity loss in associated companies, partially
offset by our revenues and interest income earned.
Prospective Stock-based Compensation
Charges
Through April 30, 2000, we granted options to
purchase 7,051,522 shares of our class A common stock, and
issued 116,665 shares of restricted stock, under our 1999 Stock
Incentive Plan to our employees and non-employee directors,
including options to purchase 3,533,904 shares during 1999. As
of April 30, 2000, options to purchase 8,000 shares had been
cancelled and 22,510 shares of restricted stock issued upon
exercise of options had been forfeited. The options and
restricted stock were granted with exercise prices lower than
the fair value of our class A common stock on the dates of
grant. The options were granted with exercise prices ranging
from $4.50 per share to $13.50 per share, with a weighted
average exercise price of $5.70 per share. The fair value of our
class A common stock ranged from $6.00 to $36.00 per share for
the period during which these options were granted, with a
weighted average fair value of $21.86 per share. In connection
with the options and restricted stock, we recorded unearned
stock-based compensation of approximately $27,408,000 in 1999,
approximately $81,508,000 in the first quarter of 2000, and
approximately $5,955,000 in April 2000. The total unearned
stock-based compensation will be amortized as stock-based
compensation expense in our consolidated financial statements
over the vesting period of the applicable options or restricted
stock, generally four years in the case of options granted to
employees and one year in the case of options granted, or
restricted stock issued, to non-employee directors or restricted
stock issued to employees. In 1999, we amortized approximately
$747,000 of stock-based compensation expense. During the three
months ended March 31, 2000, we amortized approximately
$7,150,000 of stock-based compensation expense. We expect to
amortize the remaining unearned stock-based compensation as
follows: 2000$34,141,000 (including $7,150,000 amortized
in the first three months of 2000); 2001$27,426,000;
2002$26,614,000; 2003$24,669,000; and
2004$1,274,000, which will reduce our earnings, or
increase our losses, in those years.
On March 9, 2000, we issued an option to purchase
166,666 shares of our class A common stock with an exercise
price of $6.00 per share to one of our non-employee directors,
of which 125,000 shares relate to a consulting agreement between
that director and us. Additionally, in February and March 2000,
we issued options to purchase 108,295 shares of our class A
common stock with exercise prices ranging from $10.50 to $13.50
per share to consultants. These options issued to a non-employee
director and to consultants are included in the options
discussed in the preceding paragraph. In accounting for these
options, we relied on the guidance set forth in EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services (EITF 96-18). We applied the
Black-Scholes model to the portion of these options granted for
consulting services, resulting in a total future expense to us
of approximately $6,893,000. We will recognize this total future
expense over the three-year vesting period of the related
consulting agreements in accordance with FIN 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Options or Award Plans, which will reduce
our earnings, or increase our losses, in those years. We will
continue to revalue the services on a quarterly basis based upon
our
future publicly traded stock price in accordance with EITF 96-18
and adjust our expense incurred accordingly. The future value of
these potential additional charges cannot be estimated at this
time, because the charges will be based on the future fair value
of our stock. In the future, we may incur similar charges in
connection with other stock option awards to consultants,
including members of our advisory board, which will reduce our
earnings, or increase our losses, in the affected
periods.
During January 2000, our employees acquired an
average of 22.0% ownership interest in 13 companies that we
established in October and November 1999. The employee ownership
of these associated companies was 39.5% for sho research, Inc.,
34.5% for Brandango, inc., and ranged from 19.1% to 19.4% for
the remaining 11 companies. The employees contributed a total of
approximately $57,000, which represented $0.001 per share. For
financial statement purposes, the deemed fair value of the
employees share of these established companies was
approximately $24,282,000, or $0.43 per share at the time of
issuance of the stock. In connection with these stock issuances,
we have recorded unearned stock-based compensation of
approximately $24,225,000 for the first quarter of 2000. The
total unearned stock-based compensation will be amortized as
stock-based expense in our financial statements ratably over
four years, which represents the vesting period of the shares
issued. We amortized approximately $1,514,000 of this
stock-based compensation expense for the three months ended
March 31, 2000 and expect to amortize the remaining unearned
stock-based compensation as follows: 2000$6,056,000
(including $1,514,000 amortized in the first three months of
2000); 2001$6,056,000; 2002$6,056,000; and
2003$6,056,000, which will reduce our earnings, or
increase our losses, in those years.
Summary of Currently Expected Fixed
Charges
The following table summarizes the fixed charges as
of March 31, 2000 that we currently expect to incur over the
next five years for amortization of (1) identifiable intangible
assets and goodwill, (2) our net excess investment over our
equity in the net assets of associated companies and (3)
unearned stock-based compensation:
|
|
Year
|
Amortization of:
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
Identifiable Intangible Assets and Goodwill |
|
14,570,000 |
|
14,776,000 |
|
14,181,000 |
|
750,000 |
|
|
Our Net
Excess Investment |
|
41,608,000 |
|
47,813,000 |
|
47,072,000 |
|
5,815,000 |
|
|
Unearned Stock-Based Compensation |
|
40,197,000 |
|
33,482,000 |
|
32,670,000 |
|
30,725,000 |
|
1,274,000 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
96,375,000 |
|
96,071,000 |
|
93,923,000 |
|
37,290,000 |
|
1,274,000 |
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These
unearned stock-based compensation charges do not reflect
potential additional charges associated with options granted
to consultants, as discussed under Prospective
Stock-based Compensation Charges above. The future value
of these potential charges cannot be estimated at this time
because the charges will be based on the future value of our
stock.
|
Liquidity and Capital Resources
As of May 31, 2000, we had cash and cash equivalents
of approximately $132,052,000, including cash and cash
equivalents of $40,477,000 held by our consolidated associated
companies, consisting almost entirely of funds raised in private
placements of securities. Our cash and cash equivalents as of
May 31, 2000 represented a decrease of approximately $79,859,000
from approximately $211,911,000 as of March 31, 2000, which
represented an increase of approximately $49,070,000 from
approximately $162,841,000 as of December 31, 1999.
Our burn rateour use of cash in
operating activitieswas approximately $34,885,000 for the
three months ended March 31, 2000, or an average of
approximately $11,628,000 per month. As of December 31, 1999, we
had raised $212,323,553 from sales of shares of our convertible
preferred stock. From January 1 through March 14, 2000, we
raised an additional $215,134,327 from sales of additional
shares of our convertible preferred stock.
The net decrease in cash and cash equivalents of
$79,859,000 from March 31, 2000 to May 31, 2000 was due
primarily to acquisitions of interests in associated companies
and repayments of promissory notes of approximately $39,759,000,
our burn rateuse of cash in operating activitiesof
approximately $26,781,000, or an average of approximately
$13,391,000 per month, our acquisition of shares of 360networks
for approximately $4,181,000, and cash used in other
non-operating activities of approximately
$9,138,000.
During the period ended December 31, 1999, we
borrowed approximately $927,000 under a line of credit for
ongoing operating expenses. This amount was repaid during
October 1999. We are currently negotiating to enter into a
$50,000,000 line of credit with La Salle Bank N.A. We do not
expect to enter into any agreements relating to this line of
credit until after the completion of this offering and do not
expect to enter into this line of credit unless we complete this
offering. 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 associated companies. In addition, our obligations
under our office lease in Lisle, Illinois are secured by a
letter of credit for $442,865 issued by Bank of
America.
We continually analyze our business plans and
internal operations and the operations and business plans of
each of our associated companies in light of market
developments. As a result of this ongoing analysis, we may
decide to make substantial changes in our business plan and
organization and in the business plans and organizations of the
associated companies that we control. We recently decided to
change the organizational structure of our associated company
development group, which is principally responsible for making
acquisition and funding recommendations to our senior
management. We reorganized that group into three areas: (1)
market makers; (2) infrastructure companies; and (3) business
services (which combine with the infrastructure companies to
form the infrastructure service provider category). In this
process, we decided to eliminate 29 positions within this group,
laying off 28 employees in the second quarter of 2000 and moving
one employee to another position within our organization. The
decision to eliminate these positions was based in part on our
conclusion that, due to changing market conditions, we had more
employees in that group than were needed to efficiently deploy
the cash we expect to have available in the near future. The
total expense associated with these layoffs was approximately
$456,000, which consisted of severance pay, accrued vacation,
continuation of employee benefits and forgiveness of interest
rate receivables from employee loans. We have expensed an
additional $502,000 related to acceleration of unearned
stock-based compensation related to these terminated employees.
We have not, however, made any material changes in our overall
business model or plans. In the future, as we continue our
internal analysis and as market conditions and our available
capital change, we may decide to make additional organizational
changes and/or alter some of our overall business plans, but we
have not currently reached any conclusions or made any
decisions, preliminary or final, in this regard.
We continually examine all of our associated
companies to assess their potential for financial success as
part of our organization, whether on a stand-alone basis or
otherwise. This examination includes consideration of each
associated companys development of its business plans and
objectives and progress toward achievement of its performance
goals. Based on this examination, we expect to make future
funding decisions with respect to existing and new associated
companies, including whether to adjust our currently intended
contributions to the associated companies we established.
Generally, we intend to make the greatest financial commitments
to those companies that we believe have the greatest potential
for future value and profitability and for initial public
offerings or other liquidity events and/or operate in particular
markets on which we intend to focus. In some cases, we may
determine not to provide any future capital to particular
associated companies, including associated companies that we
control, and those companies may need to obtain third-party
financing, if available, to continue operations as currently
anticipated, if at all. In some cases, these companies may
elect, or be forced, to lay off employees or take other measures
to reduce costs. In addition, we may decide in the future to
combine, restructure or alter the business plans of associated
companies that we control to enhance their potential value in
the public markets or their value to potential acquirers. We
expect that we will apply these same principles, and a
consideration of our available cash and other resources, in
making decisions with respect to future acquisitions of
interests in associated companies. To date, however, we have not
changed our plans with respect to our expected financial
contributions to existing or new associated
companies.
If we do not complete this offering and the
concurrent private placements, we expect to take steps to reduce
our costs and also to seek alternative sources of capital. Our
cost reduction measures would include laying off additional
employees, including in our associated company development group
and at associated companies that we control, although we do not
currently know how many positions would be eliminated or who
would be considered for termination. We would also decrease or
eliminate our currently intended capital contributions to the
associated companies we established, as well as to other
associated companies. Further, we would significantly scale
back, or terminate entirely, our program of acquiring interests
in, and establishing, new associated companies. In addition, we
would scale back, postpone or cancel our plan to construct an
approximately 400,000 square foot facility in Chicago. We have
not, however, made any specific plans with respect to these or
other cost reduction measures, including when or how they would
be implemented.
In an article in The Chicago Sun-Times dated
May 27, 2000, information regarding our business and this
offering was published. Some of the information in the article
was attributed to oral statements made by Mr. Filipowski, our
Chief Executive Officer, during an interview with The Chicago
Sun-Times. While some of the factual statements about us in
the article are disclosed in this prospectus, the article also
includes statements regarding the companys liquidity and
financial condition that are inconsistent with those disclosed
in this prospectus. In a Chicago Sun-Times article dated
June 6, 2000 referencing the May 27, 2000 article, the following
statement is attributed to Mr. Filipowski: divine, which
backs more than 50 tech companies, [has] more than $100 million,
enough to last 20 months without a cash infusion. The May
27, 2000 statements are also repeated in a May 30, 2000
Chicago Sun-Times article, which references a burn
rateour use of cash in operating activitiesof
$5,000,000 per month. The statements made by Mr. Filipowski do
not accurately reflect our financial condition. As of May 31,
2000, we had cash and cash equivalents of approximately
$132,052,000. Our burn rate averaged approximately $11,628,000
per month for the first three months of 2000 and averaged
approximately $13,391,000 per month for April and May 2000. We
are unable to accurately project our future burn rate, because
it will be based upon many factors, including revenue growth of
us and our consolidated associated companies, employee hiring
and retention decisions and the implementation of, and any
changes in, business plans. Additionally, according to the May
30 article, Filipowski expects the Company to begin
making money in eight months. This statement made by
Mr. Filipowski also does not accurately reflect our financial
condition. We cannot now determine when we will or begin making
moneyor be cash flow positive but we do not expect
to be cash flow positive in eight months or for the foreseeable
future after that time. The statements of Mr. Filipowski have
been repeated, sometimes in slightly altered forms, in several
other press articles. The published statements of Mr. Filipowski
should not be considered, and you should make your investment
decision only after carefully evaluating all of the information
in this prospectus, including the risks described in this
section and throughout the prospectus.
Through June 30, 2000, we have paid a total of
$344,839,846 in cash, including $56,471,429 in the form of
outstanding promissory notes, in connection with our
acquisitions of interests in 39 associated companies. These
amounts include amounts paid by two of the associated companies
that we established to acquire interests in three associated
companies. We have also provided approximately $6,500,000 of
additional financing to two of these associated companies. We
currently intend to contribute up to a total of $116,000,000 for
start-up financing over the next three to five years to
associated companies that we have established to date,
approximately $37,000,000 of which we have paid through
May 31, 2000. Two of these associated companies have used
$12,750,000 of this amount to acquire interests in three
associated companies, and there is an outstanding promissory
note in the amount of $250,000 relating to one of these
acquisitions. Our future contributions to each of these
associated companies that we have established may be
significantly increased or decreased and accelerated or
decelerated based upon various factors, including each
companys and our respective development of business plans
and objectives and progress toward achievement of performance
goals, as well as additional funding available from third-party
sources. We intend to continue to acquire interests in
associated companies, and we expect that the amount of cash that
we will use for acquisitions will increase substantially in
future periods. We also expect to expend substantial funds in
future periods to fund our establishment of new associated
companies.
In connection with our acquisition of an interest
in Emicom, we have agreed that, beginning March 24, 2002, Emicom
will have a right to cause us to purchase all of its outstanding
common stock at a price equal to 75% of the product of (1)
Emicoms net asset value at the time this right is
exercised multiplied by (2) the quotient of (a) our then total
market capitalization, divided by (b) our then net asset value.
This right will terminate under some circumstances, including
Emicoms completion of an initial public offering or
Emicoms receipt of $157,000,000 or more of gross proceeds
from private sales of its common stock if, as a result, we own
25% or less of its common stock.
We have committed to contribute a total of
$10,000,000 to Skyscraper Ventures, $9,860,000 as a limited
partner and $140,000 as general partner of the fund. The fund
may draw down our commitment to it for a period of four years.
As of July 1, 2000, we had contributed approximately $2,300,000
to the fund.
We have exercised our option to purchase, for
$9,750,000 plus the costs and expenses of Blackhawk, the
property in Chicago on which our planned 400,000 square foot
facility is to be constructed for an aggregate total of
approximately $12,000,000. Based on our most recent internal
discussions regarding plans for the facility, we currently
estimate that our budget for the land acquisition and
construction and development of the facility will total between
$60,000,000 and $80,000,000. However, this budget may increase
or decrease as we finalize plans for the facility. We expect
that the substantial majority of the construction and
development costs will be funded through third-party financing
and that $14,000,000 of this amount will be reimbursed to us
through tax increment financing. We currently anticipate that
the facility will be ready for occupancy by Summer 2001.
However, the timing of our development of the facility, as well
as the scale and final design of the facility will, depend on
the anticipated space needs of us and other projected users of
the facility, transportation issues and the availability of
third-party financing. In addition, under an Alliance Agreement
with Microsoft, we have committed to purchase approximately
$9,600,000 of software products, $4,700,000 of consulting
services and $1,000,000 of product support services from
Microsoft through January 2004.
We have agreed to sell 7,257,455 shares of our class
A common stock and 23,288,511 shares of our class C convertible
common stock in the concurrent private placements. These private
placements are conditional upon our completion of this offering.
We estimate that our net cash proceeds from these concurrent
private placements will be approximately $218,421,629. In
connection with these private placements, we have agreed (1)
under our Alliance Agreement with Microsoft to expend $4,000,000
over four years to promote Microsoft solutions, to open an
office in Seattle within 60 days after the completion of that
offering, which we expect to cost approximately $1,500,000, and
to dedicate up to $50,000,000 in capital to our Seattle
operations for projects and acquisitions, (2) to purchase a
minimum of $100,000,000 of colocation and bandwidth services
from Level 3 over four years, $25,000,000 of which will be
credited to us as payment by Level 3 for its purchase of shares
from us, and (3) to purchase a minimum of $5,000,000 of computer
equipment and software, storage solutions and professional
services from Compaq over four years. In addition, in connection
with our private placement to 360networks, we purchased 374,181
subordinated voting shares of 360networks, in a private
placement, concurrent with its initial public offering on April
26, 2000. We purchased 93,545 shares at a purchase price of
$5.00 per share and 280,636 shares at a price of $13.23 per
share, which represents the 360networks initial public
offering price, less underwriting discounts, for a total
purchase price of $4,180,539. We completed our purchase of these
shares on April 26, 2000, at which time the shares had an
aggregate market value of $5,238,534.
The following table summarizes the current capital
commitments discussed above:
Commitment to/for
|
|
Purpose
|
|
Amount
|
|
Time
Period
|
Associated companies we acquired |
|
Repay
promissory notes |
|
$ 56,471,429 |
|
|
Through
August
2000 |
Associated companies we
established |
|
Provide
start-up financing |
|
$ 79,000,000 |
|
|
3 to 5
years |
Blackhawk |
|
Purchase Chicago facility |
|
$ 12,000,000 |
|
|
July
2000 |
Compaq |
|
Purchase computer equipment |
|
$ 5,000,000 |
|
|
4
years(1) |
Level
3 |
|
Purchase colocation and
bandwidth services |
|
$100,000,000 |
(2) |
|
4
years |
Microsoft |
|
Open
Seattle facility |
|
$ 1,500,000 |
|
|
Within
60 days
from the date
of this offering |
Microsoft |
|
Promote
Microsoft solutions |
|
$ 4,000,000 |
|
|
4
years |
Microsoft |
|
Fund
Seattle projects and
acquisitions |
|
$ 50,000,000 |
|
|
None
Specified |
Microsoft |
|
Purchase software products, |
|
$ 15,300,000 |
|
|
4
years |
|
|
consulting services
and product support
services |
|
|
|
|
|
Skyscraper Ventures |
|
Fund
acquisitions |
|
$ 7,700,000 |
|
|
4
years |
(1)
|
$2,500,000 of equipment must be purchased within the
first 18 months.
|
(2)
|
$25,000,000 of the commitment will be satisfied by a
service credit issued to us by Level 3 in connection with the
concurrent private placement.
|
We estimate that, following this offering and the
concurrent private placements, we will have cash and cash
equivalents, and hold direct or guaranteed obligations of the
United States, totalling approximately $449,000,000, compared to
approximately $230,000,000 if we did not complete the concurrent
private placements and approximately $117,000,000 if we
completed neither this offering nor the concurrent private
placements, in each case excluding cash and cash equivalents
held by our associated companies. We believe that, if we did not
complete this offering and the concurrent private placements,
the proceeds we received from our previously completed private
placements of equity securities would not be sufficient to fund
our currently anticipated working capital and other cash needs
for the next 12 months if we continued to implement our current
business plans. In that case, we would seek alternative sources
of capital and would implement cost reduction measures,
including reducing our workforce and the workforce of our
majority-owned associated companies. We believe that, if we
completed this offering but did not complete the concurrent
private placements, the proceeds we received from this offering
and our prior private placements of equity securities would be
sufficient to fund our currently anticipated working capital and
other cash needs for at least the next 12 months, but that we
would be severely constrained in our ability to acquire
interests in and establish business-to-business e-commerce
companies and to provide capital at currently anticipated levels
to the associated companies that we have established to date.
Our proceeds from this offering and the concurrent private
placements should enable us to fund our currently anticipated
working capital and other cash needs for at least the next 12
months, as well as acquire interests in and establish a
significant number of new associated companies during this
12-month period. However, during this period, we may seek
additional capital in the private or public equity markets to
enable us to further expand our program of acquiring interests
in and establishing associated companies. On a longer-term
basis, we expect to need to periodically access the private
and/or public equity markets to obtain the funds we need to
support our operations and continued growth and the operations
and continued growth of our associated companies. Because, for
the foreseeable future, we expect to incur increasing losses, do
not expect to receive cash distributions from our associated
companies for the foreseeable future and do not plan to sell our
associated company interests, we expect to seek additional
capital after we use the cash we will have available after we
complete this offering and the concurrent private
placements. Our long-term capital requirements will depend in
large part on the number of associated companies which we
establish and in which we acquire interests, the amounts we pay
for interests and as capital contributions and the timing of
these payments. Managements plans and the related capital
requirements will depend on various factors, such as
developments in our markets and the availability of acquisition
and entrepreneurial opportunities. We may not be able to
obtain financing on acceptable terms, or at all, when we need
it. If we require, but are unable to obtain, additional
financing in the future on acceptable terms, if at all, we will
not be able to continue our business strategy, respond to
changing business or economic conditions, withstand adverse
operating results or compete effectively.
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 December 31, 1999, we had approximately
$162,841,000 in cash and cash equivalents, and, at March 31,
2000, we had approximately $211,911,000 in cash and cash
equivalents. A decrease in market rates of interest would have
no material effect on the value of these assets.
(This
page intentionally left blank)
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 an Internet holding company actively engaged
in business-to-business e-commerce through our community of
associated companies, currently consisting of 52
business-to-business e-commence companies. We foster
collaboration among these companies, 15 of which are currently
located together in our facilities, to provide cross-selling and
marketing opportunities and support business growth and the
sharing of information and business expertise. We finance and
assist in the development, management and operations of our
associated companies. Through associated companies that we
established and control, we also offer them infrastructure
services to help them build their businesses.
We were formed in May 1999 and on June 30, 1999
began start-up and organizational activities, including building
our management team, raising our initial capital, hiring
technical and operational personnel and marketing our business.
In addition, from June 30, 1999 to September 30, 1999, we
engaged in initial analysis of, and discussions with, potential
associated companies, but we did not acquire interests in or
establish any associated companies. Since September 30, 1999, we
have acquired interests in 39 associated companies, established
a total of 13 associated companies and also further developed
our operational procedures and capabilities. We acquire
interests in infrastructure service providers, market makers and
do rights, primarily by purchasing capital stock of these
companies. We also establish new associated companies when we
identify opportunities consistent with our business strategy and
recruit entrepreneurial talent to manage these companies. After
forming these companies, we help develop their business plans,
provide them with capital, build their management teams and hire
their initial employees. Through associated companies that we
control, we provide a wide range of infrastructure and support
services, such as marketing and public relations, web site
design and strategic planning. Through December 31, 1999, we
directly operated the infrastructure service businesses that are
now operated by associated companies that we established and
control. We currently operate principally in the Chicago area
and also recently opened an office in Austin, Texas, and,
through our acquisition of an interest in LAUNCHworks, began
operating in Calgary, Alberta, Canada. We recently established
operations outside of North America by acquiring an interest in
Emicom Group, a provider of capital and infrastructure services
located in Israel. We have also entered into a non-binding
letter of intent, which terminates on July 15, 2000, to acquire
an interest in a company that plans to provide capital and
strategic services to Internet and related companies throughout
Latin America, to be formed by Consultores Asset Management,
S.A., an investor in and developer of Internet companies. We are
currently conducting a due diligence investigation in connection
with this proposed transaction.
Through the remainder of 2000, we plan to continue
acquiring interests in associated companies, although we have
not determined the number or size of the acquisitions that we
will make. We may acquire greater percentage equity interests,
including whole companies, and we may acquire interests in
larger companies, than has typically been the case with our
acquisitions to date. We also intend to expand the operations of
associated companies we have established and, as we identify
opportunities and recruit entrepreneurial talent, we will
consider establishing new associated companies that can advance
our business strategy. Throughout the year, we will be providing
strategic guidance and day-to-day operational support and
offering our infrastructure services to our associated companies
to assist them in getting their products and services to market
quickly and positioning themselves for possible initial public
offerings. Most of our current associated companies are now in
the development stage and have not yet generated meaningful
revenues. We expect that all of our current associated companies
will be engaged in revenue-generating operating activities by
the end of the year. Further, in 2000, we plan to begin
development of approximately 400,000 square foot facility in
Chicago to house and
facilitate collaboration among associated companies, as well as
other e-commerce businesses. In addition, we plan to hire a
general manager and core business development team for a
Seattle-based facility to develop business-to-business
e-commerce companies. We plan to establish and staff a Seattle
office within 60 days after the completion of this offering. We
also plan to expand our Austin facility and expect that our
associated company development group, Buzz divine, dotspot and
Xqsite will operate at this facility by August 2000. We are also
contemplating expanding our operations to the Far East, although
we have not yet determined a timetable for this expansion.
Additionally, we will continue to build the internal corporate
and managerial capabilities we need to support our planned rapid
growth and the growth of our associated companies.
Finally, to accelerate this growth, we may seek
additional capital in the public or private securities markets
later in the year. In future years, we intend to continue to
grow our business through internal expansion and acquisitions,
both domestic and international, supported by periodic
capital-raising.
Industry Background
|
The Growth of Business-to-Business
E-Commerce
|
Businesses are increasingly relying on the Internet
to share information and sell goods and services. We believe,
based on estimates published in February 2000 by Forrester
Research, an independent industry research firm, that the
inter-company trade of goods and services over the Internet,
commonly referred to as business-to-business e-commerce, will
grow to approximately $2.7 trillion by 2004. 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 to
integrate their systems more efficiently with those of their
partners and customers.
With the continuous advances in the use and business
applications of the Internet, the economy is becoming
increasingly competitive and customer-oriented. The
proliferation of the Internet has enabled businesses to
establish more direct relationships with customers. As a result
of the 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 rapid 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.
To capitalize on these business trends, a large
number of new companies exclusively devoted to developing
business-to-business 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
business-to-business e-commerce companies as either
infrastructure service providers, market makers or do
rights:
|
Infrastructure Service Providers:
Infrastructure service providers assist companies in building
and managing the infrastructure needed to support
business-to-business e-commerce. Their goal is to maintain and
extend their clients competitive advantage by allowing
companies to focus on their core 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
software and other products and services, such as legal and
accounting services and marketing and public relations
expertise.
|
|
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.
|
|
Do Rights: Do rights use the Internet to
operate for-profit businesses with social, cultural or
educational purposes. Do rights generally either conduct
philanthropic activities themselves or provide opportunities
for their customers to provide financial support to
philanthropic entities.
|
|
Operating Challenges Facing Emerging
Business-to-Business E-Commerce Companies
|
Todays low barriers to entry and the ability
of businesses to market products on a global basis make it
critical that businesses bring new products and services to
market quickly. To be successful, new business-to-business
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 internally the necessary technology and
management infrastructure in a timely manner, new
business-to-business e-commerce companies must obtain 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 business-to-business e-commerce companies also often require
the assistance of industry experts. In todays 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 managements attention from efforts to
construct core product or service offerings and bring them to
market. Accordingly, in addition to capital, emerging
business-to-business 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 business-to-business 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
in the U.S.
|
We believe, based on venture capital industry data
released in February 2000 by The National Venture Capital
Association, a trade organization for venture capital and
private equity firms, and Thompson Financial Securities
Datas Venture Economics Group, an information provider for
private equity professionals, that $48.3 billion of venture
capital investments were made in U.S. businesses in 1999, and
that, of that amount, approximately $34.5 billion was invested
in businesses located in California and the northeastern United
States, including $16.9 billion invested in northern California
businesses alone. We believe that this capital concentration has
contributed to a lack of infrastructure services available
outside of these areas, making it more difficult to launch
successful e-commerce start-ups and attract capital. 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.
|
Growth in International
Markets
|
We believe that the same trends that are driving the
growth of the business-to-business e-commerce market in the U.S.
are promoting the growth of business-to-business e-commerce
internationally. We believe, based on estimates published in
April 2000 by Forrester Research, that the percentage of
worldwide e-commerce conducted in North America will decline
from approximately 78% in 2000 to approximately 50% in 2004 as a
result of e-commerce growth internationally. We further believe,
based on those Forrester Research estimates,
that over that time period, the percentage of worldwide e-commerce
conducted in Asia will grow from approximately 8% to
approximately 24%, the percentage conducted in Western Europe
will grow from approximately 13% to approximately 22% and the
percentage conducted in Latin America will grow from
approximately 0.5% to approximately 1.2%. We believe that this
expected growth of international business-to-business e-commerce
and the global nature of the Internet will drive demand for
capital and infrastructure services worldwide.
Our
Solution and Strategy
We focus primarily on partnering with, managing and
operating emerging companies that develop business-to-business
e-commerce products and services and that we believe can become
leaders in their markets. In addition to providing our
associated companies with capital, we offer them a comprehensive
array of strategic and infrastructure services. Our
collaborative network of business-to-business e-commerce
companies creates an environment designed to support business
growth and the sharing of information and business
expertise.
|
Exploit Our Resources to Identify Potential
Business-to-Business Associated Companies
|
We believe that significant industry and management
expertise is required to understand and forecast industry
trends, assess the value and needs of our associated companies
and successfully build market leaders. We have assembled a team
of experienced managers, as well as individuals with extensive
knowledge of Internet services and emerging e-commerce
industries. This team includes general managers and managers who
identify and act as liaisons to associated companies, including
nine persons who have experience analyzing, recommending and
making investments in e-commerce businesses on behalf of venture
capital firms and other equity investors. We also intend to
capitalize on the industry knowledge, insights and expertise of
the members of our Board of Directors and the corporations and
venture capital firms that have invested in us. For example,
Dell USA, which only recently made a large investment in us, has
already assisted us in identifying a potential associated
company, Neoforma, in which we subsequently acquired an
interest. We believe that our team of senior management, general
managers and managers, directors and investors provide us with
the expertise necessary to review and evaluate new acquisition
opportunities. For example, we encourage our directors to
present acquisition and other business opportunities to us in
which they may already have a financial interest and are
therefore familiar.
In addition, we manage, and have committed to
contribute $10,000,000 to, Skyscraper Ventures. As of July 1,
2000, we had contributed $2,300,000 to the fund. This venture
capital fund will focus on making investments of less than
$3,500,000 in start-up and early-stage technology companies
located in Illinois, but may make larger or smaller investments
in these companies and in companies outside Illinois. We expect
that 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 associated
companies.
|
Focus on Associating with Companies that can
Become Market Leaders
|
We focus on associating with business-to-business
e-commerce companies that we believe are positioned to become
leaders in their markets. We select associated companies through
a screening process that includes web-based initial screening, a
comprehensive due diligence investigation and a review by our
associated company development group, which consists of
individuals with finance, acquisitions and technology
experience. This screening process involves the contributions of
business, industry and technical experts. In addition, we use
the expertise of employees of our existing associated companies,
many of whom have extensive industry experience before joining
those companies, to evaluate opportunities that are related to,
or extensions of, the market segments in which their companies
operate. In evaluating these companies, we analyze the size and
growth of the 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 business-to-business
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
associated companies in which we acquire at least a 25% voting
interest and have board representation. Through associated
companies that we currently control, we offer our network of
associated companies a variety of infrastructure services
designed to enable them to focus most of their efforts on
product development and marketing, rather than the many other
aspects of building a company. We believe that by allowing an
associated company to focus on its core business, the associated
company can accelerate its time-to-market with new products and
services. The infrastructure services offered by entities we
currently control may also reduce the operating costs of
associated companies, due to the economies of scale created by
our collaborative network.
Based upon our acquisition experience to date, we
believe that the infrastructure services offered by companies we
control enhance our competitive position when compared with
traditional venture capital and other private company investors.
The companies listed below currently offer services at
competitive rates to each other and our other associated
companies, as well as to e-commerce businesses outside our
network:
Brandangocustomer service
Buzz
divinemarketing services, including branding,
advertising and public relations
dotspotfacilities leasing and other real estate
services
eXperience divinee-commerce consulting
services
FiNetricsaccounting and financial services
Host
divinecore information technology
services, including hosting, customer service
and infrastructure implementation
|
|
Justice divinemanagement of legal service
relationships
Knowledge divineknowledge applications and consulting
services
OfficePlanIt.comoffice furniture and
supplies
salespringsales strategy and support
sho
researchmarket and opportunity
assessment
Talent
divinerecruiting and human resources
Xqsiteweb site design and deployment
|
|
These companies generally do not provide their
services for equity or any other non-cash consideration, and the
company providing the services charges the business that uses
them, whether that business is within or outside of our network.
These services are generally provided under written service
agreements.
Our executive team dedicates significant attention
to our associated companies, offering them strategic guidance on
such matters as private financings, public offerings, market
positioning and business development. 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 associated
companies management with day-to-day operations. We assign
a general manager to each of our associated companies to offer
dedicated operational guidance and resources, to assist it in
refining its business model and adopting sound business
practices and to act as a liaison with that associated company.
The general manager also has principal responsibility for
ensuring that the associated company has full access to our wide
range of infrastructure and support services. The general
manager assigned to a particular associated company will
generally be the same person who led our initial due diligence
review of that company.
|
Promote Collaboration among our Associated
Companies and Strategic Relationships
|
We promote collaboration among the associated
companies in our network to help them gain significant
cross-selling and marketing benefits. We encourage and
coordinate joint marketing activities where various associated
companies together offer comprehensive solutions in particular
markets, as well as efforts of associated companies to assist
each other in accessing their respective customer bases. Our
community of associated companies also facilitates the sharing
of information and expertise regarding technology, operational
issues, market opportunities and other strategic and business
matters. In connection with the regularly scheduled meetings of
our Board of Directors, we bring together our management team
and representatives of
our associated companies for conferences combining presentations
by new associated companies, guest speakers, panel discussions,
team building and networking activities and other forums for the
exchange of information and ideas. We held the first of these
conferences in January 2000 and the second in April 2000. In
addition, we seek to leverage the aggregate purchasing power of
our network of associated companies in order to reduce the costs
of obtaining equipment, supplies, software and legal and other
professional services. 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. For example, we
have entered into an Alliance Agreement with Microsoft, which is
one of our investors and has a representative on our Board of
Directors, under which we are required to purchase approximately
$9,600,000 of software products and approximately $5,700,000 in
consulting and product support services that our associated
companies can use and to use commercially reasonable efforts to
encourage our associated companies to use Microsoft software
solutions, including expending $4,000,000 to promote these
solutions. We have also agreed to dedicate up to $50,000,000 to
projects and acquisitions in Seattle and to use commercially
reasonable efforts to develop a Seattle-based incubator habitat
by May 2001. In addition, as part of a recent agreement, we and
CMGI agreed to acquire interests in one another. Under the
written agreement providing for these stock sales, we and CMGI
have agreed to attempt to use and promote the products and
services of the others associated companies, so long as
those products, services or offerings are not competitive with
those offered by the other partys associated companies.
Affiliates of CMGI may offer our associated companies software
and services such as profile-based Internet marketing solutions,
software solutions that facilitate communication and
collaboration for business professionals and high-performance
Internet access solutions. However, under the terms of this
arrangement, neither party is legally obligated to use any of
the services, products or offerings of the other party or its
affiliates. We have also entered into agreements with
Hewlett-Packard and Level 3 to purchase technology services
which we intend to include in our offerings to our associated
companies.
|
Target Underserved Markets
|
We acquire interests in and establish 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 traditional
manufacturing, retail and service businesses in these areas will
provide a customer base for our associated companies, as well as
a source for potential associated companies as these traditional
businesses develop online divisions and subsidiaries. By
focusing on these 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. In that regard, we have
begun operations in Austin, Texas and plan to open a facility in
Seattle, Washington by May 2001. We continue to evaluate these
and other potential U.S. markets.
|
Expand into International
Markets
|
To capitalize on the international growth of
business-to-business e-commerce, we consider acquiring interests
in or establishing associated companies which operate in
selected international markets that meet our criteria. In
particular, we are focusing on establishing relationships with
foreign companies that have business models similar to ours,
providing capital and infrastructure services targeted at their
home markets. We recently acquired an interest in LAUNCHworks,
which is based in Calgary, Alberta, Canada and in Emicom Group,
which is based in Israel, both of which have business models
similar to ours. Additionally, we have entered into a
non-binding letter of intent, which terminates on July 15, 2000,
to acquire an interest in a company based
in Buenos Aires, Argentina that plans to provide capital and
strategic services to Internet and related companies, to be
formed by Consultores Asset Management, S.A., an investor in and
developer of Internet companies. Under this letter of intent, we
intend to enter into an agreement with Consultores Asset
Management whereby we would acquire approximately 40% of the
newly-formed company for approximately
$25,000,000. We are currently conducting a due diligence
investigation in connection with this proposed transaction. We
are also contemplating expanding our operations to the Far East,
but have not yet determined a timetable for this
expansion.
Associated Company Criteria and Screening
Process
We regularly analyze and monitor developments in
business-to-business e-commerce so we can identify suitable
associated companies. We identify potential associated companies
in a variety of ways, including referrals from multiple sources,
such as our existing associated companies, board members and the
corporations and venture capital firms that have invested in us,
and unsolicited proposals and business plans submitted to our
web site. We also expect to identify potential associated
companies through relationships we establish through our
management of Skyscraper Ventures. We have developed associated
company criteria that we believe allow us to identify attractive
business-to-business e-commerce infrastructure service
providers, market makers and do rights. Our screening procedures
are designed to ensure that we maximize the number of
opportunities we review and that we acquire interests in
associated companies in a rapid and efficient
manner.
|
Associated Company Criteria
|
We believe that there are several key elements to
evaluating the potential success of a business-to-business
e-commerce company. We focus on companies with one or more of
the following characteristics:
|
|
Compelling Concept. We seek associated 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.
|
|
|
Technical Expertise. We look for companies 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
the services provided by us and the associated 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 an associated companys share of that market
allow us to determine the potential future value of that
company.
|
|
|
Favorable Competitive Landscape. We favor companies
with strong competitive positions, as well as industries in
which there is no dominant business-to-business e-commerce
participant. As part of our assessment of associated
companies, we evaluate current competitors and potential
market entrants.
|
|
|
Strong Management Team. We target companies with
highly-qualified management that 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.
|
Our screening process is designed to rapidly
identify attractive associated companies, assess their value and
determine their ability to be integrated into our collaborative
network. Our screening process consists of the following
steps:
|
Initial Screening. We have recently
implemented a web-based initial screening stage. In this
initial stage of our screening process, a potential associated
company is required to complete an on-line
questionnaire for review by our associated company development
group, which consists of individuals with experience in
finance, acquisitions and technology and which is principally
responsible for making acquisition and funding recommendations
to our senior management. This questionnaire, which provides
us with general information about the potential associated
companys 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
strategy. Suitable opportunities are passed on to the due
diligence phase of the screening process described below. We
anticipate that only a small percentage of the potential
associated companies that we review will successfully pass
through this stage of our screening process. All of the
companies in which we have acquired interests to date have
come to our attention through referrals or other direct
sources, and none of them have participated in this initial
screening process.
|
|
Due Diligence. The next step of our
screening process involves a comprehensive due diligence
investigation. A due diligence team with transactional and
industry expertise is assigned to each potential associated
company. This team assesses the overall business opportunity
by performing a financial review and valuation of the
potential associated company, reviewing its technical
capability and conducting more specialized reviews of areas
critical to its success. We have completed a comprehensive due
diligence assessment for all of our acquisitions of interests
in associated companies to date.
|
|
Associated Company Development Group Approval.
Following the completion of due diligence, our associated
company development group makes a determination as to whether
we will pursue acquiring an interest in a potential associated
company. All of our acquisitions of interests in associated
companies to date have received the approval of the associated
company development group.
|
If we make a decision to pursue an acquisition, the
designated general manager works with our legal department and
the potential associated company to agree to terms for the
transaction. As part of this process, associated companies that
we control make proposals to provide infrastructure and other
services to the potential associated company based on its
specific needs. In addition, if a transaction meets criteria
established by the Board of Directors, it will be submitted to
the acquisition committee or the conflicts committee for
additional approval.
Overview of Current Associated
Companies
The table below and the tables on pages 89 and 92
show information about our associated companies as of May 15,
2000. Our current equity ownership and voting power percentages
have been calculated based on the issued and outstanding common
stock of each associated company, assuming the issuance of
common stock on the conversion or exercise of preferred stock,
but excluding the effect of options and warrants. Except where
we indicate otherwise, our equity ownership and voting power
percentages are the same. Each associated company we have
established has an initial stock option program equal to up to
20% of that companys common equity, and we expect that at
least 50% of those options will be granted to employees of the
associated companies in the near future. Each associated company
that is a development stage company is marked with an asterisk
(*); each associated company that we have established is marked
with a cross (). A development stage company is a company
that has not yet begun planned principal operations, or has
begun planned principal operations but has not yet generated
significant revenue from those operations. Whether a company is
in the development stage is determined on a case by case basis
by that companys management. There is no specific revenue
threshold that is applicable in each case. A development stage
company will typically be devoting most of its efforts to
activities such as financial planning, raising capital, research
and development, acquiring operating assets and recruiting and
training personnel. Currently, 34 of our 52 associated companies
are in the development stage. For additional information
regarding our equity interests in, and ability to exercise
control over, our associated companies, see
Structure of Interests in Associated
Companies.
Infrastructure Service Providers:
Associated Company
|
|
Market
|
|
Date
Formed
|
|
Associated
Company
Since
|
|
Our
Current
Equity
Ownership/
Voting Power
Percentage
|
Brandango, Inc.* |
|
Customer Service |
|
10/26/99 |
|
10/26/99 |
|
65.5%/90.0% |
|
|
|
Buzz
divine, inc.* |
|
Marketing/Public Relations |
|
10/26/99 |
|
10/26/99 |
|
80.6%/90.0% |
|
|
|
closerlook, inc. |
|
Digital
Strategy and Design |
|
12/1/94 |
|
2/1/00 |
|
42.6% |
|
|
|
comScore, Inc. |
|
Online
Tracking Tools and
Services |
|
8/18/99 |
|
9/27/99 |
|
0.9% |
|
|
|
dotspot, Inc.* |
|
Facilities Management and
Leasing |
|
10/26/99 |
|
10/26/99 |
|
80.6%/90.0% |
|
|
|
Emicom
Group, Inc.* |
|
Incubation Services |
|
3/23/00 |
|
3/24/00 |
|
33.0% |
(1) |
|
|
eReliable Commerce, Inc.* |
|
Transaction Services |
|
8/2/99 |
|
3/15/00 |
|
47.1% |
|
|
|
eXperience divine, inc.* |
|
Internet Consulting |
|
10/26/99 |
|
10/26/99 |
|
80.8%/90.0% |
|
|
|
FiNetrics, Inc.* |
|
Accounting and Finance
Services |
|
11/3/99 |
|
11/3/99 |
|
80.9%/90.0% |
(2) |
|
|
Host
divine inc.* |
|
Information Technology
Services |
|
10/26/99 |
|
10/26/99 |
|
80.6%/90.0% |
|
|
|
i-Fulfillment, Inc.* |
|
Inventory Management
Services |
|
10/6/98 |
|
1/28/00 |
|
48.8% |
|
|
|
i-Street, Inc.* |
|
Media/Business Services |
|
9/15/98 |
|
11/23/99 |
|
63.8%/89.8% |
(3) |
|
|
Justice
divine, inc.* |
|
Legal
Services |
|
10/26/99 |
|
10/26/99 |
|
80.9%/90.0% |
|
|
|
Knowledge divine, inc.* |
|
Consulting Services |
|
10/26/99 |
|
10/26/99 |
|
80.7%/90.0% |
|
|
|
LAUNCHworks inc. |
|
Incubation Services |
|
2/1/99 |
|
2/25/00 |
|
39.7% |
(4) |
|
|
LiveOnTheNet.com, Inc. |
|
Web
Broadcasting/Online
Advertising |
|
9/13/85 |
|
12/8/99 |
|
76.9% |
(5) |
|
|
Martin
Partners, L.L.C. |
|
Executive Recruiting |
|
1/10/96 |
|
2/8/00 |
|
25.0% |
|
|
|
Mercantec, Inc. |
|
E-commerce Software |
|
2/13/97 |
|
2/11/00 |
|
40.4%(6) |
|
|
|
mindwrap, inc. |
|
Knowledge Management
Software |
|
1/12/88 |
|
11/19/99 |
|
97.1% |
|
|
|
NetUnlimited, Inc.(7) |
|
Hosting
and Web Applications |
|
3/22/96 |
|
3/24/00 |
|
61.4% |
|
|
|
OpinionWare.com, Inc.* |
|
Online
Surveys |
|
11/16/99 |
|
12/8/99 |
|
54.4% |
|
|
|
Outtask.com, Inc.* |
|
Business Services |
|
4/6/99 |
|
12/10/99 |
|
28.9% |
|
|
|
Parlano, Inc.* |
|
Collaboration Software |
|
1/26/00 |
|
2/11/00 |
|
70.4%/86.9% |
|
|
|
Perceptual Robotics, Inc. |
|
Internet-Based Video Software |
|
7/27/95 |
|
2/14/00 |
|
33.4% |
|
|
|
PocketCard Inc.* |
|
Business and Consumer Debit
Cards |
|
11/2/99 |
|
11/23/99 |
|
37.5% |
|
|
|
salespring, inc.!!* |
|
Sales
Services |
|
10/26/99 |
|
10/26/99 |
|
80.9%/90.0% |
|
|
|
Sequoia
Software Corporation |
|
Internet Infrastructure
Software |
|
10/15/92 |
|
11/23/99 |
|
8.8% |
|
|
|
sho
research, Inc.* |
|
Market
Research |
|
10/26/99 |
|
10/26/99 |
|
60.5%/90.0% |
|
|
|
Talent
divine, inc.* |
|
Human
Resources |
|
10/26/99 |
|
10/26/99 |
|
80.8%/90.0% |
|
|
|
TV
House Inc. |
|
Financial News |
|
2/11/00 |
|
3/8/00 |
|
42.0% |
|
|
|
ViaChange.com, Inc.* |
|
Mortgages |
|
6/28/99 |
|
1/31/00 |
|
70.0% |
|
|
|
Web
Design Group, Inc.(8) |
|
Web
Design |
|
6/9/93 |
|
2/11/00 |
|
53.7% |
|
|
|
Westbound Consulting, Inc.(8) |
|
Internet Consulting Services |
|
8/25/97 |
|
2/11/00 |
|
52.4% |
|
|
|
Xippix,
Inc. |
|
E-Commerce Imaging |
|
4/14/99 |
|
2/4/00 |
|
31.5% |
|
|
|
Xqsite,
Inc.* |
|
Web
Design |
|
10/26/99 |
|
10/26/99 |
|
80.6%/90.0% |
|
(1)
|
Our
current equity ownership and voting power percentage is 7.6%,
which will be increased to 33.0% when Emicom completes the
private financing it is currently conducting. Beginning March
24, 2002, Emicom will have a right to cause us to purchase all
of its outstanding common stock, which right will terminate
under certain circumstances, including Emicoms
completion of an initial public offering.
|
(2)
|
FiNetrics has entered into a non-binding letter of
intent to combine with BrightLane.com, an online business
center that provides administrative business services. This
combination would reduce our equity ownership percentage in
FiNetrics to approximately 45% and our voting power percentage
in FiNetrics to approximately 75%.
|
(3)
|
Excludes 500,000 shares of series B-2 preferred stock,
which are non-voting, non-convertible and redeemable at
i-Streets option at any time before March 24, 2003.
These shares were issued to us in exchange for $1,500,000 in
additional financing we provided to i-Street in March
2000.
|
(4)
|
We also
hold warrants to purchase shares of common stock of
LAUNCHworks. Giving effect to the exercise of these warrants,
we would hold 50.9% of both the equity and voting power of
LAUNCHworks.
|
(5)
|
Excludes 5,000 shares of series A preferred stock,
which are non-voting, non-convertible and redeemable at
LiveOnTheNets option at any time before February 17,
2001 with respect to 4,523 of these shares and April 18, 2001
with respect to 477 of these shares. These shares were issued
to us in exchange for $5,000,000 in additional financing we
provided to LiveOnTheNet in February and April
2000.
|
(6)
|
We also
hold warrants to purchase shares of common stock of Mercantec.
Giving effect to the exercise of these warrants, we would hold
42.7% of both the equity and voting power of
Mercantec.
|
(7)
|
We own
our interest in NetUnlimited through Host divine.
|
(8)
|
We own
our interest in Web Design Group and Westbound Consulting
through Xqsite.
|
|
Brandango, Inc provides outsourced
customer acquisition and customer care for
business-to-business e-commerce companies and other Internet
companies. Its agents communicate with customers and potential
customers by telephone, e-mail, mail and fax. Brandango uses
data modeling to identify and execute targeted sales and
marketing campaigns. Brandango also plans to provide
specialized customer service and community building programs.
Brandango generates revenues from retainer and usage fees.
Brandango is headquartered in Lisle, Illinois and had 11
full-time employees as of March 31, 2000.
|
|
Buzz divine, inc. is an integrated
marketing firm specializing in servicing business-to-business
Internet companies. Buzz divine offers a variety 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
corporate marketing efforts. Buzz divine generates revenues
primarily from service fees. Buzz divine is headquartered in
Lisle, Illinois and had 67 full-time employees as of March 31,
2000.
|
|
closerlook, inc.
(www.closerlook.com) specializes in digital
strategy, web site design, e-commerce solutions and hands-on
interactive learning initiatives. closerlook primarily serves
small and mid-sized companies, working with senior and
executive management in industries such as technology,
pharmaceuticals, financial services and professional services.
closerlook designers, strategists and programmers work with
clients to understand their business goals and develop
effective digital designs. closerlook generates revenues from
the sale of Internet strategy and development services.
closerlook is headquartered in Chicago, Illinois and had 69
full-time employees as of March 31, 2000.
|
|
comScore, Inc.
(www.comScore.com) provides online consumer
behavior data and related consulting services. It uses its
proprietary research software technology to track
consumers online behavior by monitoring web use
activities, online purchasing habits and responses to online
advertisements. comScores customers can obtain market
intelligence to assist them in resource investment and
marketing decisions. comScore generates 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 and had 37 full-time employees as of March 31,
2000.
|
|
dotspot, inc. develops and
leases facilities and provides real estate services for our
associated 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. It generates revenues primarily from fees associated
with developing, managing and leasing facilities, as well as
from consulting services. dotspot is headquartered in Lisle,
Illinois and had 33 full-time employees as of March 31,
2000.
|
|
Emicom Group, Inc.
(www.emicomgroup.com) is a technology holding
company that provides capital and advisory services to
early-stage technology companies located in the Middle East.
Emicom expects to generate revenues primarily from fees
associated with providing infrastructure services and from
gains on securities owned by Emicom. Emicom is headquartered
in Ramat Gan, Israel and had 14 full-time employees as of
March 31, 2000.
|
|
eReliable Commerce, Inc. is
developing technology to provide business-to-business
e-commerce web sites with customized guaranteed transaction
services, including electronic checking, insurance, credit
card processing, financing and logistics services, under their
own brand name. This technology will be designed to enable
businesses to conduct all necessary steps of acquiring goods,
simplify the registration and order process, increase customer
satisfaction and reduce the level of fraudulent transactions.
eReliable Commerce intends to generate revenues through
licensing and transaction fees. eReliable Commerce is
headquartered in the Chicago metropolitan area and had four
full-time employees as of March 31, 2000.
|
|
eXperience divine, inc. provides
business-to-business 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,
strategy and the planning of an initial public offering.
eXperience divine generates revenues primarily from fixed fee
contracts. eXperience divine is headquartered in Lisle,
Illinois and had four full-time employees as of March 31,
2000.
|
|
FiNetrics, Inc.
(www.finetrics.com) offers a suite of
integrated accounting and financial services designed to help
small and mid-sized companies get their products and services
to market quickly. FiNetrics includes accounts payable,
billing and collections, payroll, project accounting, general
ledger, cash management, stock administration and purchasing
in its service offerings. In addition, FiNetrics will assist
customers with SEC reporting, tax matters, financial reporting
and strategic planning and analysis. FiNetrics generates
revenues primarily from customer fees. FiNetrics is
headquartered in Lisle, Illinois and had 48 full-time
employees as of March 31, 2000.
|
|
Host divine, inc. provides
information technology services for business-to-business
e-commerce companies, including hosting, customer service and
infrastructure implementation, such as phone and
e-mail systems and Internet connectivity. Its 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. Host divine 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. Host divine generates revenues primarily from
customer fees. Host divine is headquartered in Lisle, Illinois
and had 30 full-time employees as of March 31,
2000.
|
|
i-Fulfillment.com, Inc.
(www.i-fulfillment.com) plans to provide
standardized, complete fulfillment and inventory management
services to businesses selling products over the Internet.
i-Fulfillment.com intends to provide this service by
integrating its supply chain systems and operating automated
fulfillment centers from which clients inventory may be
shipped. Its service will help businesses bring their products
to market quickly without undertaking proprietary systems
integration and infrastructure development. i-Fulfillment.com
plans to generate revenues primarily through activity- and
resource-based fees. i-Fulfillment.com is headquartered in
Chicago, Illinois and had 16 full-time employees as of March
31, 2000.
|
|
i-Street, Inc.
(www.i-streetcentral.com) is a
business-to-business media company and news portal focused on
the Internet and technology businesses in Chicago and
elsewhere in the midwest. i-Streets products include
i-StreetCentral.com, a web community which supports
entrepreneurs who are establishing and growing start-up
business-to-business companies by providing an Internet
whos who, a newsletter covering Internet issues,
discussion networks and interviews and web broadcasts
featuring Internet entrepreneurs. i-Street also offers The
Chicago Software News, a subscription newspaper, and
Chisoft.com its related web site, which offers its articles
online, as well as job postings and software directories.
i-Street currently generates revenues from advertising,
sponsorships and content licensing fees. i-Street is
headquartered in Chicago, Illinois and had three full-time
employees as of March 31, 2000.
|
|
Justice divine, inc. facilitates the
provision of legal services at cost-effective prices for
associated companies and other customers and intends to
develop a web portal which aggregates tools for corporate
legal departments to manage and communicate with their
external legal counsel. Justice divine meets the demands of
its customers through a program with Piper Marbury Rudnick
& Wolfe, a national law firm. Justice divine manages the
relationships between the law firm and its customers and
generates revenues from fees charged by it to its customers
for these management services. Justice divine is headquartered
in Lisle, Illinois and had no full-time employees as of March
31, 2000; however, two of our employees devote a portion of
their time to Justice divine.
|
|
Knowledge divine, inc. offers a
combination of focused knowledge applications and consulting
services. Knowledge divine intends to help organizations
identify, capture, manage and share their intellectual
capital. Knowledge divine generates revenues primarily from
consulting fees and the sales of application systems.
Knowledge divine is headquartered in Lisle, Illinois and had
26 full-time employees as of March 31, 2000.
|
|
LAUNCHworks inc.
(www.launchworks.com) is a provider of capital
and strategic services to business-to-business e-commerce
companies. LAUNCHworks works closely with its associated
companies to foster their business goals and participates in
that success as a shareholder. LAUNCHworks generates revenues
primarily from consulting services. LAUNCHworks is
headquartered in Calgary, Alberta, Canada and had six
full-time employees as of March 31, 2000.
|
|
LiveOnTheNet.com
(www.liveonthenet.com) provides video content
through its web site as a vehicle to showcase local and
national advertisers. LiveOnTheNet.com acquires and
distributes live events, such as concerts, sports and
educational programming online. It partners with content
providers, including music and film festivals, professional
sports leagues and record labels. National advertisers and
thousands of small business customers have used Cornerpost,
LiveOnTheNet.coms online promotion and advertising
platform for small businesses. LiveOnTheNet.com generates
revenues from advertising fees. LiveOnTheNet.com is
headquartered in Lisle, Illinois, with production studios and
operational centers in Nashville, Tennessee, Atlanta, Georgia
and Huntsville, Alabama, and had 59 full-time employees as of
March 31, 2000.
|
|
Martin Partners, L.L.C.
(www.martinptrs.com) is an executive search
firm which focuses on
e-commerce and technology. Martin Partners clients include
start-ups, companies preparing to go public
|
|
and
large public companies. Martin Partners generates revenues
from client fees paid in exchange for providing search
services. Martin Partners is headquartered in Chicago,
Illinois and had 14 full-time employees as of March 31,
2000.
|
|
Mercantec, Inc.
(www.mercantec.com) produces software that
allows merchants to integrate
e-commerce capabilities into their existing web sites. Mercantec
has licensed its software to more than 160 Internet service
providers and entered into licensing agreements with original
equipment manufacturers and web hosting providers in 13
countries. Through these licensed users over 10,000 merchants
use Mercantec software to sell their products. Mercantec
generates revenues primarily from monthly license fees.
Mercantec is headquartered in Naperville, Illinois and had 76
full-time employees as of March 31, 2000.
|
|
mindwrap, inc.
(www.mindwrap.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. mindwrap generates revenues primarily
from product licensing fees. mindwrap is currently located in
Flint Hill, Virginia and is moving its headquarters to
Chicago, Illinois and had 37 employees as of March 31,
2000.
|
|
NetUnlimited, Inc.
(www.netunlimited.com) markets various Internet
technology infrastructure services. NetUnlimited generates
revenues primarily from fees associated with Internet
connectivity and hosting services, as well as web application
services. NetUnlimited is headquartered in Winston-Salem,
North Carolina and had 58 full-time employees as of March 31,
2000. We own our interest in NetUnlimited through Host
divine.
|
|
OpinionWare.com, Inc.
(www.opinionware.com) has developed technology to allow
businesses to gather and analyze the opinions of large public
and private online communities. OpinionWare.coms
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 are able
to use OpinionWare.com 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.com expects to generate revenues
primarily from product license fees, product rental fees from
web-hosting businesses and advertising revenue-sharing
arrangements. OpinionWare.com is headquartered in Chicago,
Illinois and had 16 full-time employees as of March 31,
2000.
|
|
Outtask.com Inc.
(www.outtask.com) provides business-to-business
e-commerce applications and services to technology and
Internet companies. Outtask.com provides its customers with a
full range of supported, hosted e-commerce applications.
Outtask.coms primary applications include budgeting and
sales, customer resource and time and expense report
management. Its integrated services include employee travel,
payroll, personal computer acquisition, telecommunications and
e-mail. Outtask.com generates revenues primarily from annual
subscription fees and transaction fees for integrated services
and on-site implementation consulting support. Outtask.com is
headquartered in Arlington, Virginia and had 60 full-time
employees as of March 31, 2000.
|
|
Parlano, Inc. (www.parlano.com)
intends to develop, market, license and manage text-based
collaboration and communication software. This software is
intended to allow information to be captured, filtered and
stored in corporate databases and used in knowledge management
applications. Parlano intends to generate revenues primarily
from software licenses, as well as from consulting and other
services. Parlano is headquartered in Chicago, Illinois and
had 19 full-time employee as of March 31, 2000.
|
|
Perceptual Robotics
(www.perceptualrobotics.com) offers a
software system called Truelook that allows Internet users to
control a robotic camera and immediately capture still images
from remote locations. Users of this system can control both
the size and quality or the image to adjust to their own modem
or network speed. Peceptual Robotics system includes
software, an integrated video subsystem and a server computer.
Perceptual Robotics currently generates revenues primarily
from sales and maintenance of its hardware and software.
Perceptual Robotics plans eventually to charge customers
monthly fees. Perceptual Robotics is headquartered in
Evanston, Illinois and had 30 full-time employees as of March
31, 2000.
|
|
PocketCard Inc.
(www.pocketcard.com) provides businesses and
individuals with debit cards that allow real-time funding,
control and reporting over the Internet. PocketCards
product and services offer versatile payment solutions to meet
the day-to-day spending and financial management needs of
businesses and families. PocketCard uses web-based technology
which allows for secure on-line transactions and reporting.
PocketCard is an approved Independent Service Organization of
Visa and also plans to co-brand its cards with other
recognized companies. PocketCard also provides funding,
spending and risk management expertise. PocketCard generates
revenues through annual membership and transaction fees, as
well as online advertising. PocketCard is headquartered in
Gurnee, Illinois and had 41 full-time employees as of March
31, 2000.
|
|
salespring, inc.!! provides
experienced sales personnel to help improve the sales
performance, and accelerate sales results, of its customers.
salespring services include sales strategy development, sales
deployment modeling, hiring/placement, quota
distribution/allocation, sales plan management, contract
management, pipeline/forecast management and sales training.
salespring generates revenues primarily from customer
commission fees and other revenue goal-based incentives.
salespring is headquartered in Lisle, Illinois and had 33
full-time employees as of March 31, 2000.
|
|
Sequoia Software Corporation
(www.sequoiasw.com) provides Internet
infrastructure software, based on the XML programming language
for web applications, to help shorten the cost and time
necessary to deploy corporate portals. 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. 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. Sequoias
primary source of revenue is license and transaction fees from
the use of its software. Sequoia is headquartered in Columbia,
Maryland, with offices in Santa Clara, California and Dublin,
Ireland, and had 173 full-time employees as of March 31, 2000.
Sequoia is a public company listed on the Nasdaq National
Market under the symbol SQSW.
|
|
sho research, Inc. is a market
research company providing information about how businesses
use, and can be expected to use, the Internet. sho research
uses the Internet to collect and distribute information. sho
research generates revenues through consulting fees. sho
research is headquartered in Lisle, Illinois and had eight
full-time employees as of March 31, 2000.
|
|
Talent divine, inc. provides
recruiting, human resources and benefits services for our
associated companies by identifying and satisfying recruitment
needs. Talent divine also manages benefits and employee human
resource requirements and negotiate relationships with
employee benefit plan carriers and payroll information
services. Talent divine generates revenues through recruiting
and outsourcing fees. Talent divine is headquartered in Lisle,
Illinois and had 19 full-time employees as of March 31,
2000.
|
|
TV House, Inc. plans to produce and
syndicate Internet video financial news updates designed for
individual investors. These news updates will be licensed to
companies for use on their web sites.
|
|
Additionally, TV House intends to provide a variety of
Internet video content to e-commerce and other companies. TV
House intends to generate revenues from product licensing
fees, contracts and advertising. TV House is headquartered in
Chicago, Illinois and had three full-time employees as of
March 31, 2000.
|
|
ViaChange.com, Inc.
(www.viachange.com) has developed technology to
conduct auctions in capital market products.
ViaChange.coms solution has been initially developed for
the secondary mortgage market, by providing online auctioning,
valuation and transfer of whole loans and loan servicing
rights. The secondary mortgage market involves the purchasing
and selling of mortgage loans between banks, pension funds,
government agencies, insurance companies and investment banks.
Other potential products that Viachange.com may auction in the
future include student loans, consumer loans, automobile
leases, credit card debt, commercial loans and equipment
leases. The exchange will also offer online computational
models for portfolio trading. ViaChange.com intends to
generate revenues from transaction fees. ViaChange.com is
headquartered in Chicago, Illinois and had nine full-time
employees as of March 31, 2000.
|
|
Web Design Group, Inc.
(www.webdesigngroup.com) provides web
development and electronic business services to companies
seeking to develop and implement effective web solutions for
their operations. Web Design Group has developed over 185
internet, intranet and extranet web applications. Web Design
Group coordinates strategic consulting, project management,
creative technology, online marketing and systems
administration services. Web Design Group generates revenues
primarily through web technology consulting services, online
marketing services and development and production services, as
well as hosting and maintenance services. Web Design Group is
headquartered in Chicago, Illinois and had 35 full-time
employees as of March 31, 2000. We own our interest in Web
Design Group through Xqsite.
|
|
Westbound Consulting, Inc.
(www.westbound.com) delivers customized
Internet solutions. Westbound generates revenues through web
consulting, marketing, development and hosting services.
Westbound is headquartered in Chicago, Illinois and has
established its overseas development center in Hyderabad,
India. Westbound had 40 full-time employees as of March 31,
2000. We own our interest in Westbound through
Xqsite.
|
|
Xippix, Inc. (www.xippix.com)
has developed technology that enables e-commerce
businesses to incorporate a large number of large,
high-resolution images into their web sites. Its high-speed
image server, ImagePump, allows viewers to zoom, pan and spin
images on the web. Xippix generates revenues primarily from
consulting fees and sales of ImagePump servers. Xippix is
headquartered in Larkspur, California and had 37 full-time
employees as of March 31, 2000.
|
|
Xqsite, Inc. provides web site
design, deployment and implementation solutions designed to
help business-to-business 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. It uses
integrated strategy, design and technology to deliver
e-commerce solutions. Xqsites primary source of revenues
is expected to be contract service fees. Xqsite is
headquartered in Lisle, Illinois and had 90 full-time
employees as of March 31, 2000.
|
Market Makers:
Associated Company
|
|
Market
|
|
Date
Formed
|
|
Associated
Company
Since
|
|
Our
Current
Equity
Ownership/
Voting Power
Percentage
|
Aluminium.com, Inc.* |
|
Aluminum |
|
11/1/99 |
|
3/10/00 |
|
34.6% |
|
|
BeautyJungle.com, Inc.* |
|
Beauty
Products |
|
5/11/99 |
|
1/11/00 |
|
61.0% |
|
|
bid4real.com, inc.* |
|
Real
Estate |
|
12/13/99 |
|
1/24/00 |
|
54.3% |
|
|
BidBuyBuild, Inc.* |
|
Construction |
|
11/9/99 |
|
2/11/00 |
|
35.5%(1) |
|
|
CapacityWeb.com, Inc.* |
|
Manufacturing |
|
1/11/00 |
|
2/11/00 |
|
44.8% |
|
|
Commerx, Inc. |
|
Plastics |
|
12/14/98 |
|
11/19/99 |
|
1.0% |
|
|
eFiltration.com, Inc.* |
|
Filtration |
|
9/7/99 |
|
2/11/00 |
|
45.2% |
|
|
Entrepower, Inc.* |
|
Executive Recruiting |
|
10/14/99 |
|
11/23/99 |
|
43.0% |
|
|
Farms.com, Ltd. |
|
Agriculture |
|
3/2/00 |
|
4/28/00 |
|
41.0%(2) |
|
iSalvage.com, Inc.* |
|
Automotive Parts |
|
7/20/99 |
|
2/3/00 |
|
36.3% |
|
|
The
National Transportation
Exchange, Inc. |
|
Freight
Transportation |
|
4/30/99 |
|
10/29/99 |
|
5.3% |
|
|
Neoforma.com, Inc.* |
|
Medical
Products |
|
8/18/98 |
|
10/14/99 |
|
1.5% |
|
|
OfficePlanIt.com, Inc.* |
|
Office
Furniture and
Supplies |
|
11/23/99 |
|
11/23/99 |
|
80.6%/90.0% |
|
|
Oilspot.com, Inc.* |
|
Petroleum |
|
10/21/99 |
|
2/10/00 |
|
55.6% |
|
|
Whiplash, Inc.* |
|
Travel |
|
3/7/96 |
|
11/8/99 |
|
26.5%(3) |
(1)
|
We also
hold warrants to purchase shares of common stock of
BidBuyBuild. Giving effect to the exercise of these warrants,
we would hold 37.7% of both the equity and voting power of
BidBuyBuild.
|
(2)
|
We also
hold warrants to purchase shares of common stock of Farms.com.
Giving effect to the exercise of these warrants, we would hold
45.7% of both the equity and voting power of
Farms.com.
|
(3)
|
On June
16, 2000, we obtained additional equity of Whiplash in
exchange for cash in the amount of $1,250,000 and a promissory
note in the amount of $1,250,000, increasing our equity
ownership and voting power percentages to 31.0%. We also hold
warrants to purchase shares of common stock of Whiplash.
Giving effect to the exercise of these warrants, we would hold
33.0% of both the equity and voting power of
Whiplash.
|
|
Aluminium.com, Inc.
(www.aluminium.com) provides a
business-to-business online exchange for buying and selling
all grades of aluminum raw materials. Participants in the
aluminum market are able to interact on the Aluminium.com
exchange without purchasing departments, brokers or middlemen.
Aluminium.com generates revenues from transaction-based fees.
Aluminium.com is headquartered in New York, New York and had
17 full-time employees as of March 31, 2000.
|
|
BeautyJungle.com, Inc.
(www.beautyjungle.com) offers an electronic
marketplace for beauty products buyers and sellers to reduce
the transaction costs of manufacturers and retailers,
including drugstores, salons, and spas. BeautyJungle.com is
also expanding its e-commerce service provider business which
will enable content and portal sites, manufacturers and
brick-and-mortar retailers to sell beauty products online at
reduced costs, with accelerated time to market and greater
operating efficiencies. BeautyJungle.com also
maintains a consumer online retailing site that offers a wide
selection of beauty products. BeautyJungle.com generates
revenues from transaction fees and enablement services.
BeautyJungle.com is headquartered in Chicago, Illinois and had
89 full-time employees as of March 31, 2000.
|
|
bid4real.com, inc.
(www.bid4real.com) provides online business-to-business
real estate auctions. bid4real.com focuses on the auction of
commercial, industrial and government-owned properties,
initially in the Chicago area, and plans to expand across the
United States. bid4real.com expedites the exchange of
information and improve the due diligence process in real
estate purchases through the use of virtual tours and
electronic information dissemination. Sellers using
bid4real.coms services are able to offer properties via
the auction process, either with or without a broker.
bid4real.com generates revenues from transaction-based fees
and advertising. bid4real.com is headquartered in Chicago,
Illinois and had six full-time employees as of March 31,
2000.
|
|
BidBuyBuild, Inc.
(www.bidbuybuild.com) is creating an electronic
marketplace in the commercial and industrial construction
supply industry, initially focusing on the heating,
ventilation and air conditioning markets. BidBuyBuild intends
to serve contractors and subcontractors and manufacturers. It
plans to allow contractors and subcontractors to obtain bids
from various suppliers of building equipment and materials
quickly and cost-effectively. It intends to allow
manufacturers to reduce their dependence on field sales
offices, third party distributors and other sales
organizations. BidBuyBuild expects to generate revenues
primarily through commissions and membership fees. BidBuyBuild
is headquartered in Chicago, Illinois and had 23 full-time
employees as of March 31, 2000.
|
|
CapacityWeb.com, Inc.
(www.capacityweb.com) is creating an electronic
marketplace for custom manufactured parts. Starting with
fabricated metal manufacturing, CapacityWeb.coms site
will be marketed as an exchange for industrial manufacturing
capacity across a variety of industries. CapacityWeb.com
intends to generate revenues through annual membership fees,
sales commissions and transaction fees. CapacityWeb.com is
headquartered in Evanston, Illinois and had eight full-time
employees as of March 31, 2000.
|
|
Commerx, Inc. (www.commerx.com)
creates electronic marketplaces that enable buyers and
sellers in industrial processing markets to transact business
on the Internet. Its first marketplace, PlasticsNet, is
designed for plastics processors and suppliers. It 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 information on products.
Commerx generates revenues through e-commerce transaction
fees. Commerx is headquartered in Chicago, Illinois and had
156 full-time employees as of March 31, 2000. On January 26,
2000 Commerx filed a registration statement with the SEC for
an initial public offering of its common stock.
|
|
eFiltration.com, Inc.
(www.efiltration.com) offers an electronic
marketplace for the filtration industry. eFiltration.com
brings together a wide array of filtration equipment
manufacturers in one online destination, allowing users to
compare products, seek technical support, contact customer
service, participate in auctions, track orders and obtain
financing. Customers include consumers, resellers and
manufacturers of filtration products. eFiltration.com
generates revenues primarily from transaction fees.
eFiltration.com is headquartered in Chicago, Illinois and had
three full-time employees as of March 31, 2000.
|
|
Entrepower, Inc.
(www.entrepower.com) is developing web database
and proprietary profile matching technologies to allow
businesses, recruiters and experienced professionals to
locate, learn about and contact one another easily and
confidentially through its web site. Entrepowers
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.
Entrepower intends to generate revenues primarily from
registration and advertising fees. Entrepower is headquartered
in Chicago, Illinois and had one full-time employee as of
March 31, 2000.
|
|
Farms.com (www.farms.com),
which recently combined with eHarvest.com, provides an
electronic marketplace for the livestock and grain industries
and provides both producers and processors in these
industries with an assortment of risk management and decision
support tools. Farms.com generates revenues from the sale of
livestock and transaction fees. Farms.com is headquartered in
Memphis, Tennessee and had 55 full-time employees as of March
31, 2000.
|
|
iSalvage.com, Inc.
(www.isalvage.com) offers an electronic
marketplace for recycled and rebuilt automotive parts. Buyers
will be able to use iSalvage.com to search for parts quickly
and efficiently based on both quantitative and qualitative
criteria, compare their prices and purchase them through
iSalvage.com. iSalvage.com will also enable sellers of
recycled parts to make price specifications available on the
Internet and offer their inventories outside their local
trading areas. iSalvage.com has completed its three month
pilot program, which ran in the mid-Atlantic and the
Southeastern United States. The iSalvage.com marketplace was
activated on June 2, 2000 with coverage on the East Coast.
iSalvage.com expects to have national coverage by October
2000. iSalvage.com intends to generate revenues primarily
through transaction fees it charges to suppliers and through
auctions, subscription fees and advertising. iSalvage.com is
headquartered in New York City and had 19 full-time employees
as of March 31, 2000.
|
|
The National Transportation Exchange, Inc.
(www.nte.net) offers an electronic marketplace
that aggregates suppliers and buyers of freight transportation
capacity. Its electronic marketplace is designed to
allow suppliers of freight capacity to sell available unused
capacity efficiently and effectively and to improve yields and
reduce buyer costs. NTE currently has over 100 shipper
members and 250 member carriers, which operate a total of
200,000 trucks, participating in its marketplace. It generates
revenues from transaction and placement fees. NTE is
headquartered in Downers Grove, Illinois and had 81 full-time
employees as of March 31, 2000.
|
|
Neoforma.com, Inc.
(www.neoforma.com) provides
business-to-business e-commerce services in the medical
products market. Neoforma.com uses the Internet to address
inefficiencies in the market for medical products, 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.coms principal source of revenue is
transaction fees paid by the sellers of medical products that
use the Shop and Auction services. Neoforma.com is
headquartered in Santa Clara, California and had 326 full-time
employees as of March 31, 2000. Neoforma.com is a public
company listed on the Nasdaq National Market under the symbol
NEOF.
|
|
OfficePlanIt.com, Inc. develops
Internet technologies and establishes electronic marketplaces
to allow businesses to research, procure and manage office
products and services from a single source. OfficePlanIt.com
expects to generate revenues principally from transaction and
subscription fees and technology license fees.
OfficePlanIt.com is headquartered in Lisle, Illinois and had
26 full-time employees as of March 31, 2000.
|
|
Oilspot.com, Inc.
(www.oilspot.com) provides an electronic
marketplace that aggregates suppliers and buyers of petroleum
products and services. It serves as an Internet clearinghouse
for the petroleum industrys information, product
availability and purchases through online exchanges, auctions
and buying groups. Oilspot.com intends to generate revenues
primarily through transaction fees and service fees.
Oilspot.com is headquartered in Chicago, Illinois and had two
full-time employees as of March 31, 2000.
|
|
Whiplash, Inc.
(www.whiplashnow.com) is a web-based
distribution system that allows travel providers to market and
produce complex leisure travel reservations. Whiplashs
electronic 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 and is
intended to enable them to achieve operational efficiencies.
Whiplash software integrates reservations and combines
disparate products from various sources on one itinerary and
in real time.
Whiplashs primary source of revenue is transaction fees
paid by travel providers. Whiplash is headquartered in Lisle,
Illinois and had 38 full-time employees as of March 31,
2000.
|
Do
Rights:
Associated Company
|
|
Market
|
|
Date
Formed
|
|
Associated
Company
Since
|
|
Our
Current
Equity
Ownership/
Voting
Power
Percentage
|
iGive.com, inc. |
|
Charitable Assistance Services |
|
9/21/95 |
|
2/11/00 |
|
32.1% |
|
|
Panthera Productions, LLC |
|
Wildlife Film Production |
|
10/13/93 |
|
3/30/00 |
|
62.9% |
|
iGive.com, inc (www.igive.com)
provides technology and services to a network of
merchants, non-profit organizations and consumers which enable
retail purchasers to assist non-profit organizations. Members
of iGive.coms network may currently shop at over 190
online vendors, serving over 8,000 non-profit organizations.
iGive.com generates revenues through merchant fees, online
advertising and sponsorship fees. iGive.com is headquartered
in Evanston, Illinois and had 31 full-time employees as of
March 31, 2000.
|
|
Panthera Productions, LLC is
developing a web channel for entertainment and education that
will provide users a virtual experience with animals
throughout Africa. The company will use its traditional film
production company to generate traffic to its web site.
Panthera Productions films are broadcast internationally in
over 40 countries and are distributed worldwide on videotape.
Panthera generates revenue through film sales, sponsorship
fees and the sale of retail products. Panthera Productions is
headquartered in Dallas, Texas and had four full-time
employees as of March 31, 2000.
|
Structure of Interests in Associated Companies
|
Associated Companies in Which We Acquire
Interests
|
Generally, we initially acquire a greater than 25%
voting equity interest, consisting of convertible preferred
stock in the associated companies in which we acquire interests.
We generally structure our interests in our associated companies
so that we are the shareholder holding the most voting power and
can maintain our control position in these companies. However,
we have made, and expect to continue to make, a limited number
of smaller investments in associated 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 associated
companies grow, thereby increasing our ownership interest.
Whenever possible, we obtain rights of participation in, or
control over, material decisions affecting the associated
company, including the right to approve business plans, mergers
and acquisitions, management compensation, stock and option
issuances and corporate borrowings. We also typically negotiate
for additional rights, including registration rights, rights of
first refusal, buy/sell arrangements, anti-dilution protection
and preemptive rights relating to the associated companys
issuance of additional equity. We generally have the right to
appoint or nominate one or more members of our management team
to each of our associated companies boards of directors,
with no other person having the right to appoint or nominate any
greater number 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 associated company interests.
The convertible preferred stock we acquire in our
associated companies votes as if it were converted into common
stock. As long as we hold this stock, it converts into a special
class of common stock, with the voting rights described below.
This preferred stock converts automatically upon an initial
public offering of the common stock of the associated company
that meets criteria relating to total offering size and offering
price per share. We may also convert this preferred stock at our
option at any time before a qualifying initial public offering.
In general, the class of common stock issuable upon conversion
of our preferred stock has the greater of one vote per share or
a total of 25.1% of the voting power of all outstanding capital
stock of the company. In addition, we typically require that no
other stockholder can have more than 25% of the total voting
power. To retain these voting rights, we typically need to
maintain a minimum equity ownership interest in the associated
company, which, in most cases, is five percent but in some cases
is greater. For some associated companies, we also must
participate pro rata up to a specified dollar amount in future
equity financings of the associated company.
Also, when we hold this preferred stock, we
generally have the right to take control of the board of
directors of the associated company upon events of default under
the terms of this preferred stock. These events of default
include failure to make a redemption payment when due,
bankruptcy or insolvency and default on indebtedness over a
threshold amount.
The holders of a specified portion of this preferred
stock, typically a majority or two-thirds, generally have the
right to cause the redemption of the preferred stock upon a
fundamental change or change in ownership of the associated
company, upon events of default under the terms of the preferred
stock or on the fifth anniversary of the issue date of the
preferred stock. The redemption price typically equals the
liquidation value of the preferred stock plus accrued but unpaid
dividends on the preferred stock.
The table below shows our voting percentage, type of
stock owned, voting rights and board rights, as of May 15, 2000,
for our current associated companies in which we have acquired
interests. Our voting power percentages have been calculated
based on the issued and outstanding common stock of each
associated company, assuming the issuance of common stock on the
conversion or exercise of preferred stock, but
excluding the effect of options and warrants. Because the
preferred stock votes as if it were converted into common stock,
the voting rights described below are those of the common stock
into which the preferred stock is convertible.
Associated Company
|
|
Current
Voting
Power
Percentage
|
|
Stock Type
|
|
Voting Rights
|
|
Board Seats
|
Aluminium.com, Inc. |
|
34.6% |
|
|
Series
B-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power as long as we hold at
least 5% equity interest and continue to
exercise our right of first refusal |
|
2 of 7
directors designated by us and 3
directors designated jointly by
management representatives and us |
|
BeautyJungle.com, Inc. |
|
61.0% |
|
|
Series
B-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power as long as we hold at
least 5% equity interest |
|
2 of 7
directors designated by us, 1
additional director designated by us,
subject to management shareholders
approval, 1 director designated jointly
by management shareholders and us and
1 director designated by management
shareholders subject to our approval |
|
bid4real.com, inc. |
|
54.3% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
3 of 7
directors designated by us and 1
additional director designated jointly
with the holders of a majority of the
common shares |
|
BidBuyBuild, Inc. |
|
35.5% |
(1) |
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
additional director designated jointly by
management representatives and us |
|
CapacityWeb.com, Inc. |
|
44.8% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 6
directors designated by us and 1
additional director designated jointly by
us and the management representative
director |
|
closerlook, inc. |
|
42.6% |
|
|
Class B
Common
and Series A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 10% equity interest |
|
2 of 5
directors designated by us |
|
Commerx, Inc. |
|
1.0% |
|
|
Series B
Preferred |
|
1 vote
per share |
|
None |
|
comScore, Inc. |
|
0.9% |
|
|
Series A
Preferred |
|
1 vote
per share |
|
None |
|
eFiltration.com, Inc. |
|
45.2% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
additional director mutually approved
by us and the management
representatives |
|
Emicom
Group, Inc. |
|
33.0% |
(2) |
|
Series A
Preferred |
|
1 vote
per share |
|
3 of 7
directors designated by us |
|
Entrepower, Inc. |
|
43.0% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power as long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
additional director who must be
acceptable to us |
|
eReliable Commerce, Inc. |
|
47.1% |
|
|
Series
A-2
Preferred
|
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 7
directors designated by us and 3
additional directors mutually approved
by us and the management
representatives |
|
Farms.com, Ltd. |
|
41.0% |
(3) |
|
Series
E-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 7
directors designated by us and 1
additional director designated jointly by
us and the management director |
|
i-Fulfillment, Inc. |
|
48.8% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
additional director mutually agreed to
by us and a majority of the holders of
common stock |
|
iGive.com, inc. |
|
32.1% |
|
|
Series
B-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
additional director mutually approved
by us and the management
representatives |
|
iSalvage.com, Inc. |
|
36.3% |
|
|
Series
B-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us |
|
i-Street, Inc. |
|
89.8% |
|
|
Series
A-2
Preferred |
|
5 votes
per share |
|
3 of 5
directors designated by us |
|
LAUNCHworks inc. |
|
39.7% |
(4) |
|
Class A
Special Shares |
|
1 vote
per share |
|
2 of 7
directors designated by us and 1
director designated jointly by us and the
management representatives |
|
Associated Company
|
|
Current
Voting
Power
Percentage
|
|
Stock Type
|
|
Voting Rights
|
|
Board Seats
|
LiveOnTheNet.com, Inc. |
|
76.9% |
|
|
Common |
|
1 vote
per share |
|
Total
control of board |
|
Martin
Partners, L.L.C. |
|
25.0% |
|
|
L.L.C.
interest |
|
25%
voting interest |
|
We must
approve replacement of
manager |
|
Mercantec, Inc. |
|
40.4% |
(5) |
|
Series
D-2 Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 8% equity interest |
|
1
director designated by us, 1 outside
director designated jointly by us and the
management representatives and 1
additional director designated jointly by
us and the management representatives |
|
mindwrap, inc. |
|
97.1% |
|
|
Class A
Common |
|
1 vote
per share |
|
Total
control of board |
|
The
National Transportation
Exchange, Inc |
|
5.3% |
|
|
Series
C-2
Preferred |
|
1 vote
per share |
|
1 of 6
directors designated by us |
|
Neoforma.com, Inc. |
|
1.5% |
|
|
Series E
Preferred |
|
1 vote
per share |
|
None |
|
NetUnlimited, Inc. |
|
61.4% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
4 of 7
directors designated by us and 1
additional director mutually approved
by us and the management shareholders |
|
Oilspot.com, Inc. |
|
55.6% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
additional director designated by us and
approved by holders of a majority of
founders securities |
|
OpinionWare.com, Inc. |
|
54.4% |
|
|
Series
A-2
Preferred and Series
B-2 Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
additional director designated jointly
with the holders of a majority of the
common shares |
|
Outtask.com Inc. |
|
28.9% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power as long as we hold at
least 10% equity interest |
|
2 of 5
directors designated by us |
|
Panthera Productions, LLC. |
|
62.9% |
|
|
LLC
Interest |
|
62.9%
voting interest |
|
3 of 5
managers designated by us |
|
Parlano, Inc.. |
|
86.9% |
|
|
Series
A-2
Preferred and
Class B Common |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
6 of 7
directors designated by us |
|
Perceptual Robotics, Inc. |
|
33.4% |
|
|
Series
C-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power as long as we hold at
least 10% equity interest |
|
2 of 7
directors designated by us and 3
additional directors designated jointly
by us and the management
representatives |
|
PocketCard Inc. |
|
37.5% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
director designated jointly by us and
management representatives |
|
Sequoia
Software
Corporation |
|
8.8% |
|
|
Common Stock |
|
1 vote per share |
|
1 of 7 directors designated by us |
|
TV
House, Inc. |
|
42.0% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power as long as we hold at
least 5% equity interest |
|
2 of 5
directors designated by us and 1
additional director designated jointly
with the holders of a majority of the
common shares |
|
ViaChange.com, Inc. |
|
70.0% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
5 of 8
directors designated by us |
|
Web
Design Group, Inc. |
|
53.7% |
|
|
Series A
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power as long as we hold at
least 5% equity interest |
|
3 of 5
directors designated by us |
|
Westbound Consulting, Inc. |
|
52.4% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
2 of 3
directors designated by us |
|
Whiplash, Inc. |
|
26.5% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power as long as we
continue to exercise our right of first refusal |
|
1 of 5
directors designated by us |
|
Xippix,
Inc. |
|
31.5% |
|
|
Series
A-2
Preferred |
|
Greater
of one vote per share or 25.1% of
the total voting power so long as we hold at
least 5% equity interest |
|
3 of 7
directors designated by us, and 1
additional director designated jointly by
us and management representatives |
(1)
|
We also
hold warrants to purchase shares of common stock of
BidBuyBuild. Giving effect to the exercise of these warrants,
we would hold 37.7% of both the equity and the voting power of
BidBuyBuild.
|
(2)
|
Our
current equity ownership and voting power percentage is 7.6%,
which will be increased to 33.0% when Emicom completes the
private financing it is currently conducting. The cash
consideration and promissory note shown in the table reflect
payment for a 33.0% equity interest in Emicom. Beginning March
24, 2002, Emicom will have a right to cause us to purchase all
of its outstanding common stock, which right will terminate
under certain circumstances, including Emicoms
completion of an initial public offering.
|
(3)
|
We also
hold warrants to purchase shares of common stock of Farms.com.
Giving effect to the exercise of these warrants, we would hold
45.7% of both the equity and the voting power of
Farms.com.
|
(4)
|
We also
hold warrants to purchase shares of common stock of
LAUNCHworks. Giving effect to the exercise of these warrants,
we would hold 50.9% of both equity and voting power of
LAUNCHworks.
|
(5)
|
We also
hold warrants to purchase shares of common stock of Mercantec.
Giving effect to the exercise of these warrants, we would hold
42.7% of both the equity and voting power of
Mercantec.
|
|
Associated Companies We Establish
|
Several of our infrastructure service provider
associated companies have been established by us as
subsidiaries. We typically own at least 80% of the initial
equity of each subsidiary, and up to 20% of the initial equity
has been sold to those persons who were our employees, including
our executive officers, as of December 31, 1999. We have
received class B convertible common stock entitled to ten votes
per share and the eligible employees, including our executive
officers, have received class A common stock entitled to one
vote per share. However, the voting power of the class B
convertible common stock that we received is limited to 90% of
the voting power of any of these subsidiaries. The equity sold
to eligible employees is subject to transfer restrictions and
repurchase rights which lapse over time. For each of the
following associated companies that we have established to date:
Buzz divine, dotspot, eXperience divine, FiNetrics, Host divine,
Justice divine, Knowledge divine, OfficePlanIt.com, salespring,
Talent divine and Xqsite, we contributed $16,000 in exchange for
approximately 80% of the companys common stock. For sho
research, we contributed $12,000 in exchange for approximately
60% of its common stock, and its president contributed $4,000 in
exchange for approximately 20% of its common stock. For
Brandango, we contributed approximately $13,000 in exchange for
approximately 65% of its common stock and three key employees of
Brandango contributed approximately $3,000 in exchange for
approximately 15% of its common stock. Our eligible employees,
including our executive officers, as of December 31, 1999 were
given the opportunity to purchase stock of each of the
associated companies that we have established to date. For each
of these companies, these employees contributed a total of
approximately $4,000 in exchange for a total of approximately
20% of the companys common stock. Of these total amounts
for each of these associated companies, our executive officers
contributed a total of approximately $2,000 in exchange for
approximately 10% of their outstanding equity, and none of our
other affiliates own any of their equity. Except as described
above, none of the stock of any of these associated companies
was issued to employees of that company or of any other
associated company. We intend to cause each associated company
that we established to issue options to purchase shares of
common stock representing up to 20% of the equity of that
associated company on a fully-diluted basis to employees and
service providers of that company, including our employees. We
have not yet determined specifically how these options will be
allocated, but we currently expect that a majority of these
options will be granted to employees of the associated company.
Any options to purchase stock of our associated companies that
are granted to our employees will be in addition to grants of
our class A common stock made to them under our 1999 Stock
Incentive Plan. As a result of these issuances of stock and
options, we may have as little as 50% of the economic interest
in associated companies that we established, even if we have
contributed substantially all of their operating capital. We
intend to issue one-half of the options shortly after the time
of formation of each of these associated companies to current
employees of that associated company and our employees working
directly with that associated company. Options granted under
this program generally will not be exercisable earlier than an
initial public offering or a change in control of the associated
company.
In addition, we intend to contribute additional
capital to these established companies on an as-needed basis for
start-up financing. We currently intend to contribute a total of
$116,000,000 to these associated companies over the next three
to five years. The amounts we have contributed to these
associated companies total approximately $37,000,000 through May
31, 2000 and are currently reflected as receivables from these
companies. However, we currently contemplate that this initial
funding is to be made in exchange for preferred stock of the
companies and that the outstanding receivables will convert into
preferred stock of the companies. We expect that this preferred
stock will (1) be non-voting, (2) earn an 8% cumulative
dividend, (3) convert into class B common stock after three
years at the lesser of the original purchase price or the fair
market value of the preferred stock and (4) be redeemable at the
associated companys option at any time after three years
from its issuance. Our receipt of this preferred stock will
increase our equity ownership, but not our voting power,
percentages of these companies. The terms and amounts of any
funding to these associated companies are potentially subject to
significant changes. Some of these associated companies may seek
third-party financing, which, if obtained, could reduce our and
our employees equity interests in these companies. They
may also enter into business combination transactions that could
similarly reduce our and our employees equity
interests.
|
Maximizing Stockholder Value
|
We anticipate that the value to us of our associated
company interests will increase principally through initial
public offerings and also through mergers and sales of the
companies. Following initial public offerings by our associated
companies, we generally expect to continue to retain controlling
interests in most of these companies and to benefit as a
stockholder from their increased public company values. We
acquire interests in our associated companies for the long term.
Although we do not anticipate selling our interests in
associated companies in the ordinary course of business, other
than as part of the merger or sale of an entire company, we may,
from time to time, undertake sales of our interests when we
believe them to be in our best interests.
In the future, we may combine or restructure
associated companies to enhance their potential value in the
public markets or their value to potential acquirors. We may
bring together associated companies that are operating in the
same general line of business or the same vertical or horizontal
markets or that could otherwise be combined to provide a
comprehensive solution to customers. We may achieve such a
combination by transferring our interests in one or more
associated companies to another associated company, by forming a
new holding company to own two or more of our associated
companies or in another way. We also may subdivide associated
companies into separate companies that focus on more discrete
products or services. However, we have not currently decided to
effect any combinations or restructurings of this
type.
Our stockholders may in the future be offered
opportunities to participate in the initial public offerings of
associated companies that we establish or that we control. In
addition, we typically seek in our purchase agreements rights
relating to participation in directed share programs associated
with initial public offerings of our associated companies. The
applicable provisions generally require that, at the time of an
associated companys initial public offering, the
associated company will attempt to cause an offer to be made to
us or our designees, which we expect would include our
stockholders, to purchase 20% of the shares in the initial
public offering. Currently, we have this right with respect to
BeautyJungle.com, bid4real.com, BidBuyBuild, CapacityWeb.com,
closerlook, eFiltration.com, Emicom Group, Entrepower, eReliable
Commerce, Farms.com, i-Fulfillment, iGive.com, iSalvage.com,
i-Street, Mercantec, NetUnlimited, Oilspot.com, OpinionWare.com,
Panthera Productions, Perceptual Robotics, PocketCard, TV House,
ViaChange.com, Web Design Group, Westbound Consulting and
Xippix. In addition, we have a similar right with respect to 5%
of the common stock offered by Outtask.com in its initial public
offering. However, these rights are exercisable only as to
initial public offerings of associated companies that occur at
least one year after the dates we obtained these rights.
Further, if we are able to exercise these rights as to an
associated companys initial public offering and direct
that offers of the associated companys stock be made to
our stockholders, we may be deemed to be an underwriter of the
public offering made by that associated company or to be a
co-issuer of that associated companys stock. As an
underwriter or co-issuer, we could face significant legal risks,
including potential liability under federal and state securities
laws for allegedly false or misleading statements made in
connection with the public offerings. Alternatively, we may
elect not to exercise our rights to avoid becoming subject to
these risks. Our stockholders, therefore, may not benefit from the
rights we have obtained with respect to initial public offerings
by our associated companies. Two of our associated companies,
Neoforma.com and Sequoia Software Company, recently completed
their initial public offerings and one of our other associated
companies, Commerx, has filed a registration statement with the
Securities and Exchange Commission for its initial public
offering. We did not obtain any rights to participate in these
three offerings.
Management of Venture Capital Funds
Skyscraper Ventures. We have organized
Skyscraper Ventures, a venture capital fund, and our
wholly-owned subsidiary serves as its general partner. As
general partner, we have exclusive control over the management
and operations of the fund. The fund generally will invest in
start-up and early-stage companies located in Illinois and
generally will make initial investments of $3,500,000 or less in
each company. The fund may, however, make larger or smaller
investments in these companies and in companies outside
Illinois. On February 10, 2000, we became general partner and
were admitted as a limited partner, and one other investor, an
affiliate of Mesirow Financial, was admitted as a limited
partner. The two initial investors in the fund committed to
contribute a total of $14,000,000 to the fund, of which we have
committed to contribute $9,860,000 as a limited partner and
$140,000 as general partner for a total of $10,000,000. As of
July 1, 2000, we had contributed approximately $2,300,000 to the
fund. We are obligated to contribute 1% of the total commitments
to the fund as general partner. The fund is seeking $75,000,000
to $125,000,000 in total commitments and may admit additional
limited partners for a period of nine months from the date the
initial partner was admitted. We believe that 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 associated companies.
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 these funds have raised and invested
substantially all of their authorized capital, we only devote a
limited amount of resources to managing their
operations.
Competition
|
Competition for Associated
Companies
|
We face competition from numerous other capital
providers seeking to acquire interests in Internet-related
businesses, including:
|
|
publicly-traded Internet companies;
|
|
|
traditional venture capital firms, including those that
have invested in us and those that we manage;
|
|
|
large
corporations, including those that have invested in
us;
|
|
|
other
capital providers that also offer support services to
companies; and
|
|
|
our
associated 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 we do. 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! and
our associated companies Emicom Group and LAUNCHworks, devote
significant resources to providing capital together with other
resources to Internet companies. We may also face competition
from an emerging group of online service providers that
facilitate relationships between entrepreneurs and venture
capitalists, such as
vcapital.com and Garage.com. Further, several professional service
firms have recently announced their intention to provide capital
and service to e-commerce companies. Corporate strategic
investors, including Fortune 500 and other major companies, are
also 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. Moreover, private venture capital firms and other
capital and support service providers which do not plan to go
public can avoid regulation under the Investment Company Act
either by having no more than 100 beneficial owners of their
securities, other than short-term paper, or by limiting the
owners of their securities to certain qualified purchasers.
These exemptions 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 associated companies.
If we cannot acquire controlling interests in attractive
companies, our strategy to build a collaborative network of
associated companies will not succeed.
|
Competition Facing our Associated
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 associated companies will
compete for a share of a customers:
|
|
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 associated companies will encounter competition
from existing companies that offer competitive solutions and
additional companies that develop competitive solutions in the
future. Our associated companies competitors may develop
Internet products or services that are superior to, or have
greater market acceptance than, the solutions offered by our
associated companies. If our associated companies are unable to
compete successfully against their competitors, our associated
companies will fail. In addition, our associated companies may
compete with each other for business-to-business e-commerce
opportunities. If this type of competition develops, it may
deter companies from partnering with us and limit our business
opportunities. Additionally, we may acquire interests in
associated companies that compete with our current associated
companies, which may deprive them of some of the benefits of
being part of our network.
Many of our associated companies will have to
compete against companies with greater brand recognition and
greater financial, marketing and other resources. Our associated
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
|
U.S. companies that have more than 100 shareholders
or are publicly traded in the U.S. and 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
business-to-business e-commerce and are not an investment company,
we also rely on an SEC rule that allows 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, majority-owned subsidiaries, primarily controlled
companies and other assets that meet the requirements of that
rule. A committee of our Board of Directors will determine the
value of our assets and of our interests in our associated
companies, and the income or losses attributable to them, for
purposes of determining compliance with this rule on at least a
quarterly basis. 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 associated 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 associated
companies and the income/loss and revenue attributable to our
associated 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 associated
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 associated
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 associated 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
from the requirement of registering as an investment company for
up to one year. 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 intend to seek this exemptive relief even while
we are in compliance with the SEC rule in order to obtain
greater assurance that we will not be regulated under the
Investment Company Act. 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 associated
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.
In addition, our associated companies that are not
U.S. companies with business models similar to ours, Emicom
Group and LAUNCHworks, may become subject to regulation under
the Investment Company Act in the future if they have more than
100 U.S. shareholders or become publicly traded in the U.S. and
are, or hold themselves out as being, engaged primarily in the
business of investing, reinvesting or trading in securities.
These companies could not feasibly operate as registered
investment companies. We also may acquire interests
in other companies with business models that could subject them to
regulation under the Investment Company Act. Specifically, we
have entered into a letter of intent to acquire an interest in a
company to be formed in Latin America with a business model
similar to ours. If any associated companies become subject to
regulation under the Investment Company Act, they would be
subject to the operating restrictions described
above.
|
Other Regulations and Legal
Uncertainties
|
As of the date of this prospectus, there are few
laws or regulations directed specifically at e-commerce.
However, because of the Internets 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, promotions, distribution and
quality of goods and services, registration of domain names and
use, and export and distribution of encryption technology. The
enactment of any additional laws or regulations may impede the
growth of the Internet and business-to-business e-commerce,
which could decrease the revenues of our associated companies
and place additional financial burdens on them.
E-commerce businesses are subject to the same
numerous laws affecting interstate and international 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. 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
some 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. If any regulations are enacted,
business-to-business e-commerce companies may find their
marketing activities restricted. In addition, the European
Union has directed its member nations to enact much more
stringent privacy protection laws than are generally found in
the United States. The Department of Commerce has reached a
safe harbor agreement with the European Union, subject to
approval by national governments, to allow U.S. corporations
to conduct e-commerce in the European Union if they agree to
abide by European privacy laws, or equivalent measures, when
dealing with European consumers. Private industry initiatives
and standards may also develop concerning privacy issues. In
addition to compliance with governmental regulation, we and
our associated companies may decide that it is in our best
interest to comply with industry standards or public opinion
regarding privacy issues voluntarily.
|
|
|
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 associated companies may
not be able to acquire or maintain relevant web site addresses
in all countries where they conduct business. In 1999,
Congress enacted legislation to address the practice of domain
name piracy, often referred to as cybersquatting, the practice
of registering an Internet address of an established trademark
with the hopes of selling the Internet address to the affected
company. The legislation also includes a
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|
|
prohibition on the registration of a domain name that
is the name of another living person or a name that is
confusingly similar to that name. The scope of this
legislation has not been precisely defined. As a result of
this legislation and trademark laws generally, we or our
associated companies may be subject to liability based on use
of domain names or trademarks that allegedly infringe the
rights of third parties.
|
|
|
Business Opportunities. An amendment to the Delaware
General Corporation Law, which became effective on July 1,
2000, clarifies that a corporation has the power to waive in
advance, in its certificate of incorporation or by action of
its board of directors, the corporations interest or
expectations in business opportunities or classes or
categories of business opportunities, as those opportunities
may be defined by the corporation. These classes or categories
of opportunities could be defined in many different ways,
including by type of business, by who originated the business
opportunity, by who has the interest in the business
opportunity, by the period of time, or by the geographical
location. Our Board of Directors may consider and take action
as permitted by this new statutory provision. If we waive an
opportunity in accordance with this provision, a director
would not be required to present the waived opportunity to us,
even if pursuing the opportunity could be in our best
interest, and instead could present it to other businesses,
including the directors own business.
|
In addition to the specific issues outlined above,
other generally applicable laws may also affect our associated
companies and us. The exact applicability of many of these laws
to Internet e-commerce is, however, uncertain.
Proprietary Rights
Our associated companies have or are seeking
copyrights and patents with respect to software applications,
web sites, business processes, innovations, designs and other
works of authorship or invention. These materials may constitute
an important part of our associated companies assets and
competitive strengths. Federal law generally protects our
associated 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 principal operational
facilities are currently located in leased space in two
buildings in Lisle, Illinois. We also lease additional office
space in Chicago, Illinois; Austin, Texas; and the New York
metropolitan area.
We also have exercised an option to purchase the
property in Chicago on which our high-tech 400,000 square foot
facility is to be built. We expect to purchase this property by
July 31, 2000 and thereafter begin the construction and
development of the facility. We expect that this facility will
serve as our corporate
headquarters and the headquarters of some of our associated
companies, as well as other non-affiliated entities. This
facility is being designed as a model home for a community of
between 20 and 30 e-commerce businesses, featuring
state-of-the-art technology to meet the needs of these companies
and to showcase our capabilities. We currently expect that the
facility will include a media center and television studio,
child care center, health club and large restaurant-style
kitchen and dining room, along with a digital museum. We
currently anticipate that the facility could be ready for
initial occupancy by Summer 2001. However, although we are
contractually required to purchase the property, we are not
obligated to proceed with the development of the facility.
Further, the timing of our development of the facility as well
as the scale and final design of the facility will depend on the
anticipated space needs of us and other projected users of the
facility, transportation issues and the availability of
third-party financing. If we do not complete this offering and
the concurrent private placements, we would scale back, postpone
or cancel our plan to construct this facility. Based on our most
recent internal discussions regarding the plans for the
facility, we currently estimate that the land acquisition and
construction costs for the facility will total between
$60,000,000 and $80,000,000.
Employees
As of March 31, 2000, we had 265 employees, and our
majority-owned associated companies had 758 employees. We
believe that our relations with our employees are generally
good.
Legal
Proceedings
We are not currently a party to any material legal
or administrative proceedings.
Executive Officers and Directors
The table below contains information about our
executive officers and directors as of July 11, 2000. 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.
Name
|
|
Age
|
|
Position with Company
|
|
Director Class
|
Andrew
J. Filipowski |
|
49 |
|
Chairman of the Board and Chief Executive
Officer |
|
Class
I |
|
|
Scott
A. Hartkopf |
|
42 |
|
President and Director |
|
Class
I |
|
|
Michael
P. Cullinane |
|
50 |
|
Executive Vice President, Chief Financial Officer,
Treasurer and Director |
|
Class
II |
|
|
Paul L.
Humenansky |
|
43 |
|
Executive Vice President and Director |
|
Class
II |
|
|
Larry
S. Freedman |
|
37 |
|
Executive Vice President, General Counsel
and Secretary |
|
|
|
|
Lynn S.
Wilson |
|
56 |
|
Executive Vice President and Chief Operating
Officer |
|
|
|
|
Robert
Bernard |
|
39 |
|
Director |
|
Class
II |
|
|
Michael
J. Birck |
|
62 |
|
Director |
|
Class
III |
|
|
Peter
C.B. Bynoe |
|
49 |
|
Director |
|
Class
III |
|
|
James
E. Cowie |
|
45 |
|
Director |
|
Class
I |
|
|
Andrea
Lee Cunningham |
|
43 |
|
Director |
|
Class
II |
|
|
Thomas
P. Danis |
|
53 |
|
Director |
|
Class
III |
|
|
Michael
H. Forster |
|
57 |
|
Director |
|
Class
III |
|
|
Arthur
P. Frigo |
|
59 |
|
Director |
|
Class
I |
|
|
Gian M.
Fulgoni |
|
52 |
|
Director |
|
Class
II |
|
|
George
Garrick |
|
47 |
|
Director |
|
Class
I |
|
|
Craig
D. Goldman |
|
56 |
|
Director |
|
Class
III |
|
|
Joseph
D. Gutman |
|
43 |
|
Director |
|
Class
I |
|
|
Arthur
W. Hahn |
|
55 |
|
Director |
|
Class
II |
|
|
David
D. Hiller |
|
47 |
|
Director |
|
Class
III |
|
|
Jeffrey
D. Jacobs |
|
50 |
|
Director |
|
Class
I |
|
|
Gregory
K. Jones |
|
39 |
|
Director |
|
Class
II |
|
|
Michael
J. Jordan |
|
37 |
|
Director |
|
Class
III |
|
|
Steven
Neil Kaplan |
|
40 |
|
Director |
|
Class
III |
|
|
Richard
P. Kiphart |
|
58 |
|
Director |
|
Class
II |
|
|
Sanjay
Kumar |
|
38 |
|
Director |
|
Class
II |
|
|
Ronald
D. Lachman |
|
42 |
|
Director |
|
Class
III |
|
|
Eric C.
Larson |
|
45 |
|
Director |
|
Class
I |
|
|
William
A. Lederer |
|
38 |
|
Director |
|
Class
I |
Name
|
|
Age
|
|
Position with Company
|
|
Director Class
|
Michael
E. Leitner |
|
32 |
|
Director |
|
Class
I |
|
|
Lawrence F. Levy |
|
56 |
|
Director |
|
Class
II |
|
|
Thomas
J. Meredith |
|
49 |
|
Director |
|
Class
III |
|
|
Teresa
L. Pahl |
|
40 |
|
Director |
|
Class
II |
|
|
John
Rau |
|
52 |
|
Director |
|
Class
III |
|
|
Bruce
V. Rauner |
|
44 |
|
Director |
|
Class
I |
|
|
Andre
Rice |
|
42 |
|
Director |
|
Class
I |
|
|
Mohanbir S. Sawhney |
|
36 |
|
Director |
|
Class
III |
|
|
Alex C.
Smith |
|
40 |
|
Director |
|
Class
II |
|
|
Tim J.
Stojka |
|
34 |
|
Director |
|
Class
I |
|
|
Aleksander Szlam |
|
48 |
|
Director |
|
Class
II |
|
|
Mark A.
Tebbe |
|
38 |
|
Director |
|
Class
III |
|
|
David
Tolmie |
|
45 |
|
Director |
|
Class
I |
|
|
James
C. Tyree |
|
42 |
|
Director |
|
Class
I |
|
|
William
Wrigley, Jr. |
|
36 |
|
Director |
|
Class
I |
|
|
Robert
Jay Zollars |
|
43 |
|
Director |
|
Class
III |
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., Blue Rhino Corporation
and Bluestone Software Inc.
Mr. Hartkopf has been our President since
October 1999 and also served as our Chief Operating Officer from
October 1999 until April 2000. 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. 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 PresidentProduct 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. 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 1988 to August 1994.
Mr. Wilson has been our Chief Operating
Officer since April 2000 and has served as our Executive Vice
President since our inception. He was also our Chief Information
Officer from our inception until April 2000. He has also been
the President of Host divine, one of our associated companies,
since its inception in October 1999. From 1997 until its
acquisition in June 1999, Mr. Wilson was the Executive Vice
President, Global Services Organization and Chief Information
Officer of PLATINUM. From 1994 until 1997, Mr. Wilson was Vice
President and Chief Information Officer of Entex Information
Services, Inc., a provider of information technology
services.
Mr. Bernard is the founder of marchFIRST,
Inc. (formerly Whittman-Hart, Inc.), an information technology
company, and has served as its Chief Executive Officer since its
inception in 1984. From its inception until its merger with
USWeb/CKS in March 2000, Mr. Bernard served as the
companys Chairman. Mr. Bernard resumed his role as
Chairman in late March 2000. From 1984 to August 1997, Mr.
Bernard also served as the companys President. Mr. Bernard
resumed his role as President in March 2000. Mr. Bernard serves
as Chairman of the subcommittee on education, skill and
workforce development for the Chicago Mayors Council of
Technology Advisors and is currently a director of Web Street,
Inc. and marchFIRST.
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. Bynoe has been a partner with the law
firm of Piper Marbury Rudnick & Wolfe since March 1995 and
serves on the firms management committee. Since May 1999,
Mr. Bynoe has been the manager of Torchstar Communications, LLC,
an investor in Midwest radio stations. In addition, since 1982,
Mr. Bynoe has served as Chairman of Telemat Ltd., a business
consulting firm. Mr. Bynoe is a director of Uniroyal Technology
Corporation.
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. Mr. Cowie was elected to
our Board of Directors as a representative of Frontenac under
the stockholders agreement with the holders of our series D and
D-1 preferred stock.
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 a Managing Director of Aon
Risk Services of Southern California since January 2000 and a
Managing Director of Aon Risk Services Mergers and
Acquisitions group since 1977. From 1992 until 1999, he was the
President and Chief Executive Officer of Aon Risk Services of
Missouri. 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 currently 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 Sybases Senior Vice
President and President of Sybases Information Connection
Division. Mr. Forster has over 30 years of sales, marketing and
general management experience in the information technology
industry. Mr. Forster is currently a director of Tangram
Enterprise Solutions, Inc.
Mr. Frigo has been the Chairman of the
Board of Lucini 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 associated companies, and has served as its Chairman
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 served as
IRIs President, and, from 1991 to 1995, he was its
Chairman. Mr. Fulgoni is also currently a director of
yesmail.com, inc.
Mr. Garrick has owned and operated G2
Ventures, Inc., his own private Internet venture and consulting
company since 1996. From April 1998 until its acquisition by
CMGI in January 2000, Mr. Garrick served as Chief Executive
Officer and President of Flycast Communications Corporation, an
Internet marketing and advertising network, and also served as
its Chairman beginning in January 1999. Following the
acquisition and until March 2000 Mr. Garrick provided transition
services to CMGI. 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 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 PresidentTechnology 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 currently a director of CMGI, Inc., Engage
Technologies, Inc., NaviSite, Inc., PRT Group Inc. and
MangoSoft, Inc.
Mr. Gutman has been a Managing Director of
Goldman Sachs & Co. since 1996. Mr. Gutman joined the
Equities Department of Goldman Sachs in 1981 and is currently
also manager for the Chicago Institutional Equities Department
of Goldman Sachs and co-head of Goldman Sachs Chicago
office.
Mr. Hahn has been a partner with the law firm
of Katten Muchin Zavis since 1984 and is a member of the
firms executive committee. Mr. Hahn was Chairman of the
faculty of the Illinois Institute of Technology Chicago-Kent
College of Law Graduate School of Financial Services Law from
its inception in 1985 through 1999.
Mr. Hiller has served as Senior Vice
PresidentDevelopment of the Tribune Company since 1993.
Mr. Hiller is currently a director of the Lightspan Partnership,
Inc.
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 currently a director of D.I.Y.
Home Warehouse, Inc. and uBid.
Mr. Jordan has been the President of
Basketball Operations of the Washington Wizards, a partner in
Lincoln Holdings, LLC, the holding company that owns the
Washington Capitals franchise of the National Hockey League, and
has indirectly owned an interest in the Washington Wizards
franchise of the National Basketball Association since January
2000. From 1984 to 1993 and from 1995 to January 1999, Mr.
Jordan was a player for the Chicago Bulls franchise of the
National Basketball Association. Mr. Jordan is currently a
director of Oakley, Inc.
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 currently a director of Concord
EFS, Inc.
Mr. Kumar has been the President, Chief
Operating Officer and a director of Computer Associates, Inc., a
provider of enterprise management, information management and
business application software products, since January 1994. Mr.
Kumar joined Computer Associates in 1984 as a director of
software development and has held senior positions at Computer
Associates in development, strategic planning and operations.
Mr. Kumar was nominated to our Board of Directors by CBW/SK
divine Investments under the stockholders agreement with the
holders of our series D and D-1 preferred stock.
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. 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 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. Mr.
Larson was elected to our Board of Directors as a representative
of First Chicago Equity Capital under the stockholders agreement
with the holders of our series D and D-1 preferred
stock.
Mr. Lederer is the founder of Minotaur
Capital Management, an Illinois-based investment firm, and its
fund, Minotaur Partners, L.P., 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 the Vice President,
Corporate Development of 360networks, inc., a provider of fiber
optic communications network products and services, since March
2000. He also continues to serve as a Senior Director of
Corporate Development for Microsoft Corporation, a position he
has held 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. Leitner was elected
to our Board of Directors as a representative of Microsoft under
the stockholders agreement with the holders of our series D and
D-1 preferred stock.
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 currently a director of Chicago Title Corporation and Il
Fornaio America Corporation.
Mr. Meredith has been a Senior Vice
President of the Dell Computer Corporation since 1996, and has
served as its Chief Financial Officer since 1992. Mr. Meredith
is currently a director of i2 Technologies, Inc. and
FreeMarkets, Inc. Mr. Meredith was elected to our Board of
Directors as a representative of Dell under the stockholders
agreement with the holders of our Series D and D-1 preferred
stock.
Ms. Pahl has been the Chief Executive Officer
of Incent Inc., a technology company, since June 2000. From
August 1999 to June 2000, Ms. Pahl was the Executive Vice
President of Aon Group, Inc, a subsidiary of Aon Corporation,
and the Chairman of Aon Enterprise Insurance Services, Inc. and,
from 1995 until August 1999, she was President and CEO of Aon
Enterprises Insurance Services, Inc. Ms. Pahl served on the Aon
Risk Services U.S. operating board from 1997 until June
2000.
Mr. Rau has been the Chairman of Chicago
Title and Trust Company Foundation since April 2000. From 1997
until April 2000, he was the President and Chief Executive
Officer of Chicago Title Corporation and Chicago Title Company.
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 is Managing Principal of GTCR
Golder Rauner, L.L.C., a private equity and investment firm,
which he joined in 1981. Mr. Rauner is currently a director of
AnswerThink Consulting Group, Inc. AppNet, Inc., Coinmach
Laundry Corporation and Polymer Group, Inc.
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. From
1980 until 1985, Mr. Rice was a securities salesman at Goldman,
Sachs & Co.
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 Lynchs 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. From 1991 until November 1995, Mr. Smith held
various management positions within the Treasury Department of
Dell USA. Mr. Smith was elected to our Board of Directors as a
representative of Dell under the stockholders agreement with the
holders of our Series D and D-1 preferred stock.
Mr. Stojka is the founder of Commerx, Inc.,
one of our associated companies, and has served as its Chairman
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 eShares name.
Mr. Szlam continues to serve as Chairman and Chief Executive
Officer of the combined entity.
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 Lantes
President from 1984 to 1999. Mr. Tebbe currently serves as a
director of ZixIt Corporation, an Internet security technology
company.
Mr. Tolmie has been the President and Chief
Executive Officer of yesmail.com, Inc., now a subsidiary of
CMGI, since January 1999. From September 1997 to December 1998,
Mr. Tolmie served as CEO in Residence of Platinum Venture
Partners. From 1988 until September 1997, he was Senior Vice
President of Operations for Bally Total Fitness.
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 currently 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
associated 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.
Nominee for Directorship
Harold F. (Bud) Enright Jr., age 63, has been
nominated to our Board of Directors for election as a Class II
director as a representative of Compaq. The terms of the
purchase agreement between us and Compaq, relating to
Compaqs purchase of shares of our class C convertible
common stock in a concurrent private placement, entitle Compaq
to nominate one member to our Board of Directors. Mr. Enright
has served as Vice President of Corporate Business Development
and Technology of Compaq Computer Corporation since 1998, when
Compaq acquired Digital Equipment Corporation. From 1993 to
1998, he held various senior management positions with Digital,
including Vice President of Marketing, Vice President of
Software Development, Vice President of the Asia Pacific
Technology Office, and Vice President of Corporate
Development.
Committees of the Board of Directors
Our Board of Directors has established an
acquisition committee, audit committee, compensation committee,
conflicts committee, do right committee, executive committee,
Internet economy strategy committee and Investment Company Act
compliance committee.
Our acquisition committee has responsibility for
reviewing, approving and authorizing significant transactions
with associated companies and, to the extent necessary, may
administer the functions of our conflicts committee with respect
to these transactions. Our acquisition committee, consisting
solely of non-employee directors, is divided into three teams.
The current members of team one of our acquisition committee are
Messrs. Frigo (co-chairman), Kaplan (co-chairman), Cowie,
Forster, Leitner, Rau and Zollars. The current members of team
two of our acquisition committee are Messrs. Goldman
(co-chairman), Sawhney (co-chairman), Fulgoni, Hahn, Jones,
Kiphart and Szlam. The current members of team three of our
acquisition committee are Messrs. Smith (chairman), Bernard,
Danis, Garrick, Tebbe, Tyree and Wrigley.
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), Birck, Frigo, Garrick and Jones.
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 and Zollars.
Our conflicts committee has principal
responsibility for approving contracts and transactions between
us or any of our subsidiaries, on the one hand, and any of our
directors or officers or those 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 do right committee has responsibility for
advancing our charitable and community service efforts,
including the advancement of social, cultural and educational
efforts. The current members of our do right committee are
Messrs. Filipowski (co-chairman), Humenansky (co-chairman),
Jordan (co-chairman), Gutman and Jacobs.
Our executive committee has responsibility for
reviewing and generally recommending matters to our 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
Meredith.
Our Internet economy strategy committee assists our
management in developing our business strategy as it relates to
the business-to-business Internet economy and offers strategic
guidance and industry expertise to us and our associated
companies. The current members of our Internet economy strategy
committee are Messrs. Garrick (co-chairman), Sawhney
(co-chairman), Bernard, Cunningham, Fulgoni, 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 for determining the value of our securities
holdings, total assets and net income (loss) 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.
Advisory Board
We are establishing an advisory board to assist our
management team in addressing strategic issues in particular
business-to-business or geographic markets. We will seek members
for this advisory board who are experienced business leaders or
academics and who can provide high level insight and expert
advice regarding our marketplaces and regions that we target.
Our advisory board will initially consist of 25 members,
including 20 industry advisors and five advisors for the Austin
region. Each advisor will be expected to devote a minimum number
of days per year to performing his or her duties, including
attending periodic meetings on at least a quarterly basis. We
will grant to each advisory board member, upon joining the
advisory board, an option to purchase 4,166 shares of our class
A common stock, which will vest over four years and be
exercisable at the fair market value on the date of grant.
Subsequent annual grants will be considered by the compensation
committee of our Board of Directors.
Arrangements for Nomination as Director and Committee
Member
Under the stockholders agreement that we entered
into with the holders of our series D and D-1 preferred stock,
(1) we, (2) Messrs. Filipowski, Cullinane, Humenansky, Freedman,
Kennedy, Santer, Slowey and Tatro and affiliates of Messrs.
Filipowski, Humenansky, Freedman and Tatro, who together hold
all of our class B common stock, and (3) the purchasers of our
series D and D-1 preferred stock, have agreed to take all
necessary actions, so that:
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one
member of our Board of Directors can be designated by each of
the following holders of our series D and D-1 preferred stock:
(1) CBW/SK divine Investments, (2) First Chicago Investment
Corporation and Cross Creek Capital Partners X, LLC, which we
together refer to as First Chicago Equity Capital, (3)
Frontenac VII Limited Partnership and Frontenac Masters VII
Limited Partnership, which we together refer to as Frontenac
and (4) Microsoft Corporation; and
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Dell
USA L.P., which also holds our series D preferred stock, can
designate two members of our Board of Directors.
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Additionally, we have agreed under the stockholders
agreement to take all necessary actions so that one of the
directors designated by each of Frontenac and Dell is designated
as a member of our executive committee. However, none of CBW/SK
divine Investments, First Chicago Equity Capital, Frontenac,
Microsoft or Dell will have any of these rights if it does not
continue to own least 25% of the capital stock originally
purchased by it.
We have entered into a three year consulting
agreement with Michael Jordan under which we agreed to use our
best efforts to have Mr. Jordan elected to our Board of
Directors, which occurred on March 13, 2000. Under the
agreement, Mr. Jordan has agreed to be a co-chairman of our do
right committee and to perform promotional activities for us. In
connection with the consulting agreement, we issued Mr. Jordan
an option to purchase 166,666 shares of our class A common stock
at a purchase price of $6.00 per share under our stock incentive
plan. The option was exercisable in full upon its grant, but
vests as follows: 83,333 shares on the first anniversary of the
grant date and 41,666 shares on each of the second and third
anniversaries of the grant date, provided that Mr. Jordan
continues to serve as a director and consultant on each of these
anniversaries. Mr. Jordan exercised the option in full and
purchased 166,666 shares of our class A common stock on March
10, 2000. We loaned Mr. Jordan $1,000,000 to pay the exercise
price of the option. These shares 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 transfers and repurchase rights expire based on
the option vesting schedule. Effective upon the consummation of
this offering, we will grant Mr. Jordan an option to purchase an
additional 300,000 shares of our class A common stock at the
initial public offering price. This option will be exercisable
in full upon its grant, but will vest as follows: 150,000 shares
on the first anniversary of the grant date and 75,000 shares on
each of the second and third anniversaries of the grant
date.
In connection with the purchase agreement relating
to our concurrent private placement to Compaq, we have agreed to
take all necessary action to elect a nominee of Compaq to our
Board of Directors. Compaq will have this right to nominate a
director so long as it continues to own at least 25% of the
shares originally purchased by it in the private
placement.
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 each director who is
not our officer or employee for 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
41,666 shares of our class A common stock at a price of $0.006
per share for service as a director. Each of the persons who has
been appointed as a non-employee director after September 1999
has been granted an option to purchase 41,666 shares of our
class A common stock for service as a director. In addition, our
1999 stock incentive plan provides for the automatic grant on
December 1 of each year, beginning December 1, 1999, of an
option to purchase 8,333 shares of class A common stock to each
person who is a non-employee director on the grant date. 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 $100,000 for
1999.
Summary Compensation Table
Name
and Principal Positions
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Annual Compensation
|
|
Long
Term
Compensation
Awards
|
|
Salary($)
|
|
Bonus($)
|
|
Other Annual
Compensation($)
|
|
Securities
Underlying
Options(#)
|
Andrew
J. Filipowski
Chairman and Chief Executive
Officer (1) |
|
$ |
|
|
$
|
|
$15,300 |
(2) |
|
229,166 |
Scott
A. Hartkopf,
President |
|
41,500 |
(3) |
|
200,000 |
|
|
|
|
125,000 |
(1)
|
Mr.
Filipowski has agreed to waive his base salary through June
15, 2004.
|
(2)
|
Represents personal travel for family members of Mr.
Filipowski.
|
(3)
|
Based
on an annual rate of $239,778.
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Each of Messrs. Cullinane and Humenansky has agreed
to waive his base salary 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
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 $100,000 for 1999.
Name
|
|
Individual Grants
|
|
Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
for Option Term (3)
|
|
Number of
Shares
Underlying
Options
Granted
(#) (1)
|
|
Percentage
of Total
Options
Granted to
Employees
in Fiscal
1999
|
|
Exercise
Price
($/Sh)(2)
|
|
Expiration
Date
|
|
|
|
|
|
0%
($)
|
|
5%
($)
|
|
10% ($)
|
Andrew
J. Filipowski |
|
229,166 |
|
8.8% |
|
$4.50 |
|
11/5/2009 |
|
$343,749 |
|
$1,208,477 |
|
$2,535,139 |
Scott
A. Hartkopf |
|
125,000 |
|
4.8% |
|
$4.50 |
|
11/5/2009 |
|
187,500 |
|
659,171 |
|
1,382,807 |
(1)
|
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.
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(2)
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The
exercise price of each of these options equalled the fair
market value per share of our class A common stock on the
grant date, as determined by the compensation committee of our
Board of Directors, based upon the most recent price at which
we sold our senior convertible preferred stock before the
grant date in capital raising transactions. However, for
financial statement purposes, the deemed fair market value of
our class A common stock on the grant date was $6.00 per
share.
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(3)
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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 deemed fair market value of our
class A common stock on the date of grant for financial
statement purposes appreciates at the indicated annual rates,
compounded annually, for the term of the option. The 0%, 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 class A
common stock. Using the initial public offering price for
purposes of these calculations, the potential realizable
values of these options at the assumed annual rates of stock
price appreciation, would be as follows: Mr.
Filipowski$1,031,247 at 0%, $2,328,338 at 5% and
$4,318,331 at 10%; and Mr. Hartkopf$562,500 at 0%,
$1,270,006 at 5% and $2,355,460 at 10%. Actual gains will be
dependent on the future performance of our class A common
stock and the option holders continued employment
through the vesting periods.
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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 $4.50 per share: Mr.
Cullinane104,166 shares; Mr. Humenansky125,000
shares; Mr. Freedman52,083 shares; and Mr.
Wilson41,666 shares.
1999
Option Values
The following table shows information regarding the
unexercised options, all of which were immediately exercisable,
held by our chief executive officer and our only other executive
officer whose combined salary and bonus exceeded $100,000 for
1999 as of December 31, 1999. None of our executive officers
exercised any options during 1999.
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Number of Shares
Underlying
Unexercised
Options at
December 31,
1999
|
|
Value of
Unexercised
In-the-Money
Options at
December 31,
1999($)
|
Name
|
|
Exercisable
|
|
Exercisable
|
Andrew
J. Filipowski |
|
229,166 |
|
$5,568,734 |
Scott
A. Hartkopf |
|
125,000 |
|
3,037,500 |
The value of unexercised in-the-money options at
December 31, 1999 is based upon the difference between the $4.50
per share exercise price of these options and the fair market
value of our class A common stock of $28.80 per share on
December 31, 1999. Using the initial public offering price for
the purpose of calculating the value of unexercised in-the-money
options held by Messrs. Filipowski and Hartkopf, as of December
31, 1999, the values would have been as follows: Mr.
Filipowski$1,031,247; and Mr.
Hartkopf$562,500.
Compensation Committee Interlocks and Insider
Participation
Upon completion of this offering, our compensation
committee will make all compensation decisions and will
administer our incentive compensation programs and plans.
Messrs. Fulgoni, Levy, Rice, Szlam, Tyree and Zollars currently
serve as the members of our compensation committee. In addition,
Ms. Pahl served as a member of our compensation committee in
1999. 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 serve on our compensation
committee.
The members of our compensation committee and their
affiliates purchased shares of our class A common stock for
$0.006 per share and shares of series C senior convertible
preferred stock for $1.00 per share, as shown in the following
table below. Each share of series C preferred stock will convert
into one-sixth of a share of class A common stock upon
completion of this offering.
Committee Member
|
|
Class A
Common
Shares
|
|
Series C
Preferred
Shares
|
Gian M.
Fulgoni |
|
41,666 |
|
1,100,000 |
|
Lawrence F. Levy |
|
|
|
2,741,000 |
|
Teresa
L. Pahl |
|
41,666 |
|
100,000 |
|
Andre
Rice |
|
41,666 |
|
200,000 |
|
Aleksander Szlam |
|
|
|
1,000,000 |
(1) |
James
C. Tyree |
|
|
|
|
|
Robert
J. Zollars |
|
41,666 |
|
350,000 |
|
|
(1)
|
Represents shares purchased by a family partnership
controlled by Mr. Szlam.
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In addition, members, or former members, of our
compensation committee have management positions with, and
economic interests (determined as of May 15, 2000) in, entities
with which we have engaged in transactions, as
follows:
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Mr.
Fulgoni is the founder and chairman of comScore. On October
29, 1999, we acquired approximately 0.9% of comScore for
$200,208.
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Until
June 2000, Ms. Pahl was the Vice President of Aon Group, Inc.,
a subsidiary of Aon Corporation and Chairman of Aon Enterprise
Insurance Services, Inc., an affiliate of Aon Risk Services of
Missouri. We have paid Aon Risk Services of Missouri
approximately $241,000 as broker with respect to our directors
and officers liability insurance. We have agreed to sell to
Aon Corporation, concurrent with our completion of this
offering, for cash in a private placement, a number of shares
of our class C common stock having an aggregate initial public
offering value of $25,000,000. We have also entered into a
non-binding memorandum of understanding with Aon Corporation
to collaborate toward the development and operation of an
insurance services component of FiNetrics, as well as a
reinsurance business, which may include Aon Corporation
acquiring an ownership interest in FiNetrics.
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James
C. Tyree is the Chairman and Chief Executive Officer of
Mesirow Financial. An affiliate of Mesirow has committed to
invest $4,000,000 in the Skyscraper Ventures, L.P.
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Robert
Jay Zollars is the Chairman, President and Chief Executive
Officer of Neoforma.com and beneficially owns approximately
7.6% of Neoforma.com. On October 14, 1999, we acquired
approximately 2.1% of Neoforma.com. Following
Neoforma.coms initial public offering, as of May 31,
2000, our interest is approximately 1.5%.
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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 with
PLATINUM.
The consulting agreements contain non-compete
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 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,
PLATINUMs 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 agreements, competitive activities which
Messrs. Filipowski, Cullinane and Humenansky are prohibited from
conducting include:
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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
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soliciting or assisting another person to solicit or
attempt to solicit persons or entities that were customers as
of March 29, 1999 or in the three years before that date 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.
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The 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 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 consultants 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
consultants activities would not have a material adverse
impact on any of PLATINUMs 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.
Larry S. Freedman, our Executive Vice President,
General Counsel and Secretary, has 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 these agreements with Computer
Associates terminate on June 29, 2001.
To manage our business effectively with respect to
these agreements, we have consulted with PLATINUM and Computer
Associates before making any acquisition to confirm that it
would not result in a breach of these agreements. If the
relevant parties to these agreements were to deem our activities
or those of any proposed
associated company to be prohibited by these consulting and
non-compete agreements, we might not be able to conduct those
activities or acquire interests in that associated company. To
date, neither PLATINUM nor Computer Associates has raised any
objection to any of our acquisitions or the business activities
of us or any of our associated companies, including the web
design and deployment operations of Xqsite. In the future,
however, these consulting and non-compete agreements could limit
our business opportunities, which could impair our
success.
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 associated companies that have
completed initial public offerings and in any public companies
into which our associated 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 employees 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 have made available
10,833,333 shares of our class A common stock for issuance under
the plan. 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)
50,000,000 shares. Our compensation committee administers the
stock incentive plan. This plan provides our compensation
committee with broad discretion to select the officers,
employees, directors, consultants and advisors to whom awards
may be granted, as well as the type, size and terms and
conditions of each award. The stock incentive compensation plan
permits grants of the following types of awards:
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non-qualified and incentive stock options;
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stock
appreciation rights; and
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other
stock-based awards.
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Options granted 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 stock incentive plan provides for the automatic
grant on December 1 of each year, beginning on December 1, 1999,
of an option to purchase 8,333 shares of class A common stock to
each of our non-employee directors. Options granted to
non-employee directors will have an exercise price equal to the
fair market value of our class A common stock on the date of
grant, as determined by our compensation committee. Stock
options granted to non-employee directors expire on the earliest
of (1) ten years after their date of grant, (2) one year after
the termination of the non-employee directors service as
our director because of death, disability or retirement at or
after age 65 or (3) 90 days after the termination of the
non-employee directors service as our director for any
other reason. If a non-employee directors 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.
As of July 11, 2000, 7,268,660 shares of our class
A common stock had been issued under our stock incentive plan,
upon exercise of outstanding options or otherwise, at prices
ranging from $4.50 to $13.50 per share. As of July 11, 2000,
options to purchase 20,120 shares had been cancelled and 502,024
shares of restricted stock issued upon exercise of options had
been repurchased, and we had outstanding options to purchase
978,866 shares of class A common stock under our stock incentive
plan, with exercise prices ranging from $4.50 to $13.50 per
share as of July 11, 2000. Each of the outstanding options is,
and each of the exercised options was, 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 or issued 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.
Equity
Compensation Loan Program
In accordance with our stock incentive plan, we
offered to loan each employee and director who has been awarded
a non-qualified stock option under our stock incentive plan an
amount necessary to pay the exercise price of their outstanding
options. Under this program, we have loaned a total of
$31,166,660 to a total of 785 employees and non-employee
directors, through July 11, 2000. As of July 11, 2000,
$3,186,697 of these loans had been cancelled in connection with
stock repurchases. The outstanding loans of $27,979,963 are full
recourse, bear interest at the Applicable Federal Rate and have
five-year terms. Each employee or director receiving a loan has
pledged the number of shares acquired with loan proceeds upon
exercise of the applicable option as collateral for the loan. If
the employee or director sells any of these shares, the employee
or director will be obligated under the terms of the loan to use
the proceeds of the sale to repay the outstanding balance of the
loan related to the shares sold. If the employees
employment with us or the directors service to us
terminates for any reason, the employee or director must repay
the full outstanding loan balance to us within 90 days of this
termination.
2000
Employee Stock Purchase Plan
In January 2000, we adopted, subject to stockholder
approval, our 2000 employee stock purchase plan, under which a
total of 4,166,666 shares of class A common stock are available
for sale to our employees and employees of our majority-owned
associated companies. Through this plan, our eligible employees
can purchase class A common stock through payroll deductions and
other cash contributions.
Initially, this stock purchase plan will operate
over two-year plan periods, except that the first plan period
will be shorter as described below. The stock purchase plan
generally will be implemented in a series of consecutive
three-month offering periods during each plan period. The first
plan period, however, will begin on the date of this prospectus
and end on May 31, 2002, and the first offering period will
begin on the date of this prospectus and end on August 31,
2000.
Each participant will be granted an option to
purchase our class A common stock on the first day of the plan
period, and the option will be automatically exercised on the
last day of each offering period. The purchase price of each
share of class A common stock under the stock purchase plan will
equal 85% of the lesser of (1) the fair market value of our
class A common stock on the first day of the plan period or (2)
the fair market value on the date of purchase. Accordingly, the
fair market value of our class A common stock on the first day
of the first plan period will equal our initial public offering
price. Our Board of Directors and compensation committee can
change the length of the plan periods and offering periods and
the other terms described above.
Employee contributions may not exceed $21,250 for
any employee in any calendar year. Further in any calendar year,
no participating employee may purchase more than that number of
shares which is equal to
$25,000 divided by the fair market value of our class A common
stock on the first day of the plan period. In addition, no
employee can purchase class A common stock under the stock
purchase plan if that person, immediately after the purchase,
would own stock possessing 5% or more of the total combined
voting power or value of all outstanding shares of all classes
of our capital stock.
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 directors duty of loyalty to us or our
stockholders;
|
|
|
acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
|
|
|
unlawful dividends or unlawful stock purchases or
redemptions; or
|
|
|
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
directors duty of care. However, these provisions do not
affect a directors 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 our Board of Directors, 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 have entered 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 who 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 persons 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 have purchased director and officer liability
insurance on behalf of our directors and officers.
RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
The following is a description of the relationships
and transactions to which we have been a party since our
inception, in which the amount involved exceeded $60,000 and in
which any director, executive officer or holder of more than 5%
of our class A common stock or class B convertible common stock
has or will have a direct or indirect material interest, other
than compensation arrangements which are described under
Management
.
Our
Organization
Andrew J. Filipowski, our Chairman and Chief
Executive Officer, was involved in our founding and organization
and may be considered our promoter. 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 1,666 shares of
our class A common stock.
Recent
Financings
Since our inception, we have funded our growth
primarily through the sale of common stock and convertible
preferred stock. Unless otherwise indicated, the
information below regarding our financings does not assume the
conversion of our convertible preferred stock and class B
convertible common stock, all to be effected upon the completion
of this offering. We have issued the following
shares:
In August 1999, we sold a total of 3,449,956 shares
of class A common stock at a purchase price of $0.006 per share
to a group of 77 persons and a total of 2,041,662 shares of
class B convertible common stock at a purchase price of $0.006
per share to a group of six persons. We raised a total of
$32,950 through our sale of these shares. In connection with
this offering, each share of our class B convertible common
stock will convert into one share of class A common stock. Based
upon the initial public offering price, these shares will have a
total market value of $49,424,562 upon the completion of this
offering.
The following directors, executive officers and
beneficial owners of more than five percent of either our class
A common stock or class B convertible 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 convertible common
stock in our common stock financing:
Directors, Executive Officers and 5%
Stockholders
|
|
Class A Shares
|
|
Class B Shares
|
Andrew
J. Filipowski |
|
|
|
916,666 |
Michael
P. Cullinane |
|
|
|
416,666 |
Larry
S. Freedman |
|
|
|
208,333 |
Scott
A. Hartkopf |
|
250,000 |
|
|
Paul L.
Humenansky |
|
|
|
166,666 |
Lynn S.
Wilson |
|
125,000 |
|
|
Michael
J. Birck |
|
41,666 |
|
|
James
E. Cowie |
|
41,666 |
|
|
Andrea
Lee Cunningham |
|
41,666 |
|
|
Michael
H. Forster |
|
41,666 |
|
|
Arthur
P. Frigo |
|
41,666 |
|
|
Gian M.
Fulgoni |
|
41,666 |
|
|
George
Garrick |
|
41,666 |
|
|
Craig
D. Goldman |
|
41,666 |
|
|
Arthur
W. Hahn |
|
41,666 |
|
|
Jeffrey
D. Jacobs |
|
41,666 |
|
|
Directors, Executive Officers and 5%
Stockholders
|
|
Class A Shares
|
|
Class B Shares
|
Gregory
K. Jones |
|
41,666 |
|
|
Bryan
Kennedy |
|
166,666 |
|
|
Teresa
L. Pahl |
|
41,666 |
|
|
John
Rau |
|
41,666 |
|
|
Andre
Rice |
|
41,666 |
|
|
Michael
Santer |
|
166,666 |
|
|
Paul
Tatro |
|
|
|
166,666 |
William
Wrigley, Jr. |
|
41,666 |
|
|
Robert
Jay Zollars |
|
41,666 |
|
|
|
Series A Preferred Financing
|
In September 1999, we sold a total of 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 a
total of 37,750,000 shares of our series A-2 junior convertible
preferred stock at a purchase price of $0.25 per share to a
group of seven persons. We raised a total of $11,721,650, after
estimated expenses, through our sales of these shares. Each
share of our series A-1 preferred stock will convert into
one-sixth of a share of our class A common stock, each share of
our series A-2 preferred stock will convert into one-sixth of a
share of our class B convertible common stock, and each share of
our class B convertible common stock will convert into one share
of our class A common stock, all upon completion of this
offering. Based upon the initial public offering price, these
shares of common stock will have a total market value of
$70,479,630 upon the completion of this offering.
The following directors, executive officers and
beneficial owners of more than five percent of either our class
A common stock or class B convertible 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:
Directors, Executive Officers and 5%
Stockholders
|
|
Series A-1
Preferred Shares
|
|
Series A-2
Preferred Shares
|
Andrew
J. Filipowski(1) |
|
|
|
19,950,000 |
Michael
P. Cullinane |
|
|
|
3,000,000 |
Larry
S. Freedman(2) |
|
|
|
400,000 |
Scott
A. Hartkopf |
|
200,000 |
|
|
Paul L.
Humenansky |
|
|
|
3,000,000 |
Paul A.
Tatro |
|
|
|
10,000,000 |
Lynn S.
Wilson |
|
400,000 |
|
|
(1)
|
Includes 53,333 shares purchased by a trust for the
benefit of Mr. Filipowskis children.
|
(2)
|
Represents shares purchased by Marsh Flower Investments
I, a partnership that Mr. Freedman controls.
|
|
Series B Preferred Financing
|
In September 1999, we sold a total of 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 a
total of 20,100,000 shares of our series B-2 convertible
preferred stock at a purchase price of $0.50 per share to a
group of two persons. We raised a total of $11,381,000, after
estimated expenses, through our sales of these shares. Each
share of our series B-1 preferred stock will convert into
one-sixth of a share of our class A common stock, each share of
our series B-2 preferred stock will convert into one-sixth of a
share of our class B convertible common stock, and each share of
our class B convertible common stock will convert into one share
of our class A common stock, all upon the completion of this
offering. Based upon the initial public offering price, these
shares of common stock will have a total market value of
$34,217,856 upon the completion of this offering.
The following directors, executive officers and
beneficial owners of more than five percent of either our class
A common stock or class B convertible common stock (assuming the
conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series B-2 preferred stock in
our series B preferred stock financing:
Directors, Executive Officers and 5%
Stockholders
|
|
Series B-2
Preferred Shares
|
Andrew
J. Filipowski |
|
20,000,000 |
From September through December 14, 1999, we sold a
total of 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. We raised a total of $189,220,906, after
estimated expenses, through our sale of these shares. Each share
of our series C preferred stock will convert into one-sixth of a
share of our class A common stock upon the completion of this
offering. Based upon the initial public offering price, these
shares will have a market value of $285,091,281 upon the
completion of this offering.
The following directors, executive officers and
beneficial owners of more than five percent of either our class
A common stock or class B convertible 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:
Directors, Executive Officers and 5%
Stockholders
|
|
Series C
Preferred Shares
|
Andrew
J. Filipowski (1) |
|
1,220,000 |
Michael
P. Cullinane (2) |
|
275,000 |
Robert
A. Bernard (3) |
|
2,000,000 |
Michael
J. Birck (4) |
|
5,000,000 |
Peter
C.B. Bynoe (5) |
|
600,000 |
Thomas
P. Danis (6) |
|
850,000 |
Arthur
Frigo, Sr. (7) |
|
5,000,000 |
Gian M.
Fulgoni |
|
1,100,000 |
George
Garrick |
|
100,000 |
Craig
D. Goldman |
|
200,000 |
Joseph
D. Gutman |
|
200,000 |
Arthur
W. Hahn (8) |
|
760,000 |
Jeffrey
D. Jacobs |
|
1,000,000 |
Richard
P. Kiphart (9) |
|
2,000,000 |
Ronald
D. Lachman (10) |
|
510,000 |
William
A. Lederer (11) |
|
300,000 |
Michael
Leitner |
|
100,000 |
Lawrence F. Levy |
|
2,741,000 |
Teresa
L. Pahl |
|
100,000 |
John
Rau |
|
1,000,000 |
Bruce
V. Rauner |
|
550,000 |
Andre
Rice (12) |
|
200,000 |
Tim J.
Stojka (13) |
|
1,000,000 |
Aleksander Szlam (14) |
|
1,000,000 |
Paul A.
Tatro (15) |
|
205,000 |
Mark A.
Tebbe |
|
250,000 |
David
Tolmie |
|
50,000 |
William
J. Wrigley, Jr. |
|
17,000,000 |
Robert
Jay Zollars |
|
350,000 |
(1)
|
Represents 200,000 shares purchased by Platinum
Construction Corp., a corporation controlled by Mr.
Filipowski, and 1,020,000 shares purchased by Mr.
Filipowskis brother-in-law.
|
(2)
|
Represents 200,000 shares purchased by Mr.
Cullinanes brother, 15,000 purchased by Mr.
Cullinanes father and his wife and 60,000 shares held by
Mr. Cullinanes father- and mother-in-law.
|
(3)
|
Represents shares purchased by marchFIRST, Inc. Mr.
Bernard is the Chairman of the Board and Chief Executive
Officer of marchFIRST.
|
(4)
|
Represents shares purchased by Tellabs, Inc. Mr. Birck
is the President and Chief Executive Officer and a director of
Tellabs.
|
(5)
|
Represents shares purchased by R&W Ventures, a
partnership owned 33.3% by Mr. Bynoe.
|
(6)
|
Includes 500,000 shares purchased by SINAD II, a
partnership controlled by Mr. Danis and his two
brothers.
|
(7)
|
Includes a total of 100,000 shares purchased by Mr.
Frigos son and 200,000 shares purchased by Mr.
Frigos two daughters.
|
(8)
|
Includes 400,000 shares issued to Katten Muchin Zavis
as payment for legal services.
|
(9)
|
Includes 1,000,000 shares purchased by Wilblairco
Associates. Mr. Kiphart is affiliated with Wilblairco
Associates.
|
(10)
|
Includes a total of 450,000 shares purchased by three
trusts for the benefit of Mr. Lachmans
children.
|
(11)
|
Represents shares purchased by Minotaur Partners, a
partnership controlled by Mr. Lederer.
|
(12)
|
Represents shares purchased by Rice Group, Ltd., a
company controlled by Mr. Rice.
|
(13)
|
Represents shares purchased by Stojka Brothers
Partnership, a partnership owned 25% by Mr. Stojka and 25% by
each of three of Mr. Stojkas brothers.
|
(14)
|
Represents shares purchased by Szlam Partners, L.P., a
limited partnership controlled by Mr. Szlam.
|
(15)
|
Represents 35,000 shares purchased by Mr. Tatros
father, a total of 75,000 shares purchased by Mr. Tatros
two brothers, and a total of 95,000 shares purchased by Mr.
Tatros three brothers and sisters-in-law.
|
|
Series D Preferred Financing
|
On January 19, 2000, we sold a total of 191,980,300
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 a total of 5,019,700 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. We raised $196,900,000, after estimated
expenses, through our sale of these shares. Each share of our
series D and D-1 preferred stock will convert into one-sixth of
a share of our class A common stock upon the completion of this
offering. Based upon the initial public offering price, these
shares of common stock will have a market value of $295,499,925
upon the completion of this offering.
The following directors and beneficial owner of more
than five percent of either our class A common stock or class B
convertible common stock (assuming the conversion of all shares
of preferred stock into common stock) acquired beneficial
ownership of series D preferred stock in the series D preferred
stock financing:
5%
Stockholder
|
|
Series D
Preferred Shares
|
James
E. Cowie(1) |
|
14,975,000 |
Dell
USA L.P. |
|
100,000,000 |
Sanjay
Kumar(2) |
|
25,000,000 |
(1)
|
Represents shares purchased by Frontenac VII Limited
Partnership and Frontenac Masters VII Limited
Partnership.
|
(2)
|
Represents shares purchased by CBW/SK divine
investments, a partnership of which Mr. Kumar is a general
partner.
|
|
Beneficial Ownership and Voting Power
|
The table below shows, for each officer or director
who beneficially owns 1% or more of either our class A common
stock or class B convertible common stock before this offering
and for each beneficial owner of more than 5% of either our
class A common stock or class B convertible common stock, the
percentage of our capital stock beneficially owned, and
percentage of voting power of our common stock held, by that
holder after each of the private financings discussed above,
assuming the conversion of all our preferred stock into common
stock. The table does not show our issuances of series E and
series F preferred stock, which were not issued to any director,
executive officer or holder of more than 5% of our class A
common stock or class B convertible common stock.
|
|
Common Stock
Financing
|
|
Series A
Financing
|
|
Series B
Financing
|
|
Series C
Financing
|
|
Series D
Financing
|
Directors, Executive
Officers and 1%
Stockholders
|
|
Beneficial
Ownership
|
|
Voting
Power
|
|
Beneficial
Ownership
|
|
Voting
Power
|
|
Beneficial
Ownership
|
|
Voting
Power
|
|
Beneficial
Ownership
|
|
Voting
Power
|
|
Beneficial
Ownership
|
|
Voting
Power
|
Andrew
J. Filipowski |
|
16.7 |
% |
|
38.4 |
% |
|
31.8 |
% |
|
48.0 |
% |
|
44.2 |
% |
|
62.0 |
% |
|
15.6 |
% |
|
49.2 |
% |
|
9.3 |
% |
|
40.6 |
% |
Michael
P. Cullinane |
|
7.6 |
|
|
17.5 |
|
|
6.9 |
|
|
10.4 |
|
|
5.4 |
|
|
7.5 |
|
|
1.9 |
|
|
6.0 |
|
|
1.1 |
|
|
4.9 |
|
Paul
Humenansky |
|
3.0 |
|
|
7.0 |
|
|
5.0 |
|
|
7.5 |
|
|
3.9 |
|
|
5.5 |
|
|
1.4 |
|
|
4.3 |
|
|
* |
|
|
3.6 |
|
Larry
S. Freedman |
|
3.8 |
|
|
8.7 |
|
|
2.1 |
|
|
3.1 |
|
|
1.6 |
|
|
2.2 |
|
|
* |
|
|
1.8 |
|
|
* |
|
|
1.5 |
|
James
E. Cowie |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
|
1.3 |
|
Dell
USA L.P. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.4 |
|
|
8.9 |
|
Sanjay
Kumar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.1 |
|
|
2.2 |
|
Paul A.
Tatro |
|
3.0 |
|
|
7.0 |
|
|
13.8 |
|
|
20.8 |
|
|
10.7 |
|
|
15.0 |
|
|
3.8 |
|
|
11.9 |
|
|
2.2 |
|
|
9.8 |
|
William
Wrigley, Jr. |
|
* |
|
|
* |
|
|
* |
|
|
* |
|
|
* |
|
|
* |
|
|
5.8 |
|
|
1.8 |
|
|
3.5 |
|
|
1.5 |
|
Loans
to Executive Officers and Directors
We offered to loan to each of our employees,
including our executive officers, and our non-employee directors
an amount necessary to pay the exercise price of options we
granted to that employee or director under the loan program
described under ManagementExecutive
CompensationEquity Compensation Loan Program. Under
this program, we have loaned the following amounts to our
executive officers and directors, all of which remain
outstanding:
Executive Officer/Director
|
|
Amount of Indebtedness
|
|
Interest Rate
|
Andrew
J. Filipowski |
|
$1,031,250 |
|
6.21 |
% |
Scott
A. Hartkopf |
|
$ 562,500 |
|
6.21 |
% |
Michael
P. Cullinane |
|
$ 468,750 |
|
6.21 |
% |
Paul L.
Humenansky |
|
$ 750,000 |
|
6.21 |
% |
Larry
S. Freedman |
|
$ 234,375 |
|
6.21 |
% |
Michael
J. Jordan |
|
$1,000,000 |
|
6.80 |
% |
Ronald
D. Lachman |
|
$ 225,000 |
|
6.21 |
% |
Mohanbir S. Sawhney |
|
$ 225,000 |
|
6.21 |
% |
Timothy
Stojka |
|
$ 225,000 |
|
6.21 |
% |
Stockholders Agreement
Under the stockholders agreement we entered into
with the holders of our series D and D-1 preferred stock, (1)
we, (2) Messrs. Filipowski, Cullinane, Humenansky, Freedman,
Kennedy, Santer, Slowey and Tatro and affiliates of Messrs.
Filipowski, Humenansky, Freedman and Tatro, who hold all of our
class B common stock, which will convert into shares of our
class A common stock upon completion of this offering, and (3)
the purchasers of our series D and D-1 preferred stock, who,
collectively, will hold 45.7% of the voting power of our capital
stock upon completion of this offering, have agreed take all
necessary actions, so that:
|
|
each of
the following purchasers of our series D and D-1 preferred
stock can designate one member of our Board of Directors: (1)
CBW/SK divine Investments, (2) First Chicago Investment
Corporation and
|
|
Cross
Creek Capital Partners X, LLC, which we together refer to as
First Chicago Equity Capital, (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
|
|
|
Dell
USA L.P., which also purchased our series D preferred stock,
can designate two members of our Board of
Directors.
|
Additionally, we have agreed to take all necessary
actions so that one of the directors designated by each of
Frontenac and Dell is designated as a member of our executive
committee. However, none of CBW/SK divine Investments, First
Chicago Equity Capital, Frontenac, Microsoft or Dell will have
any of these rights if it does not continue to own at least 25%
of the capital stock originally purchased by it. The entities
hold the number of shares and have designated the members of our
Board of Directors shown across from their names
below.
Investor
|
|
Shares of class A
common stock
|
|
Designated
board members
|
CBW/SK
divine Investments |
|
4,166,666 |
|
Sanjay
Kumar |
Dell |
|
16,666,666 |
|
Alex C.
Smith, Thomas J. Meredith |
First
Chicago Equity Capital |
|
2,474,998 |
|
Eric C.
Larson |
Frontenac |
|
2,495,832 |
|
James
E. Cowie |
Microsoft |
|
4,166,666 |
|
Michael
E. Leitner |
Under this stockholders agreement, Mr. Filipowski
has agreed that, for a period of one year from the consummation
of this offering, he will not transfer more than 10% of the
capital stock that he owns, other than to family members, family
trusts, family-owned corporations or partnerships or his estate,
without first giving notice to the purchasers of our series D
and D-1 preferred stock and giving these 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 purchasers of our series D and
D-1 preferred stock, including CBW/SK divine Investments, Dell,
First Chicago Equity Capital, Frontenac and Microsoft, who will
hold a total of 32,833,325 shares of our class A common stock
after this offering, 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 addition, at any time after 12
months following the consummation of this offering, the
purchaser of our series E preferred stock, CMGI, which will hold
a total of 4,749,287 shares of our class A common stock, will be
entitled to unlimited demand registrations on Form S-3 for which
we will be required to pay the expenses. 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. These stockholders have agreed not to sell their
shares or exercise any demand registration rights for the period
ending 180 days after the date of this prospectus.
In addition, holders of 86,384,087 shares of our
class A common stock will be entitled to request that we
register their shares under the Securities Act for resale to the
public in the event that we initiate a public offering. If 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 the
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.
If the registration is not an underwritten demand registration
under an agreement with us, first, shares of class A common
stock that we propose to sell will be included in the
registration, and second, shares of our class A common stock
issued upon conversion of our series D and D-1 and series E
preferred stock and other shares with equivalent rights will be
included. If the registration is an underwritten demand
registration under an agreement with us, first, the shares for
which the registration has been requested and shares of class A
common stock issued upon conversion of our series D and D-1 and
series E preferred stock and other shares with equivalent rights
will be included in the registration, and, second, shares of
class A common stock that we propose to sell will be included.
In either case, third, shares of our class A common stock issued
directly or indirectly upon conversion of our series C 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 these security holders and requested
to be included. Finally, shares of our class A common stock
which were sold by us in August 1999 or were issued upon
conversion of class B convertible common stock sold by us 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 stockholder. If we register
shares of class A common stock held by security holders with
registration rights, these holders would be able to publicly
sell those shares immediately upon effectiveness of the
registration statement and as long as the registration statement
remains effective.
NASD Conduct Rule 2710(c)(6)(b)(viii) sets
limitations on the registration and conversion rights of any
shares deemed to be compensation to the underwriters in
connection with this offering. Some shares of our series C
preferred stock and class C convertible common stock have been
deemed to be compensation to the underwriters in connection with
this offering. See Underwriting. With respect to the
shares of series C preferred stock deemed to be compensation to
the underwriters, those shares met all of the limitations set by
Rule 2710(c)(6)(b)(viii). With respect to the shares of class C
convertible common stock to be purchased by BancBoston Capital,
Inc. in the concurrent private placement deemed to be
compensation to the underwriters, BancBoston has agreed to waive
its conversion rights to the extent that they do not comply with
this NASD rule. Specifically, the shares of class C convertible
common stock to be purchased by BancBoston Capital will not be
convertible more than five years from the effective date of the
offering. The shares of class C convertible common stock do not
have any registration rights.
Associated Company Transactions
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Mr.
Filipowski, our Chairman and Chief Executive Officer,
converted $800,000 of personal loans previously made by him to
iGive.com into iGive.coms common stock at the time we
acquired an interest in iGive.com. Mr. Filipowski beneficially
owns approximately 14.6% of iGive.com (as of May 15, 2000). On
February 11, 2000, we acquired approximately 32.1% of
iGive.com for $4,000,000.
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Messrs.
Filipowski and Humenansky are directors of OpinionWare and
beneficially own a total of approximately 10.4% of the equity
of OpinionWare (as of May 15, 2000). In addition, Mr.
Filipowskis son beneficially owns less than 1% of its
equity (as of May 15, 2000). On December 8, 1999 and April 28,
2000, we acquired a combined total of approximately 54.4% of
OpinionWare for a total of $7,000,000.
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Mr.
Fulgoni, one of our directors, is the founder and chairman of
comScore and beneficially owns approximately 20.7% of comScore
(as of May 15, 2000). Mr. Garrick, one of our directors,
beneficially owns approximately 1.2% of comScore (as of May
15, 2000). On October 29, 1999 we acquired approximately 0.9%
of comScore for $200,208. Mr. Fulgoni became a member of our
Board of Directors before this transaction.
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Mr.
Goldman, one of our directors, beneficially owns less than 1%
of LAUNCHworks (as of May 15, 2000). We beneficially own
approximately 39.7% of LAUNCHworks (as of May 15, 2000).
Giving effect to the exercise of warrants that we hold, we
would beneficially own approximately 50.9% of
LAUNCHworks.
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Mr.
Filipowski is a director of Panthera Productions, beneficially
owns 14.9% of Panthera (as of May 15, 2000), through his
shared control over a charitable foundation, and has
personally loaned Panthera approximately $306,000. We
beneficially own 62.9% of Panthera (as of May 15,
2000).
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Messrs.
Kaplan and Sawhney, two of our directors, are members of
CapacityWeb.coms Advisory Board. Michigan & Oak,
LLC, a venture advisory firm of which Messrs. Kaplan and
Sawhney are principals, beneficially owns approximately 3.8%
of CapacityWeb.com (as of May 15, 2000). On February 11, 2000,
we acquired approximately 44.8% of CapacityWeb.com for
$4,500,000. In addition, Michigan & Oak is entitled to a
finders fee of approximately $225,000, 5% of the amount paid
by us for our interest in CapacityWeb.com. Michigan & Oak
will be entitled to similar fees on other transactions which
it brings to us. Messrs. Kaplan and Sawhney became members of
our Board of Directors before this transaction.
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Mr.
Stojka, one of our directors, is the Chief Executive Officer
of Commerx and beneficially owns approximately 14.7% of
Commerx (as of May 15, 2000). On November 19, 1999, we
acquired approximately 1.0% of Commerx for $2,500,000. Mr.
Stojka became a member of our Board of Directors after this
transaction.
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Mr.
Zollars, one of our directors, is the Chairman, President and
Chief Executive Officer of Neoforma.com and beneficially owns
approximately 7.6% of Neoforma.com (as of May 15, 2000). On
October 14, 1999, we acquired approximately 2.1% of
Neoforma.com. As a result of Neoforma.coms initial
public offering, our interest has been reduced to
approximately 1.5%. Mr. Filipowski is a director of Neoforma
and beneficially owns less than 1% of its equity. Mr. Zollars
became a member of our Board of Directors before this
transaction. Messrs. Cullinane, Humenansky and Hartkopf and an
entity controlled by Mr. Freedman participated in the directed
share program of the initial public offering of Neoforma.com.
These persons purchased the following number of shares with
the following market values (based on Neoforma.coms
initial public offering price): Mr. Cullinane250 shares,
$3,250; Mr. Humenansky250 shares, $3,250; Mr.
Hartkopf2,500 shares, $32,500; and Mr. Freedmans
entity250 shares, $3,250.
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Real
Estate Transactions
Mr. Filipowski is a manager of Blackhawk, LLC. He
also owns 33.3% of Blackhawk. From July 1999 through July 2000,
we have paid, or are obligated to pay, Blackhawk $50,000 per
month for an option to lease a 400,000 square foot facility in
Chicago or purchase the property on which the facility is to be
constructed. We have exercised our option to purchase the
property for $9,750,000, plus all costs and expenses of
Blackhawk associated with the property, which totals an
aggregate of approximately $12,000,000. We can complete this
purchase at any time before July 31, 2000. Based on our most
recent internal discussions regarding plans for the facility, we
currently estimate that our budget for the land acquisition and
construction and development of the facility will total between
$60,000,000 and $80,000,000. However, this budget may increase
or decrease as we finalize plans for the facility. We expect
that the majority of the construction and development costs will
be funded through third party financing and that approximately
$14,000,000 of this amount will be reimbursed to us through tax
increment financing. We currently anticipate that the facility
will be ready for occupancy by summer 2001. However, the timing
of our development of the facility, as well as the scale and
final design of the facility, will depend on the anticipated
space needs of us and other projected users of the facility,
transportation issues and the availability of third-party
financing. If we did not complete this offering and the
concurrent private placements, we would scale back, postpone or
cancel our plan to construct this facility.
Mr. Filipowski owns 33.3% and is a manager of
Habitat-Kahney, LLC. On January 7, 2000, we entered into a
ten-year lease with Habitat-Kahney for additional office space
in Chicago, Illinois. Our annual rent under this lease is
$730,080, with an annual 2% increase, and we are responsible for
our share of the buildings utilities and operating
expenses. We believe that our lease with Habitat-Kahney is on
terms no less favorable to us than those terms that would be
available in an arms-length transaction with an
unaffiliated third party.
Venture Capital Transactions
Effective August 4, 1999, Platinum Venture Partners,
Inc. withdrew, and we were substituted, as the general partner
of each 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 beneficially owns
approximately 22.5%, and each of Messrs. Cullinane and
Humenansky beneficially owns less than 5%, of the equity of
Platinum Venture Partners, Inc. Platinum Venture Partners, Inc.
beneficially owns a 2.7% limited partnership interest in
Platinum Venture Partners I and a 1.0% limited partnership
interest in Platinum Venture Partners II. Additionally, each of
Messrs. Filipowski, Humenansky, Cullinane, Cowie, Danis, Frigo,
Fulgoni, Jacobs and Levy owns a limited partnership interest in
Platinum Venture Partners I and/or 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, $193,051 on January 1, 2000 for
first quarter 2000 management fees, $214,359 on April 1, 2000
for second quarter 2000 management fees and approximately
$204,000 on July 1, 2000 for third quarter 2000 management fees.
We expect to receive a total of approximately $204,000 in
additional management fees from Platinum Venture Partners I and
II for the remainder of 2000.
Other
Transactions
Robert Bernard, one of our directors, is the
Chairman and Chief Executive Officer of marchFIRST, Inc. On
January 21, 2000, we entered into a contract under which
marchFIRST provides us with information technology consulting
services when we need them. We have paid marchFIRST
approximately $1,100,000, and owe them an additional
approximately $1,000,000 for consulting services through June
30, 2000. We expect to incur approximately $1,100,000 of
additional expenses for marchFIRST consulting services through
September 2000. We have agreed to sell to marchFIRST, concurrent
with our completion of this offering, for cash in a private
placement at the initial public offering price, a number of
shares of our class C convertible common stock having an
aggregate initial public offering value of
$15,000,000.
Peter Bynoe is a partner of Piper Marbury Rudnick
& Wolfe, which provides legal services to our associated
companies through an exclusive agreement with Justice divine.
Piper Marbury also provides legal services to other companies
that are customers of Justice divine but are not part of our
network of associated companies. Piper Marbury bills companies
directly for these services. The cost for these services through
April 30, 2000 was approximately $263,000, including
approximately $226,000 for services for associated companies.
Justice divine does not recognize the fees paid to Piper Marbury
as revenues, but receives a management fee from each company
based on the charges to that company. In addition, partners in
Piper Marbury Rudnick & Wolfe purchased for a total of
$700,000, 700,000 shares of our class C preferred stock, which
will convert into 116,666 shares of class A common stock upon
the completion of this offering.
Mr. Danis is a Managing Director of Aon Risk
Services Mergers and Acquisitions group. Through June
2000, Ms. Pahl was an Executive Vice President of Aon
Corporation and the Chairman of Aon Enterprise Insurance
Services, Inc., an affiliate of Aon Risk Services of Missouri
Aon. We have paid Aon Risk Services of Missouri approximately
$241,000 as broker with respect to our directors and officers
liability insurance. We have agreed to sell to Aon Corporation,
concurrent with our completion of this offering, for cash in a
private placement at the initial public offering price, a number
of shares of our class C convertible common stock having an
aggregate initial public offering value of $25,000,000. We have
also entered into a non-binding memorandum of understanding with
Aon Corporation to collaborate toward the development and
operation of an insurance services component of FiNetrics, as
well as a reinsurance business, which may include Aon
Corporation acquiring an ownership interest in
FiNetrics.
FleetBoston Robertson Stephens Inc., which uses
the brand name Robertson Stephens, is an underwriter of this
offering. We have agreed to sell BancBoston Capital, Inc., an
affiliate of Robertson Stephens, concurrent with our completion
of this offering, for cash in a private placement at the initial
public offering price, a number of shares of our class C
convertible common stock having an aggregate initial public
offering value of $25,000,000. However, BancBoston will not
purchase a number of shares that would cause the underwriters to
be deemed to have received underwriting compensation in excess
of the limitation imposed by a rule of the NASD. Under this
rule, the underwriters and their affiliates, collectively, may
not receive shares in excess of 10% of the number of shares
listed on the cover of this prospectus.
Arthur Hahn, one of our directors, is a partner in
the law firm of Katten Muchin Zavis, one of our legal counsels.
Katten Muchin Zavis has provided us with legal services since
our inception. The cost of these services through May 31, 2000
was approximately $5,200,000. We paid $400,000 of this total
billed amount by issuing Katten Muchin Zavis 400,000 shares of
our series C preferred stock, which will convert into 66,666
shares of our class A common stock in connection with the
completion of this offering. Mr. Hahn transferred to Katten
Muchin Zavis 20,883 of the shares of our class A common stock
initially issued by us to him for $0.001 per share in his
capacity as a director and a 50% beneficial interest in the
option to purchase 50,000 shares of our class A common stock
that was granted by us to him, which option was subsequently
exercised by Mr. Hahn on his own behalf and on behalf of Katten
Muchin Zavis. As a result, Katten Muchin Zavis will own 91,665
shares of class A common stock upon the completion of this
offering. Additionally, KMZ-DI Investors, an entity owned by
partners in Katten Muchin Zavis and partners in Katten Muchin
Zavis as individuals, including Mr. Hahn, collectively purchased
for a total of $2,350,000, 2,350,000 shares of our series C
preferred stock, which will convert into 391,666 shares of class
A common stock upon the completion of this offering.
Michael Jordan, one of our directors, entered into a
three year consulting agreement with us under which we agreed to
use our best efforts to have Mr. Jordan elected to our Board of
Directors, which occurred on March 13, 2000. Under the
agreement, Mr. Jordan has agreed to be a co-chairman of our do
right committee and to perform promotional activities for us. In
connection with the consulting agreement, we issued Mr. Jordan
an option to purchase 166,666 shares of our class A common stock
at a purchase price of $6.00 per share under our stock incentive
plan. The option was exercisable in full upon its grant, but
vests as follows: 83,333 shares on the first anniversary of the
grant date and 41,666 shares on each of the second and third
anniversaries of the grant date, provided that Mr. Jordan
continues to serve as a director and consultant on each of these
anniversaries. Mr. Jordan exercised the option in full and
purchased 166,666 shares of our class A common stock on March
10, 2000. We loaned Mr. Jordan $1,000,000 to pay the exercise
price of the option. These shares 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 transfers and repurchase rights expire based on
the option vesting schedule. Effective upon the consummation of
this offering, we will grant Mr. Jordan an option to purchase an
additional 300,000 shares of class A common stock at the initial
public offering price. This option will be exercisable in full
upon its grant, but will vest as follows: 150,000 shares on the
first anniversary of the grant date and 75,000 shares on each of
the second and third anniversaries of the grant
date.
Richard Kiphart, one of our directors, is a
principal of William Blair & Company, one of the
underwriters of this offering. William Blair is receiving a fee
as placement agent for Skyscraper Ventures, L.P. in connection
with its capital raising efforts. This fee will be equal to
1.75% of the total capital raised for the fund by William
Blair.
Michael Leitner, one of our directors, is the Vice
President, Corporate Development of 360networks, inc. We have
agreed to sell to 360networks, inc., concurrent with our
completion of this offering, for cash in a private placement,
2,000,000 shares of our class C convertible common stock at a
price, of $1.00 per share and 2,000,000 shares of our class C
convertible common stock at the initial public offering price,
for a total purchase price of $20,000,000. Based upon the
initial public offering price, these shares will have a market
value of $36,000,000 upon completion of this offering. On April
26, 2000, 360networks sold to us 93,545 shares of its
subordinate voting shares at a price of $5.00 per share and
280,636 shares of its subordinate voting
shares at a price of $13.23 per share, which represents the
360networks initial public offering price less underwriting
discounts, for an aggregate purchase price of $4,180,539 on
April 26, 2000. These shares had a market value of $5,238,534
upon completion of the 360networks initial public
offering. We expect to account for the difference between the
estimated discount being received by 360networks and the
discount received by us on our purchase of shares of
360networks, as a preferential distribution of approximately
$14,942,000. We have also entered into a non-binding memorandum
of understanding with 360networks that provides that 360networks
will be a preferred supplier to us of bandwidth and switched
data services to us and our associated companies in markets
where 360networks has an established presence and provides the
lowest industry rates. This memorandum of understanding requires
360networks to provide us with a 5% discount to the lowest
comparable competitive rates, but does not, however, require us
to purchase minimum amounts of these services. We cannot
currently quantify the amount of bandwidth and switched data
services, if any, that we and our associated companies will
purchase from 360networks under this memorandum of
understanding, in part because we have a commitment to purchase
similar services from Level 3.
Mr. Leitner also serves as a Senior Director of
Corporate Development of Microsoft. Microsoft purchased
25,000,000 shares of our series D preferred stock on January 19,
2000 for $25,000,000. On January 28, 2000, we entered into an
Alliance Agreement with Microsoft, which was amended on March
29, 2000. Under this agreement, we have agreed to incorporate
Microsoft products, technologies and services into our systems
and the web application hosting services that we provide to our
associated companies. In connection with this agreement, we are
obligated to purchase approximately $15,300,000 of Microsoft
software and services over the next four years. This agreement
allows us and our associated companies to be preferred providers
of outsourced Microsoft software solutions and allows Microsoft
to be our preferred platform. In connection with the agreement,
we have committed to use commercially reasonable efforts to
encourage our associated companies to migrate to Microsoft
software solutions, including expending $4,000,000 to promote
these solutions. We have also agreed with Microsoft to create a
digital feedback loop between us to create joint intelligence
about the marketplace, Microsoft software, new product
development and customer satisfaction. We have developed a joint
board with Microsoft that will meet quarterly to evaluate the
digital feedback loop and discuss cooperation in additional
areas. Further, under this agreement, we have agreed to use
commercially reasonable efforts to establish and staff an office
in Seattle within 60 days after the completion of this offering
and to develop a Seattle-based incubator habitat based on our
current business model by May 2001, and committed to contribute
at least $50,000,000 in capital for our Seattle operations for
projects and acquisitions. We have agreed to sell to Microsoft,
concurrent with our completion of this offering, for cash in a
private placement, a number of shares of our class A common
stock having an aggregate initial public offering value of
$50,000,000.
Alex Smith, one of our directors, is the
Vice-President of Dell Ventures. Dell Ventures is a Venture
Capital division of Dell USA L.P. , a subsidiary of Dell
Computer Corporation. Thomas J. Meredith, another of our
directors, is the Senior Vice President and Chief Financial
Officer of Dell Computer Corporation. Dell USA purchased
100,000,000 shares of our series D preferred stock on January
19, 2000 for $100,000,000. We have paid approximately $5,600,000
to Dell Computer Corporation for purchases of computers and
servers through June 30, 2000. We expect similar purchases to
continue as we grow.
Aleksander Szlam, one of our directors, is the
Chairman and Chief Executive Officer of eShare Technologies,
Inc. Brandango, one of our associated companies, has entered
into a license agreement with eShare to use eShares
software programs and receive related support and maintenance
services. Brandango has agreed to pay $1,700,000 for the license
and support through March 1, 2001. Future payments for support
and maintenance will be mutually agreed to by the
parties.
James C. Tyree, one of our directors, is the
Chairman and Chief Executive Officer of Mesirow Financial. An
affiliate of Mesirow Financial has committed to invest
$4,000,000 in Skyscraper Ventures, L.P.
On December 7, 1999, we entered into a Business
Opportunities Agreement with CBW/SK divine Investments, Dell
USA, First Chicago Equity Capital, Frontenac Mesirow Capital
Partners VII, L.P. and
Microsoft, each of which purchased shares of our Series D or D-1
preferred stock in our Series D financing described above and
each of which is entitled to at least one representative 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 the
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 arms
length basis from unaffiliated third parties. Further, any of
these transactions which we do not consider to be in the
ordinary course of business will be approved by the conflicts
committee or the acquisition committee of our Board of
Directors. Each of the transactions described under
Associated Company Transactions was approved
or ratified by our acquisition committee or conflicts committee.
Members of our acquisition committee and conflicts committee
recuse themselves from votes on matters in which they have an
interest.
The following table contains information regarding
the beneficial ownership of our common stock as of July 11, 2000
and as adjusted to reflect this offering and the concurrent
private placements, assuming the conversion into class A common
stock of all of our outstanding preferred stock and class B
convertible common stock, by:
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each
person or group of affiliated persons known by us to
beneficially own more than 5% of the outstanding shares of our
class A common stock;
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each of
our directors and executive officers;
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the
nominee to our Board of Directors; and
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all of
our directors and executive officers as a group.
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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 and percent of class 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.
The percent of total voting power held by a person is based on
the percent of each class of our common stock beneficially owned
by that person. Where the percent of class or percent of total
voting power is represented by an asterisk (*), the person owns
less than 1% beneficial ownership interest. Unless we indicate
otherwise, the address of each person who beneficially owns 5%
or more of the outstanding shares of our class A common stock is
c/o divine interVentures, inc., 4225 Naperville Road, Suite 400,
Lisle, Illinois 60532.
Name
of Beneficial Owner
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Percent of Class
|
|
Number of Shares
of Class A
Common Stock
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|
Before the Offering
and the Concurrent
Private Placements
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|
After the Offering
and the Concurrent
Private Placements
|
Executive Officers and
Directors
|
|
|
Andrew
J. Filipowski(1) |
|
8,284,163 |
|
8.4 |
% |
|
7.3 |
% |
Michael
P. Cullinane(2) |
|
1,024,998 |
|
1.1 |
|
|
* |
|
Scott
A. Hartkopf |
|
408,333 |
|
* |
|
|
* |
|
Paul L.
Humenansky |
|
833,331 |
|
* |
|
|
* |
|
Larry
S. Freedman(3) |
|
322,915 |
|
* |
|
|
* |
|
Lynn S.
Wilson |
|
233,332 |
|
* |
|
|
* |
|
Robert
Bernard |
|
49,999 |
|
* |
|
|
* |
|
Michael
J. Birck(4) |
|
49,999 |
|
* |
|
|
* |
|
Peter
C.B. Bynoe(5) |
|
141,666 |
|
* |
|
|
* |
|
James
E. Cowie(6) |
|
2,712,531 |
|
2.7 |
|
|
2.4 |
|
Andrea
Lee Cunningham |
|
49,999 |
|
* |
|
|
* |
|
Thomas
P. Danis(7) |
|
191,665 |
|
* |
|
|
* |
|
Michael
H. Forster |
|
41,000 |
|
* |
|
|
* |
|
Arthur
P. Frigo |
|
774,999 |
|
* |
|
|
* |
|
Gian M.
Fulgoni |
|
233,332 |
|
* |
|
|
* |
|
George
Garrick |
|
66,665 |
|
* |
|
|
* |
|
Craig
D. Goldman |
|
83,332 |
|
* |
|
|
* |
|
Joseph
D. Gutman |
|
74,999 |
|
* |
|
|
* |
|
Arthur
W. Hahn(8) |
|
229,997 |
|
* |
|
|
* |
|
David
D. Hiller(9) |
|
41,666 |
|
* |
|
|
* |
|
Jeffrey
D. Jacobs |
|
216,665 |
|
* |
|
|
* |
|
Gregory
K. Jones |
|
49,999 |
|
* |
|
|
* |
|
Michael
J. Jordan |
|
166,666 |
|
* |
|
|
* |
|
Steven
Neil Kaplan(10) |
|
49,999 |
|
* |
|
|
* |
|
Richard
P. Kiphart(11) |
|
360,821 |
|
* |
|
|
* |
|
Sanjay
Kumar(12) |
|
4,208,332 |
|
4.5 |
|
|
3.7 |
|
Ronald
D. Lachman |
|
59,999 |
|
* |
|
|
* |
|
Name
of Beneficial Owner
|
|
|
|
Percent of Class
|
|
Number of Shares
of Class A
Common Stock
|
|
Before the Offering
and the Concurrent
Private Placements
|
|
After the Offering
and the Concurrent
Private Placements
|
Executive Officers and Directors
(contd)
|
|
|
|
|
|
|
Eric C.
Larson(13) |
|
2,524,997 |
|
* |
|
* |
William
A. Lederer(14) |
|
99,999 |
|
* |
|
* |
Michael
Leitner |
|
66,665 |
|
* |
|
* |
Lawrence F. Levy |
|
506,832 |
|
* |
|
* |
Thomas
J. Meredith |
|
|
|
|
|
|
Teresa
L. Pahl |
|
66,665 |
|
* |
|
* |
John
Rau |
|
216,665 |
|
* |
|
* |
Bruce
V. Rauner(15) |
|
358,331 |
|
* |
|
* |
Andre
Rice(16) |
|
99,995 |
|
* |
|
* |
Mohanbir S. Sawhney |
|
49,999 |
|
* |
|
* |
Alex C.
Smith |
|
|
|
|
|
|
Tim J.
Stojka |
|
91,665 |
|
* |
|
* |
Aleksander Szlam(17) |
|
216,665 |
|
* |
|
* |
Mark A.
Tebbe |
|
91,665 |
|
* |
|
* |
David
M. Tolmie(9) |
|
49,999 |
|
* |
|
* |
James
C. Tyree(10) |
|
49,999 |
|
* |
|
* |
William
Wrigley, Jr.(18) |
|
2,883,332 |
|
3.1 |
|
2.5 |
Robert
Jay Zollars |
|
108,332 |
|
* |
|
* |
Our
executive officers and directors as a
group (45 persons)(19) |
|
28,434,907 |
|
30.0 |
|
24.9 |
|
|
Nominee for Director
|
|
|
|
|
|
|
Harold
F. (Bud) Enright, Jr. |
|
|
|
|
|
|
|
|
Other 5% Stockholders
|
|
|
|
|
|
|
Dell
USA L.P.(20) |
|
17,599,964 |
|
18.1 |
|
15.4 |
Microsoft Corporation(21) |
|
9,722,221 |
|
4.5 |
|
8.3 |
(1)
|
The
shares of class A common stock include 33,333 shares of class
A common stock held by Platinum Construction Corp., a
corporation controlled by Mr. Filipowski and 500,000 shares of
class A common stock expected to be purchased by Mr.
Filipowski in this offering. However, the percent of class
before the offering and the concurrent private placements does
not reflect the 500,000 shares of class A common stock
expected to be purchased by Mr. Filipowski in this
offering.
|
(2)
|
Excludes 38,333 shares of class A common stock held by
trusts for the benefit of Mr. Freedmans children of
which Mr. Cullinane is a trustee. Includes 4,160 shares of
class A common stock held by trusts for the benefit of Mr.
Freedmans relatives of which Mr. Cullinane is a
trustee.
|
(3)
|
The
class A common stock held by Mr. Freedman includes 66,666
shares held by Marsh Flower Investments I, a partnership
controlled by Mr. Freedman.
|
(4)
|
Includes 8,333 shares of class A common stock issuable
upon exercise of currently exercisable stock
options.
|
(5)
|
Includes 100,000 shares of class A common stock held by
R&W Venture Fund and 41,666 shares of class A common stock
issuable upon exercise of currently exercisable stock
options.
|
(6)
|
Includes 2,376,785 shares of class A common stock held
by Frontenac VII Limited Partnership, 119,047 shares of class
A common stock held by Frontenac VII Masters Limited
Partnership, 158,800 shares of class A common stock expected
to be purchased by Frontenac VII Limited Partnership in this
offering and 7,900 shares of class A common stock expected to
be purchased by Frontenac VII Masters Limited Partnership in
this offering. However, the percent of class before the
offering and the concurrent private placements does not
reflect the 158,800 shares of class A common stock expected to
be purchased by
Frontenac VII Limited Partnership in this offering or the 7,900
shares of class A common stock expected to be purchased by
Frontenac VII Masters Limited Partnership in this
offering.
|
(7)
|
Includes 83,333 shares of class A common stock held by
SINAD II, a partnership controlled by Mr. Danis and his two
brothers.
|
(8)
|
Includes 91,665 shares of class A common stock held by
Katten Muchin Zavis and 53,333 shares of class B convertible
common stock held in a trust for the benefit of Mr.
Filipowskis children, of which Mr. Hahn is the
trustee.
|
(9)
|
Includes 41,666 shares of class A common stock issuable
upon exercise of currently exercisable stock
options.
|
(10)
|
Includes 49,999 shares of class A common stock issuable
upon exercise of currently exercisable stock
options.
|
(11)
|
Includes 75,757 shares of class A common stock held by
WB Internet Fund 2000, LLC and 90,909 shares of class A common
stock held by WB Internet Fund 2000, QP, LLC. Mr. Kiphart is
affiliated with both of these entities.
|
(12)
|
Includes 4,166,666 shares of class A common stock held
by CBW/SK divine investments, a general partnership of which
Mr. Kumar is a general partner.
|
(13)
|
Includes 49,999 shares of class A common stock issuable
upon exercise of currently exercisable stock options held by
First Chicago Investment Corporation, 2,103,749 shares of
class A common stock held by First Chicago Investment
Corporation and 371,249 shares of class A common stock held by
Cross Creek Partners X, LLC. Mr. Larson is affiliated with
both of these entities.
|
(14)
|
Includes 50,000 shares of class A common stock held by
Minotaur Partners, a partnership controlled by Mr.
Lederer.
|
(15)
|
Includes 216,666 shares of class A common stock held by
GTCR Investment Partners, LLC.
|
(16)
|
Includes 33,333 shares of class A common stock held by
Rice Group, Ltd., a company controlled by Mr. Rice, 9,997
shares held in trusts for which Mr. Rice has the power to
direct the voting and investment and 8,333 shares of class A
common stock held by Mr. Rices spouse.
|
(17)
|
Includes 166,666 shares of class A common stock held by
Szlam Partners, L.P., a partnership controlled by Mr.
Szlam.
|
(18)
|
Includes 2,833,333 shares of class A common stock held
in a trust for the benefit of Mr. Wrigley.
|
(19)
|
Includes 383,331 shares of class A common stock
issuable upon exercise of currently exercisable stock
options.
|
(20)
|
Includes 89,998 shares of class A common stock issuable
upon exercise of currently exercisable stock options and
833,300 shares of class A common stock expected to be
purchased by Dell in this offering. However, the percent of
class before this offering and the concurrent private
placements does not reflect the 833,300 shares of class A
common stock expected to be purchased by Dell in this
offering. The address of Dell USA L.P. is 1 Dell Way, Round
Rock, TX 78682.
|
(21)
|
Includes 5,555,555 shares of class A common stock to be
purchased by Microsoft in a private placement concurrent with
this offering. However, the percent of class before the
offering and the concurrent private placements does not
reflect the 5,555,555 shares of class A common stock to be
purchased by Microsoft in a concurrent private placement. The
address of Microsoft is One Microsoft Way, Building 8,
Redmond, WA 98052.
|
DESCRIPTION OF CAPITAL STOCK
General
The following summary describes the material terms
of our capital stock. It also summarizes material provisions of
our Certificate of Incorporation, as it will be amended and
restated by our Third Amended and Restated Certificate of
Incorporation, and our bylaws, as amended and restated. We will
file our Third Amended and Restated Certificate of Incorporation
with the Secretary of State of Delaware before the completion of
this offering. We have filed 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 certificate of incorporation authorizes us to
issue 2,650,000,000 shares of capital stock, of which
2,500,000,000 shares are designated class A common stock, $0.001
par value per share, 100,000,000 shares are designated class C
convertible common stock, $0.001 par value per share, and
50,000,000 shares are designated preferred stock, $0.001 par
value per share. The class C convertible common stock are
convertible into class A common stock. Upon completion of this
offering, we will have no outstanding shares of our preferred
stock. Of our authorized class A common stock and class C
convertible common stock, upon completion of this offering and
the concurrent offerings:
|
|
114,158,942 shares of our class A common stock will be
issued and outstanding;
|
|
|
23,288,511 shares of our non-voting convertible class C
convertible common stock will be issued and
outstanding;
|
|
|
978,866
shares of our class A common stock will be reserved for
issuance upon exercise of currently outstanding options under
our 1999 Stock Incentive Plan;
|
|
|
3,584,793 shares of our class A common stock will be
reserved for future awards under our 1999 Stock Incentive
Plan; and
|
|
|
4,166,666 shares of our class A common stock will be
reserved for issuance under our 2000 Employee Stock Purchase
Plan.
|
Additionally, the number of shares reserved for grant
under our stock incentive 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 our 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) 50,000,000 shares.
Common
Stock
We have two classes of common stock: class A common
stock and class C convertible common stock. Except as set forth
below, our class A common stock and class C convertible common
stock have identical rights.
Holders of our class A common stock are entitled to
one vote per share. Holders of our class C convertible common
stock are not entitled to any voting rights. All actions
submitted to a vote of stockholders will be voted on by holders
of class A common stock voting together as a single class,
except as discussed below or provided by law.
Our class A common stock has no conversion rights.
Holders of our class C convertible common stock may convert
their class C convertible common stock into our class A common
stock, in whole or in part, at any
time and from time to time. Under the terms of the agreements by
which the class C convertible common stock is to be issued, a
holder of shares of class C convertible common stock immediately
following this offering may not convert these shares into shares
of class A common stock until termination or expiration of any
waiting periods that may apply under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. These waiting periods
typically expire 30 days after the filing of complete
applications with the Department of Justice and the Federal
Trade Commission. We and the parties that have agreed to
purchase our class C common stock have agreed to make any
required filings under this Act as soon as practicable after the
dates of the purchase agreements providing for the purchase of
the class C common stock in the concurrent private placements.
To date these filings have only been made with respect to
Compaq, and, in that case, the waiting period has
expired.
Holders of class A common stock and class C
convertible 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 C convertible common stock receive payable in shares of
class C convertible common stock.
After satisfaction of the liquidation preferences of
all securities ranking senior to the class A common stock and
class C convertible common stock, the holders of class A common
stock and class C convertible 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.
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 C convertible
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
currently differ between the class A common stock and class C
convertible common stock.
The rights, preferences and privileges of holders of
class A common stock and class C convertible 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 that we
may designate and issue in the future. Holders of class A common
stock and class C convertible common stock have no preemptive,
subscription, redemption or conversion rights, except as
described above. The outstanding shares of class A common stock
and class C convertible common stock are, and the shares of
class A common stock and class C convertible common stock
offered by us in this offering and the concurrent private
placements will be, when issued and paid for, fully paid and
nonassessable.
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 of Directors 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, providing desirable flexibility in
connection with possible acquisitions and other corporate
purposes. Our issuance of preferred
stock 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.
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 our stockholders in a prescribed
manner. A business combination includes a merger,
asset sale or other transaction 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 corporations 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. Directors may only be removed for cause by the holders of
at least 66 2
/3% of the
voting power of our outstanding capital stock. 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 of
Directors 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 certificate of incorporation provides that our
stockholders may not take action by written consent instead of a
meeting. Our bylaws 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 that special meetings
of our stockholders may only be called by our Chairman of the
Board of Directors or President or a majority of our 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.
|
Waiver of Business
Opportunities
|
An amendment to the Delaware General Corporation
Law, which became effective on July 1, 2000, clarifies that a
corporation has the power to waive in advance, in its
certificate of incorporation or by action of its board of
directors, the corporations interest or expectations in
business opportunities or classes or categories of business
opportunities, as those opportunities may be defined by the
corporation. These classes or categories of opportunities could
be defined in many different ways, including by type of
business, by who originated the business opportunity, by who has
the interest in the business opportunity, by the period of time,
or by geographical location. Our Board of Directors may consider
and take actions as permitted by this new statutory
provision.
Transfer Agent and Registrar
The transfer agent and registrar for the class A
common stock is Computershare Investor Services,
LLC.
SHARES ELIGIBLE FOR FUTURE SALE
When we complete the offering, we will have
114,158,942 outstanding shares of class A common stock and
23,288,511 outstanding shares of class C convertible common
stock, convertible into an equal number of shares of our class A
common stock. The 14,285,000 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; and subject, in the case of
approximately 1,800,000 shares reserved for sale in this
offering to employees, directors, vendors, service providers,
customers and other persons who have business or other
relationships with us, our officers or directors or our
associated companies, to 60-day lock-up agreements described
below and subject, in the case of 1,500,000 shares we expect to
be purchased by one of our executive officers, by a greater than
10% stockholder and by affiliates of one of our directors, to
the 180-day lock-up agreements described below. The remaining
total of 123,162,453 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 123,162,453 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, and
all of these restricted shares will be subject to the 180-day
lock-up agreements described below.
In addition, upon completion of this offering,
options to purchase 978,866 shares of class A common stock will
be issued and outstanding, all of which will be exercisable in
full.
Lock-Up Agreements
Our directors and executive officers and holders of
substantially all of our outstanding stock have agreed with the
underwriters that, for a period of 180 days, they will not,
without the prior written consent of FleetBoston Robertson
Stephens Inc., which uses the brand name Robertson Stephens,
offer to sell, contract to sell, or otherwise sell, dispose of,
loan, pledge or grant any rights with respect to any shares of
common stock, any options or warrants to purchase any shares of
common stock or any securities convertible into or exchangeable
for shares of common stock other than shares purchased by them
in the open market and shares subject to the 60-day lock-up
agreements described below. Those entities that have agreed to
purchase shares in the concurrent private placements have agreed
with us under the terms of their respective purchase agreements
that they will not, directly or indirectly, sell, offer to sell,
contract to sell, assign, transfer or otherwise dispose of, or
engage in any other transaction that reduces the risk of
ownership of, the shares purchased in the concurrent private
placements for a period of 12 months after the date of the
completion of the concurrent private placements. 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 Robertson
Stephens, 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. Robertson Stephens may release all or a portion of the
shares subject to these lock-up agreements at any time without
notice. The underwriters have reserved for sale, at the initial
public offering price, up to 3,000,000 shares of class A common
stock for employees, directors, vendors, service providers,
customers and other persons who have business or other
relationships with us, our officers and directors or our
associated companies who have expressed an interest in
purchasing class A common stock in the offering. To purchase
reserved shares, those persons will be required to agree that,
for a period of 60 days after the date of this prospectus, they
will not, without the prior written consent of Robertson
Stephens, offer, pledge, sell, contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of our common
stock or any securities convertible into or exercisable or
exchangeable for shares of our common stock, or enter into any
swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any
common stock. 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
publicly 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 1,141,000 shares
immediately after this offering; or
|
|
|
the
average weekly trading volume of our class A common stock on
the Nasdaq 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 September 2000 through June 2001,
111,904,872 restricted shares of our class A common stock,
including the 22,288,511 shares of our class A common stock
issuable upon conversion of our class C convertible common
stock, will become eligible for sale pursuant to Rule 144,
subject to these volume and manner of sale limitations and the
lock-up agreements described above. These shares exclude the
shares which will be eligible for sale under Rule 701 under the
Securities Act, as described below. 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, 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,
5,489,931 shares of our common stock sold by us in August 1999,
and 5,767,650 shares of our class A common stock issued under
our 1999 stock incentive plan, upon exercise of options or
otherwise, 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 and, in the case of our affiliates,
to the volume and manner of sale limitations of Rule 144. 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, in the case
of non-affiliates of the issuer, the other restrictions
contained in Rule 144. The 5,767,650 shares issued under our
stock incentive plan are also subject to restrictions on
transfer under restricted stock agreements. These shares
generally vest and become eligible for public resale in four
equal annual installments from the option grant date in the case
of shares issued upon exercise of options granted to employees
and generally vest and become eligible for public resale on the
first anniversary of the award date in the case of restricted
stock issued to employees and shares issued upon exercise of
options granted to non-employee directors.
Summary of Shares Eligible for Future
Sale
The following table schedules the number of our
shares, giving effect to this offering and the concurrent
private placements, that will be freely tradable at the times
shown, subject to the volume and manner of sale restrictions of
Rule 144 and subject in the case of 5,767,650 shares to
restrictions on transfer imposed by restricted stock agreements
under our stock incentive plan. The table only reflects shares
that are currently issued and outstanding and does not reflect
shares which we may issue in the future, including under our
2000 employee stock purchase plan or upon exercise of existing
or new options. Although our stockholders have agreed to
restrictions on the resale of their shares under the lock-up
agreements described above, the
underwriters of this offering may release the restrictions on
these shares, in whole or in part, at any time. We have,
therefore, shown below the cumulative number of shares that
would be freely tradeable at various times assuming that (1) the
underwriters release all of the shares from the restrictions on
resale and (2) that the underwriters do not release any shares
from the restrictions on resale:
|
|
Cumulative
Number of Shares
Freely Tradeable
|
Date
|
|
Assuming
Underwriters
Waive
Lock-Ups
|
|
Assuming
Underwriters
Do not Waive
Lock-Ups
|
Date of
this prospectus |
|
14,285,000 |
|
10,985,000 |
60 days
from the date of this prospectus |
|
19,022,435 |
|
12,785,000 |
90 days
after the date of this prospectus |
|
46,150,523 |
|
12,785,000 |
180
days after the date of this prospectus |
|
68,562,445 |
|
68,562,445 |
270
days after the date of this prospectus |
|
106,901,487 |
|
106,901,487 |
One
year after the date of this prospectus |
|
137,447,453 |
|
137,447,453 |
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 capital
stock that he owns, other than to family members, family trusts,
family-owned corporations or partnerships or his estate, without
first giving notice to stockholders who acquired class A common
stock upon the conversion of our series D and 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. The purchasers of our Series D and D-1 preferred stock
include CBW/SK divine Investments, Dell, First Chicago Equity
Capital, Frontenac and Microsoft.
Registration Rights
At any time after six months following the
consummation of this offering, the purchasers of our series D
and D-1 preferred stock, who will hold a total of 32,833,325
shares of our class A common stock after this offering, 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 addition, at any
time after 12 months following the consummation of this
offering, the purchaser of our series E preferred stock, CMGI,
which will hold a total of 4,749,287 shares of our class A
common stock will be entitled to unlimited demand registrations
on Form S-3 for which we will be required to pay the expenses.
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. These holders have agreed not to sell their shares
or exercise any demand registration rights through the period
ending 180 days after the date of this prospectus. None of the
entities that have agreed to purchase shares in the concurrent
private placements have registration rights for those shares
other than CMGI.
In addition, after the completion of this offering,
the holders of a total of 86,382,406 shares of our class A
common stock, including 37,582,612 shares as to which holders
are entitled to demand registration rights as discussed above,
will be entitled to request us to register their shares under
the Securities Act for resale to the public in the event that we
propose to register our class A common stock for ourselves or
upon demand of other stockholders. 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. The holders
of shares having piggyback rights are entitled to receive notice
of the registration and are entitled to include their shares in
the registration. These holders have agreed not to sell their
shares or exercise any demand registration rights for the period
ending 180 days after the date of this prospectus.
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.
If the registration is not an underwritten demand registration
under an agreement with us, first shares of class A common stock
that we propose to sell will be included in the registration,
and, second, shares of our class A common stock issued upon
conversion of our series D and D-1 and series E preferred stock
will be included. If the registration is an underwritten demand
registration under an agreement with us, first, the shares for
whom the registration has been requested and shares of class A
common stock issued upon conversion of our series D and D-1 and
series E preferred stock and other shares with equivalent rights
will be included in the registration, and, second, shares of
class A common stock that we propose to sell will be included.
In either case, third, shares of our class A common stock issued
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 convertible 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 stockholder. If we register
shares of class A common stock held by security holders with
registration rights, those holders would be able to publicly
sell those shares immediately upon effectiveness of the
registration statement and as long as the registration statement
remains effective.
Registration Statements on Form S-8
Immediately after the effective time of the
registration statement of which this prospectus is a part, we
intend to file a registration statement on Form S-8 under the
Securities Act to register:
|
|
978,866
shares of class A common stock issuable upon exercise of
outstanding options under our 1999 stock incentive
plan;
|
|
|
3,584,793 shares of class A common stock reserved for
future grants under our 1999 stock incentive plan;
and
|
|
|
4,166,666 shares of class A common stock issuable under
our 2000 employee stock purchase 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. Shares issuable under our 1999 stock incentive plan
and our 2000 employee stock purchase plan will also be subject
to the underwriters lock-up agreements described
above.
Subject to the terms and conditions set forth in an
underwriting agreement dated July 11, 2000, we have agreed to
sell to the underwriters named below, for whom FleetBoston
Robertson Stephens Inc., which uses the brand name Robertson
Stephens as shown on the cover of this prospectus, Bear, Stearns
& Co. Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, 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:
Underwriters
|
|
Number of
Shares
|
FleetBoston Robertson Stephens Inc. |
|
5,618,250 |
Donaldson, Lufkin & Jenrette Securities
Corporation |
|
2,497,000 |
Bear,
Stearns & Co. Inc. |
|
1,872,750 |
William
Blair & Company, L.L.C. |
|
1,872,750 |
DLJdirect Inc. |
|
624,250 |
Barrington Research Associates, Inc. |
|
200,000 |
E*offering |
|
200,000 |
First
Albany Corporation |
|
200,000 |
J.J.B.
Hilliard, W.L. Lyons, Inc. |
|
200,000 |
Lazard
Freres & Co. LLC |
|
200,000 |
Loop
Capital Markets |
|
200,000 |
Punk,
Ziegel & Company, L.P. |
|
200,000 |
Quick
& Reilly, Inc. |
|
200,000 |
Thomson
Kernaghan & Co. Ltd. |
|
200,000 |
|
|
|
Total |
|
14,285,000 |
|
|
|
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 2,142,750 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 $0.38 per share. The
underwriters and selling group members may allow a discount of
$0.10 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.
Expenses
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 7% 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.
|
|
Per
Share
|
|
Total
|
|
|
Without
Over-
allotment
|
|
With
Over-
allotment
|
|
Without
Over-
allotment
|
|
With
Over-
allotment
|
Underwriting discounts and commissions
paid by us |
|
$0.63 |
|
$0.63 |
|
$8,999,550 |
|
$10,349,483 |
Expenses payable by us |
|
$0.47 |
|
$0.41 |
|
$6,700,000 |
|
$ 6,700,000 |
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.
Purchases of Our Common Stock By Affiliates of
Underwriters
From September through December 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 of
our series C preferred stock, which will convert into 70,832
shares of our class A common stock in connection with this
offering; Leonard S. Gruenberg, an employee of Bear, Stearns
& Co. Inc. purchased 250,000 shares of our series C
preferred stock, which will convert into 41,666 shares of our
class A common stock in connection with this offering; and
Richard Kiphart, an employee of William Blair & Company,
L.L.C., and an entity affiliated with William Blair &
Company, L.L.C. purchased a total of 2,000,000 shares of our
series C preferred stock, which will convert into 360,821 shares
of our class A common stock in connection with this offering.
Each of these purchases was made 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 one-sixth of a share of
class A common stock upon the closing of this offering. Mr.
Kiphart also owns 49,999 and 114,940 shares of class A common
stock which he acquired upon the exercise of
options.
In addition, concurrent with the closing of this
offering, BancBoston Capital, Inc. will purchase at the initial
public offering price a number of shares of our class C
convertible common stock having an aggregate initial public
offering value of $25,000,000. BancBoston and Robertson
Stephens, a representative of the underwriters, are both
subsidiaries of the Fleet Financial Group Inc. and are
affiliated for purposes of the National Association of
Securities Dealers Rules of Conduct. As a result, the NASD
will deem the shares to be purchased by BancBoston to be
compensation of the underwriters in connection with this
offering. BancBoston has agreed that it will not purchase a
number of shares that will cause the compensation received by
the underwriters in connection with this offering to be deemed
unfair and unreasonable, as those terms are defined by the NASD.
Under NASD Rule 2710(c)(6)(xi), underwriter compensation will be
automatically deemed unfair and unreasonable if the underwriters
and their affiliates, collectively, are found to have received a
number of shares equal to or greater than 10% of the number of
shares listed for sale on the cover page of this prospectus. For
purposes of this analysis, this maximum number will include all
sales, transfers and assignments to, or pledges or
hypothecations by, the underwriters and their affiliates, of
shares of our class A common stock or securities convertible
into shares of our class A common stock, during a period
beginning six months prior to the initial filing of this
registration statement and ending six months following the
conclusion of this offering. As a result of these limitations,
we currently expect that BancBoston will purchase 955,181 shares
of our class C convertible common stock.
The shares of our series C preferred stock
beneficially owned by the affiliates of Donaldson, Lufkin and
Jenrette Securities Corporation and DLJdirect Inc., by
the employee of Bear, Stearns & Co. Inc. and by the employee
and affiliates of William Blair & Company, L.L.C.; and the
shares of our class C convertible common stock to be purchased
by BancBoston Capital, Inc., have been deemed by the NASD, to be
underwriting compensation and will be restricted from sale,
transfer, assignment or hypothecation for a period of one year
from the date of this offering, except as otherwise permitted by
the National Association of Securities Dealers, Inc. Conduct
Rule 2710(c)(7)(A). The following table summarizes each type of
compensation and expense considered by the NASD to be underwriting
compensation for purposes of the NASDs Rules of Fair
Practice. In calculating these amounts, the NASD will use the
initial public offering price of $9.00 per share.
Item
|
|
Underwriting
Compensation
Value Upon
Completion of
this Offering
without Over-
allotment
|
|
Underwriting
Compensation
Value Upon
Completion of
this Offering
with Over-
allotment
|
70,832
shares of our class A common stock held by four affiliates of
Donaldson, Lufkin and Jenrette
Securities Corporation and DLJdirect
Inc. (1) |
|
$ 292,496 |
|
$ 292,496 |
|
|
41,665
shares of our class A common stock held by an affiliate of
Bear,
Stearns & Co. Inc.
(1) |
|
124,995 |
|
124,995 |
|
|
360,822
shares of our class A common stock held by affiliates of
William Blair & Company,
L.L.C. (1) |
|
1,082,466 |
|
1,082,466 |
|
|
Legal
fees payable by us in connection with NASD matters |
|
35,500 |
|
35,500 |
|
|
Underwriters 7% commission |
|
8,999,550 |
|
10,349,483 |
|
|
955,181
shares of our class C convertible common stock to be
purchased by an affiliate of
Robertson Stephens (2) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$10,455,007 |
|
$11,804,940 |
|
|
|
|
|
(1)
|
Includes shares issuable upon conversion of our series
C convertible preferred stock purchased by the party or
parties.
|
(2)
|
Included solely for purposes of NASD Rule
2710(c)(6)(xi) described above.
|
Lock-up Agreements
We and each of our executive officers and directors
and holders of substantially all of our outstanding stock have
agreed not to offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any
shares of common stock, any options or warrants to purchase any
shares of common stock or any securities convertible into or
exchangeable for shares of common stock other than shares
purchased by them in the open market, without the prior written
consent of Robertson Stephens for a period of 180 days after the
date on which our class A common stock begins trading on the
Nasdaq National Market, except that we may effect, (1) issuances
of common stock (a) in the concurrent private placements (b)
upon the conversion of our class C convertible common stock, (c)
upon the exercise of employee stock options outstanding on the
date of this prospectus, (d) under our stock incentive plan in
effect on the date of this prospectus, (e) under our employee
stock purchase plan in effect on the date of this prospectus and
(f) in acquisitions and strategic transactions, provided that
the parties receiving shares in these acquisitions and strategic
transactions agree to be bound by the restrictions described
above for the remainder of the 180-day lock-up period, and (2)
the filing of a Form S-8 registration statement covering shares
up to 15,000,000 shares issued or issuable under our stock
incentive plan and employee stock purchase plan. The entities
that have agreed to purchase shares in the concurrent private
placements have agreed with us under the terms of their
respective purchase agreements that they will not, directly or
indirectly, sell, offer to sell, contract to sell, assign,
transfer or otherwise dispose of, or engage in any other
transaction that reduces the risk of ownership of, the shares
purchased in the concurrent private placements for a period of
12 months after the date of the completion of the concurrent
private placements.
Electronic Prospectus Distribution
A prospectus in electronic format will be made
available on the web site maintained by DLJdirect
Inc., an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation and a representative of the underwriters.
Electronic prospectuses may also be made available on the web
sites maintained by one or more of the other underwriters
participating in this offering.
The representatives may agree to allocate a number
of shares to underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated by the
underwriters that will make Internet distributions on the same
basis as other allocations. DLJdirect is an online
investment bank that will receive an allocation of shares of
common stock in its capacity as an underwriter.
Other than the prospectus in electronic format, the
information contained on any underwriters web site and any
information contained on any other web site maintained by an
underwriter is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been
approved or endorsed by us or any underwriter in its capacity as
an underwriter and should not be relied upon by
investors.
Indemnification
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.
Listing
Our class A common stock has been approved for
quotation on the Nasdaq National Market under the symbol
DVIN.
Public
Offering Price
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.
|
Stabilization
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.
|
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
National Market or otherwise and, if commenced, may be
discontinued at any time.
Directed Share Program
The underwriters have reserved for sale, at the
initial public offering price, up to 3,000,000 shares of the
class A common stock for employees, directors, vendors, service
providers, customers and other persons who have business or
other relationships with us, our officers or directors or our
associated companies who have expressed an interest in
purchasing class A common stock in the offering. To purchase
reserved shares, those persons will be required to agree that,
for a period of 60 days after the date of this prospectus, they
will not, without the prior written consent of Robertson
Stephens, offer, pledge, sell, contract to sell, sell any
option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any reserved shares, or any
securities convertible into or exercisable or exchangeable for
reserved shares or enter into any swap or other arrangement that
transfers all or a portion of the economic consequences
associated with the ownership of any reserved shares. 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. We expect that approximately
1,800,000 shares will be purchased under this reserved share
program.
Delivery of Our Common Stock
We expect that we will deliver our shares against
payment for the shares on or about July 18, 2000, which will be
the fifth business day following the pricing of the shares.
Under Rule 15c6-1 of the Exchange Act, trades in the secondary
market generally are required to settle in three business days,
unless the parties to any such trade expressly agree otherwise.
Accordingly, purchasers who wish to trade shares on the date of
pricing or the next succeeding business day will be required, by
virtue of the fact that the shares initially will settle in T+5,
to specify alternative settlement arrangements to prevent a
failed settlement.
NOTICE TO CANADIAN RESIDENTS
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 issuers 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 Blanket 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.
Katten Muchin Zavis, Chicago, Illinois, will pass
upon the validity of the class A common stock offered in this
offering for us. Arthur W. Hahn, a partner in Katten Muchin
Zavis is one of our directors. Mr. Hahn and several other
partners of Katten Muchin Zavis have purchased a total of
2,350,000 shares of our series C preferred stock, which will
convert into 391,666 shares of our class A common stock upon
completion of this offering. Based upon the initial public
offering price, these shares will have a market price of
$3,524,994 upon completion of this offering. In addition, as
consideration for legal services, we issued to Katten Muchin
Zavis 400,000 shares of our series C preferred stock, which will
convert into 66,666 shares of our class A common stock in
connection with the completion of this offering. Further, Mr.
Hahn transferred to Katten Muchin Zavis 20,833 of the shares of
our class A common stock initially issued by us to him for
$0.006 per share in his capacity as a director and a 50%
beneficial interest in the option to purchase 8,333 shares of
our class A common stock with an exercise price of $4.50 per
share that was granted by us to him, which option was
subsequently exercised by Mr. Hahn on his own behalf and on
behalf of Katten Muchin Zavis. As a result, Katten Muchin Zavis
will own 91,665 shares of our class A common stock upon
completion of this offering. Based upon the initial public
offering price, these 91,665 shares will have a market price of
$824,985 upon completion of this offering. Mr. Hahn has also
agreed to transfer to Katten Muchin Zavis 50% of the net
proceeds associated with options granted by us to him in the
future. Shearman & Sterling, New York, New York, will pass
upon selected legal matters in connection with this offering for
the underwriters.
The consolidated financial statements of divine
interVentures, inc. as of December 31, 1999 and for the period
from May 7, 1999 (date of inception) through December 31, 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 mindwrap, inc. as of
March 31, 1998 and 1999, and November 19, 1999 and for the years
ended March 31, 1998 and 1999 and the period from April 1, 1999
through November 19, 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 BeautyJungle.com, Inc.
as of December 31, 1999 and for the period from May 11, 1999
(date of inception) through December 31, 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 bid4real.com, inc. as of
December 31, 1999 and for the period from December 13, 1999
(date of inception) through December 31, 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 Bid4Real.com LLC as of
December 31, 1999 and for the period from July 15, 1999 (date of
inception) through December 31, 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 BidBuyBuild, Inc. as of
December 31, 1999 and for the period from November 9, 1999 (date
of inception) through December 31, 1999 have been included
herein and in the registration
statement in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, appearing elsewhere
herein, and upon authority of said firm as experts in auditing
and accounting.
The consolidated financial statements of closerlook,
inc. as of December 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 eFiltration.com, Inc. as
of December 31, 1999 and for the period from September 7, 1999
(date of inception) through December 31, 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 balance sheet of i-Fulfillment, Inc. as of June
30, 1999, and the related statements of operations,
stockholders (deficit) equity and cash flows for the
period from October 6, 1998 (inception) through June 30, 1999,
included in this S-1 Registration Statement have been audited by
Arthur Andersen LLP, independent certified public accountants,
as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as
experts in giving said report.
The financial statements of iGive.com, inc. as of
December 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 iSalvage.com, Inc. as of
December 31, 1999 and for the period from July 20, 1999 (date of
inception) through December 31, 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 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 Martin Partners, L.L.C.
as of December 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 Mercantec, Inc. as of
December 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 The Oilspot.com LLC as
of December 31, 1999 and for the period from October 21, 1999
(date of inception) through December 31, 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 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 Perceptual Robotics,
Inc. as of December 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 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 ViaChange.com, Inc. as
of December 31, 1999 and for the period from June 28, 1999 (date
of inception) through December 31, 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 Web Design Group, Inc.
as of December 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 consolidated financial statements of Westbound
Consulting, Inc. as of December 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 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.
The financial statements of Xippix, Inc. as of
December 31, 1999 and for the period from April 14, 1999 (date
of inception) through December 31, 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.
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 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 to this registration statement are
not necessarily complete. In each instance, please refer to the
copy of the 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.
Judiciary Plaza
Room
1024
Washington, D.C. 20549
|
|
Seven
World Trade Center
Suite
1300
New
York, New York 10048
|
|
Citicorp Center
500
West Madison Street
Suite
1400
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 SECs 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.
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS REPORT
The
Board of Directors
divine
interVentures, inc.:
We have audited the accompanying consolidated
balance sheet of divine interVentures, inc. and subsidiaries as
of December 31, 1999, and the related consolidated statements
of operations, stockholders equity, and cash flows for
the period from May 7, 1999 (inception) through December 31,
1999. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of divine interVentures, inc.
and subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the period from May
7, 1999 (inception) through December 31, 1999, in conformity
with generally accepted accounting principles.
Chicago,
Illinois
February
14, 2000, except as to Note 16, which is as of June 1,
2000
DIVINE INTERVENTURES, INC.
CONSOLIDATED
BALANCE SHEETS
Assets |
|
December 31,
1999
|
|
(Unaudited)
March 31,
2000
|
|
(Unaudited)
Pro Forma
March 31,
2000
|
Current
assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$162,840,846 |
|
|
$211,911,423 |
|
|
|
|
Restricted cash |
|
|
|
|
1,500,000 |
|
|
|
|
Accounts receivable, less allowance for doubtful
accounts of $586,511 and $263,935 |
|
2,628,718 |
|
|
5,556,325 |
|
|
|
|
Available-for-sale securities |
|
|
|
|
17,297,535 |
|
|
|
|
Notes receivable |
|
4,075,000 |
|
|
115,099 |
|
|
|
|
Prepaid expenses and other current
assets |
|
1,391,100 |
|
|
6,097,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
170,935,664 |
|
|
242,477,409 |
|
|
|
|
Property and equipment, net of accumulated
depreciation |
|
3,926,816 |
|
|
23,858,489 |
|
|
|
|
Goodwill and other intangible assets, net of
accumulated amortization of $594,992 and $4,009,710 |
|
17,839,757 |
|
|
40,359,186 |
|
|
|
|
Ownership interests in associated companies |
|
44,455,409 |
|
|
177,549,521 |
|
|
|
|
Deferred offering costs |
|
1,612,500 |
|
|
2,032,568 |
|
|
|
|
Other
noncurrent assets |
|
101,894 |
|
|
983,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$238,872,040 |
|
|
$487,260,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity |
|
Current
liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ 3,523,756 |
|
|
$ 6,116,748 |
|
|
|
|
Accrued expenses and other current
liabilities |
|
6,096,355 |
|
|
6,718,903 |
|
|
|
|
Notes payable to associated companies |
|
22,500,000 |
|
|
38,660,949 |
|
|
|
|
Deferred revenue |
|
536,217 |
|
|
631,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
32,656,328 |
|
|
52,128,361 |
|
|
|
|
Long-term debt |
|
|
|
|
810,552 |
|
|
|
|
Other
noncurrent liabilities |
|
281,118 |
|
|
4,862,320 |
|
|
|
|
Minority interest |
|
700,430 |
|
|
20,690,867 |
|
|
|
|
Redeemable preferred stock: |
|
|
|
|
|
|
|
|
|
Series D senior participating convertible
redeemable preferred stock, $.001 par value;
197,000,000 shares
authorized; 0, 191,980,300 and 0 shares issued and outstanding
(liquidation preference of
$195,051,985) |
|
|
|
|
195,051,985 |
|
|
|
|
Series D-1 senior participating convertible
redeemable preferred stock, $.001 par value;
15,000,000 shares
authorized; 0, 5,019,700 and 0 shares issued and outstanding
(liquidation
preference of
$5,100,015) |
|
|
|
|
5,100,015 |
|
|
|
|
Series E senior participating convertible
redeemable preferred stock, $.001 par value; 20,000,000
shares authorized; 0,
18,284,327 and 0 shares issued and outstanding (liquidation
preference
of $18,356,462) |
|
|
|
|
18,356,462 |
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
Series F senior convertible preferred stock, $.001
par value; 13,000,000 shares authorized; 0,
13,000,000 and 0 shares
issued and 0, 11,500,000 and 0 shares outstanding |
|
|
|
|
11,500 |
|
|
|
|
Series C senior convertible preferred stock, $.001
par value; 200,000,000 shares authorized;
190,062,125, 190,062,125,
and 0 shares issued and outstanding |
|
190,062 |
|
|
190,062 |
|
|
|
|
Series B-1 junior convertible preferred stock,
$.001 par value; 25,000,000 shares authorized;
2,712,000, 2,712,000 and 0
shares issued and outstanding |
|
2,712 |
|
|
2,712 |
|
|
|
|
Series B-2 junior convertible preferred stock,
$.001 par value; 21,000,000 shares authorized;
20,100,000, 20,100,000,
and 0 shares issued and outstanding |
|
20,100 |
|
|
20,100 |
|
|
|
|
Series A-1 junior convertible preferred stock,
$.001 par value; 48,000,000 shares authorized;
9,236,600, 9,236,600, and
0 shares issued and outstanding |
|
9,237 |
|
|
9,237 |
|
|
|
|
Series A-2 junior convertible preferred stock,
$.001 par value; 39,000,000 shares authorized;
37,750,000, 37,750,000,
and 0 shares issued and outstanding |
|
37,750 |
|
|
37,750 |
|
|
|
|
Class A common stock, $.001 par value; 900,000,000
shares authorized; 3,791,614, 9,602,447,
and 92,747,184 shares
issued and outstanding |
|
3,792 |
|
|
9,602 |
|
|
92,747 |
|
Class B common stock, $.001 par value; 100,000,000
shares authorized; 2,041,662, 2,037,496,
and 0 shares issued and
outstanding |
|
2,042 |
|
|
2,038 |
|
|
|
|
Additional paid-in capital |
|
241,036,506 |
|
|
419,235,690 |
|
|
637,934,406 |
|
Notes receivable from exercise of stock
options |
|
|
|
|
(29,676,990 |
) |
|
(29,676,990 |
) |
Unearned stock-based compensation |
|
(26,660,788 |
) |
|
(123,729,632 |
) |
|
(123,729,632 |
) |
Accumulated other comprehensive income |
|
|
|
|
6,778,521 |
|
|
6,778,521 |
|
Accumulated deficit |
|
(9,407,249 |
) |
|
(82,630,915 |
) |
|
(82,630,915 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders
equity |
|
205,234,164 |
|
|
190,259,675 |
|
|
408,768,137 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$238,872,040 |
|
|
$487,260,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
DIVINE INTERVENTURES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
May
7, 1999
(inception)
through
December 31,
1999
|
|
(Unaudited)
Three months ended
March 31,
2000
|
Revenues: |
|
|
|
|
|
|
Products |
|
$ 312,742 |
|
|
$ 777,230 |
|
Services |
|
723,877 |
|
|
4,437,739 |
|
|
|
|
|
|
|
|
|
|
1,036,619 |
|
|
5,214,969 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
Products (exclusive of $0 and $61,915 of
amortization of stock-
based compensation) |
|
233,778 |
|
|
527,537 |
|
Services (exclusive of $4,746 and $422,888
of amortization of
stock-based
compensation) |
|
793,637 |
|
|
3,879,717 |
|
|
|
|
|
|
|
|
|
|
1,027,415 |
|
|
4,407,254 |
|
Selling, general and administrative (exclusive of
$740,831 and
$8,106,950 of amortization
of stock-based compensation) |
|
8,557,198 |
|
|
31,451,265 |
|
Research and development (exclusive of $1,833 and
$72,710 of
amortization of
stock-based compensation) |
|
133,452 |
|
|
1,595,665 |
|
Amortization of stock-based
compensation |
|
747,410 |
|
|
8,664,463 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
10,465,475 |
|
|
46,118,647 |
|
|
|
|
|
|
|
|
Operating loss |
|
(9,428,856 |
) |
|
(40,903,678 |
) |
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
Interest income |
|
1,588,863 |
|
|
3,713,452 |
|
Interest expense |
|
(204,817 |
) |
|
(302,064 |
) |
Other loss, net |
|
|
|
|
(2,461 |
) |
|
|
|
|
|
|
|
Total other income (expense) |
|
1,384,046 |
|
|
3,408,927 |
|
Loss before minority interest and equity in
losses of associated
companies |
|
(8,044,810 |
) |
|
(37,494,751 |
) |
Minority interest |
|
51,277 |
|
|
4,187,298 |
|
Equity
in losses of associated companies |
|
(1,413,716 |
) |
|
(10,877,751 |
) |
|
|
|
|
|
|
|
Net loss |
|
(9,407,249 |
) |
|
(44,185,204 |
) |
Accretion of redeemable preferred stock
dividends |
|
|
|
|
(3,224,135 |
) |
Accretion of preferred stock dividends |
|
(3,520,052 |
) |
|
(4,192,236 |
) |
Deemed
dividends related to beneficial conversion feature in Series E
and F
preferred stock |
|
|
|
|
(25,814,327 |
) |
|
|
|
|
|
|
|
Net loss applicable to common
stockholders |
|
$(12,927,301 |
) |
|
$ (77,415,902 |
) |
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
applicable to common
stockholders |
|
$
(4.59 |
) |
|
$
(7.79 |
) |
Shares used in computing basic and diluted
net loss per share |
|
2,816,074 |
|
|
9,941,917 |
|
See
accompanying notes to consolidated financial
statements.
DIVINE INTERVENTURES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
|
|
Preferred stock
|
|
Common stock
|
|
Additional
paid-in
capital
|
|
Notes
receivable
from
exercise of
stock
options
|
|
Unearned
stock-based
compensation
|
|
Accumulated
deficit
|
|
Accumulated other
comprehensive
income
|
|
Total
stockholders
equity
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance
at May 7, 1999 (inception) |
|
|
|
$
|
|
|
|
|
$ |
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
$
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,407,249 |
) |
|
|
|
(9,407,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,407,249 |
) |
|
|
|
(9,407,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class A common stock |
|
|
|
|
|
3,449,956 |
|
|
3,450 |
|
|
17,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
20,700 |
|
Issuance of Class B common stock |
|
|
|
|
|
2,041,662 |
|
|
2,042 |
|
|
10,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
190,062,125 |
|
190,062 |
|
|
|
|
|
|
|
189,030,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
189,220,903 |
|
Exercise of stock optionsClass A
common stock |
|
|
|
|
|
341,658 |
|
|
342 |
|
|
1,537,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,537,500 |
|
Unearned stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
27,408,198 |
|
|
|
|
|
(27,408,198 |
) |
|
|
|
|
|
|
|
|
Amortization of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
747,410 |
|
|
|
|
|
|
|
747,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
259,860,725 |
|
259,861 |
|
5,833,276 |
|
|
5,834 |
|
|
241,036,506 |
|
|
|
|
|
(26,660,788 |
) |
|
(9,407,249 |
) |
|
|
|
205,234,164 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,185,204 |
) |
|
|
|
(44,185,204 |
) |
Other
comprehensive income,
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
appreciation on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,778,521 |
|
6,778,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,185,204 |
) |
|
6,778,521 |
|
(37,406,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series F preferred stock
(unaudited) |
|
11,500,000 |
|
11,500 |
|
|
|
|
|
|
|
14,718,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14,730,000 |
|
Issuance of Class A common stock (unaudited) |
|
|
|
|
|
116,665 |
|
|
116 |
|
|
524,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
525,000 |
|
Exercise of stock optionsClass A
common stock (unaudited) |
|
|
|
|
|
5,690,008 |
|
|
5,690 |
|
|
31,808,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
31,813,879 |
|
Conversion from Class B common stock to Class
A common stock (unaudited) |
|
|
|
|
|
(4,166 |
) |
|
(4 |
) |
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
Conversion to Class A common stock from Class
B common stock, net of fractional shares
(unaudited) |
|
|
|
|
|
4,160 |
|
|
4 |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
Notes
receivable from exercise of stock options
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,676,990 |
) |
|
|
|
|
|
|
|
|
|
(29,676,990 |
) |
Unearned stock-based compensation
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
105,733,307 |
|
|
|
|
|
(105,733,307 |
) |
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,664,463 |
|
|
|
|
|
|
|
8,664,463 |
|
Accretion of redeemable preferred stock
dividends (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,224,135 |
) |
|
|
|
(3,224,135 |
) |
Deemed
dividends related to beneficial
conversion feature of preferred
stock
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
25,814,327 |
|
|
|
|
|
|
|
|
(25,814,327 |
) |
|
|
|
|
|
Redeemable preferred stock offering costs
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
(150,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(150,000 |
) |
Capital
raising costs of subsidiaries (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
(250,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(250,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2000 (unaudited) |
|
271,360,725 |
|
$271,361 |
|
11,639,943 |
|
|
$11,640 |
|
|
$419,235,690 |
|
|
$(29,676,990 |
) |
|
$(123,729,632 |
) |
|
$(82,630,915 |
) |
|
$6,778,521 |
|
$190,259,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
DIVINE INTERVENTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
May
7, 1999
(inception)
through
December 31,
1999
|
|
(Unaudited)
Three months
ended
March 31,
2000
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$ (9,407,249 |
) |
|
$ (44,185,204 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
693,113 |
|
|
3,943,093 |
|
Amortization of stock-based
compensation |
|
747,410 |
|
|
8,664,463 |
|
Equity in losses of associated
companies |
|
1,413,716 |
|
|
10,877,751 |
|
Minority interest |
|
(51,277 |
) |
|
(4,187,298 |
) |
Changes in assets and liabilities, excluding
effects from acquisitions: |
|
|
|
|
|
|
Restricted cash |
|
|
|
|
(1,500,000 |
) |
Accounts receivable, net |
|
(577,266 |
) |
|
(1,678,500 |
) |
Deferred offering costs |
|
(1,612,500 |
) |
|
(365,046 |
) |
Prepaid expenses and other
assets |
|
(488,550 |
) |
|
(3,249,382 |
) |
Accounts payable |
|
2,640,822 |
|
|
(2,813,772 |
) |
Accrued expenses and other
liabilities |
|
5,816,420 |
|
|
(478,752 |
) |
Deferred revenue |
|
121,753 |
|
|
87,349 |
|
|
|
|
|
|
|
|
Net cash used in operating
activities |
|
(703,608 |
) |
|
(34,885,298 |
) |
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
Additions to property and equipment |
|
(2,636,365 |
) |
|
(3,751,824 |
) |
Acquisitions of ownership interests in associated
companies, net of cash
acquired |
|
(43,238,184 |
) |
|
(128,230,828 |
) |
Net repayments on (issuances of) notes
receivable |
|
(4,075,000 |
) |
|
4,000,000 |
|
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
(49,949,549 |
) |
|
(127,982,652 |
) |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
Proceeds from the issuance of common
stock |
|
32,950 |
|
|
|
|
Proceeds from the exercise of stock
options |
|
1,537,500 |
|
|
2,661,889 |
|
Proceeds from the issuance of preferred stock, net
of issuance costs |
|
211,923,553 |
|
|
229,864,327 |
|
Net proceeds from (repayments on) notes payable to
associated
companies |
|
|
|
|
(20,826,005 |
) |
Issuance of long-term debt |
|
|
|
|
488,339 |
|
Capital raising costs of subsidiaries |
|
|
|
|
(250,023 |
) |
|
|
|
|
|
|
|
Net cash provided by financing
activities |
|
213,494,003 |
|
|
211,938,527 |
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents |
|
162,840,846 |
|
|
49,070,577 |
|
Cash
and cash equivalents at beginning of period |
|
|
|
|
162,840,846 |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period |
|
$162,840,846 |
|
|
$211,911,423 |
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
Interest paid |
|
$
26,543 |
|
|
$
341,109 |
|
Noncash financing activities: |
|
|
|
|
|
|
Issuance of preferred stock in exchange for
professional services |
|
400,000 |
|
|
|
|
Issuance of notes payable for ownership
interests in associated
companies |
|
22,500,000 |
|
|
35,000,000 |
|
Issuance of notes receivable from exercise
of stock options |
|
|
|
|
29,676,990 |
|
See
accompanying notes to consolidated financial
statements.
DIVINE INTERVENTURES, INC.
NOTES TO CONSOLIDATED 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 and
commenced operations on June 30, 1999. The Company is actively
engaged in business-to-business e-commerce through its community
of associated companies. The Company fosters collaboration among
the associated companies, many of which are located together in
the Companys facilities, to provide cross-selling and
marketing opportunities and support business growth and the
sharing of information and business expertise. The Company
manages, finances, operates and provides services to its
associated companies.
|
(b)
Principles of Consolidation
|
The various interests that the Company acquires in
its associated companies are accounted for under three methods:
consolidation, equity, or cost method. The Company determines
the method of accounting for its associated companies on a
case-by-case basis based upon its ownership percentage in each
associated company, as well as its degree of influence over each
associated company.
Consolidation. Associated companies in which
the Company owns, directly or indirectly, more than 50% of the
outstanding voting power are accounted for under the
consolidation method of accounting. Under this method, an
associated companys results of operations are reflected
within the Companys consolidated statements of operations.
Earnings or losses attributable to other stockholders of a
consolidated associated company are identified as minority
interest in the Companys consolidated statements of
operations. Minority interest adjusts the Companys
consolidated net results of operations to reflect only its share
of the earnings or losses of an associated company. Transactions
between the Company and its consolidated associated companies
are eliminated in consolidation.
Equity Method. Associated companies in which
the Company owns 50% or less of the outstanding voting power,
but over which the Company exercises significant influence, are
accounted for under the equity method of accounting. Whether or
not the Company exercises significant influence with respect to
an associated company depends on an evaluation of several
factors including, among other things, representation on the
associated companys board of directors, ownership
percentage and voting rights associated with the Companys
holdings in the associated company. If the Company owns at least
20%, but not more than 50%, of the outstanding voting power of
an associated company, the Company accounts for its interests
under the equity method. Under the equity method of accounting,
associated companies results of operations are not
reflected within the Companys consolidated operating
results. However, the Companys share of the earnings or
losses of these associated companies is identified as
equity in earnings (losses) of associated companies
in the Companys consolidated statements of
operations.
The amount by which the Companys carrying
value exceeds its share of the underlying net assets of
associated companies accounted for under the equity method of
accounting is amortized on a straight-line basis over three
years, which the Company believes to be the minimum number of
years for which the associated companies will be successfully
implementing their business plans, based on various factors such
as their revenue models and technology, and the industries in
which they operate. This amortization adjusts the Companys
share of the equity in earnings (losses) of associated
companies in the Companys consolidated statement of
operations.
Cost Method. Associated 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, the Companys share of the
earnings and losses of these companies is not included in the
Companys consolidated statements of
operations.
The Company records its ownership interest in equity
securities of its associated 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 accounted
for in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities.
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 equivalents at December
31, 1999 are invested principally in money market
accounts.
|
(d)
Concentration of Credit Risk
|
The Companys financial instruments that are
exposed to concentrations of credit risk consist primarily of
cash equivalents. The Company maintains all of its cash accounts
with Bank of America. The total cash balances of the Company are
insured by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000. The Company had cash balances on deposit with Bank
of America at December 31, 1999 that exceeded the balance
insured by the FDIC by approximately $162,741,000.
|
(e)
Financial Instruments
|
Cash equivalents, accounts receivable, notes
receivable, accounts payable and notes payable to associated
companies are carried at cost which approximates fair value due
to the short-term maturity of these instruments.
|
(f)
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. Amortization of leasehold improvements is computed
over the shorter of the lease term or estimated useful life of
the assets.
|
(g)
Software Development Costs
|
Product development costs are expensed as incurred.
SFAS No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed, does not materially
affect the Company.
Software transactions are accounted for 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 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 where the separate
service elements are not essential to functionality of the other
elements is generally recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the
fee is fixed or determinable, and collectibility is probable.
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.
Revenue earned from webcasting and Web page
development, hosting and advertising are generally 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.
One-time fees earned from web page development is recognized
upon completion of the work. Revenues for Web hosting and
advertising are recognized in the period the services are
provided. Amounts received in advance of meeting the revenue
recognition criteria are deferred.
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Consulting revenue is recognized as the services
are performed.
Revenue from equipment sales is recognized upon
shipment.
Management fees are recognized as revenue over the
period of the management service.
|
(i)
Goodwill and Other Intangible Assets
|
Goodwill represents the excess of cost over net
assets of acquired businesses that are consolidated and is
amortized on a straight-line basis over three years, which the
Company believes to be the minimum number of years for which the
associated companies will be successfully implementing their
business plans, based on various factors such as their revenue
models and technology, and the industries in which they operate.
Other intangible assets include developed technology, customer
lists and workforce in place which are generally amortized over
one to two years.
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.
SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to
record compensation cost for stock-based employee compensation
plans at fair value. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost of stock options
is measured as the excess, if any, of the fair value of the
Companys stock at the date of grant over the option
exercise price and is charged to operations over the vesting
period. Income tax benefits attributable to stock options
exercised are credited to additional paid-in
capital.
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
$12,927,301, which includes preferred stock dividends of
$3,520,052. Because the Company reported a net loss for the
period ended December 31, 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 December 31, 1999, the weighted average number of shares
outstanding would have potentially been diluted by approximately
14,992,500 common equivalent shares, assuming the conversion of
preferred stock and an additional 619,000 common equivalent
shares, assuming the exercise of stock options.
Comprehensive income is the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Excluding net
income, the Companys source of
comprehensive income is from net unrealized appreciation on its
available-for-sale securities. The Company reports comprehensive
income in the consolidated statements of stockholders
equity.
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.
|
(o)
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.
(2)
Interim and Pro Forma Financial Information
(Unaudited)
|
(a)
Interim Financial Information (Unaudited)
|
The interim financial statements of the Company as
of and for the three months ended March 31, 2000, included
herein, have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations
relating to interim financial statements.
In the opinion of management, the accompanying
unaudited interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly the Companys financial position, results of
operations and cash flows as of and for the three months ended
March 31, 2000. The accompanying unaudited interim financial
statements are not necessarily indicative of full-year
results.
At March 31, 2000, the Company had $17,298,000 of
securities held as available-for-sale under SFAS 115. This
amount consists of the Companys investment in
Neoforma.com, Inc., which completed an initial public offering
of its stock in January 2000. The Company recorded other
comprehensive income of $6,779,000, which represents the
Companys unrealized gain on this investment, net of
tax.
On February 25, 2000, the Company acquired 39.7% of
LAUNCHworks, inc. (LAUNCHworks) for $11,428,571. LAUNCHworks is
a provider of capital and strategic services to
business-to-business e-commerce companies.
On March 8, 2000, the Company paid $2,500,000 and
issued a promissory note for $2,500,000 for 42.0% of TV House,
Inc., which produces and syndicates Internet video financial
news updates designed for individual investors. The promissory
note carries interest at 8.5% and is due in June
2000.
On March 10, 2000, the Company acquired 34.6% of
Aluminium.com, Inc. (Aluminium) for $19,250,000. Aluminium
provides a business-to-business online exchange for buying and
selling all grades of aluminum raw materials.
On March 15, 2000, the Company acquired 47.1% of
eReliable Commerce, Inc. (eReliable) for $4,725,000. eReliable
offers technology to provide business-to-business e-commerce web
sites with customized guaranteed transaction
services.
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
On March 24, 2000, Host divine, inc., of which the
Company owns 80.6%, acquired 76.2% of NetUnlimited, Inc.
(NetUnlimited) for $5,000,000. NetUnlimited markets various
Internet technology infrastructure services.
On March 30, 2000, the Company acquired 62.9% of
Panthera Productions, LLC (Panthera) for $2,700,000. Panthera
offers a web channel for entertainment and education that will
provide users a virtual experience with animals throughout
Africa.
On April 3, 2000, the Company paid $2,000,000 and
issued a promissory note for $24,871,429 for 33.0% of Emicom
Group, Inc. (Emicom). The promissory note carries interest at
8.5% and is due on the earlier of 5 business days after
consummation of the Companys initial public offering of
its stock, 5 business days after consummation by the Company of
a private equity financing yielding proceeds of $200,000,000 or
more to the Company, or September 30, 2000. Emicom is a
technology holding company that provides capital and advisory
services to early-stage technology companies located in the
Middle East.
On April 28, 2000, the Company paid $16,100,000 and
issued a promissory note for $16,100,000 for 41.0% of Farms.com,
Ltd. (Farms). The promissory note carries interest at 8.0% and
is due in June 2000. Farms provides an electronic marketplace
for the livestock and grain industries.
During the three months ended March 31, 2000, the
Company recorded $20,600,000 of goodwill and $5,334,000 of other
intangible assets related to acquisitions of associated
companies accounted for under the consolidation method of
accounting. The Company also recorded $87,583,000 in excess
investment over its share of the underlying equity in the net
assets of companies acquired during the three months ended March
31, 2000 accounted for under the equity method of
accounting.
The Companys carrying value and cost basis of
associated companies accounted for under the equity method of
accounting at March 31, 2000 was approximately $163,985,000 and
$176,014,000, respectively. The Companys carrying value
and cost basis of associated companies accounted for under the
cost method of accounting at March 31, 2000 was approximately
$13,565,000.
At March 31, 2000, the Companys carrying value
in its associated companies accounted for under the equity
method of accounting exceeded its share of the underlying equity
in the net assets of such companies by $102,329,000, net of
accumulated amortization of $6,973,000.
The Companys associated companies accounted
for under the equity method of accounting had total revenues of
$3,682,000 and total net loss of $11,595,000 during the three
months ended March 31, 2000. The Companys revenues for the
three months ended March 31, 2000 included $1,509,000 of revenue
generated by its consolidated associated companies from sales of
products and services to the Companys equity method
associated companies.
The Companys net loss for the three months
ended March 31, 2000 included $3,415,000 of amortization of
goodwill and other intangible assets as well as $6,231,000 of
amortization of the Companys net excess investment over
the equity in net assets of its equity method associated
companies.
During the three months ended March 31, 2000, the
Company recorded $81,508,000 in unearned stock-based
compensation related to grants to its employees, non-employee
directors, and consultants of 3,254,849 options to purchase the
Companys class A common stock and the issuance of 116,665
restricted common shares to employees. The Company recorded
$7,150,000 of amortization expense related to stock options and
restricted stock issuances. The Company also recorded
$29,677,000 of notes receivable for the three months ended March
31, 2000, which represents loans to its employees, non-employee
directors and consultants to exercise options.
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
During the three months ended March 31, 2000, the
Company also recorded $24,225,000 of unearned stock-based
compensation related to common stock, purchased by the
Companys employees, in thirteen associated companies
established by the Company. Amortization expense recognized by
the Company during the three months ended March 31, 2000 related
to these shares was $1,514,000.
On March 14, 2000, the Company sold 18,284,327
shares of its series E preferred stock to CMGI, Inc. (CMGI) for
$18,284,327. The fair value of the series E preferred stock at
the time of this sale was $4.80 per share. The Company sold the
series E shares to CMGI for less than the fair value to
encourage CMGI to enter into a private financing agreement,
concurrent with the Companys initial public offering,
whereby the Company and CMGI will receive an ownership interest
in one another.
In connection with the issuance of the
Companys series E preferred stock on March 14, 2000, the
Company recorded a non-cash dividend of $18,284,327. This
non-cash dividend relates to the deemed beneficial conversion
features associated with this preferred stock.
|
(b)
Pro Forma Financial Information (Unaudited)
|
Upon the proposed initial public offering of the
Companys class A common stock, all shares of preferred
stock outstanding as of March 31, 2000 will be converted into
one-sixth of a share of common stock, net of fractional shares.
Class B common stock will also convert into class A common stock
on a one-to-one basis upon the completion of the proposed
initial public offering. These transactions have been reflected
in the unaudited pro forma balance sheet as of March 31,
2000.
(3)
Revenues From Equity Method Investees
Consolidated revenues for the period from May 7,
1999 (inception) through December 31, 1999 includes $292,893 of
revenues generated from transactions with the Companys
equity-method associated companies.
(4)
Property and Equipment
Property and equipment, at cost, less accumulated
depreciation and amortization, are summarized as follows at
December 31, 1999:
Computer equipment and software |
|
$3,739,362 |
|
Office
equipment and furniture |
|
194,054 |
|
Construction in progress |
|
32,564 |
|
Leasehold improvements |
|
62,922 |
|
|
|
|
|
|
|
4,028,902 |
|
Less
accumulated depreciation and amortization |
|
(102,086 |
) |
|
|
|
|
|
|
$3,926,816 |
|
|
|
|
|
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(5)
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are summarized
as follows at December 31, 1999:
Goodwill |
|
$12,222,072 |
|
Developed technology |
|
3,893,971 |
|
Customer lists |
|
1,502,685 |
|
Workforce in place |
|
573,273 |
|
Other
intangible assets |
|
242,748 |
|
|
|
|
|
|
|
18,434,749 |
|
Less
accumulated amortization |
|
(594,992 |
) |
|
|
|
|
|
|
$17,839,757 |
|
|
|
|
|
(6)
Business Combinations
On October 14, 1999, the Company acquired 1.9% of
Neoforma.com, Inc. (Neoforma) for $6,000,000. Neoforma provides
business-to-business e-commerce services in the medical products
market.
On October 29, 1999, the Company acquired 2.1% of
The National Transportation Exchange, Inc. (NTE) for $750,000.
NTE offers an electronic marketplace that aggregates suppliers
and buyers of freight transportation capacity.
On October 29, 1999, the Company acquired 0.9% of
comScore, Inc., (comScore) for $200,208. ComScore is a company
that provides online consumer behavior data and related
consulting services.
On November 8, 1999, the Company paid $2,000,000 and
issued a promissory note for $4,000,000 for 26.5% of Whiplash,
Inc. (Whiplash), which provides a web-based global distribution
system that improves the efficiency and profitability of sellers
in the leisure travel market space. The promissory note carries
interest at 6% and is payable in a $2,000,000 final installment
on March 31, 2000. The first $2,000,000 installment was paid on
December 31, 1999.
On November 19, 1999, the Company acquired 1.1% of
Commerx, Inc. (Commerx) for $2,500,000. Commerx provides
vertical online marketplaces for industrial markets.
On November 19, 1999, the Company paid $4,905,275
for 100% of mindwrap, inc. (mindwrap) and their OPTIX software,
which provides document imaging, management and control to laser
disk technology. As part of this acquisition, $694,529 of debt
owed by mindwrap to its parent company was forgiven.
On November 23, 1999, the Company paid $5,000,000
and issued a promissory note for $10,000,000 for 37.4% of
PocketCard Inc., which provides businesses and individuals with
debit cards that allow real-time funding over the Internet. The
promissory note carries interest at 8% and is payable in equal
installments on February 20, 2000 and March 22,
2000.
On November 23, 1999, the Company acquired 8.3% of
Sequoia Software Corporation (Sequoia) for $5,000,000. Sequoia
provides Internet infrastructure software to proprietary web
sites designed as market makers.
On November 23, 1999, the Company paid $500,000 for
63.8% of i-Street, Inc., which is a business-to-business media
company and news portal focused on the Internet and technology
businesses in Chicago and the Midwest.
On November 23, 1999, the Company paid $867,000 for
a 43.0% interest in Entrepower, Inc., which is an on-line
recruiting service provider.
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
On December 8, 1999, the Company paid $7,500,000
and issued a promissory note for $7,500,000 to purchase 76.9% of
LiveOnTheNet.com, Inc. (LiveOnTheNet), which offers proprietary
technology for webcasting live events online. This promissory
note carries interest at the prime rate as recorded in the Wall
Street Journal (8.5% at December 31, 1999) and is payable in
full on June 30, 2000, or the consummation of an initial public
offering by the Company, whichever is sooner. As part of this
acquisition, $4,514,000 of debt owed by LiveOnTheNet to its
parent company was forgiven.
On December 8, 1999, the Company acquired 44.1% of
OpinionWare.com, Inc. (OpinionWare) for $2,000,000. OpinionWare
provides technology that allows businesses to gather and analyze
the opinions of large public and private online
communities.
On December 10, 1999, the Company acquired 31.8% of
Outtask.com Inc. (Outtask) for $4,000,000 and a promissory note
for $3,000,000. The promissory note is payable on March 1, 2000
and carries an interest rate of 8.5%. Outtask provides
business-to-business e-commerce applications and services to
technology and Internet companies.
The following unaudited pro forma financial
information presents the consolidated operations of the Company
and the acquired companies for the period from May 7, 1999
(inception) through December 31, 1999 as if the acquisitions had
occurred as of May 7, 1999, after giving effect to certain
adjustments including increased amortization of goodwill and
other intangible assets related to the acquisitions. The
unaudited pro forma financial information is provided for
informational purposes only and should not be construed to be
indicative of the Companys consolidated results of
operations had the acquisitions been consummated May 7, 1999 and
do not project the Companys results of operations for any
future period:
Revenues |
|
$ 3,908,000 |
|
Net
loss applicable to common stockholders |
|
(16,100,000 |
) |
Basic
and diluted net loss per share applicable to common
stockholders |
|
$
(5.72 |
) |
(7)
Ownership Interests in Associated Companies
The following summarizes the Companys
ownership interests in associated companies accounted for under
the equity method or cost method of accounting. The ownership
interests are classified according to applicable accounting
methods at December 31, 1999 and March 31, 2000. Cost basis
represents the Companys original acquisition
cost.
|
|
December 31, 1999
|
|
(Unaudited)
March 31, 2000
|
|
|
Carrying value
|
|
Cost basis
|
|
Carrying value
|
|
Cost basis
|
Equity
method |
|
$30,003,284 |
|
$31,417,000 |
|
$163,984,731 |
|
$176,014,433 |
Cost
method |
|
14,452,125 |
|
14,452,125 |
|
13,564,790 |
|
13,564,790 |
|
|
|
|
|
|
|
|
|
|
|
$44,455,409 |
|
$45,869,125 |
|
$177,549,521 |
|
$189,579,223 |
|
|
|
|
|
|
|
|
|
During 1999, the Company recorded an excess
investment over the equity in the net assets of acquired
companies of approximately $21,719,000. This excess is being
amortized over a three-year period. Amortization expense of
$741,617 is included in equity in losses of associated
companies in the accompanying consolidated statement of
operations. The Company also recorded $87,583,000 in excess
investment over its share of the underlying equity in the net
assets of companies acquired during the three months ended March
31, 2000 accounted for under the equity method of accounting.
Amortization expense of $6,230,564 is included in equity
in losses of associated companies in the accompanying
consolidated statement of operations.
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following summarized financial information for
associated companies accounted for under the equity method of
accounting at December 31, 1999 and March 31, 2000 has been
compiled from the financial statements of the respective
associated companies:
Balance Sheet
|
|
December 31,
1999
|
|
(Unaudited)
March 31,
2000
|
Current
assets |
|
$30,758,857 |
|
|
$146,145,393 |
|
Noncurrent assets |
|
1,327,778 |
|
|
22,607,510 |
|
|
|
|
|
|
|
|
Total assets |
|
$32,086,635 |
|
|
$168,752,903 |
|
|
|
|
|
|
|
|
Current
liabilities |
|
$ 1,713,148 |
|
|
$ 11,814,175 |
|
Non-current liabilities |
|
375,000 |
|
|
2,312,314 |
|
Redeemable preferred stock |
|
32,613,762 |
|
|
161,617,334 |
|
Stockholders deficit |
|
(2,615,275 |
) |
|
(6,990,920 |
) |
|
|
|
|
|
|
|
Total liabilities, redeemable preferred
stock and stockholders equity |
|
$32,086,635 |
|
|
$168,752,903 |
|
|
|
|
|
|
|
|
Results of Operations
|
|
May 7, 1999
(inception)
through
December 31, 1999
|
|
(Unaudited)
Three Months
Ended
March 31, 2000
|
Revenues |
|
$ 34,092 |
|
|
$ 5,053,891 |
|
Gross
profit |
|
24,134 |
|
|
3,151,060 |
|
Net
loss |
|
$(4,784,780 |
) |
|
$(15,533,550 |
) |
Three of the companies in which the Company acquired
an interest during the period ended December 31, 1999 and nine
of the companies in which the Company acquired an interest
during the three months ended March 31, 2000 have been accounted
for using the consolidation method. The purchase prices have
been allocated to the identifiable net assets based upon their
book values, which approximate fair values, at the dates of
acquisition. The portions of the purchase prices allocated to
identifiable intangible assets and goodwill are being amortized
on a straight-line basis over two to three years. These
companies are included in the Companys consolidated
financial statements from the dates of acquisition. The purchase
prices for the period ended December 31, 1999 and the three
months ended March 31, 2000 for these acquisitions were
allocated as follows:
|
|
mindwrap,
inc.
|
|
LiveOnTheNet.com,
Inc.
|
|
i-Street,
Inc.
|
|
Total For the
Period Ended
December 31,
1999
|
|
(Unaudited)
Total For the
Three Months
Ended
March 31,
2000
|
Identifiable net assets (liabilities
assumed) |
|
$ (26,843 |
) |
|
$ 1,941,063 |
|
$299,054 |
|
$ 2,213,274 |
|
$27,089,798 |
Developed technology |
|
3,893,971 |
|
|
|
|
|
|
3,893,971 |
|
1,493,845 |
Customer lists |
|
751,803 |
|
|
750,882 |
|
|
|
1,502,685 |
|
3,974,657 |
Workforce in place |
|
286,344 |
|
|
286,929 |
|
|
|
573,273 |
|
1,604,353 |
Goodwill |
|
|
|
|
12,021,126 |
|
200,946 |
|
12,222,072 |
|
18,037,347 |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price |
|
$4,905,275 |
|
|
$15,000,000 |
|
$500,000 |
|
$20,405,275 |
|
$52,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
(8)
Lease Commitments
The Company has noncancelable operating lease
commitments for office space and equipment. The future minimum
lease payments as of December 31, 1999 are as
follows:
2000 |
|
$1,010,059 |
2001 |
|
1,157,606 |
2002 |
|
776,677 |
2003 |
|
613,329 |
2004 |
|
631,657 |
Thereafter |
|
1,209,267 |
|
|
|
Total minimum lease payments |
|
$5,398,595 |
|
|
|
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Rental expense under operating leases was
approximately $200,000 for the period from May 7, 1999
(inception) through December 31, 1999.
(9)
Income Taxes
The reconciliation of income tax expense (benefit)
computed using the Federal statutory rate of 34% to the
Companys income tax expense (benefit) is as
follows:
Federal
income tax benefit at the statutory rate |
|
$(3,198,465 |
) |
State
income tax benefit, net |
|
(329,274 |
) |
Equity
in losses of associated companies |
|
480,663 |
|
Minority interest |
|
(17,434 |
) |
Amortization of stock-based compensation |
|
254,119 |
|
Nondeductible intangible asset amortization |
|
201,686 |
|
Nondeductible meals and entertainment |
|
40,365 |
|
|
|
|
|
|
|
(2,568,340 |
) |
Effect
of change in valuation allowance |
|
2,568,340 |
|
|
|
|
|
|
|
$
|
|
|
|
|
|
The tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and
liabilities at December 31, 1999 are as follows:
Deferred tax assets: |
|
|
Depreciation |
|
$
3,171 |
|
State taxes |
|
40,767 |
|
Accrued expenses |
|
274,041 |
|
Net operating loss carryforward |
|
2,250,361 |
|
|
|
|
|
Total gross deferred tax assets |
|
2,568,340 |
|
Less valuation allowance |
|
(2,568,340 |
) |
|
|
|
|
Net deferred tax asset |
|
$
|
|
|
|
|
|
No provision for Federal or state income taxes has
been recorded as the Company incurred a net operating loss
during the period presented. The Company has recorded a full
valuation allowance against its gross deferred tax assets since
management believes that it is more likely than not that these
assets will not be realized. No income tax benefit has been
recorded for the period presented because of the valuation
allowance.
At December 31, 1999, the Company had approximately
$5,770,000 of net operating loss carryforwards, which are
available to reduce future Federal income taxes, if any. The net
operating loss carryforwards expire at the end of
2019.
(10)
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) pursuant to a vote
by the limited partners of PVP I and PVP II, after Platinum
Venture Partners, Inc. withdrew as general partner. The Company
provides strategic and operations support to the portfolio
companies of PVP I and PVP II. These services are generally
provided by the Companys employees, members of its board
of directors, and outside consultants. The costs related to
employees are paid by the Company and are reflected by the
Company in cost of revenues on the consolidated statement of
operations.
The Company has made no contribution to, and has no
interest in the profits and losses of, PVP I and PVP II. As the
general partner of PVP I, the Companys only source of
income is 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 percentage increase
in the Consumer Price Index for All Urban Consumers, U.S. City
Average during the preceding calendar year. As the general
partner of PVP II, the Companys only source of income is
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.
Beginning on January 1, 2001, the Companys annual
management fee as general partner of PVP II will be payable in
advance in quarterly installments of 2 1
/2% of the
fair market value of the partnership, 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. The Company accounts for its general partnership
interests in PVP I and PVP II under the equity method of
accounting because it has influence over the operating and
financial policies of the partnerships.
(11)
Capital Stock
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 one-sixth of a share of class A common stock.
Series A-2 and series B-2 shares are convertible at any time
into one-sixth of a share of class B common stock. Series C
preferred shares are convertible into one-sixth of a 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 Companys 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 Companys 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.
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Preferred stock dividends in arrears as of
December 31, 1999 are $169,513 for series A, $189,361 for series
B, and $3,161,178 for series C.
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.
Dividends on series D and D-1 preferred stock are
cumulative, accrue on a daily basis at an annual rate of 8.0% of
the series D and D-1 liquidation value and are payable only upon
declaration by the Companys board of directors. Series D
preferred shares vote together with the common shares as a
single class. Series D-1 preferred shares are nonvoting. The
Series D and D-1 preferred shares are convertible into one-sixth
of a share of class A common stock based upon the liquidation
value of the series D and D-1 preferred stock, at any time by
the stockholder. Series D and D-1 preferred stock ranks senior
to all other classes and series of capital stock in the Company
with regard to dividends and distributions on
liquidation.
The Company is obligated to redeem the series D and
D-1 preferred stock on scheduled redemption dates at specified
cumulative percentages as follows: 25% on January 1, 2005; 33%
on July 1, 2005; 50% on January 1, 2006; and 100% on July 1,
2006. The redemption price is $1 per share, plus all accrued and
unpaid dividends.
(12)
Stock Options
The Company, under the 1999 Stock Incentive Plan
(Plan), which was adopted on October 1, 1999, and amended on
January 29, 2000 reserved 10,833,333 shares of common stock for
issuance. 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)
50,000,000 shares.
The stock is reserved for employees, directors, and
consultants. The Company applies APB 25 in accounting for the
Plan.
During 1999, the Company granted stock options to
purchase shares of class A common stock to employees and
directors at a weighted average exercise price of $4.50, which
were granted at less than the fair value of the common stock at
the date of grant. For the period from May 7, 1999 (inception)
through December 31, 1999, the Company recorded unearned
stock-based compensation of approximately $27,408,000 in
connection with these options. This amount will be amortized
over the vesting period of the applicable options, generally
four years in the case of options granted to employees and one
year in the case of options granted to non-employee directors.
The Company amortized approximately $747,000 of unearned
stock-based compensation for the period from May 7, 1999
(inception) through December 31, 1999. The Company expects to
amortize the following amounts of deferred compensation relating
to options granted in 1999 as follows: 2000 - $7,819,000; 2001 -
$6,480,000; 2002 - $6,480,000 and 2003 - $5,882,000.
For the three months ended March 31, 2000, the
Company granted stock options to purchase shares of class A
common stock to employees and directors at a weighted average
exercise price of $6.89 (unaudited), which were granted at less
than the fair value of the common stock at the date of grant. In
January 2000, the Company also sold 116,665 restricted shares of
class A common stock to its employees at a price of $4.50 per
share. These restricted shares reduce the otherwise available
shares reserved for issuance under the plan. For the three
months ended March 31, 2000, the Company recorded unearned
stock-based compensation of approximately $81,508,000
(unaudited) in connection with these options. This amount will
be amortized over the vesting period of the applicable options,
generally four years in the case of options granted to employees
and one year in the case of options granted to non-employee
directors. The Company amortized approximately $7,150,000
(unaudited) of unearned stock-based compensation for the three
months ended March 31, 2000. The Company expects to amortize the
following amounts of deferred compensation relating to the
options granted from May 7, 1999 through March 31, 2000 as
follows (unaudited): 2000 (for the nine months ended December
31, 2000)$25,863,000; 2001$25,927,000;
2002$25,115,000; 2003$23,169,000; and
2004$870,000.
Had compensation cost for the Plan been determined
consistent with SFAS No. 123, the Companys net loss and
net loss per share would have been the pro forma amounts
indicated below for the period from May 7, 1999 (inception)
through December 31, 1999, and the three months ended March 31,
2000:
|
|
May 7, 1999
(inception) through
December 31, 1999
|
|
(Unaudited)
Three months ended
March 31, 2000
|
Net
loss: |
|
|
|
|
|
|
As
reported |
|
$9,407,249 |
|
|
$44,185,204 |
|
Pro
forma |
|
9,557,116 |
|
|
44,436,296 |
|
Net
loss per share applicable to common stockholders: |
|
|
|
|
|
|
As
reported |
|
$
(4.59 |
) |
|
$
(7.79 |
) |
Pro
forma |
|
(4.64 |
) |
|
(7.81 |
) |
The term of each option is stated in the option
agreement and is not to exceed 10 years after the grant date.
Option pricing shall be determined by the Plan Administrator.
However, if the stock option is an incentive stock option, then
the exercise price of the stock cannot be less than 100% of the
fair value per share on the date of the grant.
Any option granted shall be exercisable at such
times and under such conditions as determined by the Plan
Administrator. However, for most options, 25% of the shares
subject to the option shall vest on each of the next four
anniversaries of the vesting commencement date. Options under
the Plan are exercisable immediately, subject to repurchase
rights held by the Company, which lapse over the vesting
period.
The fair value of the stock option grants is
estimated using the Black-Scholes option-pricing model, with the
following weighted-average assumptions used for stock option
grants in 1999 and the three months ended March 31, 2000,
respectively: weighted-average exercise price of $4.50 and $6.89
(unaudited); expected dividend yields of 0% and 0% (unaudited)
for all years; expected volatility of 0% and 0% (unaudited);
risk-free interest rate of 6.42% and 6.80% (unaudited); and an
expected life of four years.
A summary of the status of the Companys stock
option plan and the changes during the periods ended on those
dates, is presented below:
|
|
May
7, 1999
(inception)
through December
31, 1999
|
|
(Unaudited)
Three months ended
March 31, 2000
|
|
|
Shares
|
|
Weighted
average
exercise
price
|
|
Shares
|
|
Weighted
average
exercise
price
|
Outstanding at beginning of period |
|
|
|
|
|
|
3,192,246 |
|
|
$4.50 |
Granted |
|
3,533,904 |
|
|
$4.50 |
|
3,254,849 |
|
|
6.89 |
Exercised |
|
(341,658 |
) |
|
4.50 |
|
(5,690,008 |
) |
|
5.78 |
Forfeited |
|
|
|
|
|
|
(2,340 |
) |
|
4.50 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
3,192,246 |
|
|
4.50 |
|
754,747 |
|
|
6.90 |
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of period |
|
3,192,246 |
|
|
|
|
754,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during
the period |
|
$1.02 |
|
|
|
|
$1.52 |
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table summarizes information about
stock options outstanding at December 31, 1999:
|
|
Options outstanding
|
|
Options exercisable
|
Exercise price
|
|
Number of
Shares
|
|
Weighted-avg.
remaining
contractual life
|
|
Weighted-avg.
exercise price
|
|
Number of
shares
|
|
Weighted-avg.
exercise price
|
$4.50 |
|
3,192,246 |
|
9.8
years |
|
$4.50 |
|
3,192,246 |
|
$4.50 |
The following table summarizes information about
stock options outstanding at March 31, 2000
(unaudited):
|
|
Options outstanding
|
|
Options exercisable
|
Exercise price
|
|
Number of
Shares
|
|
Weighted-avg.
remaining
contractual life
|
|
Weighted-avg.
exercise price
|
|
Number of
shares
|
|
Weighted-avg.
exercise price
|
$4.50 to $13.50 |
|
754,747 |
|
9.8
years |
|
$6.90 |
|
754,747 |
|
$6.90 |
(13)
Related-party Transactions
The Companys 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 and a $100,000 design supervision fee to Blackhawk.
During the period from July 1, 1999 through December 31, 1999,
the Company paid Blackhawk $250,000.
The Companys Chief Executive officer owns
33.3% of Habitat-Kahney, LLC (Habitat). In January 2000, the
Company entered into a ten year facility lease with Habitat. The
Companys rent under this lease is $730,080 per year, with
an annual 2% increase.
(14)
Revenues from Major Customers
The Company applies SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, as
it pertains to significant customers. PVP I and PVP II, for
which the Company acts as general partner, and Whiplash, Inc.
accounted for $275,082 (27%) and $282,493 (27%), respectively,
of the Companys total revenues in 1999. No other customers
accounted for more than 10% of the Companys total revenues
in 1999.
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(15)
Subsequent Events
|
Ownership Interests in Associated
Companies
|
During the period from January 1, 2000 through
February 12, 2000, the Company acquired ownership interests in
the following companies:
Company
|
|
Acquisition
Date
|
|
Purchase
Price
|
|
Equity
Interest
|
BeautyJungle.com, Inc. |
|
1/11/00 |
|
$10,000,000 |
|
51.3% |
|
bid4real.com, inc. |
|
1/24/00 |
|
7,000,000 |
|
54.3% |
|
BidBuyBuild, Inc. |
|
2/11/00 |
|
6,000,000 |
|
35.5% |
|
CapacityWeb.com, Inc. |
|
2/11/00 |
|
4,500,000 |
|
44.5% |
|
closerlook, inc. |
|
2/1/00 |
|
22,600,000 |
|
42.7% |
|
eFiltration.com, Inc. |
|
2/11/00 |
|
10,000,000 |
|
45.2% |
|
i-Fulfillment, Inc. |
|
1/28/00 |
|
10,000,000 |
|
48.8% |
|
iGive.com, inc. |
|
2/11/00 |
|
4,000,000 |
|
32.1% |
|
iSalvage.com, Inc. |
|
2/3/00 |
|
6,500,000 |
|
36.3% |
|
Martin
Partners, L.L.C. |
|
2/8/00 |
|
1,670,883 |
|
25.0% |
|
Mercantec, Inc. |
|
2/11/00 |
|
23,500,000 |
|
40.4% |
|
The
National Transportation Exchange, Inc. |
|
1/5/00 |
|
5,112,665 |
|
5.3% |
* |
Oilspot.com, Inc. |
|
2/10/00 |
|
5,000,000 |
|
55.6% |
|
Parlano, Inc. |
|
2/11/00 |
|
63,000,000 |
|
75.1% |
|
Perceptual Robotics, Inc. |
|
2/14/00 |
|
14,800,000 |
|
33.4% |
|
ViaChange.com, Inc. |
|
1/31/00 |
|
5,000,000 |
|
70.0% |
|
Web
Design Group, Inc. |
|
2/11/00 |
|
7,000,000 |
|
53.7% |
|
Westbound Consulting, Inc. |
|
2/11/00 |
|
1,000,000 |
|
52.4% |
|
Xippix,
Inc. |
|
2/4/00 |
|
9,000,000 |
|
32.3% |
|
|
*Ownership percentage includes the effect of the
Companys initial acquisition of $750,000 on October 29,
1999.
|
|
The Companys Chairman of the Board of
Directors is also Chairman of the Board of Directors of
iGive.com and beneficially owns approximately 14.2% of
iGive.com.
|
On January 5, 2000, the Company paid $5,112,665 to
acquire 3.2% of The National Transportation Exchange, Inc.
(NTE). This acquisition increased the Companys ownership
percentage of NTE to 5.3%.
On January 11, 2000, the Company acquired 51.3% of
BeautyJungle.com, Inc. (BeautyJungle) for $10,000,000.
Subsequently on March 13, 2000, the Company acquired an
additional interest in BeautyJungle for $8,000,000 which
increased the Companys ownership percentage of
BeautyJungle to 61.0%. Beauty Jungle offers an electronic
marketplace for buyers and sellers of beauty
products.
On January 24, 2000, the Company acquired 54.3% of
bid4real.com, inc., (bid4real) for $7,000,000. bid4real provides
a forum on which real estate auctions are conducted
on-line.
On January 28, 2000, the Company paid $1,000,000 and
issued a promissory note for $9,000,000 for 48.8% of
i-Fulfillment, Inc., which provides fulfillment and inventory
management services to businesses selling products over the
Internet. The promissory note carries interest at 8.5% and was
paid in installments through May 2000.
On January 31, 2000, the Company paid $3,000,000 and
issued a promissory note for $2,000,000 for 70.0% of
ViaChange.com, Inc., which provides a forum on which auctions of
products in capital markets are conducted on-line. The
promissory note carries interest at 8.0% and is due in May
2000.
On February 1, 2000, the Company paid $11,500,000
and issued 500,000 shares of its series F preferred stock (with
a fair value of $4.80 per share) for 42.7% of closerlook, inc.,
which provides digital strategy, web site design, e-commerce
solutions and hands-on interactive learning initiatives to small
and mid-sized companies. As part of the purchase agreement, the
Company placed an additional $1,500,000 and 1,500,000 shares of
its series F preferred stock into escrow, which may or may not
be released to the sellers depending on whether or not
closerlook meets certain predetermined revenue goals for 2000.
These predetermined revenue
goals may also require the Company to fund an additional
$3,000,000 to closerlook for no additional equity interest in
closerlook. The 1,500,000 shares of series F preferred stock
held in escrow at March 31, 2000 have been reflected as issued
but not outstanding within the accompanying unaudited
consolidated balance sheet as of March 31, 2000.
On February 3, 2000, the Company acquired 36.3% of
iSalvage.com, Inc., (iSalvage) for $6,500,000. iSalvage provides
an electronic marketplace for recycled and rebuilt automotive
parts.
On February 4, 2000, the Company paid $5,000,000 and
issued a promissory note for $4,000,000 for 32.3% of Xippix,
Inc., which provides technology that allows high-resolution
imaging for companies web sites. The promissory note
carries interest at 8.0% and was paid in May 2000.
On February 8, 2000, the Company acquired 25.0% of
Martin Partners, L.L.C. (Martin Partners) for $1,670,883. Martin
Partners is an executive search firm which focuses on e-commerce
and technology companies.
On February 10, 2000, the Company paid $2,500,000
and issued a promissory note for $2,500,000 for 55.6% of
Oilspot.com, Inc., which provides an electronic marketplace for
purchasers and suppliers of petroleum products and services. The
promissory note carries interest at 8.5% and is due in May
2000.
On February 11, 2000, the Company paid $3,000,000
and issued a promissory note for $3,000,000 for 35.5% of
BidBuyBuild, Inc., which provides an electronic marketplace in
the commercial and industrial construction supply industry. The
promissory note carries interest at 8.5% and was paid in April
2000.
On February 11, 2000, the Company acquired 44.5% of
CapacityWeb.com, Inc. (CapacityWeb) for $4,500,000. CapacityWeb
provides an electronic marketplace for industrial manufacturing
capacity.
On February 11, 2000, the Company paid $15,000,000
and issued 10,000,000 shares of its series F preferred stock
(with a fair value of $4.80 per share) for communication and
collaboration software. This software was the basis for Parlano,
Inc. (Parlano), of which the Company obtained a 75.1% ownership
interest. Parlano markets and licenses software that allows
information to be captured, filtered and stored in corporate
databases and used in knowledge management applications. In
connection with the issuance of the Companys series F
preferred stock on February 11, 2000, the Company recorded a
non-cash dividend of $7,530,000. This non-cash dividend relates
to the deemed beneficial conversion features associated with
this preferred stock.
On February 11, 2000, the Company paid $5,000,000
and issued a promissory note for $5,000,000 for 45.2% of
eFiltration.com, Inc., which offers an electronic marketplace
for the filtration industry. The promissory note carries
interest at 8.5% and is due in August 2000.
On February 11, 2000, the Company acquired 32.1% of
iGive.com, inc. (iGive) for $4,000,000. iGive provides
technology and services to a network of merchants, non-profit
organizations and consumers which enable retail purchasers to
assist non-profit organizations.
On February 11, 2000, the Company paid $12,000,000
and issued a promissory note for $11,500,000 for 40.4% of
Mercantec, Inc., which produces software that allows merchants
to integrate e-commerce capabilities into their existing web
sites. The promissory note carries interest at 6.0%; $6,500,000
was paid in April 2000 and $5,000,000 is due in July
2000.
On February 11, 2000, Xqsite, Inc., of which the
Company owns 80.6%, acquired 66.7% of Web Design Group, Inc.
(Web Design Group) for $7,000,000. Web Design Group provides web
development and electronic business services to companies
seeking to develop and implement effective web solutions for
their operations.
On February 11, 2000, Xqsite, Inc., paid $500,000
and issued a promissory note for $500,000 for 65.0% of Westbound
Consulting, Inc., which delivers customized Internet solutions
through web consulting,
marketing, development and hosting services. The promissory note
carries interest at the prime rate of interest as stated in the
Wall Street Journal; $250,000 was paid in April 2000 and
$250,000 is due in August 2000.
On February 14, 2000, the Company paid $10,000,000
and issued 1,000,000 shares of its series F preferred stock
(with a fair value of $4.80 per share) for 33.4% of Perceptual
Robotics, Inc., which offers a software system that allows
Internet users to control a robotic camera and immediately
capture still images from remote locations.
|
Related-party Transaction
|
During January 2000, a subsidiary of the Company
paid $1,800,000 to Platinum Entertainment, Inc. and paid
$200,000 into an escrow account for certain licensing rights of
Platinum Entertainment, Inc. The Companys Chief Executive
Officer and two Executive Vice Presidents serve as directors of
Platinum Entertainment, Inc.
|
Sale
of Series D Preferred Stock
|
On January 19, 2000, the Company sold 191,980,300
shares of series D preferred stock and 5,019,700 shares of
Series D-1 preferred stock for net proceeds of approximately
$196,900,000.
|
Authorization of Preferred Shares
|
On February 3, 2000, the Company designated
20,000,000 preferred shares as series E senior participating
convertible redeemable preferred stock. Series E preferred
shares are convertible into one-sixth of a share of class A
common stock at any time by the stockholder. Series E preferred
stock is on an equal ranking with series D and series D-1 senior
participating convertible redeemable preferred stock with regard
to dividends and distributions on liquidation.
On January 19, 2000, the Company designated
12,600,000 preferred shares as series F senior convertible
preferred stock. An additional 400,000 shares were authorized in
February 2000. Series F preferred shares are convertible into
one-sixth of a share of class A common stock at any time by the
stockholder. Series F preferred stock ranks senior to class A
common stock, class B common stock, series A preferred stock,
series B preferred stock, and series C preferred stock, and
ranks junior to series D preferred stock, series D-1 preferred
stock, and series E preferred stock, with regard to dividends
and distributions on liquidation.
|
Microsoft Alliance Agreement
|
On January 28, 2000, the Company entered into a
four-year agreement (Agreement) with Microsoft Corporation
(Microsoft) pursuant to which the Company agreed to acquire at
least $9,595,167 in desktop and server Microsoft software
products, and purchase a minimum of $4,660,174 in Microsoft
Consulting Services and a minimum of $1,067,430 in Microsoft
product support services.
As a term of the Agreement, the Company shall
exercise commercially reasonable efforts to develop a
Seattle-based facility that is anticipated to be leased to
various other companies, consistent with the Companys
current business model, within 15 months of the effective date
of the Agreement.
On February 3, 2000, the Company entered into an
agreement whereby it authorized the sale of 20,000,000 shares of
its series E senior participating convertible redeemable
preferred stock to CMGI, Inc. (CMGI). These shares are
convertible into shares of the Companys class A common
stock. The sale is to be consummated as follows:
|
|
In
March 2000, CMGI will purchase 18,284,327 shares of the
preferred stock for $18,284,327.
|
|
|
Upon
the consummation of a qualified initial public offering (IPO)
of the Company, CMGI will purchase the number of shares of
class A common stock necessary to make CMGI the beneficial
owner of 4.9% of the class A common stock of the Company.
These shares will be purchased at the qualified IPO price, and
will be paid by the issuance to the Company of shares of CMGI
common stock.
|
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The Company is obligated to redeem these shares as
set forth in the following schedule.
Scheduled
Redemption Date
|
|
Specified
Cumulative Percentage
|
January
1, 2005 |
|
25% |
July 1,
2005 |
|
33% |
January
1, 2006 |
|
50% |
July 1,
2006 |
|
100% |
The redemption price is $1 per share, plus all
accrued and unpaid dividends, which accrue at an annual rate of
8%.
|
2000
Employee Stock Purchase Plan
|
In January 2000, the Company adopted, subject to
stockholder approval, its 2000 Employee Stock Purchase Plan
(ESPP), under which a total of 4,166,666 shares of class A
common stock are available for sale to the Companys
employees. Through this plan, the Companys eligible
employees can purchase class A common stock through payroll
deductions and other cash contributions.
Initially, this ESPP will operate over two-year plan
periods, except that the first plan period will be shorter as
described below. The ESPP generally will be implemented in a
series of consecutive six-month offering periods during each
plan period. The first ESPP period, however, will begin on the
date of the Companys prospectus and end on May 31, 2002,
and the first offering period will begin on the date of the
Companys prospectus and end on August 31, 2000. There will
be only three offering periods during the ESPP
period.
Each participant will be granted an option to
purchase the Companys class A common stock on the first
day of the ESPP period, and the option will be automatically
exercised on the last day of each offering period. The purchase
price of each share of class A common stock under the ESPP will
equal 85% of the lesser of (1) the fair market value of the
Companys class A common stock on the first day of the plan
period or (2) the fair market value on the date of purchase.
Accordingly, the fair market value of the Companys class A
common stock on the first day of the first ESPP period will
equal the Companys initial public offering price. The
Companys Board of Directors and compensation committee can
change the length of the plan periods and offering periods and
the other terms described above.
Employee contributions may not exceed $21,250 for
any employee in any calendar year. Further, in any calendar
year, no participating employee may purchase more than that
number of shares which is equal to $25,000 divided by the fair
market value of the Companys class A common stock on the
first day of the ESPP period. In addition, no employee can
purchase class A common stock under the ESPP if that person,
immediately after the purchase, would own stock possessing 5% or
more of the total combined voting power or value of all
outstanding shares of all classes of the Companys capital
stock.
|
Issuance of Shares in Associated Companies to
Employees
|
During January 2000, employees of the Company
acquired an ownership interest averaging 22.0% in 13 companies
established by the Company in 1999 (the Established Companies).
The Established Companies commenced operations on January 1,
2000. The employees of the Company contributed an aggregate of
approximately $57,000, or $.001 per share, for these interests.
The total deemed fair value of the employees shares of the
Established Companies was approximately $24,282,000, or $0.43
per share, at the time of issuance of the stock. In connection
with the issuance of the stock, approximately $24,225,335 of
unearned stock-based compensation will be recorded in the first
quarter of 2000. The total unearned stock-based compensation
will be amortized ratably over the four-year vesting period of
the shares, resulting in $6,056,000 of amortization each year
during this period.
DIVINE
INTERVENTURES, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The Established Companies stock issued to
employees is class A common stock, which is the subject of a
restricted stock agreement. During the restricted period, which
may last up to three years, the employee may not sell the
shares, may only transfer the shares in limited circumstances,
and must sell the shares back to the Company if the individual
ceases to be an employee.
Immediately upon issuance, including the restricted
period, each share of class A common is entitled to: one vote
per share; receive dividends, although any dividends declared
must also be declared on class B common stock, which is held by
the Company; receive an allocable portion of liquidation
proceeds.
The issuance of the class A common stock will not
impact the Companys earnings per share under paragraph 62
of SFAS 128, Earnings per Share, as the stock has no
conversion rights with respect to stock of the Company. Since
the shares do not convert into shares of the Company, they will
only be considered in determining the earnings per share of the
Established Companies.
On February 10, 2000, the Company committed to fund
$4,000,000 to Skyscraper Ventures (Fund) that will invest in
start-up and early-stage companies located in Illinois. The
Company serves as general partner of the Fund. The $4,000,000
commitment consists of $80,000 as general partner and $3,920,000
as a limited partner. As general partner, the Company will be
required to fund 1% of the total contributions to the Fund. The
maximum total contribution to the Fund is $125,000,000,
resulting in a maximum future contribution to the Fund by the
Company as general partner of $1,170,000.
With respect to each interest in a company acquired
by the Fund, the Company is 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 contributed capital,
the Company is obligated to contribute an amount equal to the
deficiency, but not to exceed an amount equal to the
distributions received by the Company with respect to the
Companys 20% share. The Company is also 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.
This management fee will then be reduced in 10% increments each
year until the termination of the Fund.
The Company will initially account for its ownership
interest in the Fund under the consolidation method of
accounting as long as its aggregate general and limited partner
ownership interest is in excess of 50%. Once the Companys
aggregate general and limited ownership interest is reduced to
or goes below 50%, the Company will account for its ownership
interest under the equity method of accounting. The Company may
be removed as general partner for cause upon the written notice
of a two-thirds interest of the limited partners.
(16)
Reverse Stock Split
On June 1, 2000, the Companys Board of
Directors and stockholders authorized a one-for-six reverse
stock split for its common shares. The par value of the common
stock was maintained at the pre-split amount of $.001 per share.
All references to common share and per share amounts in these
consolidated financial statements and notes to consolidated
financial statements have been restated to reflect this reverse
stock split on a retroactive basis, exclusive of fractional
shares. All fractional common shares resulting from the
Companys reverse stock split will be redeemed by the
Company at a price per share equal to the Companys initial
public offering price for the class A common stock.
DIVINE INTERVENTURES, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BASIS
OF PRESENTATION
During the period from January 1, 2000 through
February 14, 2000, the Company acquired a controlling interest
in ViaChange.com, Inc., BeautyJungle.com, Inc., bid4real.com,
Inc., Westbound Consulting, Inc., Oilspot.com, Inc. and Web
Design Group, Inc. and significant minority ownership in eleven
equity method associated companies.
The unaudited pro forma condensed combined statement
of operations for the period from May 7, 1999 (Companys
inception) through December 31, 1999 reflects these
acquisitions, as well as acquisitions made during 1999, namely
mindwrap, inc., LiveOnTheNet.com, Inc. and i-Street, Inc.
(consolidated entities) and five equity method associated
companies, as if they occurred on May 7, 1999.
The unaudited pro forma condensed combined statement
of operations for the three months ended March 31, 2000 reflects
the acquisitions made during the period from January 1, 2000
through February 14, 2000 as if they occurred on May 7,
1999.
During the period from February 15, 2000 through
March 31, 2000, the Company acquired a controlling interest in
NetUnlimited, Inc. and Panthera Productions, LLC and significant
minority ownership in six equity method associated companies.
The accompanying unaudited pro forma condensed combined
statements of operations for the period from May 7, 1999
(inception) through December 31, 1999 and for the three months
ended March 31, 2000 do not include the operating results of
these associated companies because the acquisitions did not meet
the criteria for the acquisition of a significant subsidiary as
defined by the SECs published rules and regulations and,
as a result, the effect of the acquisitions are not required to
be presented within the Companys pro forma financial
statements.
An unaudited pro forma condensed balance sheet at
March 31, 2000 has not been presented in this section since the
acquisitions made during the period from January 1, 2000 through
February 14, 2000 are reflected in the unaudited balance sheet
of the Company at March 31, 2000 included within this
registration statement. The pro forma effect of the conversion
of preferred stock to common stock upon an initial public
offering of the Companys class A common stock has been
reflected along with the historical balance sheets on page
F-6.
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
statements of operations 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 mindwrap, inc., LiveOnTheNet.com, Inc., i-Street,
Inc., ViaChange.com, Inc., BeautyJungle.com, Inc., bid4real.com,
Inc., Westbound Consulting, Inc., Oilspot.com, Inc. and Web
Design Group, Inc. and certain equity method associated
companies and the notes thereto included elsewhere in this
prospectus.
DIVINE INTERVENTURES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
FOR
THE PERIOD FROM MAY 7, 1999 (INCEPTION)
THROUGH DECEMBER 31, 1999
|
|
(a)
divine
interVentures, inc.
|
|
mindwrap,
inc.
|
|
LiveOnTheNet.com,
Inc.
|
|
i-
Street,
Inc.
|
|
ViaChange.com,
Inc.
|
Revenues |
|
$ 626,406 |
|
|
3,430,638 |
|
|
3,146,889 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues (exclusive of $4,746 of amortization of
stock-based compensation) |
|
540,231 |
|
|
1,353,235 |
|
|
3,668,222 |
|
|
|
|
|
|
|
Selling, general and administrative (exclusive of
$742,664 of amortization of stock-based
compensation) |
|
8,207,643 |
|
|
2,387,846 |
|
|
1,480,133 |
|
|
29,175 |
|
|
95,729 |
|
Amortization of stock-based compensation |
|
747,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
|
9,495,284 |
|
|
3,741,081 |
|
|
5,148,355 |
|
|
29,175 |
|
|
95,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
(8,868,878 |
) |
|
(310,443 |
) |
|
(2,001,466 |
) |
|
(29,175 |
) |
|
(95,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
1,588,863 |
|
|
1,311 |
|
|
6,044 |
|
|
|
|
|
|
|
Interest expense |
|
204,816 |
|
|
9,562 |
|
|
12,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense) |
|
1,384,047 |
|
|
(8,251 |
) |
|
(6,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes, minority interest and equity in
losses of associated
companies |
|
(7,484,831 |
) |
|
(318,694 |
) |
|
(2,007,511 |
) |
|
(29,175 |
) |
|
(95,729 |
) |
Income
tax expense (benefit) |
|
|
|
|
91,839 |
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in losses of associated companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
(7,484,831 |
) |
|
(410,533 |
) |
|
(2,007,511 |
) |
|
(29,175 |
) |
|
(95,729 |
) |
Accretion of preferred stock dividends and deemed
dividends
related to beneficial conversion feature
in Series E and F
preferred stock |
|
(3,520,052 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders |
|
$(11,004,883 |
) |
|
(410,533 |
) |
|
(2,007,511 |
) |
|
(29,175 |
) |
|
(95,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share applicable to
common stockholders |
|
$(4.59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used to compute basic and diluted net loss per
share |
|
2,816,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVINE INTERVENTURES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
FOR
THE PERIOD FROM MAY 7, 1999 (INCEPTION)
THROUGH DECEMBER 31, 1999
BeautyJungle.com,
Inc.
|
|
bid4real.com,
inc.
|
|
Westbound
Consulting, Inc.
|
|
Oilspot.com, Inc.
|
|
Web Design
Group, Inc.
|
|
Pro
forma
adjustments
|
|
Pro forma
balances
|
196,730 |
|
|
|
|
|
226,313 |
|
|
|
|
|
1,902,311 |
|
|
|
9,529,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,712 |
|
|
|
|
|
5,610 |
|
|
|
|
|
832,047 |
|
|
|
6,508,057 |
|
|
9,327,102 |
|
|
259,600 |
|
|
420,769 |
|
|
49,201 |
|
|
499,842 |
|
7,893,905 (b) |
|
30,650,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
747,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,435,814 |
|
|
259,600 |
|
|
426,379 |
|
|
49,201 |
|
|
1,331,889 |
|
7,893,905 |
|
37,906,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,239,084 |
) |
|
(259,600 |
) |
|
(200,066 |
) |
|
(49,201 |
) |
|
570,422 |
|
(7,893,905) |
|
(28,377,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189 |
|
|
|
|
|
|
|
|
|
|
|
3,140 |
|
|
|
1,602,547 |
|
46,643 |
|
|
5,424 |
|
|
6,296 |
|
|
|
|
|
|
|
(21,651)(e) |
|
263,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,454 |
) |
|
(5,424 |
) |
|
(6,296 |
) |
|
|
|
|
3,140 |
|
21,651 |
|
1,339,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,282,538 |
) |
|
(265,024 |
) |
|
(206,362 |
) |
|
(49,201 |
) |
|
573,562 |
|
(7,872,254) |
|
(27,037,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,839 |
|
|
|
|
|
|
|
45,355 |
|
|
|
|
|
|
|
2,836,045 (c) |
|
2,881,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,365,772)(d) |
|
(21,365,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,282,538 |
) |
|
(265,024 |
) |
|
(161,007 |
) |
|
(49,201 |
) |
|
573,562 |
|
(26,401,981) |
|
(45,613,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,814,327)
(3) |
|
(29,334,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,282,538 |
) |
|
(265,024 |
) |
|
(161,007 |
) |
|
(49,201 |
) |
|
573,562 |
|
(52,216,308) |
|
(74,948,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(26.61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,816,074 |
|
See
accompanying notes to unaudited pro forma condensed combined
financial statements.
DIVINE INTERVENTURES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2000
|
|
divine
interVentures,
inc.
|
|
Pro
forma
adjustments
|
|
Pro
forma
balances
|
Revenues |
|
$
5,214,969 |
|
|
$ 450,869 |
(g) |
|
$ 5,665,838 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of $484,803 of
amortization of
stock-based
compensation) |
|
4,407,254 |
|
|
275,071 |
(g) |
|
4,682,325 |
|
Selling, general and administrative (exclusive of
$8,106,950 of amortization
of stock-based
compensation) |
|
31,451,265 |
|
|
570,883 |
(g) |
|
|
|
|
|
|
|
|
338,625 |
(i) |
|
32,360,773 |
|
Research and development (exclusive of $72,710 of
amortization of
stock-based compensation) |
|
1,595,665 |
|
|
117,296 |
(g) |
|
1,712,961 |
|
Amortization of stock-based
compensation |
|
8,664,463 |
|
|
|
|
|
8,664,463 |
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
|
46,118,647 |
|
|
1,301,875 |
|
|
47,420,522 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
(40,903,678 |
) |
|
(851,006 |
) |
|
(41,754,684 |
) |
|
|
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
Interest income |
|
3,713,452 |
|
|
|
|
|
3,713,452 |
|
Interest expense |
|
(302,064 |
) |
|
|
|
|
(302,064 |
) |
Other loss, net |
|
(2,461 |
) |
|
|
|
|
(2,461 |
) |
|
|
|
|
|
|
|
|
|
|
Total
other income (expense) |
|
3,408,927 |
|
|
|
|
|
3,408,927 |
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest and equity in losses of associated
companies |
|
(37,494,751 |
) |
|
(851,006 |
) |
|
(38,345,757 |
) |
Minority interest |
|
4,187,298 |
|
|
240,391 |
(h) |
|
4,427,689 |
|
Equity
in losses of associated companies |
|
(10,877,751 |
) |
|
(2,569,791 |
)(j) |
|
(13,447,542 |
) |
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
(44,185,204 |
) |
|
(3,180,406 |
) |
|
(47,365,610 |
) |
Accretion of preferred stock dividends and deemed
dividends
related to beneficial conversion
feature in Series E and F
preferred stock |
|
(33,230,698 |
) |
|
|
|
|
(33,230,698 |
) |
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders |
|
$(77,415,902 |
) |
|
$(3,180,406 |
) |
|
$(80,596,308 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to
common
stockholders |
|
$
(7.79 |
) |
|
|
|
|
$
(8.11 |
) |
Shares used to compute basic and diluted net loss
per
share |
|
9,941,917 |
|
|
|
|
|
9,941,917 |
|
DIVINE INTERVENTURES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
1.
Basis of Presentation
The unaudited pro forma condensed combined statement
of operations for the period from May 7, 1999 through December
31, 1999 gives effect to the acquisitions of mindwrap, inc.,
LiveOnTheNet.com, Inc., i-Street, Inc., ViaChange.com, Inc.,
BeautyJungle.com, Inc., bid4real.com, inc., Westbound
Consulting, Inc., Oilspot.com, Inc. and Web Design Group, Inc.
and the acquisitions of significant minority ownership interest
in sixteen equity method associated companies as if they had
occurred on May 7, 1999 (Companys inception).
The following summarizes information concerning the
estimated purchase price allocation for the acquisitions of the
consolidated companies.
|
|
Purchase
price
|
|
Fair
value of
tangible net
assets
acquired
|
|
Goodwill
and other
intangible
assets
|
1999
acquisitions |
|
$20,405,275 |
|
2,213,274 |
|
18,192,001 |
2000
acquisitions |
|
35,000,000 |
|
14,733,447 |
|
20,266,553 |
The effects of the acquisitions have been presented
using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired,
liabilities assumed and certain identifiable intangible assets
based upon managements best preliminary estimate of fair
value with any excess purchase price being allocated to
goodwill. The preliminary allocation of the purchase price will
be subject to further adjustments, 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 managements best estimate of the effects of the
acquisitions.
The unaudited pro forma condensed combined statement
of operations for the three months ended March 31, 2000 gives
effect to the 2000 acquisitions, namely the acquisitions of
ViaChange.com, Inc., bid4real.com, inc., Westbound Consulting,
Inc., Oilspot.com, Inc. and Web Design Group, Inc. and the
acquisitions of eleven equity method associated companies, as if
they had occurred on January 1, 2000.
2. Pro
Forma Statement of Operations Adjustments
The pro forma statement of operations adjustments
for the period from May 7, 1999 (Companys inception)
through December 31, 1999 consist of:
|
(a) The divine interVentures, inc. column has been
adjusted to exclude all operating activity from acquisitions
which occurred through December 31, 1999 for LiveOntheNet.com,
Inc., i-Street, Inc., OpinionWare.com, Inc., Outtask.com Inc.,
PocketCard Inc., Entrepower, Inc. and mindwrap,
inc.
|
|
(b) Selling, general and administrative expenses
have been adjusted to reflect the amortization of goodwill and
other intangible assets associated with acquisitions of
mindwrap, inc., LiveOntheNet.com, Inc., i-Street, Inc.,
ViaChange.com, Inc., BeautyJungle.com, Inc., bid4real.com,
Inc., Westbound Consulting, Inc., Oilspot.com, Inc. and Web
Design Group, Inc. over a useful life of two to three years.
The acquisitions are reflected as the later of either May 7,
1999 (Companys inception) or each respective
companys inception date.
|
|
(c) Minority interest has been adjusted to reflect
the minority interest portion of the operating loss in
LiveOntheNet.com, Inc., i-Street, Inc., mindwrap, inc.,
ViaChange.com, Inc., BeautyJungle.com, Inc.,
bid4real.com, Inc., Westbound Consulting, Inc., Oilspot.com,
Inc. and Web Design Group, Inc. The following table reflects
the calculation of minority interest for each of these
associated companies.
|
Associated company
|
|
Net
income
(loss)
|
|
Minority
interest
percentage
|
|
Minority
interest
|
BeautyJungle.com, Inc. |
|
$(6,124,581 |
) |
|
39.0 |
% |
|
$2,388,588 |
|
bid4real.com, inc. |
|
(265,024 |
) |
|
45.7 |
% |
|
121,116 |
|
i-Street, Inc. |
|
(29,175 |
) |
|
36.2 |
% |
|
10,561 |
|
LiveOnTheNet.com, Inc. |
|
(2,007,511 |
) |
|
23.1 |
% |
|
463,735 |
|
mindwrap, inc. |
|
(410,533 |
) |
|
2.9 |
% |
|
11,905 |
|
Oilspot.com, Inc. |
|
(49,201 |
) |
|
44.4 |
% |
|
21,845 |
|
ViaChange.com, Inc. |
|
(27,638 |
) |
|
30.0 |
% |
|
8,291 |
|
Web
Design Group, Inc. |
|
573,562 |
|
|
46.6 |
% |
|
(267,280 |
) |
Westbound Consulting, Inc. |
|
(161,007 |
) |
|
48.0 |
% |
|
77,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2,836,045 |
|
|
|
|
|
|
|
|
|
|
|
|
(d) Equity in losses of associated companies has
been adjusted to reflect the Companys ownership interest
in the income (loss) of the equity method associated companies
and the amortization of the difference in the Companys
carrying value in the associated company and the
Companys ownership interest in the underlying net equity
of the associated company over an estimated useful life of
three years. The Companys equity income (loss) in each
equity method associated company is as follows:
|
Associated company
|
|
Equity income (loss)
|
BidBuyBuild, Inc. |
|
$ (323,178 |
) |
CapacityWeb.com, Inc. |
|
(555,000 |
) |
closerlook, inc. |
|
(2,901,569 |
) |
eFiltration.com, inc. |
|
(629,490 |
) |
i-Fullfillment, Inc. |
|
(1,158,677 |
) |
iGive.com, inc. |
|
(1,027,958 |
) |
iSalvage.com, Inc. |
|
(1,108,869 |
) |
Martin
Partners, L.L.C. |
|
183,809 |
|
Mercantec, Inc. |
|
(4,607,913 |
) |
OpinionWare.com, inc. |
|
(608,746 |
) |
Outtask.com Inc. |
|
(1,147,052 |
) |
Perceptual Robotics, Inc. |
|
(2,304,369 |
) |
PocketCard Inc. |
|
(2,290,284 |
) |
Entrepower, Inc. |
|
(113,682 |
) |
Whiplash, Inc. |
|
(1,265,016 |
) |
Xippix,
Inc. |
|
(1,507,778 |
) |
|
|
|
|
|
|
$(21,365,772 |
) |
|
|
|
|
|
(e) Reflects the reduction in interest expense of
mindwrap, inc. and LiveOnTheNet.com, Inc. as a result of the
forgiveness of debt by their former Parent companies, assuming
that the forgiveness occurred on May 7, 1999.
|
|
(f) Shares used to compute basic and diluted net
loss per share are based upon the weighted average number of
common shares outstanding by the Company for the period from
May 7, 1999 (inception) through December 31, 1999.
|
|
Based on the short period of time elapsed between
the issuance of the Series E Preferred Stock on February 3,
2000 and the filing of the Companys Registration
Statement on Form S-1 on February 14, 2000, the Company has
recorded a non-cash preferred stock dividend of $18,284,327
which relates to the beneficial conversion feature associated
with that preferred stock. Additionally, based on the short
period of time elapsed between the issuance of the Series F
Preferred Stock for collaboration and communication software
on February 11, 2000 and the filing of the Companys
Registration Statement on February 14, 2000, the Company has
recorded a non-cash preferred stock dividend of $7,530,000
which relates to the beneficial conversion feature associated
with that preferred stock. These deemed dividends have been
included for purposes of determining basic and diluted net
loss per common 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
$74,948,347, which includes preferred stock dividends of
$29,334,379.
|
The pro forma statement of operations adjustments
for the three months ended March 31, 2000 consist
of:
|
(g) Revenues, cost of revenues, selling, general,
and administrative expenses, and research and development
expenses have been adjusted to include the amounts recognized
by the consolidated companies in the first quarter but not
recorded in the Companys consolidated statement of
operations for the three months ended March 31,
2000.
|
|
(h) Minority interest has been adjusted to reflect
the minority interest portion of the additional operating
loss. The following table reflects the minority interest
adjustment by associated company.
|
Associated company
|
|
Additional
minority
interest
|
bid4real.com, inc. |
|
$127,279 |
Oilspot.com, Inc. |
|
9,162 |
ViaChange.com, Inc. |
|
300 |
Web
Design Group, Inc. |
|
33,973 |
Westbound Consulting, Inc. |
|
69,677 |
|
|
|
|
|
$240,391 |
|
|
|
|
(i) Selling, general and administrative expenses
have been adjusted to reflect additional amortization of
goodwill and other intangible assets, as follows:
|
Associated company
|
|
Additional
amortization
|
bid4real.com, inc. |
|
$ 99,363 |
Oilspot.com, Inc. |
|
64,261 |
ViaChange.com, Inc. |
|
64,425 |
Web
Design Group, Inc. |
|
100,353 |
Westbound Consulting, Inc. |
|
10,223 |
|
|
|
|
|
$338,625 |
|
|
|
|
(j) Equity in losses of associated companies has
been adjusted to reflect the Companys ownership interest
in the additional income (loss) of the equity method
associated companies and the additional amortization of the
excess investment over the Companys share of the equity
in net assets of the equity method associated companies, as
follows:
|
Associated company
|
|
Equity
income (loss)
|
BidBuyBuild, Inc. |
|
$ (252,045 |
) |
CapacityWeb.com, Inc. |
|
(53,621 |
) |
closerlook, inc. |
|
(514,302 |
) |
eFiltration.com, inc. |
|
(163,101 |
) |
i-Fulfillment, Inc. |
|
(153,584 |
) |
iGive.com, inc. |
|
(176,203 |
) |
iSalvage.com, Inc. |
|
(193,881 |
) |
Martin
Partners, L.L.C. |
|
81,088 |
|
Mercantec, Inc. |
|
(643,372 |
) |
Perceptual Robotics, Inc. |
|
(244,761 |
) |
Xippix,
Inc. |
|
(256,009 |
) |
|
|
|
|
|
|
$(2,569,791 |
) |
|
|
|
|
INDEPENDENT AUDITORS REPORT
The Board
of Directors
mindwrap,
inc.:
We have audited the accompanying balance sheets of
mindwrap, inc. (a wholly-owned subsidiary of Metters Industries,
Inc.) as of March 31, 1998 and 1999, and November 19, 1999, and
the related statements of operations, net investment by Parent,
and cash flows for the years ended March 31, 1998 and 1999, and
for the period from April 1, 1999 through November 19, 1999.
These financial statements are the responsibility of the
Companys 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 mindwrap, inc. as of March 31, 1998 and 1999, and
November 19, 1999, and the results of its operations and its
cash flows for the years ended March 31, 1998 and 1999, and for
the period from April 1, 1999 through November 19, 1999, in
conformity with generally accepted accounting
principles.
McLean,
Virginia
January
21, 2000, except as to note 13,
|
which
is as of February 18, 2000
|
MINDWRAP, INC.
(a
wholly-owned subsidiary of Metters Industries,
Inc.)
March
31, 1998 and 1999, and November 19, 1999
|
|
March 31,
|
|
November 19,
1999
|
ASSETS
|
|
1998
|
|
1999
|
|
Current
assets: |
|
|
|
|
Cash |
|
$
111,244 |
|
60,942 |
|
34,900 |
Accounts receivable |
|
955,863 |
|
542,545 |
|
628,773 |
Inventory |
|
380,318 |
|
29,251 |
|
13,200 |
Deposits and prepaid expenses |
|
4,083 |
|
56,464 |
|
45,352 |
|
|
|
|
|
|
|
Total current assets |
|
1,451,508 |
|
689,202 |
|
722,225 |
Property and equipment, net |
|
155,238 |
|
219,439 |
|
197,874 |
Goodwill, net of accumulated amortization of $726,818,
$1,114,454,
and $1,331,947,
respectively |
|
1,211,343 |
|
823,707 |
|
469,934 |
|
|
|
|
|
|
|
Total assets |
|
$
2,818,089 |
|
1,732,348 |
|
1,390,033 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND NET INVESTMENT BY
PARENT
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Accounts payable |
|
$
326,648 |
|
201,851 |
|
230,606 |
Accrued expenses |
|
241,934 |
|
258,003 |
|
234,188 |
Deferred revenue |
|
1,169,054 |
|
795,090 |
|
414,465 |
Current maturities of obligations under capital
leases |
|
34,002 |
|
44,790 |
|
51,872 |
Deferred taxes |
|
38,000 |
|
|
|
|
Due to Parent |
|
203,146 |
|
414,582 |
|
402,000 |
|
|
|
|
|
|
|
Total current liabilities |
|
2,012,784 |
|
1,714,316 |
|
1,333,131 |
|
|
|
|
|
|
|
Obligations under capital leases, net of current
portion |
|
66,470 |
|
762 |
|
21,257 |
|
|
|
|
|
|
|
Total liabilities |
|
2,079,254 |
|
1,715,078 |
|
1,354,388 |
Net
investment by Parent |
|
738,835 |
|
17,270 |
|
35,645 |
|
|
|
|
|
|
|
Total liabilities and net investment by
Parent |
|
$2,818,089 |
|
1,732,348 |
|
1,390,033 |
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MINDWRAP, INC.
(a
wholly-owned subsidiary of Metters Industries,
Inc.)
Years
ended March 31, 1998 and 1999, and the
period from April 1, 1999 through November 19,
1999
|
|
Years ended March 31,
|
|
Period from
April 1, 1999
through
November 19,
1999
|
|
|
1998
|
|
1999
|
Revenue |
|
$4,943,641 |
|
|
4,519,945 |
|
|
2,301,990 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Costs of revenue |
|
1,789,021 |
|
|
1,782,918 |
|
|
820,769 |
|
Selling, general and administrative |
|
2,358,437 |
|
|
3,113,163 |
|
|
1,062,292 |
|
Research and development |
|
390,063 |
|
|
32,879 |
|
|
356,453 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
406,120 |
|
|
(409,015 |
) |
|
62,476 |
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
Interest expense |
|
(21,296 |
) |
|
(12,598 |
) |
|
(5,907 |
) |
Interest income |
|
2,801 |
|
|
1,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
(18,495 |
) |
|
(10,871 |
) |
|
(5,907 |
) |
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes |
|
387,625 |
|
|
(419,886 |
) |
|
56,569 |
|
Provision for income taxes |
|
(197,000 |
) |
|
(121,000 |
) |
|
(7,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ 190,625 |
|
|
(540,886 |
) |
|
49,569 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MINDWRAP, INC.
(a
wholly-owned subsidiary of Metters Industries,
Inc.)
STATEMENTS OF NET INVESTMENT BY PARENT
Years
ended March 31, 1998 and 1999, and the
period
from April 1, 1999 through November 19, 1999
|
|
Capital
contributed
by Parent
|
|
Distributions
to Parent
|
|
Retained
earnings
(deficit)
|
|
Net investment
by Parent
|
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 |
|
Distribution to Parent |
|
|
|
(31,194 |
) |
|
|
|
|
(31,194 |
) |
Net income |
|
|
|
|
|
|
49,569 |
|
|
49,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at November 19, 1999 |
|
$2,389,925 |
|
(742,889 |
) |
|
(1,611,391 |
) |
|
35,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MINDWRAP, INC.
(a
wholly-owned subsidiary of Metters Industries,
Inc.)
Years
ended March 31, 1998 and 1999, and the
period from April 1, 1999 through November 19,
1999
|
|
Years ended March 31,
|
|
Period from
April 1, 1999
through
November 19,
1999
|
|
|
1998
|
|
1999
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ 190,625 |
|
|
(540,886 |
) |
|
49,569 |
|
Adjustments to reconcile net income (loss) to net
cash provided by
(used in) operating
activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
461,156 |
|
|
483,984 |
|
|
280,933 |
|
Deferred taxes |
|
38,000 |
|
|
(38,000 |
) |
|
|
|
Changes in assets and
liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
(711,384 |
) |
|
413,318 |
|
|
(86,228 |
) |
Inventory |
|
(379,343 |
) |
|
351,067 |
|
|
16,051 |
|
Deposits and prepaid
expenses |
|
45,458 |
|
|
(52,381 |
) |
|
11,112 |
|
Accounts payable |
|
241,602 |
|
|
(124,797 |
) |
|
28,755 |
|
Accrued expenses |
|
88,817 |
|
|
16,069 |
|
|
(23,815 |
) |
Deferred revenue |
|
859,893 |
|
|
(373,964 |
) |
|
(380,625 |
) |
Due to Parent |
|
10,146 |
|
|
211,436 |
|
|
(12,582 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
844,970 |
|
|
345,846 |
|
|
(116,830 |
) |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchases of equipment |
|
(53,618 |
) |
|
160,549 |
|
|
|
|
Income tax refunds reducing goodwill |
|
|
|
|
|
|
|
136,280 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities |
|
(53,618 |
) |
|
(160,549 |
) |
|
136,280 |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
Payments under capital lease
obligations |
|
(45,287 |
) |
|
(54,920 |
) |
|
(14,298 |
) |
Distributions to Parent |
|
(531,016 |
) |
|
(180,679 |
) |
|
(31,194 |
) |
Proceeds from line of credit |
|
175,000 |
|
|
|
|
|
|
|
Repayments on line of credit |
|
(375,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities |
|
(776,303 |
) |
|
(235,599 |
) |
|
(45,492 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in
cash |
|
15,049 |
|
|
(50,302 |
) |
|
(26,042 |
) |
Cash,
beginning of period |
|
96,195 |
|
|
111,244 |
|
|
60,942 |
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period |
|
$ 111,244 |
|
|
60,942 |
|
|
34,900 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information |
|
|
|
|
|
|
|
|
|
cash paid for interest |
|
$ 20,222 |
|
|
13,672 |
|
|
4,882 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing
activities |
|
|
|
|
|
|
|
|
|
capital lease obligations |
|
$ 145,759 |
|
|
|
|
|
41,875 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MINDWRAP, INC.
(a
wholly-owned subsidiary of Metters Industries,
Inc.)
NOTES TO FINANCIAL STATEMENTS
(1)
Organization and Business
mindwrap, inc., 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 Companys business activities, if
necessary.
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
acquired all of the outstanding common stock of the Company,
subject to normal conditions of closing.
(2)
Summary of Significant Accounting Policies
|
(a)
Basis of Presentation
|
The accompanying financial statements include the
accounts of mindwrap, inc., a wholly-owned subsidiary of Metters
Industries, Inc.
|
(b)
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.
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
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 where the separate
service elements are not essential to functionality of the other
elements is generally recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the
fee is fixed or determinable, and collectibility is probable.
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.
Inventories, which consist primarily of finished
goods, are stated at the lower of cost or market. Cost is
determined on a specific identification basis.
|
(e)
Property and Equipment
|
Property and equipment is carried at historical cost
less accumulated depreciation and amortization. Depreciation and
amortization is calculated using the straight-line method based
on the estimated remaining useful lives of the assets as
follows:
Computer equipment |
|
3 to 5
years |
Furniture and fixtures |
|
5
years |
Capital
leases |
|
Shorter
of estimated life or lease term |
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.
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, or November 19,
1999.
|
(g)
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.
MINDWRAP, INC.
(a
wholly-owned subsidiary of Metters Industries,
Inc.)
NOTES
TO FINANCIAL STATEMENTS(Continued)
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.
During the period from April 1, 1999 through
November 19, 1999, the Company received refunds of $136,280 of
previously paid income taxes for periods prior to the
acquisition by Metters. Such refunds have been recognized as a
reduction of the goodwill from the acquisition by
Metters.
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 Companys Federal and state deferred
tax assets.
|
(j)
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 Companys financial
statements.
|
(k)
Services Provided by the Parent
|
Through November 19, 1999, the Parent provided
certain services to the Company, including marketing, financial,
and administrative support, and insurance. Certain costs of such
services were 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, and November 19, 1999:
|
|
March 31,
|
|
November 19,
1999
|
|
|
1998
|
|
1999
|
Computer equipment |
|
$499,149 |
|
|
659,698 |
|
|
701,573 |
|
Furniture and fixtures |
|
3,862 |
|
|
3,862 |
|
|
3,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
503,011 |
|
|
663,560 |
|
|
705,435 |
|
Less
accumulated depreciation and amortization |
|
(347,773 |
) |
|
(444,121 |
) |
|
(507,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$155,238 |
|
|
219,439 |
|
|
197,874 |
|
|
|
|
|
|
|
|
|
|
|
MINDWRAP, INC.
(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 November
19, 1999 are as follows:
Year
ending March 31, |
|
Operating
|
|
Capital
|
2000 |
|
$13,644 |
|
57,159 |
|
2001 |
|
|
|
22,710 |
|
2002 |
|
|
|
1,856 |
|
|
|
|
|
|
|
Total minimum lease payments |
|
$13,644 |
|
81,725 |
|
|
|
|
|
|
|
Less
amount representing interest |
|
|
|
(8,596 |
) |
|
|
|
|
|
|
Present
value of minimum lease payments |
|
|
|
73,129 |
|
Less
current maturities of obligations under capital
leases |
|
|
|
(51,872 |
) |
|
|
|
|
|
|
Obligations under capital leases, net of current
maturities |
|
|
|
$21,257 |
|
|
|
|
|
|
|
Rental expense under operating leases was
approximately $55,000, $73,000, and $25,000 for the years ended
March 31, 1998 and 1999, and the period from April 1, 1999
through November 19, 1999, respectively. Cost and accumulated
amortization for computer equipment under capital leases at
November 19, 1999 are approximately $129,000 and $64,600,
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 Companys net income (loss) and
contributions (distributions). As of March 31, 1998 and 1999,
and November 19, 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, and the period from April
1, 1999 through November 19, 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, and November 19, 1999:
|
|
March 31,
|
|
November 19,
1999
|
|
|
1998
|
|
1999
|
Billed |
|
$621,760 |
|
534,229 |
|
628,773 |
Unbilled |
|
334,103 |
|
8,316 |
|
|
|
|
|
|
|
|
|
|
|
$955,863 |
|
542,545 |
|
628,773 |
|
|
|
|
|
|
|
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, and November 19, 1999:
|
|
March 31,
|
|
November 19,
1999
|
|
|
1998
|
|
1999
|
Accrued
compensation and benefits |
|
$166,802 |
|
185,751 |
|
228,478 |
Other |
|
75,132 |
|
72,252 |
|
5,710 |
|
|
|
|
|
|
|
|
|
$241,934 |
|
258,003 |
|
234,188 |
|
|
|
|
|
|
|
MINDWRAP, INC.
(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, and
the period from April 1, 1999 through November 19, 1999, the
Parent collected cash from customers on behalf of the Company in
the amounts of $531,016, $180,679, and $31,194, respectively,
each 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, and
the period from April 1, 1999 through November 19, 1999, the
Company incurred expenses of approximately $141,000, $159,000
and $98,000, respectively, for certain support services provided
by the Parent. At March 31, 1998 and 1999, and November 19,
1999, the Company owed $44,146, $96,582, and $0, 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 banks 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, and the period from April
1, 1999 through November 19, 1999 are as follows:
|
|
Years ended March 31,
|
|
Period from
April 1, 1999
through
November 19,
1999
|
|
|
1998
|
|
1999
|
Current: |
|
|
|
|
|
|
Federal |
|
$135,150 |
|
102,850 |
|
5,950 |
State |
|
23,850 |
|
18,150 |
|
1,050 |
|
|
|
|
|
|
|
|
|
159,000 |
|
121,000 |
|
7,000 |
Deferred: |
|
|
|
|
|
|
Federal |
|
32,300 |
|
|
|
|
State |
|
5,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
38,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$197,000 |
|
121,000 |
|
7,000 |
|
|
|
|
|
|
|
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 income (loss) as a result of the following:
|
|
Years ended March 31,
|
|
Period from
April 1, 1999
through
November 19,
1999
|
|
|
1998
|
|
1999
|
Computed expected tax provision
(benefit) |
|
$131,793 |
|
|
(142,761 |
) |
|
19,233 |
|
Increase (reduction) in income taxes resulting
from: |
|
|
|
|
|
|
|
|
|
Increase (decrease) in the beginning of the
period valuation
allowance |
|
(89,848 |
) |
|
95,723 |
|
|
(36,723 |
) |
Amortization of goodwill |
|
151,308 |
|
|
151,308 |
|
|
74,510 |
|
Income tax refunds received |
|
|
|
|
|
|
|
(77,000 |
) |
Other, net |
|
3,747 |
|
|
16,730 |
|
|
26,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$197,000 |
|
|
121,000 |
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
MINDWRAP, INC.
(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 Companys deferred tax
assets and liabilities as of March 31, 1998 and 1999, and
November 19, 1999 are as follows:
|
|
March 31,
|
|
November 19,
1999
|
|
|
1998
|
|
1999
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Book depreciation in excess of tax
depreciation |
|
$56,881 |
|
54,649 |
|
|
22,500 |
|
Other accruals |
|
38,760 |
|
44,400 |
|
|
36,500 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
95,641 |
|
99,049 |
|
|
59,000 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unbilled accounts receivable |
|
133,641 |
|
3,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
133,641 |
|
3,326 |
|
|
|
|
Valuation allowance |
|
|
|
(95,723 |
) |
|
(59,000 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$38,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 at March 31, 1999
and November 19, 1999. The net change in the valuation allowance
during the period from April 1, 1999 through November 19, 1999
was a decrease of $36,723. No income tax payments were made
during the years ended March 31, 1998 and 1999, or the period
from April 1, 1999 through November 19, 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, and
the period from April 1, 1999 through November 19, 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 revenue from
three customers. During the year ended March 31, 1999, the
Company generated approximately 37 percent of its total revenue
from three customers. During the period from April 1, 1999
through November 19, 1999, the Company generated approximately
31 percent of its total revenue from three customers. At March
31, 1998 and 1999, and November 19, 1999, accounts receivable
from these customers was approximately $68,700, $269,800, and
$151,400, respectively.
(13)
Subsequent Event
Effective February 18, 2000, the Company changed its
name from Blueridge Technologies, Incorporated to mindwrap, inc.
All references to the Companys name have been reflected as
mindwrap, inc. within these financial statements.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
BeautyJungle.com, Inc.:
We have audited the accompanying balance sheet of
BeautyJungle.com, Inc. (a development stage enterprise) as of
December 31, 1999, and the related statements of operations,
stockholders equity/(deficit), and cash flows for the
period from May 11, 1999 (inception) through December 31, 1999.
These financial statements are the responsibility of the
Companys 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 BeautyJungle.com, Inc. (a development stage
enterprise) as of December 31, 1999 and the results of its
operations and its cash flows for the period from May 11, 1999
(inception) through December 31, 1999 in conformity with
generally accepted accounting principles.
Chicago,
Illinois
February
28, 2000,
except for note 10,
which is as of March 13, 2000
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
December 31, 1999
ASSETS
Current
assets: |
|
|
Cash and cash equivalents |
|
$ 188,779 |
|
Accounts receivable |
|
10,729 |
|
Inventory |
|
1,146,888 |
|
Prepaid expenses |
|
146,874 |
|
Other current assets |
|
136,125 |
|
|
|
|
|
Total current assets |
|
1,629,395 |
|
Property and equipment, net |
|
1,202,368 |
|
Other assets |
|
254,900 |
|
|
|
|
|
Total assets |
|
$ 3,086,663 |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY/(DEFICIT) |
|
Current
liabilities: |
|
|
|
Accounts payable |
|
$ 4,717,452 |
|
Accrued expenses |
|
414,316 |
|
Deferred rent |
|
16,350 |
|
Capital lease obligation |
|
30,255 |
|
Notes payable to related parties |
|
3,500,000 |
|
|
|
|
|
Total current liabilities |
|
8,678,373 |
|
Deferred rent, less current portion |
|
70,744 |
|
Capital
lease obligation, less current portion |
|
115,820 |
|
|
|
|
|
Total liabilities |
|
8,864,937 |
|
|
|
|
|
Stockholders equity/(deficit): |
|
|
|
Common stock, $.001 par value. 47,000,000 shares
authorized; 17,217,632 shares issued and
outstanding |
|
17,218 |
|
Series A preferred stock, $.001 par value.
18,137,500 shares authorized; 18,137,500 shares
issued and
outstanding |
|
18,137 |
|
Additional paid-in capital |
|
3,472,299 |
|
Subscription receivable |
|
(3,390 |
) |
Deficit accumulated during the development
stage |
|
(9,282,538 |
) |
|
|
|
|
Total stockholders
equity/(deficit) |
|
(5,778,274 |
) |
|
|
|
|
Total liabilities and stockholders
equity/(deficit) |
|
$ 3,086,663 |
|
|
|
|
|
See
accompanying notes to financial statements.
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
Period
from May 11, 1999 (inception) through December 31,
1999
Net
revenue |
|
$ 196,730 |
|
|
|
|
|
Operating expenses: |
|
|
|
Cost of sales |
|
108,712 |
|
General and administrative |
|
5,216,074 |
|
Sales and marketing |
|
4,065,678 |
|
Depreciation and amortization |
|
45,350 |
|
|
|
|
|
Total operating expenses |
|
9,435,814 |
|
|
|
|
|
Operating loss |
|
(9,239,084 |
) |
|
|
|
|
Other
income (expense): |
|
|
|
Interest income |
|
3,189 |
|
Interest expense |
|
(46,643 |
) |
|
|
|
|
Total other income (expense) |
|
(43,454 |
) |
|
|
|
|
Net loss |
|
$(9,282,538 |
) |
|
|
|
|
See
accompanying notes to financial statements.
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
STATEMENT OF STOCKHOLDERS EQUITY/(DEFICIT)
Period
from May 11, 1999 (inception) through December 31,
1999
|
|
Common stock
|
|
Preferred stock
|
|
Additional
paid-in
capital
|
|
Subscription
receivable
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
stockholders
equity/(deficit)
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance as of May 11, 1999 (inception) |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in formation of the
Company, adjusted for
stock split |
|
16,950,000 |
|
16,950 |
|
|
|
|
|
(13,560 |
) |
|
(3,390 |
) |
|
|
|
|
|
|
Exercise of stock options |
|
267,632 |
|
268 |
|
|
|
|
|
26,496 |
|
|
|
|
|
|
|
|
26,764 |
|
Issuance of Series A preferred stock |
|
|
|
|
|
18,137,500 |
|
18,137 |
|
3,609,363 |
|
|
|
|
|
|
|
|
3,627,500 |
|
Costs related to the issuance of Series A
preferred stock |
|
|
|
|
|
|
|
|
|
(150,000 |
) |
|
|
|
|
|
|
|
(150,000 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,282,538 |
) |
|
(9,282,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 1999 |
|
17,217,632 |
|
$17,218 |
|
18,137,500 |
|
$18,137 |
|
3,472,299 |
|
|
(3,390 |
) |
|
(9,282,538 |
) |
|
(5,778,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
Period
from May 11, 1999 (inception) through December 31,
1999
Cash
flows from operating activities: |
|
|
Net loss |
|
$(9,282,538 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
Depreciation and amortization |
|
45,350 |
|
Changes in assets and
liabilities: |
|
|
|
Accounts receivable |
|
(10,729 |
) |
Inventory |
|
(1,146,888 |
) |
Prepaid expenses |
|
(146,874 |
) |
Other current assets |
|
(136,125 |
) |
Other assets |
|
(254,900 |
) |
Accounts payable |
|
4,717,452 |
|
Accrued expenses |
|
414,316 |
|
Deferred rent |
|
87,094 |
|
|
|
|
|
Net cash used in operating
activities |
|
(5,713,842 |
) |
|
|
|
|
Cash
flows from investing activitiesadditions to property and
equipment |
|
(1,034,108 |
) |
|
|
|
|
Cash
flows from financing activities: |
|
|
|
Proceeds from issuance of preferred stock, net of
issuance costs |
|
3,477,500 |
|
Proceeds from notes payable to related
parties |
|
3,500,000 |
|
Proceeds from issuance of common stock |
|
26,764 |
|
Payments on capital lease obligation |
|
(67,535 |
) |
|
|
|
|
Net cash provided by financing
activities |
|
6,936,729 |
|
|
|
|
|
Net increase in cash and cash
equivalents |
|
188,779 |
|
Cash and cash equivalents at beginning of
period |
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period |
|
$ 188,779 |
|
|
|
|
|
Supplemental disclosure of cash flow
informationinterest paid |
|
$
1,736 |
|
|
|
|
|
Supplemental disclosure of noncash financing
activityequipment under capital lease |
|
$ 213,610 |
|
|
|
|
|
See
accompanying notes to financial statements.
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
NOTES TO THE FINANCIAL STATEMENTS
(1)
Nature of the Business
BeautyJungle.com, Inc. (the Company) was
incorporated on May 11, 1999 as a C corporation. The Company
sells a wide range of cosmetics, fragrances, and personal care
products through its website,
www.BeautyJungle.com.
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 Statement of
Financial Accounting Standards (SFAS) No. 7, Accounting and
Reporting by Development Stage Enterprises.
The Company has incurred losses since inception.
Should the Company be unable to generate significant net
revenues and realize cash flows from operations in the near
term, the Company may require additional equity or debt
financing to meet working capital needs and to fund operating
losses. Although management believes the Company could obtain
such financing, there can be no assurances that such financing
will be available in the future at terms acceptable to the
Company.
The Company is subject to risks and uncertainties
common to growing technology-based companies, including
technological change, growth and commercial acceptance 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
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.
The Company considers all highly liquid investments
with original maturities of three months or less to be cash
equivalents.
At December 31, 1999, the Company maintained a
$100,000 certificate of deposit in support of its merchant
service agreement and a $209,375 certificate of deposit in
support of a letter of credit related to one of its operating
leases (see note 5). At December 31, 1999, $134,895 and $174,480
were included in current and non-current other assets,
respectively.
Accounts receivable represents amounts due from
credit card purchases net of service fees to the credit card
processors.
|
(e)
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 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 amounts.
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
NOTES
TO THE FINANCIAL STATEMENTS(Continued)
|
(f)
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 five to
seven years.
|
(g)
Financial Instruments
|
The fair value of the Companys financial
instruments were not materially different from their carrying
values as of December 31, 1999.
Revenue, net of returns and allowances, is
recognized upon shipment of products to the
customer.
Inventory is recorded at cost using the first-in,
first-out (FIFO) method.
|
(j)
Computer Software/Website Development
|
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 provided these costs will be
recoverable. During the period from May 11, 1999 (inception)
through December 31, 1999, $1,092,600 related to website
development was incurred. This amount was expensed due to the
uncertainty of recovery.
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.
The Company has adopted the disclosure-only
provisions of SFAS No. 123, Accounting for Stock Based
Compensation. SFAS No. 123 encourages, but does not require,
companies to adopt a fair value based method for determining
expense related to stock based compensation. The disclosures are
presented in note 8. The Company accounts for stock based
compensation as prescribed under Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly,
compensation cost of stock options is measured as the excess, if
any, of the fair value of the Companys stock at the date
of grant over the option exercise price and is charged to
operations over the vesting period.
Advertising expenses are charged to operations
during the period in which they are incurred. The total amount
of advertising expenses charged to operations was $3,282,031 for
the period from May 11, 1999 (inception) through December 31,
1999.
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
NOTES
TO THE FINANCIAL STATEMENTS(Continued)
|
(n)
Concentration of Credit Risk
|
The Companys financial instruments that are
exposed to concentrations of credit risk consist primarily of
cash and cash equivalents. The Company maintains its cash and
cash equivalents with one financial institution.
(3)
Property and Equipment
Property and equipment, including assets under
capital lease, consist of the following:
|
|
December 31,
1999
|
Furniture and fixtures |
|
$ 194,272 |
|
Equipment |
|
664,799 |
|
Computers |
|
208,734 |
|
Software |
|
5,969 |
|
Leasehold improvements |
|
173,944 |
|
|
|
|
|
|
|
1,247,718 |
|
Less
accumulated depreciation and amortization |
|
(45,350 |
) |
|
|
|
|
Property and equipment, net |
|
$1,202,368 |
|
|
|
|
|
(4)
Income Taxes
The provision for income taxes differs from the
amounts which would result by applying the applicable Federal
income tax rate of 34% to income before provision for income
taxes for the period from May 11, 1999 (inception) through
December 31, 1999 as follows:
Expected income tax benefit |
|
$(3,156,063 |
) |
State
income tax benefit, net of Federal taxes |
|
(556,952 |
) |
Permanent differences |
|
8,596 |
|
Effect
of change in valuation allowance |
|
3,704,419 |
|
|
|
|
|
|
|
$
|
|
|
|
|
|
Temporary differences giving rise to significant
portions of the deferred tax assets and liabilities as of
December 31, 1999 are as follows:
Deferred tax assets: |
|
|
Net operating losses |
|
$2,502,817 |
|
Start-up costs |
|
1,185,398 |
|
Deferred rent |
|
34,838 |
|
|
|
|
|
Total deferred tax assets |
|
3,723,053 |
|
Deferred tax liabilitiesdepreciation |
|
(18,634 |
) |
|
|
|
|
Net deferred tax assets |
|
3,704,419 |
|
Valuation allowance |
|
(3,704,419 |
) |
|
|
|
|
Net deferred tax assets |
|
$
|
|
|
|
|
|
The Company has a net operating loss carryforward of
approximately $6,257,043 which expires in 2019. The Company has
recorded a full valuation allowance against its net 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.
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
NOTES
TO THE FINANCIAL STATEMENTS(Continued)
(5)
Commitments
On October 6, 1999, the Company obtained a letter of
credit in the amount of $209,375 as security for one of its
lease agreements. At December 31, 1999, the letter of credit was
unused. Under the terms of the lease, the amount of the letter
of credit is scheduled to decrease in accordance with the
following:
Effective date
|
|
Aggregate
amount
|
October
1, 2000 |
|
$174,480 |
October
1, 2001 |
|
139,585 |
October
1, 2002 |
|
104,690 |
On February 25, 2000, the Company signed a 10 year
lease for office space, commencing August 1, 2000 through July
31, 2010. The Company must provide security of $349,700 either
in the form of a letter of credit or surety bond. The security
requirements decline to $202,600 effective August 1, 2005
through July 31, 2006, and to $48,200 effective August 1, 2006
through July 31, 2010. Under the terms of the lease, the Company
must pay rent and its proportionate share of operating expenses,
as determined by the lessor. Minimum noncancelable lease
commitments under this agreement are included in the table below
under Operating Lease Agreements.
|
Operating Lease Agreements
|
The Company has various lease agreements for real
and personal property. These obligations extend through 2010 and
in some cases contain renewal options. As of December 31, 1999,
future minimum lease payments for noncancelable operating leases
in excess of one year are as follows:
2000 |
|
$ 679,570 |
2001 |
|
897,888 |
2002 |
|
923,822 |
2003 |
|
817,002 |
2004 |
|
780,022 |
Thereafter |
|
2,517,469 |
|
|
|
Total |
|
$6,615,773 |
|
|
|
Rental expense on all operating leases totaled
$277,100 for the period from May 11, 1999 (inception) through
December 31, 1999.
The following are the future minimum lease payments
related to the Companys capital lease
obligations:
2000 |
|
$ 38,356 |
|
2001 |
|
43,917 |
|
2002 |
|
43,917 |
|
2003 |
|
25,381 |
|
2004 |
|
17,012 |
|
|
|
|
|
|
|
168,583 |
|
Less
amounts representing interest |
|
(22,508 |
) |
|
|
|
|
Present value of minimum lease payments |
|
146,075 |
|
Less
current maturities |
|
(30,255 |
) |
|
|
|
|
|
|
$115,820 |
|
|
|
|
|
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
NOTES
TO THE FINANCIAL STATEMENTS(Continued)
The Company has entered into three noncancelable
agreements with companies that provide services related to the
installation, implementation, hosting, and administration of the
Companys website. The Company is obligated under these
agreements as follows:
2000 |
|
$339,216 |
2001 |
|
226,144 |
|
|
|
Total |
|
$565,360 |
|
|
|
The Company also has various other commitments for
advertising and marketing totaling approximately $3,000,000
which are expected to be paid in 2000. These commitments are in
the ordinary course of business and will be expensed as incurred
in accordance with the Companys advertising policy
described in note 2.
(6)
Notes Payable to Related Parties
From October through December 1999, the Company
entered into promissory notes with the chief executive officer
aggregating $2,500,000. The notes bear interest at 9% per annum
and are payable upon demand. The principal of the notes may be
prepaid, in whole or in part, without penalty or premium, at any
time and are convertible to Series B preferred stock (see note
10). On January 11, 2000, principal of $708,000 was repaid along
with accrued interest of $42,000. The Company also entered into
a $1,000,000 promissory note with a member of the Companys
Board of Directors on December 15, 1999. This note includes the
same terms and conditions as the notes with the chief executive
officer. On January 11, 2000, this note was repaid in full
including accrued interest of $6,600.
(7)
Capital Stock
On June 22, 1999, the Board of Directors authorized
the issuance and sale of Series A preferred stock, which is
convertible into shares of the Companys common stock. The
Board of Directors reserved 13,381,579 shares of common stock
for issuance upon conversion of the Series A preferred stock. On
September 15, 1999, the number of reserved shares of common
stock for such conversion increased to 16,180,559. Any holder of
Series A preferred stock may at any time convert all or any
number of shares into a number of shares of common stock based
on the conversion price in effect at such time. At December 31,
1999, each share of preferred stock was convertible into 0.89
shares of common stock. Each share of preferred stock entitles
the holder to have the number of votes equal to the number of
shares of common stock into which such shares of preferred stock
are then convertible. The holders of preferred stock are
entitled to receive payment of dividends or other distributions
declared on common stock based on the amount of common shares
the holder would have upon conversion. The Series A preferred
shares rank senior to the common stock upon liquidation of the
Company.
On June 22, 1999, the Board of Directors declared a
five-for-one stock split. The par value of the common stock was
maintained at the pre-split amount of $.001 per share. The stock
split has been reflected in the accompanying financial
statements, and all applicable references to the number of
common shares have been restated on a retroactive
basis.
On January 11, 2000, the Company entered into a
Series B preferred stock purchase agreement (the Agreement) with
a third party. Under the terms of the Agreement, the Company
issued 35,168,864 shares of Series B convertible preferred stock
for $10 million in gross proceeds and agreed to issue an
additional 35,168,864 shares of Series B convertible preferred
stock at a second closing.
The Series B preferred stock has the same voting and
dividend rights as Series A, however, the Series B preferred
stock ranks senior to the Series A preferred stock and common
stock upon liquidation of the Company. The Series B preferred
stock is convertible into one share of common stock at any time.
In addition, two-thirds of the Series B preferred stockholders
may elect on January 11, 2005 to have the Company redeem all
Series B preferred stock outstanding at the Series B redemption
price which is the per share purchase price plus any accrued and
unpaid dividends. All preferred stock will automatically convert
upon a qualified public offering, as defined in the respective
preferred stock agreements.
As of the closing of the Agreement, the
Companys authorized capital stock consisted of 142,000,000
shares of common stock, 18,137,500 shares of Series A
convertible preferred stock, and 70,500,000 shares of Series B
convertible preferred stock.
BEAUTYJUNGLE.COM, INC.
(a
development stage enterprise)
NOTES
TO THE FINANCIAL STATEMENTS(Continued)
(8)
Options
The Company has an option plan providing for the
issuance of options for common stock to employees, directors,
consultants, and contractors. This plan permits the Company to
issue options on terms that the Company determines appropriate.
Such terms include exercise price, number of options, vesting
dates, and other terms. The Company reserved 9,317,543 shares of
common stock for issuance of awards under the plan.
The Company applies APB No. 25 and related
interpretations in accounting for its plan. Had compensation
cost for the Companys options been determined consistent
with SFAS No. 123, the net loss would have increased to the pro
forma amount indicated below:
Net
loss: |
|
|
As reported |
|
$(9,282,538 |
) |
Pro forma |
|
(9,358,994 |
) |
For purposes of calculating the compensation costs
consistent with SFAS No. 123, the fair value of each grant is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions used for grants during the period from May 11, 1999
(inception) through December 31, 1999: no expected dividend
yield; no expected volatility; risk free interest rates of
5.926.16%; and expected lives ranging from one-half of one
year to four years.
Additional information on options is as
follows:
|
|
Number of
options
|
|
Weighted
average
exercise
price
|
Options
outstanding as of May 11, 1999 (inception) |
|
|
|
|
$ |
Granted |
|
5,267,868 |
|
|
0.10 |
Exercised |
|
(267,632 |
) |
|
0.10 |
Forfeited |
|
(10,000 |
) |
|
0.10 |
|
|
|
|
|
|
Options
outstanding as of December 31, 1999 |
|
4,990,236 |
|
|
$0.10 |
|
|
|
|
|
|
Following is a summary of outstanding options as of
December 31, 1999:
Exercise
price
|
|
Options outstanding
|
|
Options exercisable
|
|
Number
|
|
Weighted
average
remaining
contractual
life
|
|
Weighted
average
exercise
price
|
|
Number
|
|
Weighted
average
exercise
price
|
$0.10 |
|
4,990,236 |
|
9.7 years |
|
$0.10 |
|
1,029,243 |
|
$0.10 |
The weighted average minimum value of options
granted during the period from May 11, 1999 (inception) to
December 31, 1999 was $0.07.
(9)
401(k) Savings Plan
The Company sponsors a 401(k) savings plan (the
Plan) covering substantially all employees. Employees may
contribute up to the maximum limits set by the Internal Revenue
Code for tax-deferred treatment. The Company does not contribute
to the Plan.
(10)
Subsequent Event
On March 13, 2000, the Company sold 35,168,864
shares of Series B convertible preferred stock for $10.0 million
in gross proceeds pursuant to the terms of the Series B
preferred stock purchase agreement (see note 7). The proceeds
were comprised of cash of $9.4 million and conversion of $0.6
million of the $2.5 million notes payable to a related party
described in note 6.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
bid4real.com, inc.:
We have audited the accompanying balance sheet of
bid4real.com, inc. (a development stage enterprise) as of
December 31, 1999, and the related statements of operations,
stockholders deficit, and cash flows for the period from
December 13, 1999 (inception) through December 31, 1999. These
financial statements are the responsibility of the
Companys 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 bid4real.com, inc. (a development stage enterprise)
as of December 31, 1999, and the results of its operations and
its cash flows for the period from December 13, 1999 (inception)
through December 31, 1999, in conformity with generally accepted
accounting principles.
Chicago,
Illinois
February
7, 2000
INDEPENDENT AUDITORS REPORT
The Board
of Directors
Bid4Real.com LLC:
We have audited the accompanying balance sheet of
Bid4Real.com LLC (a development stage enterprise) as of December
31, 1999, and the related statements of operations,
members deficit, and cash flows for the period from July
15, 1999 (inception) through December 31, 1999. These financial
statements are the responsibility of the Companys
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 Bid4Real.com LLC (a development stage enterprise) as
of December 31, 1999, and the results of its operations and its
cash flows for the period from July 15, 1999 (inception) through
December 31, 1999, in conformity with generally accepted
accounting principles.
Chicago,
Illinois
February
7, 2000
BID4REAL.COM, INC.
(a
development stage enterprise)
December 31, 1999
|
|
bid4real.com,
inc.
|
|
Bid4Real.com
LLC
|
|
bid4real.com, inc.
Pro forma
|
|
|
|
|
|
|
(unaudited) |
Assets |
Current
assets: |
|
|
|
|
|
|
|
|
|
Cash |
|
$390,607 |
|
|
75 |
|
|
390,682 |
|
Due from Bid4Real.com LLC |
|
109,393 |
|
|
|
|
|
|
|
Other current assets |
|
|
|
|
57,498 |
|
|
57,498 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
500,000 |
|
|
57,573 |
|
|
448,180 |
|
Web
site development, at cost |
|
|
|
|
48,862 |
|
|
48,862 |
|
Property and equipment, at cost |
|
|
|
|
35,323 |
|
|
35,323 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$500,000 |
|
|
141,758 |
|
|
532,365 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Deficit |
Current
liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$
|
|
|
88,513 |
|
|
88,513 |
|
Accrued expenses |
|
1,747 |
|
|
80,228 |
|
|
81,975 |
|
Convertible note payable |
|
500,000 |
|
|
|
|
|
500,000 |
|
Due to bid4real.com, inc. |
|
|
|
|
109,393 |
|
|
|
|
Related party promissory notes payable |
|
|
|
|
114,796 |
|
|
114,796 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
501,747 |
|
|
392,930 |
|
|
785,284 |
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 redeemable convertible preferred stock, $.001 par
value; 7,000,000 shares
authorized; none issued and
outstanding |
|
|
|
|
|
|
|
|
|
Series
A-2 redeemable convertible preferred stock, $.001 par
value; 7,000,000 shares
authorized; none issued and
outstanding |
|
|
|
|
|
|
|
|
|
|
|
Equity
(deficit): |
|
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
|
Member
contributions |
|
|
|
|
14,000 |
|
|
|
|
less: member contributions
receivable |
|
|
|
|
(1,895 |
) |
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
Class A common
stock, $.001 par value; 15,031,842
shares authorized; none issued and outstanding at
December 31, 1999; 5,879,999 issued in
merger |
|
|
|
|
|
|
|
5,880 |
|
Class B common
stock, $.001 par value; 7,000,000 shares
authorized; none issued and outstanding |
|
|
|
|
|
|
|
|
|
Common stock, $.001
par value; 2,000 shares authorized;
1 share issued and outstanding; cancelled in
merger |
|
|
|
|
|
|
|
|
|
Additional paid-in
capital |
|
|
|
|
|
|
|
6,225 |
|
Deficit accumulated
during the development stage |
|
(1,747 |
) |
|
(263,277 |
) |
|
(265,024 |
) |
|
|
|
|
|
|
|
|
|
|
Total deficit |
|
(1,747 |
) |
|
(251,172 |
) |
|
(252,919 |
) |
|
|
|
|
|
|
|
|
|
|
Total liabilities and deficit |
|
$500,000 |
|
|
141,758 |
|
|
532,365 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
BID4REAL.COM, INC.
(a
development stage enterprise)
|
|
Period from
December 13, 1999
(inception)
through
December 31, 1999
bid4real.com, inc.
|
|
Period from
July 15, 1999
(inception)
through
December 31, 1999
Bid4Real.com LLC
|
|
bid4real.com, inc.
Pro forma
|
|
|
|
|
|
|
(unaudited) |
Revenues |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Payroll related expenses |
|
|
|
|
151,016 |
|
|
151,016 |
|
General and administrative |
|
|
|
|
108,584 |
|
|
108,584 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
259,600 |
|
|
259,600 |
|
Interest expense |
|
1,747 |
|
|
3,677 |
|
|
5,424 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$(1,747 |
) |
|
(263,277 |
) |
|
(265,024 |
) |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
BID4REAL.COM, INC.
(a
development stage enterprise)
STATEMENT OF STOCKHOLDERS DEFICIT
Period
from December 13, 1999 (inception) through December 31,
1999
|
|
Common stock
|
|
Additional
paid-in
capital
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
stockholders
deficit
|
|
|
Shares
|
|
Amount
|
Balance
at December 13, 1999 (inception) |
|
|
|
$ |
|
|
|
|
|
|
|
|
Issuance of common stock in formation of the
Company |
|
1 |
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
(1,747 |
) |
|
(1,747 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
1 |
|
$ |
|
|
|
(1,747 |
) |
|
(1,747 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
BID4REAL.COM, INC.
(a
development stage enterprise)
STATEMENT OF MEMBERS DEFICIT
Period
from July 15, 1999 (inception) through December 31,
1999
|
|
Members
deficit
Bid4Real.com
LLC
|
Balance
at July 15, 1999 (inception) |
|
$
|
|
Contributed capital |
|
14,000 |
|
Member
contributions receivable |
|
(1,895 |
) |
Net
loss |
|
(263,277 |
) |
|
|
|
|
Balance
at December 31, 1999 |
|
$(251,172 |
) |
|
|
|
|
See
accompanying notes to financial statements.
BID4REAL.COM, INC.
(a
development stage enterprise)
Period
from December 13, 1999 (inception) through December 31,
1999
|
|
bid4real.com, inc.
|
Cash
flows from operating activities: |
|
|
|
Net loss |
|
$ (1,747 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
Changes in assets and
liabilities |
|
|
|
Accrued expenses |
|
1,747 |
|
|
|
|
|
Net cash used in operating
activities |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
Issuance of convertible note payable |
|
500,000 |
|
Advance to Bid4Real.com LLC |
|
(109,393 |
) |
|
|
|
|
Net cash provided by financing
activities |
|
390,607 |
|
|
|
|
|
Net increase in cash |
|
390,607 |
|
Cash at
beginning of period |
|
|
|
|
|
|
|
Cash at
end of period |
|
$390,607 |
|
|
|
|
|
See
accompanying notes to financial statements.
BID4REAL.COM, INC.
(a
development stage enterprise)
Period
from July 15, 1999 (inception) through December 31,
1999
|
|
Bid4Real.com
LLC
|
Cash
flows from operating activities: |
|
|
|
Net loss |
|
$(263,277 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
Changes in assets and
liabilities: |
|
|
|
Other assets |
|
(57,498 |
) |
Accounts payable |
|
88,513 |
|
Accrued expenses |
|
80,228 |
|
|
|
|
|
Net cash used in operating
activities |
|
(152,034 |
) |
|
|
|
|
Cash
flows from investing activities: |
|
|
|
Web site development costs |
|
(48,862 |
) |
Purchases of property and equipment |
|
(35,323 |
) |
|
|
|
|
Net cash used in investing
activities |
|
(84,185 |
) |
|
|
|
|
Cash
flows from financing activities: |
|
|
|
Proceeds from member contributions |
|
12,105 |
|
Advance from bid4real.com, inc. |
|
109,393 |
|
Issuance of promissory notes to members |
|
114,796 |
|
|
|
|
|
Net cash provided by financing
activities |
|
236,294 |
|
|
|
|
|
Net increase in cash |
|
75 |
|
Cash at
beginning of period |
|
|
|
|
|
|
|
Cash at
end of period |
|
$
75 |
|
|
|
|
|
See
accompanying notes to financial statements.
BID4REAL.COM, INC.
(a
development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1)
Description of the Business and Basis of
Presentation
bid4real.com, inc. (the Company) was
incorporated as a Subchapter C-corporation on December 13, 1999.
Bid4Real.com LLC was established as a limited liability company
on July 15, 1999. On January 12, 2000, Bid4Real.com LLC merged
with bid4real.com, inc. under the terms of an agreement and plan
of merger between Bid4Real.com LLC and bid4real.com, inc. Upon
completion of the merger, (i) each member of Bid4Real.com LLC
will convert each incremental 1% ownership into 58,800 shares of
bid4real.com, inc. Class A common stock, (ii) Bid4Real.com LLC
will dissolve and (iii) the assets and liabilities of
Bid4Real.com LLC will be transferred to the Company. The merger
will be accounted for as a combination of entities under common
control and, accordingly, the transfer of the assets and
liabilities of Bid4Real.com LLC to the Company will be recorded
by the Company at historical carrying values. The pro forma
effect of the combination on reported financial position and
results of operations is disclosed in the accompanying balance
sheet and statement of operations as of and for the period from
July 15, 1999 through December 31, 1999.
The Company is an Internet-based business focused on
providing real estate auction over the Internet. The
Companys web site began on January 11, 2000 and is
expected to become fully operational in February
2000.
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 was in the development stage during 1999, as defined by
Statement of Financial Accounting Standards (SFAS) No. 7,
Accounting and Reporting by Development Stage
Enterprises.
bid4real.com, inc. is subject to risks and
uncertainties common to growing technology-based companies,
including technological change, growth and commercial acceptance
of the Internet, dependence on principal products and third
party technology, new product development and performance, new
product introductions and other activities by competitors, and
its limited operating history.
(2)
Summary of Significant Accounting Policies
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)Property and Equipment
|
Property and equipment, consisting primarily of
computer equipment, is stated at cost. Bid4Real.com LLC has not
recorded depreciation expense during the period from July 15,
1999 (inception) through December 31, 1999, as the equipment has
not been placed into service.
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. As of December 31, 1999, Bid4Real.com
LLC has capitalized $48,862 of costs related to the development
of its web site.
BID4REAL.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
|
(d)
Deferred Private Placement Costs
|
The Company incurred professional fees aggregating
$57,498 in connection with a January 2000 private placement
(Note 3). Such amounts have been capitalized and are included in
the accompanying balance sheet as other current
assets.
Effective July 15, 1999, Bid4Real.com LLC elected to
become a limited liability company for income tax reporting
purposes. Accordingly, Bid4Real.com LLC is treated as a
partnership for Federal income tax purposes. For the period from
July 15, 1999 (inception) through December 31, 1999, no
provision has been made for income taxes, as Bid4Real.com LLC is
not directly subject to taxation. Bid4Real.com LLCs net
loss is allocated to and included in the income tax returns of
its members.
The Company accounts for income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes. Under
SFAS No. 109, 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 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 period that includes the
enactment date. Deferred tax assets and an income tax benefit
have not been reflected in the financial statements as of and
for the period from December 13, 1999 (inception) through
December 31, 1999, because the Companys management
believes that, after considering all the available objective
evidence, it is more likely than not that the underlying
deferred tax assets will not be realized.
|
(f)
Recent Accounting Pronouncements
|
The Company does not expect the adoption of recently
issued accounting pronouncements to have a significant impact on
the Companys results of operations, financial position, or
cash flows.
(3)
Convertible Note Payable
The Company issued a $500,000 convertible note to a
third party on December 17, 1999. The note has a maturity date
of March 27, 2000 and bears interest at 8.5% per annum. Upon the
date that the Company and the holder enter into a definitive
Series A Preferred Stock purchase agreement, the note will be
surrendered and the outstanding principal amount of the note
will automatically be converted into the Series A-2 convertible
preferred stock based upon the price per share paid by the
holder. All accrued interest and unpaid interest on the note
will be paid in cash to the holder of the note. Interest expense
totaled $1,747 for the period from December 17, 1999 through
December 31, 1999.
The note was subsequently converted into shares of
the Companys Series A-2 convertible preferred stock in
connection with the January 2000 private placement (Note
5).
(4)
Related-party Transactions
On August 10, 1999, Bid4Real.com LLC entered into
promissory notes with several members of the LLC including an
entity controlled by an officer. The promissory notes reflect
amounts owed for advances to fund operating costs. The
promissory notes bear interest at a rate of 9% per annum. No
payments have been made on these notes as of December 31, 1999.
Interest expense totaled $3,677 for the period from July 15,
1999 (inception) through December 31, 1999.
BID4REAL.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
The Companys operating facilities are located
in Chicago, Illinois. During the period from July 15, 1999
(inception) through December 31, 1999, the Company occupied
office space subleased from an entity controlled by an officer.
During this period, Bid4Real.com LLC paid $8,400 to this entity
related to rental expense. Such amount represented the estimated
market value of the rent expense.
(5)
Subsequent Events
On January 6, 2000, the Company amended its
certificate of incorporation to authorize the issuance of
7,000,000 shares of $.001 par value common stock.
On January 12, 2000, the Company amended and
restated its certificate of incorporation thereby authorizing
15,031,842 shares of $.001 par value Class A common stock,
7,000,000 shares of $.001 par value Class B common stock,
7,000,000 shares of $.001 par value Series A-1 preferred stock,
and 7,000,000 shares of $.001 par value Series A-2 preferred
stock. Upon liquidation, each holder of Series A-1 and Series
A-2 preferred shares (collectively, Series A preferred
shares) shall be entitled to receive an amount equal to
the greater of (i) $1.00, subject to adjustment in the event
such shares are subdivided through a stock split, stock
dividend, or otherwise (the Series A liquidation
value), plus all accrued and unpaid dividends, and (ii)
the amount such holder would receive if all holders of Series A
preferred shares had converted their Series A preferred shares
into common stock immediately prior to liquidation.
Upon liquidation, and after payment of preferential
amounts to holders of Series A preferred shares, the remaining
assets of the Company shall be distributed to the holders of
common shares. The Company shall pay preferential dividends to
the holders of Series A preferred shares, when and if declared
by the board of directors, at an annual rate of 8% of the sum of
the Series A liquidation value plus all accrued and unpaid
dividends. In the event any dividend or other distribution
payable in cash, stock, or other property is declared on the
common stock, each holder of Series A preferred shares on the
record date for such dividend or distribution shall be entitled
to receive the same cash, stock or other property which such
holder would have received if on such record date such holder
was the holder of record of the number of common shares into
which such Series A preferred shares then held by such holder
are then convertible.
Series A-1 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class A common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-1
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price ($1.00 initially, subject to adjustment upon
certain dilutive events), plus (y) the number of shares
determined by dividing the total amount of accrued and unpaid
dividends with respect to each Series A-1 preferred share to be
converted by the Series A conversion price. If the holders of
more than two-thirds of the Series A-1 preferred shares then
outstanding shall so elect, by vote or written consent, all of
the outstanding Series A-1 preferred shares shall automatically
convert into shares of Class A common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class B common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-2
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price, plus (y) the number of shares determined by
dividing
the total amount of accrued and unpaid dividends with respect to
each Series A-2 preferred share to be converted by the Series A
conversion price. If the holders of more than two-thirds of the
Series A-2 preferred shares then outstanding shall so elect, by
vote or written consent, all of the outstanding Series A-2
preferred shares shall automatically convert into shares of
Series A-1 preferred stock or Class B common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into an equal number of
shares of Series A-1 preferred stock. Each Series A-2 preferred
share shall automatically convert into one Series A-1 preferred
share if the aggregate number of Series A-2 preferred shares and
Class B common shares then outstanding is less than five percent
of the aggregate number of common shares then
outstanding.
Class B common shares may be converted at any time,
at the election of the holder, into an equal number of Class A
common shares. Each Class B common share shall automatically
convert into one Class A common share if the aggregate number of
Series A-2 preferred shares and Class B common shares then
outstanding is less than five percent of the aggregate number of
common shares then outstanding.
If a firm commitment underwritten public offering of
shares of common stock is effected in which (a) the aggregate
price paid by the public for the shares is at least $20,000,000
and (b) the price per share paid by the public for such shares
is at least 300% of the Series A conversion price in effect
immediately prior to such offering, then all of the outstanding
Series A preferred shares shall be automatically converted into
shares of common stock upon the closing of the public
offering.
The Series A preferred shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of a majority of the
Series A preferred shares then outstanding may require the
Company to redeem all the Series A preferred shares then
outstanding at the Series A redemption price. The Series A
redemption price per share equals the sum of the Series A
liquidation value plus all declared but unpaid dividends on such
Series A preferred share through the applicable redemption
date.
At any time or times on or after the earlier to
occur of (i) the fifth anniversary of issuance or (ii) the date
on which there is a sale of the Company by any means or change
in control by any means, the holder or holders of two-thirds of
the outstanding Series A preferred shares may elect to require
the Company to redeem all or any portion of such holders
Series A preferred shares.
Holders of Class A common stock, Class B common
stock, Series A-1 preferred stock, and Series A-2 preferred
stock vote together as a single class on all matters submitted
to a vote before the stockholders of the Company. Holders of
Class A and Class B common stock are entitled to one vote per
share. Holders of Series A-1 preferred stock are entitled to the
number of votes of Class A common shares such holders would have
been entitled to had they converted all of their Series A-1
preferred shares to Class A common shares. Holders of Series A-2
preferred stock are entitled to the number of votes of Class B
common shares such holders would have been entitled to had they
converted all of their Series A-2 preferred shares to Class B
common shares.
Provided that holders of Class B common stock
outstanding and issuable upon conversion of Series A-2 preferred
stock own at least 5% of the Companys Class A common stock
and Class B common stock and assuming conversion of all
securities convertible into such shares, (i) such holders shall
have the number of votes equal to the greater of (a) the voting
rights determined in accordance with the preceding paragraph,
and (b) 25.1% of the voting power of the Company, and (ii) the
voting rights of any person or group other than holders of Class
B common shares and Series A-2 preferred shares shall be limited
to the number of votes equal to the lesser of (x) such
holders voting rights in accordance with the preceding
paragraph, and (y) one vote less than the number of votes of the
aggregate holders of the Class B common and Series A-2
preferred.
BID4REAL.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
In conjunction with the January 12, 2000 merger of
Bid4Real.com LLC and bid4real.com, inc., as discussed in Note 1,
each member of Bid4Real.com LLC converted each incremental 1%
ownership into 58,800 shares of bid4real.com, inc. Class A
common stock. The conversion resulted in the issuance of
5,879,999 shares of the Companys Class A common stock. In
addition, the 1 share of common stock issued and outstanding at
December 31, 1999 was cancelled.
The Company issued 11,015,921 shares of Series A-2
convertible preferred stock to a third party in conjunction with
a January 2000 private placement, which yielded aggregate gross
proceeds of $7,000,000. The proceeds from this offering included
$6,500,000 cash and the conversion of a $500,000 convertible
note (Note 3). The gross proceeds received will be reduced by
$57,498 of deferred offering costs (Note 1(d)). As a result of
this transaction, a majority voting interest was acquired by the
third party.
In January 2000, the Company entered into an
operating line of credit with a borrowing limit of $250,000.
Borrowings under the line of credit accrue interest at the
banks prime rate of interest. The line of credit will
expire on December 31, 2000.
|
Stock Options (unaudited)
|
In January 2000, the Company established an
incentive and non-qualified stock option plan (the
Plan) for employees, officers, and directors of the
Company. The Company reserved 1,856,842 shares of Class A common
stock for issuance under the Plan. The Board of Directors
granted 271,158 incentive options at an exercise price of $.475
per Class A common share. The Board of Directors granted 211,526
non-qualified options at an exercise price of $.08 per Class A
common share. The options vest over a period of time approved
and adopted by the Board of Directors, generally one year from
the date of grant.
(6)
Pro Forma Presentation (unaudited)
On January 12, 2000, Bid4Real.com LLC merged with
bid4real.com, inc. under the terms of an agreement and plan of
merger between Bid4Real.com LLC and bid4real.com, inc. Upon
completion of the merger, (i) each member of Bid4Real.com LLC
will convert each incremental 1% ownership into 58,800 shares of
bid4real.com, inc. Class A common stock, (ii) Bid4Real.com LLC
will dissolve and (iii) the assets and liabilities of
Bid4Real.com LLC will be transferred to the Company. In
addition, the 1 share of common stock issued and outstanding as
of December 31, 1999 will be cancelled.
The December 31, 1999 pro forma balance sheet is
presented to give effect to the conversion of all the
outstanding Bid4Real.com LLC membership interests into 5,879,999
shares of the Companys Class A common stock. Prior to the
conversion, the net losses of Bid4Real.com LLC were allocated to
the members and reflected in members deficit. At the time
of the conversion, members deficit will be reclassified
into Class A common stock and additional paid-in capital. The
pro forma statement of operations for 1999 reflects the
aggregation of the Companys operations from December 13,
1999 (inception) through December 31, 1999 and the operations of
Bid4Real.com LLC from July 15, 1999 (inception) through December
31, 1999.
Upon completion of the merger, 5,879,999 shares of
Class A common stock will be issued and outstanding.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of
Directors
BidBuyBuild, Inc.
We have audited the accompanying balance sheet of
BidBuyBuild, Inc. (a development stage enterprise) (the Company)
as of December 31, 1999, and the related statements of
operations, shareholders deficit, and cash flows for the
period from November 9, 1999 (date of inception) through
December 31, 1999. These financial statements are the
responsibility of the Companys 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 BidBuyBuild, Inc. (a development stage enterprise)
as of December 31, 1999, and the results of its operations and
its cash flows for the period from November 9, 1999 (date of
inception) through December 31, 1999, in conformity with
generally accepted accounting principles.
Chicago,
Illinois
February
4, 2000
BIDBUYBUILD, INC.
(a
development stage enterprise)
December 31, 1999
Assets |
|
|
Current assets: |
|
|
|
Cash and cash equivalents |
|
$ 249,393 |
|
Advances to founders |
|
24,800 |
|
Prepaid expenses |
|
1,400 |
|
|
|
|
|
Total current assets |
|
275,593 |
|
Computer equipment |
|
13,152 |
|
|
|
|
|
Total assets |
|
$ 288,745 |
|
|
|
|
|
Liabilities and Shareholders Deficit |
|
|
|
Current liabilities: |
|
|
|
Accounts payable |
|
$ 10,448 |
|
Accrued expenses |
|
270,209 |
|
Convertible debt |
|
150,000 |
|
|
|
|
|
Total current liabilities |
|
430,657 |
|
|
|
|
|
Shareholders Deficit: |
|
|
|
Common stock, authorized 5,000,000 shares,
$.001 par value; 4,962,500 issued and
outstanding. |
|
4,962 |
|
Additional paid-in capital |
|
149,888 |
|
Deficit accumulated during development
stage |
|
(296,762 |
) |
|
|
|
|
Total shareholders
deficit |
|
(141,912 |
) |
|
|
|
|
Total liabilities and
shareholders deficit |
|
$ 288,745 |
|
|
|
|
|
The
accompanying notes are an integral part of this financial
statement.
BIDBUYBUILD, INC.
(a
development stage enterprise)
Period
from November 9, 1999 (inception) through December 31,
1999
Revenues |
|
$
|
|
|
|
Operating expenses: |
|
|
Product development costs |
|
250,000 |
General and administrative |
|
46,762 |
|
|
|
Total operating expenses |
|
296,762 |
|
|
|
Operating loss |
|
296,762 |
Income taxes |
|
|
|
|
|
Net loss |
|
$296,762 |
|
|
|
The
accompanying notes are an integral part of this financial
statement.
BIDBUYBUILD, INC.
(a
development stage enterprise)
STATEMENT OF SHAREHOLDERS DEFICIT
Period
from November 9, 1999 (inception) through December 31,
1999
|
|
Common stock
|
|
Additional
paid-in
capital
|
|
Deficit
accumulated
during the
development
stage
|
|
Shareholders
deficit
|
|
|
Shares
|
|
Amount
|
Balance
November 1, 1999 (inception) |
|
|
|
$ |
|
$
|
|
$
|
|
|
$
|
|
Issuance of shares |
|
4,962,500 |
|
4,962 |
|
149,888 |
|
|
|
|
154,850 |
|
Net
Loss |
|
|
|
|
|
|
|
(296,762 |
) |
|
(296,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 1999 |
|
4,962,500 |
|
$4,962 |
|
$149,888 |
|
$(296,762 |
) |
|
$(141,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of this financial
statement.
BIDBUYBUILD, INC.
(a
development stage enterprise)
Period
from November 9, 1999 (inception) through December 31,
1999
Cash
flows from operating activities: |
|
|
Net loss |
|
$(296,762 |
) |
Adjustments to reconcile net income to net cash
used in operating activities: |
|
|
|
Increase in advanced receivables |
|
(24,800 |
) |
Increase in prepaid assets |
|
(1,400 |
) |
Increase in accounts payable |
|
10,448 |
|
Increase in accrued expenses |
|
270,209 |
|
|
|
|
|
Net cash used in operating activities |
|
(42,305 |
) |
Cash
flows from investing activities: |
|
|
|
Capital expenditures |
|
(13,152 |
) |
|
|
|
|
Net cash used in investing activities |
|
(13,152 |
) |
Cash
flows from financing activities: |
|
|
|
Convertible debt |
|
150,000 |
|
Stock issuance |
|
154,850 |
|
|
|
|
|
Net cash provided by financing
activities |
|
304,850 |
|
|
|
|
|
Net
increase in cash and cash equivalents |
|
249,393 |
|
Cash
and cash equivalents at beginning of year |
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year |
|
$ 249,393 |
|
|
|
|
|
The
accompanying notes are an integral part of this financial
statement.
BIDBUYBUILD, INC.
(a
development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and
Summary of Significant Accounting Policies
BidBuyBuild, Inc. (the Company) commenced operations
on November 9, 1999, and was incorporated in the State of
Delaware under the name BidBuyBuild, Inc. The Company is a
development stage enterprise that plans to provide a web-site
initially focused on facilitating business to business ecommerce
for Mechanical, Electrical and Plumbing (MEP)
contracting.
The Company has had no operating revenue; as its
activities have focused on initial web-site development, market
development, and raising capital. Financing of the development
activities has been provided primarily through the sale of
common stock and convertible debt. The accumulated loss from
inception through December 31, 1999 was $296,762.
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 at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
|
Cash
and Cash Equivalents
|
Cash and cash equivalents include cash and
short-term investments with original maturities of not more than
three months.
Computer equipment is carried at cost and is
depreciated using the straight-line method over the estimated
useful lives of the related assets, generally three
years.
|
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.
During the period from November 9, 1999 (inception) through
December 31, 1999, software development costs of $250,000 were
incurred related to the development of a web-based network and
website. Such amounts were expensed as they were incurred during
the preliminary project phase.
The Company accounts for income taxes using
Statement of Financial Accounting Standards No. 109 (SFAS No.
109), Accounting for Income Taxes. Under SFAS No.
109 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.
BIDBUYBUILD, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
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 Companys financial statements.
2.
Computer Equipment
Computer equipment is recorded at cost. Depreciation
is provided using the straight-line method over three years. No
depreciation was recorded, as the computers were not placed into
service.
Computer equipment, stated at cost, was as follows
at December 31, 1999:
Computer equipment |
|
$13,152 |
|
|
|
3.
Advances to Founders
During December the Company advanced amounts to its
Founders. The balance outstanding as of December 31, 1999 was
$24,800.
4.
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.
Expected income tax benefit at the statutory
rate |
|
$(100,900) |
(Increase) reduction in tax benefit resulting
from: |
|
|
Increase in the beginning valuation
allowance |
|
118,706 |
State income tax benefit |
|
(17,806) |
|
|
|
|
|
$
|
|
|
|
The tax effects of temporary differences that give
rise to significant deferred tax assets as of December 31, 1999
are as follows:
Deferred tax assets: |
|
|
Net operating loss carryforward |
|
$ 3,958 |
|
Start-up and organizational costs |
|
114,748 |
|
|
|
|
|
Total deferred tax assets |
|
118,706 |
|
Valuation allowance |
|
$(118,706 |
) |
|
|
|
|
Net
deferred tax asset |
|
$
|
|
|
|
|
|
As of December 31, 1999, the Company has U.S. tax
net operating loss carryforwards of approximately $4,000, which
can be carried forward for 20 years and will begin to expire in
2019. Pursuant to Sections 382 and 383 of the Internal Revenue
Code, the annual use of the Companys 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.
BIDBUYBUILD, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or the entire 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.
5.
Convertible Notes to Stockholders
During December 1999, the Company issued various
unsecured notes payable to certain stockholders. These
promissory notes bear interest at 5.66% and are due six months
from the issuance date. The total principal balance outstanding
on the notes at December 31, 1999 was $150,000 and has been
classified as a current liability. If the Company fails to pay
in full all principal and interest due under the notes, they
shall automatically be converted into 37,500 shares of common
stock.
6.
Related Party
The Company entered into a Consulting Agreement for
the development of their ecommerce platform and web-site.
Certain employees of the consulting firm are shareholders in the
Company. Additionally, under certain circumstances, if the
consulting fees are not paid, the outstanding payable will
convert into common stock.
7.
Subsequent Event
On January 18, 2000, the Company entered into a
Letter of Intent, with a third party (Investor). Subject to the
Investors due diligence, the Company will issue to
Investor shares of Series A Convertible Preferred Stock (Series
A Stock) equal to 35.3% of the Companys common stock on a
fully diluted basis. Each share of Series A Stock is convertible
into shares of common stock at the election of Investor.
Additionally, Series A Stock will vote with the Companys
common stock on all matters. At an IPO, the Series A Stock would
be converted into shares of a class of supervoting (5 votes per
share or at least 25.1% of the votes for directors, but not to
exceed 40% of the votes for directors) common stock. The Company
will also issue a warrant to the investor for approximately
281,000 shares of common stock (or 3% of the Companys
common stock on a fully diluted basis). The warrant is
exercisable, in whole or in part, at any time over the next five
years.
INDEPENDENT AUDITORS REPORT
The
Stockholders
closerlook, inc.:
We have audited the accompanying consolidated
balance sheets of closerlook, inc. and subsidiary (the Company)
as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders equity (deficit),
and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of closerlook, inc. and
subsidiary as of December 31, 1998 and 1999, and the results of
their operations and their cash flows for the years then ended
in conformity with generally accepted accounting
principles.
Chicago,
Illinois
February
4, 2000, except for note 7,
as to which the date is March 9, 2000
CLOSERLOOK, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Assets |
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$
5,102 |
|
|
154,935 |
|
Accounts receivable, net of allowance for doubtful
accounts of $8,000 and
$10,250 in 1998 and 1999,
respectively |
|
1,313,931 |
|
|
1,127,020 |
|
Other current assets |
|
|
|
|
9,813 |
|
|
|
|
|
|
|
|
Total current assets |
|
1,319,033 |
|
|
1,291,768 |
|
Property and equipment, net |
|
331,835 |
|
|
693,303 |
|
Other
assets |
|
34,089 |
|
|
89,089 |
|
|
|
|
|
|
|
|
Total assets |
|
$1,684,957 |
|
|
2,074,160 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
(Deficit) |
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Line of credit |
|
$
|
|
|
1,050,000 |
|
Current portion of capital lease
obligations |
|
40,760 |
|
|
40,255 |
|
Accounts payable |
|
333,671 |
|
|
1,104,039 |
|
Accrued vacation |
|
146,061 |
|
|
211,212 |
|
Accrued wages and bonuses |
|
215,608 |
|
|
15,000 |
|
Accrued contract costs |
|
67,554 |
|
|
|
|
Other accrued expenses |
|
16,534 |
|
|
|
|
Deferred revenue |
|
283,408 |
|
|
179,306 |
|
Due to officer |
|
|
|
|
150,000 |
|
Dividends payable |
|
24,104 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
1,127,700 |
|
|
2,749,812 |
|
Deferred rent |
|
89,380 |
|
|
100,127 |
|
Deposits |
|
10,955 |
|
|
10,955 |
|
Line of
credit |
|
400,000 |
|
|
|
|
Capital
lease obligations, less current portion |
|
43,021 |
|
|
16,144 |
|
|
|
|
|
|
|
|
Total liabilities |
|
1,671,056 |
|
|
2,877,038 |
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
Class A common stock, no par; 1,800,000 shares
authorized in 1998;
852,000 shares issued and
outstanding in
1998 |
|
947 |
|
|
|
|
Class B common stock, no par; 200,000 shares
authorized in 1998; 48,000
shares issued and
outstanding in
1998 |
|
53 |
|
|
|
|
Common stock, $0.001 par value; 2,000,000 shares
authorized in 1999;
900,000 shares issued and
outstanding in
1999 |
|
|
|
|
900 |
|
Paid-in capital |
|
|
|
|
100 |
|
Subscription receivable |
|
(1,000 |
) |
|
(1,000 |
) |
Retained earnings (accumulated deficit) |
|
13,901 |
|
|
(802,878 |
) |
|
|
|
|
|
|
|
Total stockholders equity
(deficit) |
|
13,901 |
|
|
(802,878 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders
equity (deficit) |
|
$1,684,957 |
|
|
2,074,160 |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
CLOSERLOOK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Revenues |
|
$4,785,569 |
|
|
7,386,314 |
|
Cost of
services |
|
2,362,311 |
|
|
3,641,835 |
|
|
|
|
|
|
|
|
Gross profit |
|
2,423,258 |
|
|
3,744,479 |
|
|
Operating expenses: |
|
|
|
|
|
|
Salaries and benefits |
|
1,325,952 |
|
|
2,276,939 |
|
General and administrative |
|
880,333 |
|
|
1,801,878 |
|
Sales and marketing |
|
142,933 |
|
|
400,689 |
|
Loss on disposal of property and
equipment |
|
|
|
|
71,877 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
2,349,218 |
|
|
4,551,383 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
74,040 |
|
|
(806,904 |
) |
|
Other
income (expense): |
|
|
|
|
|
|
Rental income |
|
10,798 |
|
|
41,424 |
|
Loss on investment |
|
(47 |
) |
|
|
|
Interest income |
|
765 |
|
|
5,735 |
|
Interest expense |
|
(37,950 |
) |
|
(57,034 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$ 47,606 |
|
|
(816,779 |
) |
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
CLOSERLOOK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)
Years
ended December 31, 1998 and 1999
|
|
Class A
Common Stock
|
|
Class B
Common Stock
|
|
Common Stock
|
|
Paid-in
capital
|
|
Subscription
receivable
|
|
Retained
earnings
(accumulated
deficit)
|
|
Total
stockholders
equity
(deficit)
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance
at
December 31,
1997 |
|
900,000 |
|
|
$1,000 |
|
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
(1,000 |
) |
|
(33,705 |
) |
|
(33,705 |
) |
Issuance of Class
B Common
Stock in
exchange for
Class A
Common Stock
retired |
|
(48,000 |
) |
|
(53 |
) |
|
48,000 |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,606 |
|
|
47,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
December 31,
1998 |
|
852,000 |
|
|
947 |
|
|
48,000 |
|
|
53 |
|
|
|
|
|
|
|
|
(1,000 |
) |
|
13,901 |
|
|
13,901 |
|
Exchange of stock
in connection
with
recapitalization |
|
(852,000 |
) |
|
(947 |
) |
|
(48,000 |
) |
|
(53 |
) |
|
900,000 |
|
900 |
|
100 |
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(816,779 |
) |
|
(816,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
December 31,
1999 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
900,000 |
|
$900 |
|
100 |
|
(1,000 |
) |
|
(802,878 |
) |
|
(802,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
CLOSERLOOK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net income (loss) |
|
$ 47,606 |
|
|
(816,779 |
) |
Adjustments to reconcile net income (loss) to net
cash
provided by (used in)
operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
83,784 |
|
|
125,850 |
|
Loss on disposal of property and
equipment |
|
|
|
|
71,877 |
|
Change in assets and liabilities: |
|
|
|
|
|
|
Accounts receivable, net |
|
(674,029 |
) |
|
186,911 |
|
Other assets |
|
(1,472 |
) |
|
(64,813 |
) |
Accounts payable |
|
213,686 |
|
|
770,368 |
|
Accrued vacation |
|
24,284 |
|
|
65,151 |
|
Accrued wages and bonuses |
|
74,565 |
|
|
(200,608 |
) |
Accrued contract costs |
|
(37,032 |
) |
|
(67,554 |
) |
Other accrued expenses |
|
(6,122 |
) |
|
(16,534 |
) |
Deferred rent |
|
32,638 |
|
|
10,747 |
|
Deferred revenue |
|
283,408 |
|
|
(104,102 |
) |
Deposits |
|
10,955 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
52,271 |
|
|
(39,486 |
) |
|
|
|
|
|
|
|
Cash
flows from investing activitiespurchases of property and
equipment |
|
(69,878 |
) |
|
(543,000 |
) |
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
(69,878 |
) |
|
(543,000 |
) |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
Principal payments on capital leases |
|
(29,936 |
) |
|
(43,577 |
) |
Net borrowings on line of credit |
|
18,000 |
|
|
650,000 |
|
Net borrowings from officer |
|
|
|
|
150,000 |
|
Dividends paid |
|
(3,350 |
) |
|
(24,104 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
(15,286 |
) |
|
732,319 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents |
|
(32,893 |
) |
|
149,833 |
|
Cash
and cash equivalents at beginning of year |
|
37,995 |
|
|
5,102 |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year |
|
$ 5,102 |
|
|
154,935 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information |
|
|
|
|
|
|
interest paid |
|
$ 37,950 |
|
|
57,034 |
|
Supplemental disclosure of non-cash investing and
financing activities |
|
|
|
|
|
|
assets acquired through capital leases |
|
87,516 |
|
|
16,195 |
|
See
accompanying notes to consolidated financial
statements.
CLOSERLOOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Description of the Business
Closer Look Creative, Inc. was originally
established in 1994 as an S-Corporation. In June 1999, Closer
Look Creative, Inc. changed its name to Closer Look Group, Inc.
and formed three subsidiaries, Closer Look Creative LLC,
closerlook.com LLC and nMinds LLC. On December 31, 1999, Closer
Look Group, Inc. reincorporated as closerlook, inc., a Delaware
corporation. In conjunction with the reincorporation, Closer
Look Creative LLC and closerlook.com LLC were merged into
closerlook, inc. and ceased to exist as separate legal
entities.
closerlook, inc. (the Company) is a digital strategy
and design firm that provides print, video, and digital media
services. The Companys website,
www.closerlook.com, provides additional
information on the Company and the services it
provides.
(2)
Summary of Significant Accounting Policies
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 these estimates.
|
(b)
Basis of Consolidation
|
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiary. All significant intercompany transactions have been
eliminated.
The Company considers all highly liquid debt
instruments with an original maturity of three months or less to
be cash equivalents.
|
(d)Property and Equipment
|
Property and equipment are stated at cost.
Depreciation is computed using the straight-line method based on
the estimated useful lines of the various classes of property
ranging from three to seven years. Property and equipment under
capital leases are stated at the present value of minimum lease
payments and are amortized using the straight-line method over
either the lease term or the estimated useful lives of the
assets. Amortization of leasehold improvements is computed over
the shorter of the lease term or estimated useful life of the
asset.
The Company derives its revenues primarily from
consulting service agreements including fixed-price and
time-and-materials agreements. Revenues are recognized over the
period of each project based upon the percentage of completion
method. Provisions for contract adjustments and losses are
recorded in the period such items are identified. Deferred
revenue represents amounts billed in advance of services
rendered.
The Company operates as an S-Corporation, whereby
all income, deductions, and credits pass through to the
Companys shareholders for Federal income tax
purposes.
CLOSERLOOK, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Advertising expenses are charged to operations
during the year in which they are incurred. The total amount of
advertising expenses charged to operations was $30,342 and
$285,134 for the years ended December 31, 1998 and 1999,
respectively.
The Company applies the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (Statement 123). Statement
123 defines a fair value based method of accounting for an
employee stock option or similar equity instrument. Statement
123 gives entities a choice of recognizing related compensation
expense by adopting the new fair value method or to continue to
measure compensation using the intrinsic value approach under
Accounting Principles Board Opinion No. 25 (APB 25). The Company
applies the measurement criteria prescribed by APB 25 and
provides the pro forma disclosures required by Statement
123.
(3)
Property and Equipment
Property and equipment at December 31, 1998 and 1999
consists of the following:
|
|
December 31,
|
|
|
1998
|
|
1999
|
Editing
equipment |
|
$ 10,367 |
|
10,367 |
Graphics tools |
|
848 |
|
848 |
Leasehold improvements |
|
3,775 |
|
245,914 |
Office
equipment |
|
112,778 |
|
330,567 |
Office
furniture |
|
|
|
29,141 |
Computer equipment |
|
378,335 |
|
268,766 |
|
|
|
|
|
|
|
506,103 |
|
885,603 |
|
Less:
accumulated depreciation and amortization |
|
(174,268) |
|
(192,300) |
|
|
|
|
|
|
|
$ 331,835 |
|
693,303 |
|
|
|
|
|
(4)
Stockholders Equity (Deficit)
Effective December 30, 1998, by resolution of the
sole director, president and secretary, the Company issued
48,000 shares of Class B non-voting common stock in exchange for
48,000 shares of Class A voting common stock.
Holders of Class A common stock are entitled to one
vote per share at all meetings of the shareholders of the
Company and in all matters on which shareholders are entitled to
vote. Holders of Class B common stock are not entitled to vote.
No other special preferences or rights exist.
In conjunction with the Companys
reincorporation in the State of Delaware on December 31, 1999,
the Company underwent a recapitalization and exchanged its
852,000 shares of outstanding Class A common stock and 48,000
shares of outstanding Class B common stock for 900,000 shares of
newly authorized common stock. As a result of the
reincorporation, the Company has 2,000,000 shares of common
stock authorized and the Class A and B common stock have been
canceled.
CLOSERLOOK, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(5)
Stock Option Plan
In 1997, the Company established an employee stock
option plan (the Plan) for all employees. Options
are granted at estimated fair value as determined by the Board
of Directors and expire ten years from the date of grant.
Options granted generally vest over a 4-year period. The Company
has reserved 263,750 shares of stock for issuance upon exercise
of options.
The Company applies APB 25 in accounting for its
Plan and, accordingly, no compensation cost has been recognized
for grant of stock options in the financial statements. Had
compensation cost for the Companys options been determined
consistent with SFAS 123, the net income (loss) would have been
the pro forma amounts below:
|
|
1998
|
|
1999
|
Net
income (loss): |
As reported |
|
$47,606 |
|
(816,779 |
) |
Pro forma |
|
47,379 |
|
(864,153 |
) |
The following summarizes activity under the
Companys stock option plan:
|
|
Number of
shares
|
|
Weighted-
average
exercise
price
|
|
Weighted-
average
minimum
value
of options
granted
|
Options
outstanding at December 31, 1997 |
|
|
|
$
|
|
|
|
Options
granted |
|
4,000 |
|
0.54 |
|
$0.23 |
|
|
|
|
|
|
|
Options
outstanding at December 31, 1998 |
|
4,000 |
|
0.54 |
|
|
|
Options
granted |
|
182,900 |
|
2.11 |
|
$0.88 |
|
|
|
|
|
|
|
Options
outstanding at December 31, 1999 |
|
186,900 |
|
$ 2.07 |
|
|
|
|
|
|
|
|
|
The following table provides certain information
with respect to stock options outstanding at December 31,
1999:
|
|
Outstanding
|
|
Exercisable
|
Exercise
price
|
|
Stock
options
outstanding
|
|
Weighted-
average
exercise
price
|
|
Weighted-
average
remaining
contractual
life (years)
|
|
Stock
options
exercisable
|
|
Weighted-
average
exercise
price
|
|
Weighted-
average
remaining
contractual
life (years)
|
$0.54 |
|
4,000 |
|
$0.54 |
|
8.0 |
|
1,000 |
|
$0.54 |
|
8.0 |
$1.35 |
|
145,000 |
|
$1.35 |
|
9.0 |
|
53,000 |
|
$1.35 |
|
9.0 |
$5.00 |
|
37,900 |
|
$5.00 |
|
9.5 |
|
|
|
$5.00 |
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,900 |
|
$2.07 |
|
9.1 |
|
54,000 |
|
$1.34 |
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CLOSERLOOK, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The weighted-average minimum values at date of
grant for options granted during 1998 and 1999 were estimated
using the Black-Scholes option valuation model with the
following weighted-average assumptions:
|
|
1998
|
|
1999
|
Expected life in years |
|
10.00 |
|
|
10.00 |
|
Interest rate |
|
5.5 |
% |
|
5.1 |
% |
Volatility |
|
0 |
% |
|
0 |
% |
Dividend yield |
|
0 |
% |
|
0 |
% |
(6)
Leases
The Company leases certain computer and office
equipment under capital leases, and office space under
noncancelable operating leases expiring at various dates through
2002.
Future minimum annual lease payments under capital
and noncancelable operating leases as of December 31, 1999 are
as follows:
Year
|
|
Capital
leases
|
|
Operating
leases
|
2000 |
|
$43,641 |
|
$ 415,353 |
2001 |
|
14,251 |
|
417,189 |
2002 |
|
2,575 |
|
241,878 |
|
|
|
|
|
Total minimum payments |
|
60,467 |
|
$1,074,420 |
|
|
|
|
|
Less
amount representing interest |
|
4,068 |
|
|
|
|
|
|
|
Present value of net minimum lease
payments |
|
56,399 |
|
|
Less
current portion |
|
40,255 |
|
|
|
|
|
|
|
|
|
$16,144 |
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 1998
and 1999 was $338,226 and $390,519, respectively. Equipment
recorded under capital leases is included in property and
equipment as follows:
|
|
December 31,
|
|
|
1998
|
|
1999
|
Office
equipment |
|
$ 46,022 |
|
|
62,217 |
|
Computer equipment |
|
78,774 |
|
|
78,774 |
|
|
|
|
|
|
|
|
|
|
124,796 |
|
|
140,991 |
|
Less:
accumulated amortization |
|
(35,354 |
) |
|
(62,297 |
) |
|
|
|
|
|
|
|
Total |
|
$ 89,442 |
|
|
78,694 |
|
|
|
|
|
|
|
|
(7)
Line of Credit
The Company maintains an operating line of credit
with a borrowing limit of $400,000 and $1,050,000 at December
31, 1998 and 1999. Borrowings under the line of credit accrue
interest at the prime rate plus 0.5% (8.25% and 9.00% at
December 31, 1998 and 1999, respectively). At December 31, 1998
and 1999, the Company had outstanding borrowings of $400,000 and
$1,050,000, respectively. The line of credit expires on April
30, 2000.
At December 31, 1998 and 1999, the Company was in
technical violation of covenants prohibiting the Company from
entering into additional debt arrangements and requiring the
Company to provide annual and monthly financial statements to
the lender. On February 9, 2000, the Company obtained a
modification to the covenant prohibiting the incurrence of
additional debt after February 1, 2000. On March 9, 2000, the
Company received a waiver of the covenant requiring the Company
to provide periodic financial statements to the
lender.
CLOSERLOOK, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(8)
Employee Benefit Plan
The Company has a contributory profit sharing plan,
established pursuant to the provisions of section 401(k) of the
Internal Revenue Code, which provides retirement benefits for
eligible employees of the Company. The Company matches a
percentage of the employees contributions and may make
discretionary contributions to the plan. The Company contributed
$0 and $14,368 to the plan for the years ended December 31, 1998
and 1999, respectively.
(9)
Business and Credit Concentrations
During 1998 and 1999, certain customers individually
accounted for greater than 10% of revenues. Two customers
accounted for 27% and 22% of revenues in 1998. Three customers
accounted for 23%, 14% and 12% of revenues in 1999.
The Company has amounts receivable from individual
customers which account for greater than 10% of total accounts
receivable. In 1998, three customers accounted for 20%, 13% and
12% of total accounts receivable. In 1999, five customers
accounted for 18%, 15%, 14%, 11% and 10% of total accounts
receivable.
(10)
Related Party Transactions
The Company reimburses certain executives for the
cost incurred to lease an automobile. The total amount of
reimbursed lease payments was $19,462 and $10,967 for the years
ended December 31, 1998 and 1999, respectively.
Certain shareholders were indebted to the Company
for $1,000 and $2,818 at December 31, 1998
and 1999, respectively.
The Company was indebted to a shareholder and
officer for $150,000 at December 31, 1999.
(11)
Subsequent Events
On January 14, 2000, the Company sold its investment
in nMinds LLC to shareholders of the Company. In exchange for
100% of the outstanding units of nMinds LLC, the purchasers paid
$100,000 cash and agreed to pay an additional $343,314, which
represents amounts forwarded by the Company to nMinds from the
date of its inception through the date of sale.
Had the operations of the Company been reported
exclusive of the operations of nMinds LLC, revenues and net
income (loss) would have been the pro forma amounts indicated
below:
|
|
1998
|
|
1999
|
Revenues: |
|
|
|
|
|
As reported |
|
$4,785,569 |
|
7,386,314 |
|
Pro forma |
|
4,785,569 |
|
7,237,449 |
|
Net
income (loss): |
|
|
|
|
|
As reported |
|
47,606 |
|
(816,779 |
) |
Pro forma |
|
47,606 |
|
(153,427 |
) |
Effective February 1, 2000, the stockholders of the
Company approved an Amended and Restated Certificate of
Incorporation (Certificate). The Certificate gave the Company
the authority to issue the following classes and amounts of
stock:
|
(a) 150,000 shares of Series A-1 preferred stock,
par value $0.001 per share,
|
|
(b) 150,000 shares of Series A-2 preferred stock,
par value $0.001 per share,
|
|
(c) 2,000,000 shares of Class A common stock, par
value $0.001 per share, and
|
|
(d) 450,000 shares of Class B common stock, par
value $0.001 per share.
|
CLOSERLOOK, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The Series A-1 and A-2 preferred shares
(collectively, Series A preferred shares) have
liquidation and dividend preferences. Upon the liquidation,
dissolution or winding up of the Company, the holders of Series
A preferred shares are entitled to receive an amount in cash out
of the assets of the Company, before any payment or distribution
is made on any other securities equal to the greater of (i)
$33 1
/3 per
share (or $53 1
/3 per
share if divine interVentures, inc. (divine) makes
an additional capital contribution of $3,000,000 to the Company
pursuant to a letter agreement and based upon financial
performance in 2000) subject to adjustment in the event such
shares are subdivided through a stock split, stock dividend, or
otherwise (the Series A liquidation value) plus all
accrued and unpaid dividends, and (ii) the amount such holder
would receive if all holders of Series A preferred shares had
converted their Series A preferred shares into common stock
immediately prior to liquidation, dissolution or winding up.
Upon liquidation, and after payment of preferential amounts to
the holders of Series A preferred shares, the remaining assets
of the Company shall be distributed to the holders of Class A or
Class B common shares (collectively, Common Shares).
When, as and if declared, the Company shall pay
annual preferential dividends to the holders of Series A
preferred shares at a rate of 8% of the Series A liquidation
value. Additionally, in the event any dividend or distribution
is declared on the Common Shares, each holders of Series A
preferred shares shall be entitled to a sum equal to the amount
to which such holder would have received if the Series A
preferred shares had been converted into Common
Shares.
Series A-1 preferred shares may be converted, at
anytime, into the number of shares of Class A common stock
determined by adding (x) the number of shares determined by (i)
multiplying the number of Series A-1 preferred shares to be
converted by 33 1
/3 and (ii)
dividing the resulting product by the Series A conversion price
(initially $33 1
/3, subject
to adjustment upon certain dilutive events), plus (y) the number
of shares determined by dividing the total amount of declared
but unpaid dividends due and owing with respect to each Series
A-1 preferred share to be converted by the Series A conversion
price. If the holder or holders of more than two-thirds of the
Series A-1 preferred shares then outstanding shall so elect, by
vote or written consent, all of the outstanding Series A-1
preferred shares shall automatically convert into shares of
Class A common stock.
Series A-2 preferred shares may be converted, at any
time, into the number of shares of Class B common stock
determined by adding (x) the number of shares determined by (i)
multiplying the number of Series A-2 preferred shares to be
converted by 33 1
/3 and (ii)
dividing the resulting product by the Series A conversion price,
plus (y) the number of shares determined by dividing the total
amount of declared but unpaid dividends due and owing with
respect to each Series A-2 preferred share to be converted by
the Series A conversion price. If the holder or holders of more
than two-thirds of the Series A-2 preferred shares then
outstanding shall so elect, by vote or written consent, all of
the outstanding Series A-2 preferred shares shall automatically
convert into shares of either Series A-1 preferred stock or
Class B common stock.
Upon a public offering of Common Shares, meeting
certain criteria as described in the Certificate, the Series A-1
preferred shares shall be converted into shares of Class A
common stock and Series A-2 preferred shares shall be converted
into shares of Class B common stock
Series A-2 preferred may be converted, at anytime,
into an equal number of shares of Series A-1 preferred stock.
Each Series A-2 preferred share shall automatically convert into
one Series A-1 preferred share if the number of Class B common
shares then outstanding or issuable upon conversion of the
Series A-2 preferred shares is less than ten percent of the
aggregate number of Common shares then outstanding. Each Series
A-2 preferred share shall automatically convert into one Series
A-1 preferred share upon the transfer of such share to a person
not controlled by divine.
Class B common shares may be converted, at anytime,
into an equal number of Class A common shares. Each Class B
Common share shall automatically convert into one Class A common
share if at any time the
aggregate of number of Class B common shares then outstanding and
issuable upon conversion of the Series A preferred shares is
less than ten percent of the aggregate number of Common Shares
then outstanding. Each Class B common share shall automatically
convert into one Class A common share upon a transfer to a
person not controlled by divine.
Series A-2 preferred shares have certain redemption
rights. If a fundamental change or change in ownership occurs
the holder or holders of the majority of Series A-2 preferred
shares may require the Company to redeem all the Series A-2
preferred shares then outstanding at a price per share equal to
the Series A liquidation value.
During the ninety-day period commencing on the fifth
anniversary of February 1, 2000, the holder or holders of
two-thirds of the outstanding Series A-2 preferred shares may
elect to require the Company to redeem all or any portion of
such holders Series A-2 preferred shares. The Company
shall be required to redeem all Series A-2 preferred shares with
respect to which redemption requests have been made at a price
per share equal to the Series A liquidation value.
During the thirty-day period commencing at the end
of the ninety-day period referenced in the preceding paragraph,
the Company may elect to redeem any outstanding Series A-2
preferred shares. The Company shall be required to redeem all
Series A-2 preferred shares to be redeemed at a price per share
equal to the Series A liquidation value.
Each share of Class A and Class B common stock
entitles the holder to one vote. The Series A preferred shares
entitle the holder to one vote for each share of Class A or
Class B common stock which such holder would have been entitled
to receive had such holder converted all of its preferred stock.
However, if holders of Class B common shares then outstanding
and issuable upon conversion of A-2 preferred shares together
own at
least ten
percent of the Companys issued and outstanding Common
Shares, such holders shall have the number of votes equal to the
greater of (a) such holders voting power as determined on
a one share to one vote basis or (b) 25.1% of the voting power
of the Company.
On February 1, 2000, the Company exchanged, on a one
to one basis, all outstanding shares of closerlook, inc. common
stock for Class A common stock.
On February 1, 2000, the Company issued 150,000
shares of Series A-2 preferred stock (the Preferred
Shares) to divine for $5,000,000 cash. Additionally, the
shareholders of the Company sold 300,000 Class A common shares
for $8,000,000 cash and 2,000,000 shares of divine interVentures
Series F Senior Convertible Preferred Stock (Series F
Stock). Of the $8,000,000 and 2,000,000 shares of Series F
stock exchanged, $1,500,000 and 1,500,000 shares of Series F
stock were placed in escrow and will be paid to the shareholders
if the Company achieves certain financial results in 2000. At
the closing, divine exchanged the Class A common shares for
Class B common shares. Additionally, 5,000 shares of Class A
common stock were issued to Renaissance Capital Group, Inc. as
partial payment for financial advisory and investment banking
services related to this transaction.
After the February 1, 2000 transactions described
above, the only shares of capital stock of the Company issued
and outstanding, reserved for issuance or committed to be issued
will be:
|
(a) 605,000 fully paid and non-assessable shares
of Class A common stock, duly issued and outstanding, 150,000
shares of Class A common stock reserved for issuance upon
conversion of the Series A-1 preferred shares, and 450,000
shares of Class A common stock reserved for issuance upon
conversion of the Class B common shares;
|
CLOSERLOOK, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
(b) 300,000 fully paid and non-assessable shares
of Class B common stock, duly issued and outstanding and
150,000 shares of Class B common stock reserved for issuance
upon conversion of the Preferred Shares;
|
|
(c) 150,000 shares of Series A-1 preferred stock,
reserved for issuance upon conversion of the Preferred Shares;
and
|
|
(d) 263,750 shares of Class A common stock
reserved for issuance under the Amended and Restated
closerlook, inc. Employee Stock Option Plan.
|
INDEPENDENT AUDITORS REPORT
The Board
of Directors
eFiltration.com, Inc.:
We have audited the accompanying balance sheet of
eFiltration.com, Inc. (a development stage enterprise) as of
December 31, 1999, and the related statements of operations,
stockholders deficit, and cash flows for the period from
September 7, 1999 (inception) through December 31, 1999. These
financial statements are the responsibility of the
Companys 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 eFiltration.com, Inc. (a development stage
enterprise) as of December 31, 1999, and the results of its
operations and its cash flows for the period from September 7,
1999 (inception) through December 31, 1999, in conformity with
generally accepted accounting principles.
Chicago,
Illinois
February
7, 2000, except for note 6 which is as of February 11,
2000
EFILTRATION.COM, INC.
(a development stage enterprise)
December 31, 1999
ASSETS
Current
assets: |
|
|
Prepaid expenses |
|
$ 160 |
|
|
|
Total assets |
|
$ 160 |
|
|
|
|
LIABILITIES AND STOCKHOLDERS
DEFICIT |
|
Due to
affiliate |
|
$37,670 |
Accounts payable and accrued liabilities |
|
3,509 |
|
|
|
Total current liabilities |
|
41,179 |
|
|
|
Stockholders deficit: |
|
|
Common stock, no par value, 1,000 shares
authorized, 100 shares issued and outstanding |
|
1,000 |
|
Due from shareholders |
|
(1,000 |
) |
Deficit accumulated during the development
stage |
|
(41,019 |
) |
|
|
|
|
Total stockholders deficit |
|
(41,019 |
) |
|
|
|
|
Total liabilities and stockholders
deficit |
|
$ 160 |
|
|
|
|
|
See
accompanying notes to financial statements.
EFILTRATION.COM, INC.
(a
development stage enterprise)
Period
from September 7, 1999 (inception) through December 31,
1999
Revenues |
|
$
|
|
Selling, general and administrative expenses |
|
41,019 |
|
|
|
|
|
Net loss |
|
$(41,019 |
) |
|
|
|
|
See
accompanying notes to financial statements.
EFILTRATION.COM, INC.
(a
development stage enterprise)
STATEMENT OF STOCKHOLDERS DEFICIT
Period
from September 7, 1999 (inception) through December 31,
1999
|
|
Common stock
|
|
Due
from
shareholders
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
stockholders
deficit
|
|
|
Shares
|
|
Amount
|
Balance
at September 7, 1999 (inception) |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Issuance of common stock in formation of the
Company |
|
100 |
|
1,000 |
|
(1,000 |
) |
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
(41,019 |
) |
|
(41,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
100 |
|
$1,000 |
|
(1,000 |
) |
|
(41,019 |
) |
|
(41,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
EFILTRATION.COM, INC.
(a
development stage enterprise)
Period
from September 7, 1999 (inception) through December 31,
1999
Cash
flows from operating activities: |
|
|
Net loss |
|
$(41,019 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
Changes in assets and
liabilities: |
|
|
|
Prepaid expenses |
|
(160 |
) |
Accounts payable and accrued
expenses |
|
41,179 |
|
|
|
|
|
Net cash used in operating
activities |
|
|
|
|
|
|
|
Net increase in cash |
|
|
|
|
|
|
|
Cash at
beginning of period |
|
|
|
|
|
|
|
Cash at
end of period |
|
$
|
|
|
|
|
|
Supplemental disclosure of noncash financing
activitiesissuance of common stock for amounts
due
from shareholders |
|
$ 1,000 |
|
|
|
|
|
See
accompanying notes to financial statements.
EFILTRATION.COM, INC.
(a
development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1)
Nature of the Business
eFiltration.com, Inc. (the Company) was incorporated
as a Subchapter C corporation on September 7, 1999 as a spin-out
of Filtration GroupFluid Systems (Affiliate). Filtration
GroupFluid Systems originally served as a distributor of
heating, ventilation and air conditioning (HVAC) filters
throughout the Midwest, and has since expanded into
manufacturing filter products. eFiltration.com, Inc. is focused
on business-to-business (B2B) e-commerce in the filtration
industry. Its customers are consumers of filtration products and
other vertical sites that pay the Company to manage the
filtration component of their B2B marketplace. The
Companys website, www.efiltration.com, provides
information on the Company and the services it
performs.
Since inception, the Company has devoted
substantially all of its efforts to activities such as financial
planning, raising capital, and website development. 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.
The Company has incurred a loss since
inception. Should the Company be unable to generate
revenue and realize cash flows from operations in the near term,
the Company may require additional equity or debt financing to
meet working capital needs and to fund operating losses.
Although management believes the Company could obtain such
financing, there can be no assurances that such financing will
be available in the future at terms acceptable to the
Company.
eFiltration.com, Inc. is subject to risks and
uncertainties common to growing technology-based companies,
including technological change, growth and commercial acceptance
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
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
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
|
(b)
Website Development and Advertising
Costs
|
The Company has adopted the provisions of Statement
of Position (SOP) 93-7, Reporting on Advertising Costs
and SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.
Accordingly, costs related to media development and other
website content are expensed as incurred. Costs qualifying for
capitalization are initially capitalized and amortized over the
useful life of the asset. For the period from September 7, 1999
(inception) through December 31, 1999, the Company incurred and
expensed website development costs of $20,164. Costs initially
capitalized under SOP 98-1 have subsequently been expensed as
the useful life of the initial costs of the website has expired
given the substantial modifications being made to the
site.
For the period from September 7, 1999 (inception)
through December 31, 1999, the Company incurred and expensed
$4,936 in advertising costs.
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.
(3)
Income Taxes
The provision for income taxes differs from the
amounts which would result by applying the applicable Federal
income tax rate of 34% to loss before provision for income taxes
for the period from September 7, 1999 (inception) to December
31, 1999 as follows:
|
|
|
Expected income tax benefit from continuing
operations |
|
$(13,946 |
) |
State
income tax benefit, net of Federal taxes |
|
(2,461 |
) |
Permanent differences |
|
55 |
|
Effect
of change in valuation allowance |
|
16,352 |
|
|
|
|
|
|
|
$
|
|
|
|
|
|
Temporary differences giving rise to significant
portions of the deferred tax assets and liabilities at December
31, 1999 are as follows:
Deferred tax assets: |
|
|
|
Start-up costs |
|
$ 14,378 |
|
Net operating loss carryforward |
|
1,974 |
|
|
|
|
|
Total gross deferred tax assets |
|
16,352 |
|
Valuation allowance |
|
(16,352 |
) |
|
|
|
|
Net deferred taxes |
|
$
|
|
|
|
|
|
The Company incurred a net operating loss from
September 7, 1999 (inception) through December 31, 1999, which
can potentially be carried forward twenty years and will expire
in 2019.
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.
(4)
Related Party Transactions
The Affiliate of the Company under common control
has funded the operations of the Company. One shareholder owning
50% of the Company also owns approximately 56% of the Affiliate.
Total amounts payable at December 31, 1999 to the Affiliate is
$37,670.
Included in the amount due to Affiliate is $4,000
for corporate allocation. The corporate allocation is for
accounting salaries, administration expense, rent, and shared
office equipment.
(5)
Commitments and Contingencies
On November 24, 1999, the Company entered into an
advertising agreement that provides for the Company to make
payments during 2000 totaling $36,000.
EFILTRATION.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
(6)
Subsequent Events
On February 2, 2000, the Company reincorporated in
the State of Delaware. In conjunction with the reincorporation,
authorized capital stock consisted of 9,307,692 shares of Common
Stock, $.001 par value, all of which is issued and
outstanding.
On February 10, 2000, the Company amended and
restated its certificate of incorporation thereby authorizing
34,158,163 shares of $.001 par value Class A common stock,
21,442,308 shares of $.001 par value Class B common stock,
21,442,308 shares of $.001 par value Series A-1 preferred stock,
and 21,442,308 shares of $.001 par value Series A-2 preferred
stock. Upon liquidation, each holder of Series A-1 and Series
A-2 preferred shares (collectively, Series A preferred
shares) shall be entitled to receive an amount equal to
the greater of (i) $1.30, subject to adjustment in the event
such shares are subdivided through a stock split, stock
dividend, or otherwise (the Series A liquidation
value), plus all accrued and unpaid dividends, and (ii)
the amount such holder would receive if all holders of Series A
preferred shares had converted their Series A preferred shares
into common stock immediately prior to liquidation.
Upon liquidation, and after payment of preferential
amounts to holders of Series A preferred shares, the remaining
assets of the Company shall be distributed to the holders of
common shares. The Company shall pay preferential dividends to
the holders of Series A preferred shares, when and if declared
by the board of directors, at an annual rate of 8% of the sum of
the Series A liquidation value plus all accrued and unpaid
dividends. In the event any dividend or other distribution
payable in cash, stock, or other property is declared on the
common stock, each holder of Series A preferred shares on the
record date for such dividend or distribution shall be entitled
to receive the same cash, stock or other property which such
holder would have received if on such record date such holder
was the holder of record of the number of common shares into
which such Series A preferred shares then held by such holder
are then convertible.
Series A-1 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class A common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-1
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price ($1.30 initially, subject to adjustment upon
certain dilutive events), plus (y) the number of shares
determined by dividing the total amount of accrued and unpaid
dividends with respect to each Series A-1 preferred share to be
converted by the Series A conversion price. If the holders of
more than a majority of the Series A-1 preferred shares then
outstanding shall so elect, by vote or written consent, all of
the outstanding Series A-1 preferred shares shall automatically
convert into shares of Class A common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class B common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-2
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price, plus (y) the number of shares determined by
dividing the total amount of accrued and unpaid dividends with
respect to each Series A-2 preferred share to be converted by
the Series A conversion price. If the holders of more than a
majority of the Series A-2 preferred shares then outstanding
shall so elect, by vote or written consent, all of the
outstanding Series A-2 preferred shares shall automatically
convert into shares of Series A-1 preferred stock or Class B
common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into an equal number of
shares of Series A-1 preferred stock. Each Series A-2 preferred
share shall automatically convert
into one Series A-1 preferred share if the aggregate number of
Series A-2 preferred shares and Class B common shares then
outstanding is less than five percent of the aggregate number of
common shares outstanding, assuming conversion or exercise of
all outstanding convertible securities and options.
Class B common shares may be converted at any time,
at the election of the holder, into an equal number of Class A
common shares. Each Class B common share shall automatically
convert into one Class A common share if the aggregate number of
Series A-2 preferred shares and Class B common shares then
outstanding is less than five percent of the aggregate number of
common shares then outstanding, assuming conversion or exercise
of all outstanding convertible securities and
options.
If a firm commitment underwritten public offering of
shares of common stock is effected in which (a) the aggregate
price paid by the public for the shares is at least $20,000,000
and (b) the price per share paid by the public for such shares
is at least 300% of the Series A conversion price in effect
immediately prior to such offering, then all of the outstanding
Series A preferred shares shall be automatically converted into
shares of common stock upon the closing of the public
offering.
The Series A preferred shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of two-thirds of the
Series A preferred shares then outstanding may require the
Company to redeem all the Series A preferred shares then
outstanding at the Series A redemption price. The Series A
redemption price per share equals the greater of (i) the Series
A liquidation value plus all accrued but unpaid dividends on
such Series A preferred share through the applicable redemption
date and (ii) the amount which would be received by a holder of
such Series A preferred share upon liquidation based on fair
market value of the Company as of the redemption
date.
At any time or times on or after the fifth
anniversary of issuance, the holder or holders of two-thirds of
the outstanding Series A preferred shares may elect to require
the Company to redeem all or any portion of such holders
Series A preferred shares.
Holders of Class A common stock, Class B common
stock, Series A-1 preferred stock, and Series A-2 preferred
stock vote together as a single class on all matters submitted
to a vote before the stockholders of the Company. Holders of
Class A and Class B common stock are entitled to one vote per
share. Holders of Series A-1 preferred stock are entitled to the
number of votes of Class A common shares such holders would have
been entitled to had they converted all of their Series A-1
preferred shares to Class A common shares. Holders of Series A-2
preferred stock are entitled to the number of votes of Class B
common shares such holders would have been entitled to had they
converted all of their Series A-2 preferred shares to Class B
common shares.
Provided that holders of Class B common stock
outstanding and issuable upon conversion of Series A-2 preferred
stock own at least 5% of the Companys Class A common stock
and Class B common stock and assuming conversion of all
securities convertible into such shares, (i) such holders shall
have the number of votes equal to the greater of (a) the voting
rights determined in accordance with the preceding paragraph,
and (b) 25.1% of the voting power of the Company, and (ii) the
voting rights of any person or group other than holders of Class
B common shares and Series A-2 preferred shares shall be limited
to the number of votes equal to the lesser of (x) such
holders voting rights in accordance with the preceding
paragraph, and (y) 25% of the voting power of the
Company.
On February 11, 2000 (closing date), the Company
entered into a Series A Preferred Stock Purchase Agreement (the
Agreement) with a third party. Under the terms of the Agreement,
the third party received 7,692,308 shares of Series A-2
preferred stock from the Company for $5,000,000 in cash and a
secured promissory note in the amount of $5,000,000. The third
party is obligated to purchase additional shares of Series A-2
preferred stock for $11,000,000 if the Company has a minimum of
$2,000,000 in revenues for the 12-month period ending on the
last day of the fifteenth month after the closing
date.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the
Board of Directors of
i-Fulfillment, Inc.:
We have audited the accompanying balance sheet of
I-FULFILLMENT, INC. (an Illinois corporation in the
development stage) as of June 30, 1999, and the related
statements of operations, shareholders (deficit) equity
and cash flows for the period from October 6, 1998 (inception),
through June 30, 1999. These financial statements are the
responsibility of the Companys 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 i-Fulfillment, Inc. as of June 30, 1999, and the
results of its operations and its cash flows for the period from
October 6, 1998 (inception), through June 30, 1999, in
conformity with generally accepted accounting
principles.
Chicago,
Illinois
February
8, 2000
I-FULFILLMENT, INC.
(a
development stage company)
As of
June 30, 1999 and December 31, 1999 (Unaudited)
Assets |
|
June 30,
1999
|
|
December 31,
1999
|
|
|
|
|
(Unaudited) |
Current
Assets: |
|
|
|
|
|
|
Cash |
|
$ |
|
|
$ 1,000 |
|
Intangible Asset |
|
|
|
|
6,207 |
|
|
|
|
|
|
|
|
Total assets |
|
$
|
|
|
$ 7,207 |
|
|
|
|
|
|
|
|
Liabilities and Shareholders (Deficit)
Equity |
|
|
|
|
Current
Liabilities: |
|
|
|
|
|
|
Accrued expenses |
|
$ 1,000 |
|
|
$ 4,000 |
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
Shareholders (Deficit) Equity: |
|
|
|
|
|
|
Common stock, $0.01 par value; 10,000,000 shares
authorized; 100 shares and
5,000,000 issued and
outstanding as of June 30, 1999, and December 31, 1999,
respectively |
|
1 |
|
|
50,000 |
|
Additional paid-in capital |
|
13,138 |
|
|
|
|
Deficit accumulated during the development
stage |
|
(14,139 |
) |
|
(46,793 |
) |
|
|
|
|
|
|
|
Total shareholders (deficit)
equity |
|
(1,000 |
) |
|
3,207 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity |
|
$
|
|
|
$ 7,207 |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these balance
sheets.
I-FULFILLMENT, INC.
(a
development stage company)
Period
from October 6, 1998 (Inception), Through
June
30, 1999, Six Months Ended
December 31, 1999 (Unaudited),
and
Period from October 6, 1998 (Inception),
Through December 31, 1999 (Unaudited)
|
|
Period
From
October 6,
1998
(Inception),
Through
June 30,
1999
|
|
Six
Months
Ended
December 31,
1999
|
|
Period From
October 6,
1998
(Inception),
Through
December 31,
1999
|
|
|
|
|
(Unaudited) |
|
(Unaudited) |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
$(14,139 |
) |
|
$(32,654 |
) |
|
$(46,793 |
) |
|
|
|
|
|
|
|
|
|
|
Net
Loss |
|
$(14,139 |
) |
|
$(32,654 |
) |
|
$(46,793 |
) |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
I-FULFILLMENT, INC.
(a
development stage company)
STATEMENTS OF SHAREHOLDERS (DEFICIT) EQUITY
Period
from October 6, 1998 (Inception), Through
June
30, 1999, and Six Months Ended
December 31, 1999 (Unaudited)
|
|
Common Stock,
Par Value $.01,
10,000,000 Shares
Authorized
|
|
Additional
Paid-in
Capital
|
|
Deficit
Accumulated
During the
Development
Stage
|
|
Total
|
|
|
Shares
|
|
Amount
|
Balance, October 6, 1998 (inception) |
|
|
|
|
$ |
|
|
$
|
|
|
$ |
|
|
$
|
|
Issuance of common stock |
|
100 |
|
|
1 |
|
|
|
|
|
|
|
|
1 |
|
Operating costs funded by shareholder |
|
|
|
|
|
|
|
13,138 |
|
|
|
|
|
13,138 |
|
Net loss for the period |
|
|
|
|
|
|
|
|
|
|
(14,139 |
) |
|
(14,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 1999 |
|
100 |
|
|
1 |
|
|
13,138 |
|
|
(14,139 |
) |
|
(1,000 |
) |
Cancellation of common stock
(unaudited) |
|
(100 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
(1 |
) |
Issuance of common stock (unaudited) |
|
1,100,000 |
|
|
11,000 |
|
|
|
|
|
|
|
|
11,000 |
|
Issuance of common stock in exchange for
operating costs funded by
shareholder
(unaudited) |
|
3,900,000 |
|
|
39,000 |
|
|
(13,138 |
) |
|
|
|
|
25,862 |
|
Net loss for the period (unaudited) |
|
|
|
|
|
|
|
|
|
|
(32,654 |
) |
|
(32,654 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 1999
(unaudited) |
|
5,000,000 |
|
|
$50,000 |
|
|
$ |
|
|
$(46,793 |
) |
|
$ 3,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
I-FULFILLMENT, INC.
(a
development stage company)
Period
from October 6, 1998 (Inception), Through
June 30, 1999, Six Months Ended December 31, 1999 (Unaudited),
and Period from October 6, 1998 (Inception), Through
December 31, 1999 (Unaudited)
|
|
Period From
October 6, 1998
(Inception),
Through
June 30, 1999
|
|
Six
Months Ended
December 31,
1999
|
|
Period From
October 6, 1998
(Inception),
Through
December 31, 1999
|
|
|
|
|
(Unaudited) |
|
(Unaudited) |
Cash
Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$(14,139 |
) |
|
$(32,654 |
) |
|
$(46,793 |
) |
Adjustments to reconcile net loss to net cash used
in
operating
activities |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
1,000 |
|
|
3,000 |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities |
|
(13,139 |
) |
|
(29,654 |
) |
|
(42,793 |
) |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
Payment for patent |
|
|
|
|
(6,207 |
) |
|
(6,207 |
) |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
1 |
|
|
11,000 |
|
|
11,001 |
|
Operating costs funded by shareholder |
|
13,138 |
|
|
25,861 |
|
|
38,999 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities |
|
13,139 |
|
|
36,861 |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in cash |
|
|
|
|
1,000 |
|
|
1,000 |
|
Cash,
beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period |
|
$
|
|
|
$ 1,000 |
|
|
$ 1,000 |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
I-FULFILLMENT, INC.
(a
development stage company)
NOTES TO FINANCIAL STATEMENTS
1.
Description of Business
i-Fulfillment, Inc. (the Company) is a
development stage company that plans to provide standardized
turnkey fulfillment and inventory management services to
e-businesses selling products over the Internet. The Company
will provide this service by tightly integrating its supply
chain systems to Web-store platforms and operating highly
automated fulfillment centers from which clients inventory
will be shipped. The Companys operating strategy is to
improve the quality of the shopping experience over the Internet
through real-time inventory acknowledgement, shipment cost
calculation and visibility to order status. The Companys
goal is to allow e-businesses to go to market quickly without
undertaking proprietary systems integration and infrastructure
development. The Company plans to derive revenues primarily
through activity and resource-based fees. The Company is
headquartered in Chicago, Illinois.
2.
Risks and Uncertainties
The Company has incurred losses since inception and
expects to continue to incur substantial losses. The net loss
was $14,139 and $32,654 (unaudited) for the period ended June
30, 1999, and for the six months ended December 31, 1999,
respectively. The Company expects to continue to incur
significant expenses related to marketplace development,
technology, sales and marketing and administration. Significant
revenue will need to be generated to achieve and maintain
profitability. There can be no assurance that the Company will
be able to generate sufficient revenues to achieve or sustain
profitability in the future. If profitability is reached, the
Company may not be able to sustain or increase profitability. As
further discussed in Note 7, on January 28, 2000, the Company
entered into a Series A Preferred Stock Purchase Agreement
(Preferred Stock Agreement), pursuant to which the
Company sold 5,250,000 shares of Series A preferred stock for
$10,500,000. However, $9,000,000 of this $10,500,000 funding is
contingent upon the Company and its founder meeting certain
requirements by February 15 and March 15, 2000. Accordingly,
development of the operations is dependent upon the completion
of these requirements. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
3.
Summary of Significant Accounting Policies and
Practices
|
Interim Financial Statements
(Unaudited)
|
In the opinion of the Companys management, the
December 31, 1999, unaudited interim financial statements
include all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of such financial
statements. The results of operations for the six months ended
December 31, 1999, are not necessarily indicative of the results
to be expected for the entire year.
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.
In accordance with Statement of Position No. 98-5,
Reporting on the Costs of Start-up Activities, the
Company has expensed all start-up costs, including organization
costs, as incurred.
i-FULFILLMENT, INC.
(a
development stage company)
NOTES
TO FINANCIAL STATEMENTS(Continued)
The intangible asset, primarily the cost of
obtaining patents, is stated at cost and will be amortized using
the straight-line method over the estimated economic useful life
of 10 years.
The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income
Taxes. Under the asset and liability method of SFAS No.
109, 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. A valuation
allowance has been provided to offset deferred tax assets, which
consists primarily of net operating losses. As of June 30, 1999,
and December 31, 1999, the deferred tax asset and offsetting
valuation allowance amounted to approximately $5,800 and $19,000
(unaudited), respectively. The Company has net operating losses
for both federal and state tax purposes of approximately $14,000
and $47,000 (unaudited) as of June 30,1999, and December 31,
1999, respectively, which begin to expire in the year 2019. The
net operating losses can be carried forward to offset future
taxable income. Utilization of the above carryforwards may be
subject to the utilization limits, which may inhibit the
Companys ability to use carryforwards in the
future.
4.
Related Party
The Company made rental payments of approximately
$2,700 and $1,800 (unaudited), to a shareholder from October 6,
1998, through June 30, 1999, and for the six months ended
December 31, 1999, respectively.
5.
Commitments and Contingencies
The Company has a one-year employment agreement with
an employee that is effective if $3 million of funding is
obtained before June 30, 2000.
6.
Shareholders (Deficit) Equity
On March 16, 1999, the Company issued 100 shares of
$.01 par value common stock to its founder for $.01 per share.
Subsequent to year-end, these shares were cancelled and
additional shares were issued to the founder as is described in
Note 7.
7.
Subsequent EventsCapital Structure
On July 1, 1999, the Company cancelled the 100
shares of common stock outstanding and issued 5,000,000 shares
of common stock including 3,900,000 shares issued to the founder
and his descendants for $.01 per share. Further, on July 1,
1999, the Company and the shareholders entered into a
Shareholder Agreement which states that (a) shareholders cannot
own, operate or become interested in any business similar to the
Company, (b) transfer of shares is restricted and (c) in the
event of death or divorce, the Company and then the other
shareholders have the right of first refusal to purchase the
stock. This Shareholder Agreement was cancelled in connection
with the Preferred Stock Agreement described below.
i-FULFILLMENT, INC.
(a
development stage company)
NOTES
TO FINANCIAL STATEMENTS(Continued)
On January 27, 2000, the Company reincorporated in
Delaware. In connection with the reincorporation, the Company
increased its authorized capital stock to 5,250,000 shares of
$.001 par value Series A-1 preferred stock, 5,000,000 shares of
$.001 par value Series A-2 preferred stock, 20,000,000 shares of
$.001 par value Class A common stock and 5,000,000 shares of
$.001 par value Class B common stock. Accordingly, all existing
shares of common stock were reclassified to shares of $.001 par
value Class A common stock.
On January 28, 2000, the Company entered into a
Series A Preferred Stock Purchase Agreement. Under the terms of
the Preferred Stock Agreement, the Company issued 5,000,000
shares of Series A-2 preferred stock and 250,000 shares of
Series A-1 preferred stock for $2.00 per share. In consideration
for the Series A preferred stock, the Company received
$1,500,000 and a $9,000,000 promissory note secured by 4,500,000
shares of Series A-2 preferred stock. The promissory note is
void if certain requirements are not achieved at February 15 and
March 15, 2000. If these requirements are met, the note is
payable as follows: $1,000,000 on February 15, 2000, $3,000,000
on March 15, 2000, and $5,000,000 on May 1, 2000. If the
requirements are not met by March 15, 2000, the Series A-2
preferred stockholder has the right to require the Company to
repurchase its one million unsecured preferred shares for $2.4
million and the Series A-2 preferred stockholder forfeits the
remaining 4 million unsecured shares. The February 15,
requirement was met on February 8, 2000.
In connection with the Preferred Stock Agreement,
the Company entered into a Stockholders Agreement on
January 28, 2000. The Stockholders Agreement provides that
in the event a stockholder desires to sell stock, the Company
and then certain stockholders have the right of first
refusal.
The Series A preferred stockholders are entitled to
liquidation rights and dividends that accrue at 8% per annum.
Preferred stockholders can convert their shares into common
stock. The number of shares of common stock into which it is
convertible is determined by adding (a) the result of
multiplying the number of shares of stock to be converted by
$2.00 and dividing that product by the Series A conversion
price, as defined, plus (b) the number of shares determined by
dividing the accrued and unpaid dividends by the Series A
conversion price. In the event of an approved sale of the
Company or a qualified public offering, as defined, the Series A
preferred stock automatically converts to common stock and all
accrued dividends are cancelled upon closing. Upon a fundamental
change or change in ownership, as defined, the Series A
preferred stockholders have the right to require the Company to
redeem their stock at the Series A redemption price, as defined.
Each holder of common stock is entitled to one vote per share
outstanding. Each holder of preferred stock has votes equal to
the number of shares of common stock into which the preferred
stock is convertible.
In conjunction with the Preferred Stock Agreement,
two employees, one of which is the founder, who collectively own
3.9 million shares of Class A common stock signed Restricted
Common Stock Agreements (Restricted Stock
Agreements). The Restricted Stock Agreements provide for a
ratable 30-month vesting period, with certain restrictions
placed upon unvested shares. However, in the event of a
qualified public offering, approved sale of the Company, death
or disability of the employee or termination without cause, all
restricted shares vest immediately. In the event an employee
under the Restricted Stock Agreements is terminated for cause or
voluntarily resigns, the Company and then the other stockholders
have the right to repurchase all restricted shares at $0.01 per
share and all unrestricted shares at fair market value, as
defined.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
iGive.com, inc.:
We have audited the accompanying balance sheets of
iGive.com, inc. (the Company) as of December 31, 1998 and 1999,
and the related statements of operations and cash flows for the
years then ended. We have also audited the statement of
unitholders deficit for the year ended December 31, 1998
and the statement of stockholders deficit for the year
ended December 31, 1999. These financial statements are the
responsibility of the Companys 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 iGive.com, inc. as of December 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.
Chicago,
Illinois
February
25, 2000
IGIVE.COM, INC.
December 31, 1998 and 1999
|
|
December 31,
|
Assets |
|
1998
|
|
1999
|
Current
assets: |
|
|
|
|
|
|
Cash |
|
$ 7,337 |
|
|
|
|
Trade accounts receivable, net of allowance of $0
and $6,810 at December 31,
1998 and 1999,
respectively |
|
11,539 |
|
|
99,537 |
|
Prepaid expenses and other current
assets |
|
60,470 |
|
|
38,347 |
|
|
|
|
|
|
|
|
Total current assets |
|
79,346 |
|
|
137,884 |
|
|
|
|
|
|
|
|
Computer equipment, at cost |
|
39,927 |
|
|
129,581 |
|
Less
accumulated depreciation |
|
(11,818 |
) |
|
(40,063 |
) |
|
|
|
|
|
|
|
Computer equipment, net |
|
28,109 |
|
|
89,518 |
|
Other
assets |
|
|
|
|
16,512 |
|
|
|
|
|
|
|
|
|
|
$ 107,455 |
|
|
243,914 |
|
|
|
|
|
|
|
|
Liabilities and Unitholders and
Stockholders Deficit |
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Bank overdraft |
|
$
|
|
|
153,407 |
|
Line of credit |
|
|
|
|
100,000 |
|
Accounts payable and accrued expenses |
|
256,371 |
|
|
196,679 |
|
Member designated contributions payable |
|
112,400 |
|
|
4,301 |
|
Convertible notes and accrued interest |
|
400,000 |
|
|
1,346,097 |
|
Convertible notes held by shareholders and accrued
interest |
|
|
|
|
152,547 |
|
Due to officer |
|
118,254 |
|
|
100,210 |
|
Deposits on Series A preferred stock |
|
33,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
920,025 |
|
|
2,053,241 |
|
Line of
credit |
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
1,020,025 |
|
|
2,053,241 |
|
|
|
|
|
|
|
|
Unitholders and stockholders
deficit: |
|
|
|
|
|
|
Class A membership units: 4,286,781 units issued
and outstanding in 1998 |
|
741,185 |
|
|
|
|
Common membership units: 20,856,026 units issued
and outstanding in 1998 |
|
55,000 |
|
|
|
|
Series A preferred stock, $0.0001 par: 25,421,284
shares authorized;
18,033,498 shares issued
and outstanding in 1999 |
|
|
|
|
1,803 |
|
Common stock, $0.0001 par: 60,000,000 shares
authorized; 20,856,026 shares
issued and outstanding in
1999 |
|
|
|
|
2,086 |
|
Additional paid-in capital |
|
|
|
|
977,804 |
|
Accumulated deficit |
|
(1,708,755 |
) |
|
(2,791,020 |
) |
|
|
|
|
|
|
|
Total unitholders and
stockholders deficit |
|
(912,570 |
) |
|
(1,809,327 |
) |
|
|
|
|
|
|
|
Total liabilities and unitholders and
stockholders deficit |
|
$ 107,455 |
|
|
243,914 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
IGIVE.COM, INC.
Years
ended December 31, 1998 and 1999
|
|
Years ended December 31,
|
|
|
1998
|
|
1999
|
Net
revenue |
|
$ 18,321 |
|
|
182,533 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Sales and marketing |
|
283,308 |
|
|
503,522 |
|
Member designated contributions |
|
158,297 |
|
|
325,201 |
|
Employee compensation |
|
480,205 |
|
|
826,932 |
|
Website development and maintenance |
|
251,710 |
|
|
75,590 |
|
General and administrative |
|
212,834 |
|
|
270,495 |
|
|
|
|
|
|
|
|
Total operating
expenses |
|
1,386,354 |
|
|
2,001,740 |
|
|
|
|
|
|
|
|
Loss from operations |
|
(1,368,033 |
) |
|
(1,819,207 |
) |
Interest expense, net |
|
5,449 |
|
|
56,406 |
|
|
|
|
|
|
|
|
Net loss |
|
$(1,373,482 |
) |
|
(1,875,613 |
) |
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
IGIVE.COM, INC.
STATEMENT OF UNITHOLDERS DEFICIT FOR THE YEAR ENDED DECEMBER
31, 1998
STATEMENT OF STOCKHOLDERS DEFICIT FOR THE YEAR
ENDED DECEMBER 31, 1999
|
|
Class A
membership
units
(# of units)
|
|
Common
membership
units
(# of units)
|
|
Series A
preferred
stock
(# of shares)
|
|
Common
stock
(# of shares)
|
|
Class A
membership
units
|
|
Common
membership
units
|
|
Series A
preferred
stock,
$0.0001
par value
|
|
Common
stock,
$0.0001
par value
|
|
Additional
paid-in
capital
|
|
Accumulated
deficit
|
|
Total
|
Balance
at December
31, 1997 |
|
|
|
|
20,490,951 |
|
|
|
|
|
|
$
|
|
|
20,000 |
|
|
|
|
|
|
|
|
(335,273 |
) |
|
(315,273 |
) |
Issuance of
membership units |
|
4,286,781 |
|
|
365,075 |
|
|
|
|
|
|
741,185 |
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
776,185 |
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,373,482 |
) |
|
(1,373,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December
31, 1998 |
|
4,286,781 |
|
|
20,856,026 |
|
|
|
|
|
|
741,185 |
|
|
55,000 |
|
|
|
|
|
|
|
|
(1,708,755 |
) |
|
(912,570 |
) |
Exchange of
membership units for
stock |
|
(4,286,781 |
) |
|
(20,856,026 |
) |
|
7,512,515 |
|
20,856,026 |
|
(741,185 |
) |
|
(55,000 |
) |
|
751 |
|
2,086 |
|
|
|
793,348 |
|
|
|
|
Issuance of stock |
|
|
|
|
|
|
|
10,520,983 |
|
|
|
|
|
|
|
|
|
1,052 |
|
|
|
977,804 |
|
|
|
|
978,856 |
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,875,613 |
) |
|
(1,875,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December
31, 1999 |
|
|
|
|
|
|
|
18,033,498 |
|
20,856,026 |
|
$
|
|
|
|
|
|
1,803 |
|
2,086 |
|
977,804 |
|
(2,791,020 |
) |
|
(1,809,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
IGIVE.COM, INC.
Years
ended December 31, 1998 and 1999
|
|
Year
ended December 31,
|
|
|
1998
|
|
1999
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$(1,373,482 |
) |
|
(1,875,613 |
) |
Adjustments to reconcile net loss to net cash
used in operating activities |
|
|
|
|
|
|
Depreciation |
|
9,236 |
|
|
28,245 |
|
Noncash expenses |
|
80,000 |
|
|
|
|
Change in assets and liabilities: |
|
|
|
|
|
|
Trade accounts receivable,
net |
|
(11,539 |
) |
|
(87,998 |
) |
Prepaid expenses and other current
assets |
|
(60,470 |
) |
|
22,123 |
|
Other assets |
|
|
|
|
(16,512 |
) |
Accounts payable and accrued
expenses |
|
246,361 |
|
|
(59,692 |
) |
Member designated contributions
payable |
|
110,195 |
|
|
(108,099 |
) |
|
|
|
|
|
|
|
Net cash used
in operating activities |
|
(999,699 |
) |
|
(2,097,546 |
) |
|
|
|
|
|
|
|
Cash
flows from investing activitiescapital
expenditures |
|
(24,437 |
) |
|
(89,654 |
) |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
Net increase in bank overdraft |
|
|
|
|
153,407 |
|
Net borrowings on line of credit |
|
75,000 |
|
|
|
|
Net repayments of loans from officer |
|
(77,328 |
) |
|
(18,044 |
) |
Proceeds from issuance of convertible
notes |
|
400,000 |
|
|
1,498,644 |
|
Deposit on Series A preferred stock |
|
3,000 |
|
|
|
|
Proceeds from issuance of Class A membership
units |
|
626,185 |
|
|
|
|
Proceeds from issuance of Series A preferred
stock |
|
|
|
|
545,856 |
|
|
|
|
|
|
|
|
Net cash provided
by financing activities |
|
1,026,857 |
|
|
2,179,863 |
|
|
|
|
|
|
|
|
Net increase (decrease) in
cash |
|
2,721 |
|
|
(7,337 |
) |
Cash at
beginning of year |
|
4,616 |
|
|
7,337 |
|
|
|
|
|
|
|
|
Cash at
end of year |
|
$
7,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
informationinterest paid |
|
$
3,804 |
|
|
8,225 |
|
Supplemental disclosure of noncash financing
activities: |
|
|
|
|
|
|
Common membership units issued in exchange for
professional services |
|
$ 35,000 |
|
|
|
|
Class A membership units issued in exchange for
professional services |
|
15,000 |
|
|
|
|
Deposit on Series A preferred stock provided in
exchange
for professional
services |
|
30,000 |
|
|
|
|
Satisfaction of shareholder loans through issuance
of Class A
membership units |
|
100,000 |
|
|
|
|
Exchange of convertible notes for Series A
preferred stock |
|
|
|
|
400,000 |
|
See
accompanying notes to financial statements.
IGIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(1)
Description of the Business and Basis of
Presentation
iGive.com, inc. (the Company) is an Internet-based
business that enables consumers to assist their favorite
personal causes by making retail purchases from over 190
merchant websites accessed through the Companys website
(iGive Mall). The Companys website provides information on
the Company and the mechanisms that enable consumers to assist
their favorite personal causes
(http://www.igive.com).
The Company was originally established as a limited
liability company in 1995 under the name Intercast L.L.C.
Intercast created content and infrastructure for handheld
wireless devices. In 1996, Intercast sold its net assets to a
chip manufacturer and changed its name to Eyegive, L.L.C. On
January 15, 1999, Eyegive, L.L.C. changed its name to iGive.com,
inc. and changed its legal structure to a C-corporation. In
conjunction with the change in legal structure, all outstanding
Eyegive, L.L.C. common membership units were exchanged for an
equal number of iGive.com, Inc. common shares and each Eyegive,
L.L.C. Class A membership unit was exchanged for 1.752484 shares
of iGive.com, inc. Series A preferred stock.
(2)
|
Summary of Significant Accounting
Policies
|
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.
Under the terms of revenue sharing agreements
between the Company and the merchants on the iGive Mall, the
Company earns commissions based upon a percentage of sales
generated from the merchants link on the Companys
website. The Company recognizes commission revenue, net of
estimated sales returns, at the time a purchase is made from a
merchants website through a link from iGive Mall.
Commission agreements are terminable at anytime by either the
Company or the merchants.
The Company earns revenue from advertisers each time
an iGive.com member clicks on advertisement banners displayed on
the Companys website, up to certain daily limits. The
Company recognizes this advertising revenue at the time an
iGive.com member clicks on the advertisement banner. Advertising
agreements are terminable at anytime by either the Company or
the advertisers.
|
(c)
Member Designated Charitable Contributions
|
The Company incurs unconditional obligations to make
payments to qualified not-for-profit organizations designated by
its iGive members upon the occurrence of certain website
accessing activities by those members. The Company also makes
payments to member designated not-for-profit organizations or
individuals when commission revenues are earned through merchant
sales to iGive members. These expenses are recorded as
incurred.
Computer equipment is stated at cost. Depreciation
is provided over the three-year estimated useful lives of the
assets using the straight-line 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 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.
Prior to changing its legal form to a C-corporation
on January 15, 1999, the Company operated as a limited liability
company, whereby all income, deductions, and credits were passed
through to the Companys unitholders for income tax
purposes.
The Companys website costs consist of the
costs to develop features which enable users to perform
functions on-line, hosting costs, and costs to develop and
maintain content and graphics. The Company has adopted the
provisions of Statement of Position (SOP) 93-7, Reporting on
Advertising Costs and SOP 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use
in accounting for development costs. Accordingly, costs
related to media development and other website content are
expensed as incurred. Certain qualifying costs are capitalized
and amortized over the estimated useful life of the asset. The
Company has expensed all development costs incurred during 1998
and 1999 due to the short estimated life of these costs as a
result of the frequent replacement of substantially all of the
websites programmed features. Website hosting costs are
expensed as incurred.
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123)
defines a fair value based method of accounting for an employee
stock option or similar equity instrument. SFAS 123 gives
entities a choice of recognizing related compensation expense by
adopting the fair value method or to continue to measure
compensation using the intrinsic value approach under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25). The Company applies the measurement
criteria prescribed by APB 25 and provides the pro forma
disclosures required by SFAS 123.
The Company defers the costs of equity offerings and
applies them to the proceeds received. In 1998, $52,970 of
professional fees were incurred relating to the January 1999
private placement. In 1999, $1,017 of professional fees were
incurred relating to the February 2000 private placement. These
costs are reflected within prepaid expenses and other current
assets as of December 31, 1998 and 1999,
respectively.
(3)
Unitholders and Stockholders Deficit
The Company issued 365,075 common membership units
to certain private investors during 1998 in exchange for
professional services rendered. Expense and an equity
contribution of $35,000 was recorded based on the fair value of
the services received.
In conjunction with a 1998 private placement, the
Company issued 4,286,781 Class A membership units for a total
capital contribution of $741,185. These amounts include 578,369
units issued to the Companys president in exchange for a
$100,000 reduction in the Companys loan payable to this
individual, and 86,755 units issued to an investor in exchange
for professional services rendered. Expense and an equity
contribution of $15,000 was recorded based on the fair value of
the services received.
During 1998, the Company received $3,000 cash and
$30,000 worth of professional services as deposits on the future
issuance of 334,483 shares of Series A preferred stock. Such
shares were issued in conjunction with the January 1999 private
placement described below.
IGIVE.COM, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
In conjunction with the January 15, 1999 change in
legal structure of the Company, the 20,856,026 issued and
outstanding common membership units were exchanged for an equal
number of shares of $0.0001 par value common stock, and the
4,286,781 issued and outstanding Class A membership units were
exchanged for 7,512,515 shares of $0.0001 par value Series A
preferred stock. The Amended and Restated Articles of
Incorporation filed upon the Companys incorporation as a
C-corporation on January 15, 1999 authorized the issuance of
60,000,000 shares of common stock and 25,421,284 shares of
preferred stock.
The transfer of assets and liabilities of Eyegive
L.L.C. to the Company upon the change in legal structure have
been recorded at the historical carrying values of Eyegive
L.L.C. Net losses incurred by Eyegive L.L.C. through January 15,
1999 have been applied as a reduction of paid-in capital of the
Company, because such losses are allocable to the unitholders of
Eyegive L.L.C.
The holders of Series A preferred stock are entitled
to receive dividends annually at the rate of $0.008 per share,
when and if declared by the Board of Directors of the Company,
prior to the payment of any dividend on the common stock of the
Company. At any time, each share of Series A preferred stock is
convertible at the option of the holder into such number of
shares of common stock determined by dividing $0.09866 by the
conversion price applicable to such share. The initial
conversion price of Series A preferred stock (the Series A
conversion price) is $0.09866, and it is subject to adjustment
for certain dilutive issuances, stock splits, combinations, and
recapitalizations. In the event of any liquidation or
dissolution of the Company, either voluntary or involuntary, the
holders of Series A preferred stock shall be entitled to
receive, prior and in preference to the distribution of any
assets of the Company to the holders of common stock, an amount
equal to $0.09866 per share, adjusted for any stock split, stock
dividend, combination, or recapitalizations (the Series A
liquidation value) for each share of Series A preferred stock
then held, plus any accrued but unpaid dividends. Upon
completion of this distribution, the remaining assets of the
Company available for distribution to stockholders shall be
distributed among the holders of Series A preferred stock and
common stock pro rata based on the number of shares held by each
(assuming conversion of the Series A preferred stock) until
holders of the Series A preferred stock have received $0.79 per
share. Any remaining assets in the Company shall be distributed
solely to the holders of common stock.
The Company issued 10,216,908 shares of Series A
preferred stock in conjunction with a January 1999 private
placement. The proceeds from this offering included $608,000
cash and the conversion of $400,000 of convertible notes. The
gross proceeds received have been reduced by $59,150 of offering
costs, $52,970 of which were incurred in 1998 and are reflected
as other current assets at December 31, 1998. The January 1999
private placement included the issuance of 30,408 shares for
$3,000 that was received as of December 31, 1998.
No dividends have been declared on the common stock
or Series A preferred stock of the Company.
(4)
Leases
The Company incurred $2,679 of rent expense leasing
home office space from an employee during 1998. The Company
incurred $44,932 of rent expense leasing its office space from a
third party under a month-to-month operating lease through
December 14, 1999. The Company subsequently entered into an
operating lease for office space with future non-cancelable
rental payments of $60,450 and $62,400 in 2000 and 2001,
respectively. The Company incurred $2,500 of rent expense under
this lease for the period from December 15, 1999 through
December 31, 1999.
(5)
Due to Officer
The due to officer balance reflects amounts owed to
the president of the Company for advances provided to fund
operating costs. These advances are non-interest bearing and are
due on demand.
IGIVE.COM, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(6)
Line of Credit
The Company maintains an operating line of credit
with a borrowing limit of $100,000 at December 31, 1998 and
1999. Borrowings under the line of credit accrue interest at the
banks prime rate plus 0.5% (8.25% and 9.0% at December 31,
1998 and 1999, respectively). The Company had $100,000 of
outstanding borrowings under the line of credit as of December
31, 1998 and 1999. The line of credit expires on September 15,
2000 and is personally guaranteed by the president of the
Company.
(7)
Convertible Notes
The Company issued $400,000 of convertible notes to
venture capital investors during 1998 as bridge financing until
permanent financing could be obtained. The notes were
convertible at the option of the holder into such number of
shares of Series A preferred stock determined by dividing (1)
the outstanding principal and accrued interest on the notes,
into (2) the price per share of Series A preferred stock at the
next qualified equity offering. These convertible notes were
converted into 4,054,328 shares of Series A preferred stock in
conjunction with the January 1999 private placement (Note
3).
The Company issued a $47,403 convertible promissory
note to the president of the Company on March 4, 1999. The note
has a March 3, 2000 maturity date and accrues interest at 2%
over the prime rate, payable in a single installment at
maturity. The note may be converted into Series A preferred
stock at a rate of $0.09866 per share.
The Company issued a $50,000 convertible promissory
note to a shareholder of the Company on April 7, 1999. The note
has an April 6, 2000 maturity date and accrues interest at 2%
over the prime rate, payable in a single installment at
maturity. The note may be converted into Series A preferred
stock at a rate of $0.09866 per share.
The Company issued a $50,000 convertible promissory
note to a shareholder of the Company on May 3, 1999. The note
has a May 2, 2000 maturity date and accrues interest at 2% over
the prime rate, payable in a single installment at maturity. The
note may be converted into Series A preferred stock at a rate of
$0.09866 per share.
The Company issued a $200,000 convertible promissory
note to an investor on May 12, 1999. This individual was
subsequently appointed Chairman of the Board of Directors of the
Company. The note had a May 11, 2000 maturity date and accrued
interest at 2% over the prime rate, payable in a single
installment at maturity. The note was initially convertible into
shares of Series A preferred stock at the rate of $0.1192 per
share. The Company issued a $400,000 convertible promissory note
to its chairman on June 29, 1999. The note had a June 28, 2000
maturity date and accrued interest at 2% over the prime rate,
payable in a single installment at maturity. The note was
initially convertible into shares of Series A preferred stock at
the rate of $0.1192 per share. On February 11, 2000, these
notes, plus accrued interest thereon, were converted into shares
of Series A preferred stock (Note 11).
The Company issued a $200,000 convertible promissory
note to its chairman on October 22, 1999. The note had a January
15, 2000 maturity date and accrued interest at 2% over the prime
rate, payable in a single installment at maturity. On February
11, 2000, the Company issued 1,204,769 shares of Series B-1
preferred stock in satisfaction of the note and accrued interest
thereon (Note 11).
The Company issued a $500,000 convertible promissory
note to divine interVentures, inc. (divine) on November 8, 1999.
The Companys chairman is the chairman and chief executive
officer of divine. The note had a January 15, 2000 maturity date
and accrued interest at 2% over the prime rate, payable in a
single installment at maturity. On February 11, 2000, the
Company issued 3,003,040 shares of Series B-1 preferred stock in
satisfaction of the note and accrued interest thereon (Note
11).
IGIVE.COM, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(8)
Significant Customers
The Company had three customers that collectively
accounted for 71% of trade accounts receivable and individually
accounted for 43%, 17% and 11% of trade accounts receivable at
December 31, 1998. The Company had three customers that
collectively accounted for 64% of net revenue and individually
accounted for 30%, 20% and 14% of net revenue for the year ended
December 31, 1998. The Company had one customer that accounted
for 15% of net revenue for the year ended December 31,
1999.
(9)
Stock Options and Warrants
In 1998, the Company established a stock option plan
(the Plan) for all employees and select non-employees who render
services to the Company. The options vest over a period of time
approved and adopted by the Board of Directors, but in no event
shall exceed ten years from the date of grant. Generally, the
options vest over a four-year period from the date of grant. The
Company has reserved 10,003,000 common shares for issuance upon
exercise of options. Under the terms of an investors
rights agreement, 2,605,835 common shares are issuable to the
president of the Company, subject to approval by the
Companys board of directors, because options for all
common shares reserved for issuance under the plan were not
granted as of December 31, 1999.
In connection with the January 1999 private
placement, the Company issued 6,757,206 Series A preferred stock
purchase warrants. The warrants entitled the holders to purchase
up to 6,757,206 shares of Series A preferred stock at the
private placement price of $0.09866 per share. In lieu of
exercising the warrants through a cash contribution, the holders
were entitled to elect to receive shares equal to the value of
the warrants on the surrender date (net issue exercise). The
number of shares received through a net issue exercise is
determined by the following formula: (1) the number of shares
purchasable under the warrant, multiplied by the excess of the
fair value of the Series A preferred stock on the surrender date
over the warrant exercise price; divided by (2) the fair value
of the Series A preferred stock on the surrender date. The
warrants were cancelled on February 11, 2000.
The Company applies APB 25 in accounting for its
Plan and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had
compensation cost for the plans been determined consistent with
SFAS No. 123, the Companys net loss would have been the
pro forma amount indicated below:
|
|
1999
|
Net
loss: |
|
|
As reported |
|
$
1,875,613 |
Pro forma |
|
$ 1,879,432 |
For purposes of calculating the compensation cost
consistent with SFAS No. 123, the minimum value of each option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in 1999: dividend yield of 0%, risk
free interest rates of 5.64%, volatility of 0% and expected
lives of 10 years.
The following is a summary of activity under the
stock option plan:
|
|
Options
outstanding
|
|
Weighted-
average
exercise
price
|
Outstanding at December 31, 1998 |
|
|
|
|
Granted |
|
275,000 |
|
$0.25 |
|
|
|
|
|
Outstanding at December 31, 1999 |
|
275,000 |
|
$0.25 |
|
|
|
|
|
Options
exercisable at December 31, 1999 |
|
|
|
|
Weighted-average minimum value of options
granted |
|
$0.11 |
|
|
IGIVE.COM, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
The following table summarizes information about
stock options outstanding at December 31, 1999:
|
|
|
|
Options outstanding
|
|
Options exercisable
|
Exercise price
|
|
Number
of shares
|
|
Weighted-
average
remaining
contractual life
|
|
Weighted-
average
Exercise
price
|
|
Number
of shares
|
|
Weighted-
average
exercise
price
|
$0.25 |
|
275,000 |
|
9.75
years |
|
$0.25 |
|
|
|
|
(10)
Income Taxes
No provision for income taxes was recorded prior to
the change in legal structure on January 15, 1999, as such
liability was the responsibility of the Eyegive, L.L.C.
unitholders, rather than the Company. Upon the change in legal
structure of Eyegive, L.L.C. into iGive.com, Inc., the Company
recorded an initial net deferred tax liability of $11,243. The
remaining change in deferred income taxes for the year ended
December 31, 1999 relates to the period subsequent to the change
in legal structure.
There is no provision for income taxes for the year
ended December 31, 1999 due to the Companys net loss
before income taxes.
The total tax provision for the year ended December
31, 1999 differs from the amount computed by applying the
Federal income tax rate of 34% to the loss before income taxes
for the following reasons:
Federal
income tax benefit at statutory rate |
|
$(637,708 |
) |
Increase (decrease) in taxes resulting from: |
State income tax benefit |
|
(112,537 |
) |
Establishment of deferred tax liability upon
conversion to
C-corporation |
|
11,243 |
|
Permanent differences |
|
2,118 |
|
Increase in valuation allowance |
|
736,884 |
|
|
|
|
|
Income
tax provision |
|
$
|
|
|
|
|
|
The tax effects of the temporary differences that
give rise to the deferred tax assets and liabilities at December
31, 1999 are presented below:
Deferred tax assets: |
|
|
Allowance for doubtful accounts
receivable |
|
2,724 |
|
Deferred rent |
|
1,020 |
|
Net operating loss carryforward |
|
738,683 |
|
|
|
|
|
Gross deferred tax assets |
|
742,427 |
|
Less valuation allowance |
|
(736,884 |
) |
|
|
|
|
Net deferred tax assets |
|
5,543 |
|
Deferred tax liability |
Depreciation on computer equipment |
|
(5,543 |
) |
|
|
|
|
Net deferred income taxes |
|
$
|
|
|
|
|
|
The Company has Federal and state net operating loss
carryforwards of approximately $1,847,000, which will begin to
expire in 2019 if not used to offset future taxable income. The
Company has recorded a full valuation allowance of $736,884
against its net deferred tax assets established during 1999
because the Company has not yet determined that it is more
likely than not that the net deferred tax assets will be
realizable.
IGIVE.COM, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(11)
Subsequent Events
On February 11, 2000, the Company entered into a
Series B Preferred Stock Purchase Agreement (the Agreement) with
the Companys chairman and divine. In conjunction with this
transaction, the Company amended its articles of incorporation
to authorize 100,000,000 shares of $0.001 par value Class A
common stock, 23,388,912 shares of $0.001 par value Class B
common stock, 24,593,681 shares of $0.001 par value Series B-1
preferred stock, and 23,388,912 shares of $0.001 par value
Series B-2 preferred stock, and to increase the authorized
shares of $0.001 Series A preferred stock from 18,033,498 to
27,434,516. The Company issued 20,856,026 shares of the newly
authorized Class A common stock to existing holders of common
stock and all 20,856,026 previously outstanding shares of common
stock were cancelled.
At any time, each holder of Series A preferred stock
may convert all or a portion of such shares into the number of
shares of Class A common stock determined by (i) multiplying the
number of Series A preferred shares being converted by the
Series A liquidation value (Note 3) and (ii) dividing the
resulting product by the Series A conversion price (Note 3) then
in effect.
At any time, each holder of Series B-1 preferred
stock may convert all or a portion of such shares into the
number of shares of Class A common stock determined by adding
(x) the number of shares determined by (i) multiplying the
number of Series B-1 preferred shares being converted by
$0.17102 initially, subject to adjustment for stock splits,
stock dividends, and other subdivisions (the Series B
liquidation value) and (ii) dividing the resulting product by
$0.17102, subject to adjustment for certain dilutive issuances,
stock splits, combinations, and recapitalizations (the Series B
conversion price), plus (y) the number of shares determined by
dividing the total amount of accrued and unpaid dividends with
respect to each Series B-1 share being converted by the Series B
conversion price.
At any time, each holder of Series B-2 preferred
stock may convert all or a portion of such shares into the
number of shares of Class B common stock determined by (i)
multiplying the number of Series B-2 preferred shares being
converted by the Series B liquidation value and (ii) dividing
the resulting product by the Series B conversion price then in
effect, plus (y) the number of shares determined by dividing the
total amount of accrued and unpaid dividends with respect to
each Series B-2 share being converted by the Series B conversion
price.
At any time, each holder of Class B common stock may
convert all or a portion of such shares into an equal number of
Class A common shares.
The Series B-1 and B-2 preferred shares
(collectively, Series B preferred shares) have
certain redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of two-thirds of the
Series B preferred shares then outstanding may require the
Company to redeem all the Series B preferred shares then
outstanding at the Series B redemption price. The Series B
redemption price per share equals the greater of (i) the fair
market value of the common stock into which such Series B
preferred share is convertible and (ii) the sum of (a) the
Series B liquidation value plus (b) all accrued but unpaid
dividends on such Series B preferred share through the
applicable redemption date.
At any time or times on or after the earlier to
occur of (i) the fifth anniversary of issuance or (ii) the date
on which a holder of equity securities of the Company acquires a
voting interest in the Company which is greater than that of
divine, the holder or holders of two-thirds of the outstanding
Series B preferred shares may elect to require the Company to
redeem all or any portion of such holders Series B
preferred shares.
Holders of Class A common stock, Class B common
stock, Series A preferred stock, Series B-1 preferred stock, and
Series B-2 preferred stock vote together as a single class on
all matters submitted to a vote before
the stockholders of the Company. Holders of Class A common stock
and Class B common stock are entitled to one vote per share.
Holders of Series A preferred stock and Series B-1 preferred
stock are entitled to the number of Class A common stock votes
such holders would have been entitled to had they converted all
of their Series A and Series B-1 preferred shares to Class A
common shares. Holders of Series B-2 preferred stock are
entitled to the number of Class B common stock votes such
holders would have been entitled to had they converted all of
their Series B-2 preferred shares to Class B common
shares.
Provided that holders of Class B common stock
outstanding and issuable upon conversion of Series B-2 preferred
stock own at least 5% of the Companys Class A common stock
and Class B common stock, assuming conversion of all securities
convertible into such shares, (i) such holders shall have the
number of votes equal to the greater of (a) voting rights
determined in accordance with the preceding paragraph, and (b)
25.1% of the voting power of the Company, and (ii) the voting
rights of any person or group other than holders of Class B
common shares and Series B-2 preferred shares shall be limited
to the number of votes equal to the lesser of (x) such
holders voting rights in accordance with the preceding
paragraph, and (y) 25% of the voting power of the
Company.
In the event of any liquidation or dissolution of
the Company, either voluntary or involuntary, each holder of
Series B-1 preferred stock and Series B-2 preferred stock
(collectively, Series B preferred stock) shall be entitled to
receive an amount per share equal to the greater of (A) the
Series B liquidation value and (B) the amount such holder would
receive if all holders of Series B preferred shares had
converted their shares to Series B common shares immediately
prior to liquidation. After distributions to holders of Series B
preferred stock have been made, but prior to distribution to
holders of Class A common stock and Class B common stock, each
holder of Series A preferred stock shall be entitled to an
amount per share equal to the Series A liquidation value (Note
3), plus any accrued but unpaid dividends. After payment to
holders of Series A and Series B preferred shares, the remaining
assets available for distribution will be distributed to holders
of Class A common stock and Class B common stock in proportion
to the number of such shares then held.
The holders of Series B preferred stock are entitled
to received dividends on each Series B share annually at the
rate of 8% of the Series B liquidation value, when and if
declared by the Board of Directors of the Company, prior to the
payment of any dividend on the Series A preferred shares, Class
A common shares, or Class B common shares. After payment of
dividends to holders of Series B preferred stock, but prior to
payment of dividends to holders of Class A common stock and
Class B common stock, the holders of Series A preferred stock
are entitled to received dividends annually at the rate of
$0.008 per share, when and if declared by the Board of Directors
of the Company. The Board of Directors of the Company may
declare dividends on Class A common shares and Class B common
shares whenever all accrued preferential dividends on the Series
B preferred stock and Series A preferred stock have been paid or
set aside for payment.
Under the terms of the Agreement, the Company issued
1,204,769 shares of Series B-1 preferred stock to its chairman
and 23,388,912 shares of Series B-2 preferred stock to divine
for aggregate proceeds of $4,206,012. The proceeds from this
transaction included conversion of a $200,000 convertible
promissory note and accrued interest thereon held by the
Companys chairman and conversion of a $500,000 convertible
promissory note and accrued interest thereon held by
divine.
On February 11, 2000, the Company issued 9,401,018
shares of Series A preferred stock to certain investors,
including the president of the Company and the chairman of the
Company, for aggregate proceeds of $927,504. The proceeds from
this transaction included conversion of $200,000 and $400,000
convertible promissory notes and accrued interest thereon held
by the chairman of the Company.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
iSalvage.com, Inc.:
We have audited the accompanying balance sheet of
iSalvage.com, Inc., (a development stage enterprise) as of
December 31, 1999, and the related statements of operations,
stockholders equity, and cash flows for the period from
July 20, 1999 (inception) through December 31, 1999. These
financial statements are the responsibility of the
Companys 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 iSalvage.com, Inc. (a development stage enterprise)
as of December 31, 1999, and the results of its operations and
its cash flows for the period from July 20, 1999 (inception)
through December 31, 1999, in conformity with generally accepted
accounting principles.
New York,
New York
March 13,
2000
iSALVAGE.COM, INC.
(a
development stage enterprise)
December 31, 1999
Assets
Current
assets: |
|
|
Cash |
|
$ 298,474 |
|
Prepaid expenses |
|
13,718 |
|
|
|
|
|
Total current assets |
|
312,192 |
|
Property and equipment, net |
|
757,113 |
|
Other
assets |
|
27,510 |
|
|
|
|
|
Total assets |
|
$1,096,815 |
|
|
|
|
|
Liabilities and Stockholders
Equity |
Current
liabilities: |
|
|
|
Accounts payable |
|
$ 90,606 |
|
Accrued liabilities |
|
678,294 |
|
|
|
|
|
Total current liabilities |
|
768,900 |
|
|
|
|
|
|
Commitments |
|
|
|
|
|
Series
B-1 Redeemable Convertible Preferred Stock, $.001 par value.
Authorized 4,986,559
shares; issued and outstanding
none |
|
|
|
Series
B-2 Redeemable Convertible Preferred Stock, $.001 par value.
Authorized 4,293,064
shares; issued and outstanding
none |
|
|
|
|
Stockholders equity: |
|
|
|
Series A Convertible Preferred Stock, $.001 par
value. Authorized 2,200,000 shares; issued
and outstanding 2,200,000
shares (liquidation value of $880,000) |
|
2,200 |
|
Class A Common Stock, $.001 par value. Authorized
13,512,696 shares; issued and
outstanding 4,625,000
shares |
|
4,625 |
|
Class B Common Stock, $.001 par value. Authorized
4,293,064 shares; issued and
outstanding
none |
|
|
|
Subscription receivable |
|
(4,625 |
) |
Additional paid-in capital |
|
992,301 |
|
Deferred stock compensation |
|
(102,907 |
) |
Deficit accumulated during the development
stage |
|
(563,679 |
) |
|
|
|
|
Total stockholders equity |
|
327,915 |
|
|
|
|
|
Total liabilities and stockholders
equity |
|
$1,096,815 |
|
|
|
|
|
See
accompanying notes to financial statements.
iSALVAGE.COM, INC.
(a
development stage enterprise)
Period
from July 20, 1999 (inception) through December 31,
1999
Operating expenses: |
|
|
Product development |
|
$305,788 |
General and administrative |
|
255,567 |
Depreciation |
|
2,324 |
|
|
|
Total operating expenses |
|
563,679 |
|
|
|
Net loss |
|
$563,679 |
|
|
|
See
accompanying notes to financial statements.
iSALVAGE.COM, INC.
(a
development stage enterprise)
STATEMENT OF STOCKHOLDERS EQUITY
Period
from July 20, 1999 (inception) through December 31,
1999
|
|
Series A convertible
preferred stock
|
|
Class A
Common Stock
|
|
Subscription
receivable
|
|
Additional
paid-in
capital
|
|
Deferred
stock
compensation
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
stockholders
equity
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance
at July 20, 1999 (inception) |
|
|
|
$ |
|
|
|
$ |
|
$ |
|
|
$
|
|
$
|
|
|
$
|
|
|
$
|
|
Issuance of Class A Common Stock |
|
|
|
|
|
4,625,000 |
|
4,625 |
|
|
|
|
|
|
|
|
|
|
|
|
4,625 |
|
Receivable from stockholders |
|
|
|
|
|
|
|
|
|
(4,625 |
) |
|
|
|
|
|
|
|
|
|
(4,625 |
) |
Issuance of Series A Convertible Preferred
Stock |
|
2,200,000 |
|
2,200 |
|
|
|
|
|
|
|
|
877,800 |
|
|
|
|
|
|
|
880,000 |
|
Issuance of stock options to employees |
|
|
|
|
|
|
|
|
|
|
|
|
104,430 |
|
(104,430 |
) |
|
|
|
|
|
|
Amortization of deferred compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,523 |
|
|
|
|
|
1,523 |
|
Issuance of stock options to consultants |
|
|
|
|
|
|
|
|
|
|
|
|
10,071 |
|
|
|
|
|
|
|
10,071 |
|
Net
loss and comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(563,679 |
) |
|
(563,679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
2,200,000 |
|
$2,200 |
|
4,625,000 |
|
$4,625 |
|
$(4,625 |
) |
|
$992,301 |
|
$(102,907 |
) |
|
$(563,679 |
) |
|
$ 327,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
iSALVAGE.COM, INC.
(a
development stage enterprise)
Period
from July 20, 1999 (inception) through December 31,
1999
Cash
flows from operating activities: |
|
|
Net loss |
|
$(563,679 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
Non-cash advisory expense |
|
10,071 |
|
Depreciation and amortization |
|
3,847 |
|
Changes in assets and
liabilities: |
|
|
|
Prepaid expenses |
|
(13,718 |
) |
Other assets |
|
(27,510 |
) |
Accounts payable and accrued
liabilities |
|
768,900 |
|
|
|
|
|
Net cash provided by operating
activities |
|
177,911 |
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
Property and equipment |
|
(759,437 |
) |
|
|
|
|
Net cash used in investing
activities |
|
(759,437 |
) |
|
|
|
|
Cash
flows from financing activities: |
|
|
|
Issuance of preferred stock |
|
880,000 |
|
|
|
|
|
Net cash provided by financing
activities |
|
880,000 |
|
|
|
|
|
Net increase in cash |
|
298,474 |
|
Cash at
beginning of period |
|
|
|
|
|
|
|
Cash at
end of period |
|
$ 298,474 |
|
|
|
|
|
See
accompanying notes to financial statements.
iSALVAGE.COM, INC.
(a
development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1)
Business
iSalvage.com, Inc. (the Company) was incorporated
under the laws of the State of Delaware on July 20, 1999 for the
purpose of creating iSalvage.com, an Internet-based
business marketplace for buyers and sellers of recycled and
rebuilt auto parts.
Since inception, the Company has devoted
substantially all of its efforts to business planning, product
development, raising capital and business development
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.
iSalvage.com, 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
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)
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.
|
(c)
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
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.
|
(d)
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 after the Company has
completed a preliminary project assessment. During the period
from July 20, 1999 (inception) through December 31, 1999,
software development costs of $656,250 were capitalized in
connection with the development of iSalvage.com web-site
software.
Other assets include security deposits related the
Companys lease agreement for its office
premises.
iSALVAGE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
|
(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 (loss) 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 expense is 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.
The Company accounts for income taxes in accordance
with SFAS 109, Accounting for 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 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)
Recent Accounting Pronouncements
|
In 1999, the Company adopted SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. These statements have no impact on the
Companys financial statements.
In 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement, which
is effective for fiscal years beginning after June 15, 2000,
will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through earnings. If the
derivative is an effective hedge, changes in its fair value will
be offset against the change in the fair value of the hedged
item in either other comprehensive income or earnings. The
ineffective portion of a derivative classified as a hedge will
be immediately recognized in earnings. The Company is required
to adopt the new statement effective July 1, 2000, and has not
yet determined the effect SFAS No. 133 will have on its results
of operations and financial position. This statement is not
required to be applied retroactively to financial statements of
prior periods.
In 1999, the Company adopted SFAS No. 132,
Employers Disclosures about Pensions and Other
Postretirement Benefits. This statement did not have any
effect on the Companys financial statements.
(3)
Property and Equipment
Property and equipment at December 31, 1999 consist
of the following:
Computer hardware/software |
|
$751,288 |
|
Furniture and fixtures |
|
5,259 |
|
Leasehold improvements |
|
2,890 |
|
|
|
|
|
|
|
759,437 |
|
Less
accumulated depreciation and amortization |
|
(2,324 |
) |
|
|
|
|
Property and equipment, net |
|
$757,113 |
|
|
|
|
|
iSALVAGE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
(4)
Accrued Liabilities
Accrued liabilities at December 31, 1999 consist
primarily of accrued web development costs of
$656,250.
(5)
Lease Commitments
The Company leases office space and equipment under
operating lease agreements.
The future lease payments due under those leases are
as follows:
Year
ended December 31
|
|
Amount
|
2000 |
|
$ 81,540 |
2001 |
|
85,434 |
2002 |
|
89,522 |
|
|
|
|
|
$256,496 |
|
|
|
(6)
Income Taxes
Income tax benefit as reported herein differs from
the expected income tax benefit for the period from
July 20, 1999 (inception) through December 31, 1999, computed by
applying the Federal corporate tax rate of 34% to the loss
before income taxes, as follows:
Computed expected tax benefit |
|
$(191,700 |
) |
State
tax benefit, net of Federal income tax benefit |
|
(33,800 |
) |
Nondeductible expenses |
|
500 |
|
Increase in valuation allowance |
|
225,000 |
|
|
|
|
|
|
|
$
|
|
|
|
|
|
The tax effect of temporary differences that give
rise to deferred tax assets at December 31, 1999 is as
follows:
Net
operating loss carryforward |
|
$ 121,800 |
|
Fixed
assets, principally due to differences in
depreciation |
|
900 |
|
Expenses not currently deductible for tax
purposes |
|
102,300 |
|
|
|
|
|
Gross deferred tax assets |
|
225,000 |
|
Less
valuation allowance |
|
(225,000 |
) |
|
|
|
|
Net deferred income taxes |
|
$
|
|
|
|
|
|
In assessing the realizability of the deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized.
The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which temporary differences or net operating loss
carryforwards become deductible. Management considers projected
future taxable income and tax planing strategies which can be
implemented by the Company in making this assessment. The
Company has recorded a full valuation allowance against its
deferred tax asset since management believes that after
considering all the available objective evidence, it is more
likely that not, that these assets will not be
realized.
iSALVAGE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
At December 31, 1999, the Company has tax
operating loss carryforwards of approximately $304,500, which
expire in 2019.
(7)
Stockholders Equity
On July 28, 1999, the Company sold 4,625,000 shares
of Class A Common Stock to its founders for $4,625 or $.001 per
share. In connection with this sale, the Company accepted
promissory notes of $4,625 which are due on March 15, 2000 and
carry no interest.
On August 30, 1999, the Company sold 2,200,000
shares of Series A Convertible Preferred Stock (the Series
A Preferred Stock) for $880,000, or $.40 per share. The
Series A Preferred Stock is convertible into Class A Common
Stock at any time at the option of the holder, on a one-for-one
basis, subject to certain anti-dilution provisions, and has
preference to the Companys common stock in the event of
liquidation. In addition, the Series A Preferred Stock
automatically converts into Class A Common Stock upon the
closing of a qualified initial public offering (IPO)
of its Class A Common Stock, as defined. The holders of the
Series A Preferred Stock vote on an as-if-converted basis, and
are entitled to dividends only when and if declared by the
Company.
On January 31, 2000, the Company amended its
corporate charter to provide for 29,285,383 authorized shares
consisting of the following:
|
|
2,200,000 Series A Convertible Preferred Stock, all
issued and outstanding,
|
|
|
4,986,559 shares of Series B-1 Redeemable Convertible
Preferred Stock,
|
|
|
4,293,064 shares of Series B-2 Redeemable Convertible
Preferred Stock,
|
|
|
13,512,696 shares of Class A Common Stock, of which
4,625,000 are issued and
|
|
|
4,293,064 shares of Class B Common Stock.
|
On February 3, 2000, the Company sold 693,495 shares
of Series B-1 Redeemable Convertible Preferred Stock to third
parties and 4,293,064 shares of Series B-2 Redeemable
Convertible Preferred Stock to divine interVentures, inc., at
$1.51407 per share aggregating $7.55 million. The Series B-1 and
Series B-2 are collectively referred to as the Series B
Preferred Stock.
Series B-1 and Series B-2 are convertible into Class
A and Class B Common Stock, respectively, on a one-for-one
basis, subject to certain anti-dilution provisions, at any time
at the option of the holder or automatically upon the closing of
a qualified IPO, as defined.
The holders of the Series B Preferred Stock vote on
an as-if converted basis. However, as long as the Series B-2
stockholders hold at least 5% of the outstanding common shares,
on an as-converted basis, then the voting right of such
stockholders will be increased to the number of shares held
multiplied by 1.25 and the voting rights of all other
stockholders will be reduced proportionately.
The Series B stockholders have preference in
liquidation over the common and Series A stockholders. Upon
liquidation, including any merger or acquisition where the
existing stockholders of the Company own less than 50% of the
successor entity, the holders of the Series B Preferred Stock
are entitled to have the Company redeem their shares at the
original price paid per share, plus an 8% cumulative
return.
In the event that the Series B Preferred Stock has
not been converted by February 3, 2005, the holders of the
outstanding Series B Preferred Stock can elect to have the
Company redeem their Preferred Stock for an amount equal to
their original investment plus an 8% cumulative
return.
iSALVAGE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
The Company will record issuance costs incurred in
connection with the Series B Preferred Stock as discounts at
issuance and will accrete the discounts from the date of
issuance through the date of mandatory redemption on February 3,
2005.
(8)
Stock Options
In 1999, the Company adopted the 1999 Stock
Incentive Plan (the Plan) which authorized the
issuance of 2,196,000 shares of Class A common stock to be
issued in accordance with terms of the Plan. The options
generally vest over a four-year period and expire seven years
from the date of issuance.
In December 1999, the Company recorded deferred
stock compensation of $104,430 in connection with the granting
of options to employees and board members under the Plan. The
amount is presented as a reduction of stockholders equity
and amortized over the vesting period of the options. The
Company has amortized $1,523 of total deferred compensation for
the period from July 20, 1999 (inception) through December 31,
1999.
The Company applies APB No. 25 and related
interpretations in accounting for its stock options issued to
employees. Had compensation cost for the Companys stock
option grants been determined based on the fair value at the
grant date for awards consistent with the method of SFAS No.
123, the Companys reported net loss of $563,679 for the
period from July 20, 1999 (inception) to December 31, 1999,
would have increased to a pro forma net loss amount of
$564,173.
The fair value of each option grant was estimated on
the date of grant using the Black Scholes method option-pricing
model with the following weighted average assumptions: dividend
yield of zero (0%) percent, risk-free interest rate of 6%,
volatility of 0% and expected life of 5 years.
Stock option activity for the period indicated is as
follows:
|
|
Shares
|
|
Weighted-
average
exercise
price
|
Outstanding on July 20, 1999 (inception) |
|
|
|
$ |
Granted |
|
772,950 |
|
0.21 |
|
|
|
|
|
Outstanding on December 31, 1999 |
|
772,950 |
|
$0.21 |
|
|
|
|
|
The following table summarizes information about
stock options outstanding at December 31, 1999.
Range of
exercise price
|
|
Options outstanding
|
|
Weighted-average
exercise price
|
|
Shares
|
|
Weighted-average
remaining
contractual life
(years)
|
$0.10 |
|
275,000 |
|
6.92 |
|
$0.10 |
$0.25 |
|
427,000 |
|
6.92 |
|
$0.25 |
$0.40 |
|
70,950 |
|
6.67 |
|
$0.40 |
|
|
|
|
|
|
|
|
|
772,950 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 1999, no options were
vested.
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, stockholders 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) through
September 30, 1999. These financial statements are the
responsibility of the Companys 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.
Chicago,
Illinois
November
12, 1999, except for note 6 which is as of November 23,
1999
I-STREET, INC.
(a
development stage enterprise)
December 31, 1998 and September 30,
1999
ASSETS
|
|
December 31,
1998
|
|
September 30,
1999
|
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 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Accounts payable |
|
$
29 |
|
|
238 |
|
Accrued liabilities |
|
|
|
|
3,719 |
|
Amounts payable to sole shareholder |
|
|
|
|
7,083 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
29 |
|
|
11,040 |
|
|
|
|
|
|
|
|
Series
A-1 redeemable convertible preferred stock, $.001 par value;
574,000 shares
authorized; none issued and
outstanding |
|
|
|
|
|
|
Series
A-2 redeemable convertible preferred stock, $.001 par value;
574,000 shares
authorized; none issued and
outstanding |
|
|
|
|
|
|
|
Stockholders equity (deficit) (see note
6): |
|
|
|
|
|
|
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 stockholders equity
(deficit) |
|
1,887 |
|
|
(9,278 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders
equity (deficit) |
|
$
1,916 |
|
|
1,762 |
|
|
|
|
|
|
|
|
See
accompanying notes to the financial statements.
I-STREET, INC.
(a
development stage enterprise)
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
|
|
Period from
September 15, 1998
(inception)
through
December 31, 1998
|
|
Nine
months
ended
September 30, 1999
|
|
Period from
September 15, 1998
(inception)
through
September 30, 1999
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the financial statements.
I-STREET, INC.
(a
development stage enterprise)
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Period
from September 15, 1998 (inception) through December 31, 1998
and nine months ended September 30, 1999
|
|
Class A
common stock
|
|
Additional
paid-in
capital
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
stockholders
equity (deficit)
|
|
|
Shares
|
|
Amount
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the financial statements.
I-STREET, INC.
(a
development stage enterprise)
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
|
|
Period from
September 15, 1998
(inception)
through
December 31, 1998
|
|
Nine
months
ended
September 30, 1999
|
|
Period from
September 15, 1998
(inception)
through
September 30, 1999
|
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 activitiesadditions 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 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the financial statements.
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 Companys 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
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.
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.
Other assets (current and long-term) include amounts
paid for domain name rights which are being amortized over their
two year lives.
I-STREET, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
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
Companys 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 Companys results of operations, financial position, or
cash flows.
(3)
Property and Equipment
Property and equipment consists of the
following:
|
|
December 31,
1998
|
|
September 30,
1999
|
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 |
|
|
|
|
|
|
|
|
(4)
Income Taxes
|
The reconciliation of income tax expense (benefit)
computed using the Federal statutory rate of 34% to the
Companys income tax expense (benefit) is as
follows:
|
|
|
Period from
September 15, 1998
(inception)
through
December 31, 1998
|
|
Nine
months
ended
September 30, 1999
|
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 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
December 31,
1998
|
|
September 30,
1999
|
Deferred tax assetsstart-up costs |
|
$
870 |
|
|
18,286 |
|
Deferred tax liabilitiesdepreciation |
|
(58 |
) |
|
(18 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
812 |
|
|
18,268 |
|
Valuation allowance |
|
(812 |
) |
|
(18,268 |
) |
|
|
|
|
|
|
|
Net deferred taxes |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Companys 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 Companys
financial statements excluded rent expense for the period from
September 15, 1998 (inception) through September 30, 1999 as it
was impracticable to determine the amount of expense to allocate
to the Company from its sole shareholder.
(6)
Subsequent Events
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.
In October 1999, the Company amended and restated
its certificate of incorporation thereby authorizing 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. Upon liquidation, each
holder of Series A-1 and Series A-2 preferred shares
(collectively, Series A preferred shares) shall be
entitled to receive an amount equal to the greater of (i)
$.87108, subject to adjustment in the event such shares are
subdivided through a stock split, stock dividend, or otherwise
(the Series A liquidation value), plus all accrued
and unpaid dividends, and (ii) the amount such holder would
receive if all holders of Series A preferred shares had
converted their Series A preferred shares into common stock
immediately prior to liquidation.
Upon liquidation, and after payment of preferential
amounts to holders of Series A preferred shares, the remaining
assets of the Company shall be distributed to the holders of
common shares. The Company shall pay preferential dividends to
the holders of Series A preferred shares, when and if declared
by the board of
directors, at an annual rate of 8% of the sum of the Series A
liquidation value plus all accrued and unpaid dividends. In the
event any dividend or other distribution payable in cash, stock,
or other property is declared on the common stock, each holder
of Series A preferred shares on the record date for such
dividend or distribution shall be entitled to receive the same
cash, stock or other property which such holder would have
received if on such record date such holder was the holder of
record of the number of common shares into which such Series A
preferred shares then held by such holder are then
convertible.
Series A-1 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class A common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-1
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price ($.87108 initially, subject to adjustment upon
certain dilutive events), plus (y) the number of shares
determined by dividing the total amount of accrued and unpaid
dividends with respect to each Series A-1 preferred share to be
converted by the Series A conversion price. If the holders of
more than two-thirds of the Series A-1 preferred shares then
outstanding shall so elect, by vote or written consent, all of
the outstanding Series A-1 preferred shares shall automatically
convert into shares of Class A common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class B common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-2
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price, plus (y) the number of shares determined by
dividing the total amount of accrued and unpaid dividends with
respect to each Series A-2 preferred share to be converted by
the Series A conversion price. If the holders of more than
two-thirds of the Series A-2 preferred shares then outstanding
shall so elect, by vote or written consent, all of the
outstanding Series A-2 preferred shares shall automatically
convert into shares of Series A-1 preferred stock or Class B
common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into an equal number of
shares of Series A-1 preferred stock. Each Series A-2 preferred
share shall automatically convert into one Series A-1 preferred
share if the aggregate number of Series A-2 preferred shares and
Class B common shares then outstanding is less than five percent
of the aggregate number of common shares
outstanding.
Class B common shares may be converted at any time,
at the election of the holder, into an equal number of Class A
common shares. Each Class B common share shall automatically
convert into one Class A common share if the aggregate number of
Series A-2 preferred shares and Class B common shares then
outstanding is less than five percent of the aggregate number of
common shares then outstanding.
If a firm commitment underwritten public offering of
shares of common stock is effected in which (a) the aggregate
price paid by the public for the shares is at least $20,000,000
and (b) the price per share paid by the public for such shares
is at least 300% of the Series A conversion price in effect
immediately prior to such offering, then all of the outstanding
Series A preferred shares shall be automatically converted into
shares of common stock upon the closing of the public
offering.
The Series A preferred shares have certain
redemption rights. At any time prior to a qualified public
offering, if a fundamental change or change in ownership occurs,
the holder or holders of a majority of the Series A preferred
shares then outstanding may require the Company to redeem all
the Series A preferred shares then outstanding at the Series A
redemption price. The Series A redemption price per share equals
the sum of (a) $0.87108 (such amount to be adjusted
proportionately in the event the Series A preferred shares are
subdivided by any means into a greater number or combined by any
means into a lesser number) plus (b) all accrued but unpaid
dividends on such Series A preferred share through the
applicable redemption date.
At any time or times on or after the fifth
anniversary of issuance, but prior to a qualified public
offering, the holder or holders of two-thirds of the outstanding
Series A preferred shares may elect to require the Company to
redeem all or any portion of such holders Series A
preferred shares.
Holders of Class A common stock, Class B common
stock, Series A-1 preferred stock, and Series A-2 preferred
stock vote together as a single class on all matters submitted
to a vote before the stockholders of the Company. Holders of
Class A and Class B common stock are entitled to one vote and
five votes per share, respectively. Holders of Series A-1
preferred stock are entitled to the number of votes of Class A
common shares such holders would have been entitled to had they
converted all of their Series A-1 preferred shares to Class A
common shares. Holders of Series A-2 preferred stock are
entitled to the number of votes of Class B common shares such
holders would have been entitled to had they converted all of
their Series A-2 preferred shares to Class B common
shares.
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.
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
Companys 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.
Boston,
Massachusetts
April 18,
1999
LIVEONTHENET.COM, INC.
January 3, 1998, January 2, 1999, and October 2, 1999
(unaudited)
(In
thousands except share amounts)
ASSETS
|
|
January 3,
1998
|
|
January 2,
1999
|
|
October 2,
1999
|
|
|
|
|
|
|
(unaudited) |
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 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
INVESTMENT
|
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 |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
LIVEONTHENET.COM, INC.
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)
|
|
Year
ended
January 3,
1998
|
|
Year
ended
January 2,
1999
|
|
Period
from
January 4,
1998
through
October 3,
1998
|
|
Period
from
January 3,
1999
through
October 2,
1999
|
|
|
|
|
|
|
(unaudited) |
|
(unaudited) |
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
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)
|
|
Common
stock,
$.01 par
value
|
|
Capital in
excess of
par value
|
|
Treasury
stock
|
|
Accumulated
deficit
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
LIVEONTHENET.COM, INC.
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)
|
|
Year
ended
January 3,
1998
|
|
Year
ended
January 2,
1999
|
|
Period
from
January 4,
1998
through
October 3,
1998
|
|
Period
from
January 3,
1999
through
October 2,
1999
|
|
|
|
|
|
|
(unaudited) |
|
(unaudited) |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
LIVEONTHENET.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(1)
Nature of Operations and Summary of Significant Accounting
Policies
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 Companys 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 TISs, Colemans and Thermo
Electrons consolidated financial statements.
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 Companys 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.
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).
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.
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 Companys cash equivalents are invested in
an interest-bearing money market account. Cash and cash
equivalents are carried at cost, which approximates market
value.
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:
|
|
1997
|
|
1998
|
|
|
(In
thousands) |
Machinery and equipment |
|
$925 |
|
1,447 |
Leasehold improvements |
|
52 |
|
55 |
|
|
|
|
|
|
|
977 |
|
1,502 |
Less
accumulated depreciation and amortization |
|
365 |
|
549 |
|
|
|
|
|
|
|
$612 |
|
953 |
|
|
|
|
|
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.
During the first quarter of 1998, the Company
adopted SFAS No. 130, Reporting Comprehensive
Income. This pronouncement sets forth requirements for
disclosure of the Companys 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 Companys 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.
LIVEONTHENET.COM, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
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 Companys 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 Companys 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 Companys stock on the date of grant.
A summary of the Companys stock option
activity is:
|
|
1997
|
|
1998
|
|
|
Number
of
shares
|
|
Weighted
average
exercise
price
|
|
Number
of
shares
|
|
Weighted
average
exercise
price
|
|
|
(Shares in thousands) |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys
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 Companys net income
(loss) would have been:
|
|
1997
|
|
1998
|
|
|
(In thousands) |
Net
income (loss): |
|
|
|
|
|
As reported |
|
$(159 |
) |
|
454 |
|
|
|
|
|
|
Pro forma |
|
(169 |
) |
|
446 |
|
|
|
|
|
|
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 Companys 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 managements
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
Companys 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
employees 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:
|
|
1997
|
|
1998
|
|
|
(In thousands) |
Currently payable: |
|
|
|
|
|
Federal |
|
$ |
|
(370 |
) |
State |
|
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
(411 |
) |
|
|
|
|
|
|
Prepaid
(deferred), net: |
|
|
|
|
|
Federal |
|
83 |
|
135 |
|
State |
|
13 |
|
26 |
|
|
|
|
|
|
|
|
|
96 |
|
161 |
|
|
|
|
|
|
|
|
|
$ 96 |
|
(250 |
) |
|
|
|
|
|
|
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:
|
|
1997
|
|
1998
|
|
|
(In thousands) |
(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 |
) |
|
|
|
|
|
|
|
Prepaid income taxes in the accompanying balance
sheet consist of:
|
|
1997
|
|
1998
|
|
|
(In thousands) |
Prepaid
income taxes: |
|
|
|
|
|
|
Net operating loss carryforward |
|
$260 |
|
|
|
|
Depreciation |
|
(31 |
) |
|
(162 |
) |
Reserves and accruals |
|
6 |
|
|
558 |
|
|
|
|
|
|
|
|
|
|
$235 |
|
|
396 |
|
|
|
|
|
|
|
|
(6)
Related-party Transactions
Thermo Electrons 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
Companys revenues. From October 1996 through year-end
1997, the Company paid an amount equal to 1.0% of the
Companys 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.
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.
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):
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 |
|
|
|
(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.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
Martin
Partners, L.L.C.:
We have audited the accompanying balance sheets of
Martin Partners, L.L.C. as of December 31, 1998 and 1999, and
the related statements of operations, members equity, and
cash flows for the years then ended. These financial statements
are the responsibility of the Companys 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 Martin Partners, L.L.C. as of December 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.
Chicago,
Illinois
February
3, 2000, except for note 5
which is as of February 8, 2000
MARTIN PARTNERS, L.L.C.
December 31, 1998 and 1999
Assets |
|
1998
|
|
1999
|
Current
assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$385,136 |
|
|
590,420 |
|
Accounts receivable, less allowance for doubtful
accounts of $25,000 and $80,750
at December 31, 1998 and
1999, respectively |
|
312,607 |
|
|
1,001,425 |
|
|
|
|
|
|
|
|
Total current assets |
|
697,743 |
|
|
1,591,845 |
|
Property and equipment: |
|
|
|
|
|
|
Computer equipment |
|
78,175 |
|
|
93,404 |
|
Furniture and fixtures |
|
65,626 |
|
|
65,626 |
|
Leasehold improvements |
|
6,800 |
|
|
6,800 |
|
|
|
|
|
|
|
|
Total property and equipment |
|
150,601 |
|
|
165,830 |
|
Less
accumulated depreciation and amortization |
|
(50,195 |
) |
|
(78,412 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
100,406 |
|
|
87,418 |
|
Other
assets |
|
14,184 |
|
|
9,376 |
|
|
|
|
|
|
|
|
Total assets |
|
$812,333 |
|
|
1,688,639 |
|
|
|
|
|
|
|
|
Liabilities and Members Equity |
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Accounts payable |
|
$ 1,174 |
|
|
5,545 |
|
Accrued expenses |
|
911 |
|
|
10,412 |
|
Deferred revenue |
|
31,776 |
|
|
266,600 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
33,861 |
|
|
282,557 |
|
Members equity |
|
778,472 |
|
|
1,406,082 |
|
|
|
|
|
|
|
|
Total liabilities and members
equity |
|
$812,333 |
|
|
1,688,639 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MARTIN PARTNERS, L.L.C.
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Revenue |
|
$3,194,660 |
|
|
4,455,688 |
Operating expenses: |
|
|
|
|
|
Salaries |
|
1,229,802 |
|
|
1,448,595 |
General and administrative expenses |
|
771,573 |
|
|
709,661 |
|
|
|
|
|
|
Total operating expenses |
|
2,001,375 |
|
|
2,158,256 |
|
|
|
|
|
|
Operating income |
|
1,193,285 |
|
|
2,297,432 |
Other
income (expense): |
|
|
|
|
|
Interest expense |
|
(1,506 |
) |
|
|
Interest income |
|
20,843 |
|
|
30,892 |
Other, net |
|
6,538 |
|
|
|
|
|
|
|
|
|
Total other income |
|
25,875 |
|
|
30,892 |
|
|
|
|
|
|
Net income |
|
$1,219,160 |
|
|
2,328,324 |
|
|
|
|
|
|
See
accompanying notes to financial statements.
MARTIN PARTNERS, L.L.C.
STATEMENTS OF MEMBERS EQUITY
Years
ended December 31, 1998 and 1999
|
|
Members
Equity
|
Balance
at December 31, 1997 |
|
$ 731,717 |
|
Net
income |
|
1,219,160 |
|
Capital
withdrawal |
|
(1,172,405 |
) |
|
|
|
|
Balance
at December 31, 1998 |
|
778,472 |
|
Net
income |
|
2,328,324 |
|
Capital
withdrawal |
|
(1,700,714 |
) |
|
|
|
|
Balance
at December 31, 1999 |
|
$1,406,082 |
|
|
|
|
|
See
accompanying notes to financial statements.
MARTIN PARTNERS, L.L.C.
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net income |
|
$1,219,160 |
|
|
2,328,324 |
|
Adjustments to reconcile net income to net cash
provided by operating
activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
26,383 |
|
|
28,217 |
|
Changes in current assets and
liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
85,715 |
|
|
(688,818 |
) |
Accounts payable |
|
(25,342 |
) |
|
4,371 |
|
Accrued expenses |
|
(296 |
) |
|
9,501 |
|
Deferred revenue |
|
(79,657 |
) |
|
234,824 |
|
Other assets |
|
1,251 |
|
|
4,808 |
|
|
|
|
|
|
|
|
Net cash provided by operating
activities |
|
1,227,214 |
|
|
1,921,227 |
|
|
|
|
|
|
|
|
Cash
flows from investing activities |
|
|
|
|
|
|
property and equipment expenditures |
|
(22,812 |
) |
|
(15,229 |
) |
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
(22,812 |
) |
|
(15,229 |
) |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
Members capital withdrawn |
|
(1,172,405 |
) |
|
(1,700,714 |
) |
Principal borrowings on notes payable |
|
39,123 |
|
|
|
|
Principal payments on notes payable |
|
(57,873 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities |
|
(1,191,155 |
) |
|
(1,700,714 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents |
|
13,247 |
|
|
205,284 |
|
Cash
and cash equivalents at beginning of year |
|
371,889 |
|
|
385,136 |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year |
|
$ 385,136 |
|
|
590,420 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
informationcash paid for interest |
|
$
1,507 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MARTIN PARTNERS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Martin Partners, L.L.C. was organized in the State
of Illinois on January 10, 1996, as a limited liability company
under the Limited Liability Company Act of Illinois, in force
January 1, 1994. The Company specializes in the executive search
and placement business. The Company conducts business with
customers located worldwide.
By terms of the operating agreement, the Company
will continue until December 31, 2026, unless terminated earlier
by written agreement of a majority of the members. Members
participate in income and losses proportionately on the basis of
the percentage of interest held and are subject to losses only
to the extent of their respective investments.
Effective January 10, 1996, the Company elected to
become a limited liability company for income tax reporting
purposes. The Company has elected the cash basis of accounting
for income tax reporting purposes. The Company is treated as a
Partnership for Federal income tax purposes. Accordingly, these
financial statements contain no provision and no assets or
liabilities for Federal or state income taxes.
The financial statements of the Company have been
prepared in conformity with U.S. generally accepted accounting
principles.
Revenue from client services is generally recognized
ratably over a 90-day period commencing in the month of the
initial acceptance of a search. A client has the ability to
cancel the search at any time within the first 90 days. If a
search is canceled, the Company will bill for services performed
through the date of cancellation. Revenue consists of fees
billed to clients, net of reimbursed expenses for candidate
travel and other related recruiting expenses.
The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be
cash equivalents.
Property and equipment are stated at cost and are
depreciated on a straight-line basis over their estimated useful
lives, which range from five to seven years.
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.
MARTIN
PARTNERS, L.L.C.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(2)
Long-term Leases
The Company leases its facility under an operating
lease expiring May 31, 2004. The Company also leases a postage
meter and copier under operating lease agreements. Total rent
expense was $166,434 and $111,958 for the years ended December
31, 1998 and 1999, respectively. The following is a schedule of
the future minimum rental payments required under the above
leases as of December 31, 1999:
Year
ending
December 31, 1999
|
|
Amount
|
2000 |
|
$ 63,048 |
2001 |
|
64,626 |
2002 |
|
63,608 |
2003 |
|
64,002 |
2004 |
|
29,226 |
|
|
|
Total
future minimum payments |
|
$284,510 |
|
|
|
(3)
Incentive Plans
The Company established a qualified Defined
Contribution SAR-SEP Profit Sharing Plan (the Plan),
effective January 10, 1996. The Plan covers substantially all
employees. Annual contributions to the Plan are made at the
discretion of the Companys Board of Directors. The annual
profit sharing contribution is calculated based upon applying a
percentage, not to exceed fifteen percent (15%), to the calendar
year compensation of those employees participating in the Plan.
The Company recorded profit sharing expense of $33,344 and
$29,188 for the years ended December 31, 1998 and 1999,
respectively.
The Company established a long-term incentive plan
during 1997 for substantially all employees. The Plan awards
employees with Incentive Units with a four-year vesting period
which appreciate with increases in annual gross revenues. The
Company recorded expense related to the plan of $-0- and $10,383
for the years ended December 31, 1998 and 1999,
respectively.
(4)
Significant Customers
Revenue for the three largest customers aggregated
approximately 27% of total revenue for the year ended December
31, 1998. As of December 31, 1998, there were three customers
whose individual account balances aggregated 45% of total trade
accounts receivable.
Revenue for the three largest customers aggregated
approximately 26% of total revenue for the year ended December
31, 1999. As of December 31, 1999, there were three customers
whose individual account balances aggregated 50% of total trade
accounts receivable.
(5)
Subsequent Event
On February 8, 2000, a third party purchased a 25%
member interest in the Company from the majority member for
cash.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
Mercantec, Inc.:
We have audited the accompanying balance sheets of
Mercantec, Inc. as of December 31, 1998 and 1999, and the
related statements of operations, stockholders equity
(deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the
Companys 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 Mercantec, Inc. as of December 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.
Chicago,
Illinois
January
28, 2000, except for note 11 which is as of February 11,
2000
MERCANTEC, INC.
December 31, 1998 and 1999
ASSETS
|
|
1998
|
|
1999
|
Current
assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$5,427,024 |
|
|
2,513,428 |
|
Accounts receivable, net of allowance for doubtful
accounts of $25,000 in
1999 |
|
39,936 |
|
|
432,837 |
|
Prepaid expenses and other current
assets |
|
57,501 |
|
|
172,955 |
|
|
|
|
|
|
|
|
Total current assets |
|
5,524,461 |
|
|
3,119,220 |
|
|
|
|
|
|
|
|
Property and equipment, at cost: |
|
|
|
|
|
|
Furniture and fixtures |
|
127,272 |
|
|
156,152 |
|
Office equipment |
|
78,880 |
|
|
174,769 |
|
Computer equipment |
|
187,465 |
|
|
534,707 |
|
Computer software |
|
75,148 |
|
|
369,725 |
|
Leasehold improvements |
|
9,982 |
|
|
29,897 |
|
|
|
|
|
|
|
|
|
|
478,747 |
|
|
1,265,250 |
|
Less accumulated depreciation and
amortization |
|
146,621 |
|
|
372,065 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
332,126 |
|
|
893,185 |
|
|
|
|
|
|
|
|
Other
assets |
|
59,839 |
|
|
60,524 |
|
|
|
|
|
|
|
|
|
|
$5,916,426 |
|
|
4,072,929 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ 575,014 |
|
|
898,472 |
|
Capital lease obligation, current
portion |
|
17,766 |
|
|
17,766 |
|
Convertible note payable |
|
|
|
|
3,000,000 |
|
Deferred revenue |
|
251,975 |
|
|
363,937 |
|
Accrued payroll |
|
|
|
|
47,000 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
844,755 |
|
|
4,327,175 |
|
Capital lease obligation, less current
portion |
|
88,630 |
|
|
70,864 |
|
Note payable |
|
166,500 |
|
|
191,500 |
|
|
|
|
|
|
|
|
Total liabilities |
|
1,099,885 |
|
|
4,589,539 |
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
Preferred Stock, $.01 par value, authorized
15,000,000 shares: |
|
|
|
|
|
|
Series A Convertible
Preferred Stock, 2,432,434 shares issued and
outstanding |
|
24,324 |
|
|
24,324 |
|
Series B Convertible
Preferred Stock, 2,250,000 shares issued and
outstanding |
|
22,500 |
|
|
22,500 |
|
Series C Convertible
Preferred Stock, 6,980,000 shares issued and
outstanding |
|
69,800 |
|
|
69,800 |
|
Common stock, $.001 par value, 55,000,000 shares
authorized; 14,518,431 and
14,878,806 shares issued
in 1998 and 1999 |
|
14,518 |
|
|
14,878 |
|
Additional paid in capital |
|
8,559,804 |
|
|
8,685,919 |
|
Accumulated deficit |
|
(3,698,860 |
) |
|
(9,158,486 |
) |
Treasury stock, at cost, 2,632,500 common
shares |
|
(175,545 |
) |
|
(175,545 |
) |
|
|
|
|
|
|
|
Total stockholders equity
(deficit) |
|
4,816,541 |
|
|
(516,610 |
) |
|
|
|
|
|
|
|
|
|
$5,916,426 |
|
|
4,072,929 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MERCANTEC, INC.
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Net
revenue |
|
$1,015,416 |
|
|
1,469,245 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Sales and marketing |
|
1,440,470 |
|
|
3,039,784 |
|
Research and development |
|
928,151 |
|
|
1,839,904 |
|
General and administrative |
|
738,026 |
|
|
2,124,562 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
3,106,647 |
|
|
7,004,250 |
|
|
|
|
|
|
|
|
Loss from operations |
|
(2,091,231 |
) |
|
(5,535,005 |
) |
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
Interest income |
|
46,233 |
|
|
132,226 |
|
Interest expense |
|
(1,382 |
) |
|
(59,501 |
) |
Miscellaneous income (expense) |
|
(11,466 |
) |
|
2,654 |
|
|
|
|
|
|
|
|
Total other income (expense) |
|
33,385 |
|
|
75,379 |
|
|
|
|
|
|
|
|
Loss before income taxes |
|
(2,057,846 |
) |
|
(5,459,626 |
) |
Income
taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$(2,057,846 |
) |
|
(5,459,626 |
) |
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MERCANTEC, INC.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Years
ended December 31, 1998 and 1999
|
|
Preferred Stock
|
|
Common stock
|
|
Additional
paid in
capital
|
|
Accumulated
deficit
|
|
Treasury
stock
|
|
Total
stockholders
equity (deficit)
|
|
|
Series A
|
|
Series B
|
|
Series C
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance
at December 31, 1997 |
|
2,432,434 |
|
$24,324 |
|
|
|
$ |
|
|
|
$ |
|
14,484,375 |
|
$14,484 |
|
$1,771,100 |
|
|
$(1,641,014 |
) |
|
$(175,545 |
) |
|
$ (6,651 |
) |
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,057,846 |
) |
|
|
|
|
(2,057,846 |
) |
Issuance of common stock in lieu of
deferred payroll |
|
|
|
|
|
|
|
|
|
|
|
|
|
30,681 |
|
31 |
|
30,653 |
|
|
|
|
|
|
|
|
30,684 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,375 |
|
3 |
|
297 |
|
|
|
|
|
|
|
|
300 |
|
Issuance of Series B Convertible
Preferred Stock |
|
|
|
|
|
2,250,000 |
|
22,500 |
|
|
|
|
|
|
|
|
|
977,500 |
|
|
|
|
|
|
|
|
1,000,000 |
|
Issuance of Series C Convertible
Preferred Stock, net of issuance
costs |
|
|
|
|
|
|
|
|
|
6,980,000 |
|
69,800 |
|
|
|
|
|
5,780,254 |
|
|
|
|
|
|
|
|
5,850,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1998 |
|
2,432,434 |
|
24,324 |
|
2,250,000 |
|
22,500 |
|
6,980,000 |
|
69,800 |
|
14,518,431 |
|
14,518 |
|
8,559,804 |
|
|
(3,698,860 |
) |
|
(175,545 |
) |
|
4,816,541 |
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,459,626 |
) |
|
|
|
|
(5,459,626 |
) |
Settlement of issuance costs for
Series A Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,000 |
|
|
|
|
|
|
|
|
135,000 |
|
Issuance costs for Series C
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,000 |
) |
|
|
|
|
|
|
|
(50,000 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
360,375 |
|
360 |
|
41,115 |
|
|
|
|
|
|
|
|
41,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
2,432,434 |
|
$24,324 |
|
2,250,000 |
|
$22,500 |
|
6,980,000 |
|
$69,800 |
|
14,878,806 |
|
$14,878 |
|
$8,685,919 |
|
|
$(9,158,486 |
) |
|
$(175,545 |
) |
|
$(516,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
MERCANTEC, INC.
Years
ended December 31, 1998 and 1999
|
|
|
|
1998
|
|
1999
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
|
|
$(2,057,846 |
) |
|
(5,459,626 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
|
|
|
|
|
Loss on sale of equipment |
|
|
|
1,101 |
|
|
|
|
Depreciation and amortization |
|
|
|
86,255 |
|
|
225,444 |
|
Provision for doubtful accounts |
|
|
|
|
|
|
25,000 |
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
483,613 |
|
|
(417,901 |
) |
Prepaid expenses and other current
assets |
|
|
|
(35,822 |
) |
|
(115,454 |
) |
Accounts payable and accrued
expenses |
|
|
|
217,991 |
|
|
483,458 |
|
Deferred revenue |
|
|
|
(434,449 |
) |
|
111,962 |
|
Accrued payroll |
|
|
|
(106,562 |
) |
|
47,000 |
|
Other assets |
|
|
|
(54,801 |
) |
|
(685 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities |
|
|
|
(1,900,520 |
) |
|
(5,100,802 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
Proceeds from sale of furniture |
|
|
|
645 |
|
|
|
|
Capital expenditures |
|
|
|
(115,927 |
) |
|
(786,503 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
|
|
(115,282 |
) |
|
(786,503 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
Net proceeds (repayments) on convertible note
payable |
|
|
|
(1,258 |
) |
|
3,000,000 |
|
Payments on capital leases |
|
|
|
(2,272 |
) |
|
(17,766 |
) |
Proceeds from issuance of preferred
stockSeries B |
|
|
|
1,000,000 |
|
|
|
|
Proceeds from issuance of preferred
stockSeries C |
|
|
|
5,850,054 |
|
|
(50,000 |
) |
Proceeds from exercise of common stock
options |
|
|
|
300 |
|
|
41,475 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities |
|
|
|
6,846,824 |
|
|
2,973,709 |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents |
|
|
|
4,831,022 |
|
|
(2,913,596 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period |
|
|
|
596,002 |
|
|
5,427,024 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period |
|
|
|
$5,427,024 |
|
|
2,513,428 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
informationinterest paid |
|
|
|
$
1,390 |
|
|
9,501 |
|
Supplemental disclosure of noncash financing
activities: |
|
|
Reduction of deferred payroll resulting from
issuance of common stock |
|
|
|
30,684 |
|
|
|
|
Capital lease obligation assumed |
|
|
|
108,668 |
|
|
|
|
Settlement of issuance costs for Series A
preferred stock |
|
|
|
|
|
|
135,000 |
|
See
accompanying notes to financial statements.
MERCANTEC, INC.
NOTES TO FINANCIAL STATEMENTS
(1)
Description of the Business
Mercater, the predecessor entity, was originally
incorporated in December 1995 in the State of Illinois to
develop, integrate, and market on-line electronic commerce
solutions and technology for the Internet market place. On March
8, 1996, Mercater changed its name to Mercantec, Inc. (Mercantec
or the Company). Mercantec specializes in offering software for
building and operating electronic storefronts on the World Wide
Web.
During 1996, Mercantec acquired all rights to its
core technology, SoftCart, an electronic commerce virtual
shopping solution, from Skeleton Development Corporation, which
released the initial version in August 1995. As a part of the
agreement to acquire the technology, Skeleton Development
Corporation was dissolved and all employees joined Mercantec as
founders.
In February 1997, the Company was reincorporated in
the State of Delaware.
(2)
Summary of Significant Accounting Policies
|
(a) Cash and Cash
Equivalents
|
The Company considers all highly liquid debt
instruments with an original maturity of three months or less to
be cash equivalents.
The Company accounts for its revenue in compliance
with AICPA Statement of Position 97-2, Software Revenue
Recognition.
The Company enters into arrangements with resellers
and master distributors which typically include the following
elements: 1) the right to resell a specified number of software
licenses over a specified term; 2) maintenance services to the
reseller or distributor for a specified term; and 3) training
and consultation services. These arrangements are
separately-priced, irrevocable, and the license portion is based
on a fixed fee with no refunds entitled to the reseller or
distributor in the event the specified number of licenses are
not resold within the term of the arrangement. As the Company
does not have vendor specific objective evidence of fair value
of all elements, revenue associated with software, maintenance
and services is recognized ratably over the term of the
arrangement.
Renewal license fees and license fees in excess of
the number of licenses permitted by the original arrangement are
recognized monthly upon verification of reseller reports and/or
activation reports from the end user. Revenue is also recognized
on renewal maintenance and training and consultation services
under separately priced contracts as the services are
performed.
The Company also enters into arrangements with
merchants (end users) containing a single software license,
maintenance, and training and consultation services. License and
maintenance revenue is recognized ratably over the term of the
arrangement while service revenues are recognized as services
are performed.
MERCANTEC, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards No.
86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed. Costs associated
with the planning and designing phase of software development,
including coding and testing activities necessary to establish
technological feasibility, are classified as research and
development costs and are charged to expense as incurred. Once
technological feasibility has been established, software
development costs would be capitalized. The Companys
software costs have not been capitalized due to the short life
cycle of the Companys software products and the short
period between technological feasibility and when products are
ready for release to customers.
|
(d)Property and Equipment
|
Property and equipment are stated at cost.
Depreciation or amortization is provided over the estimated
useful lives of the assets using the straight-line method for
financial reporting purposes. The estimated useful lives are as
follows:
Furniture and fixtures |
|
7
years |
Office
equipment |
|
7
years |
Computer equipment |
|
3
years |
Computer software |
|
3
years |
Leasehold improvements |
|
Over
the lease term |
Depreciation and amortization expense was $86,255
and $225,444 for 1998 and 1999, respectively.
The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (Statement 109).
Under Statement 109, 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.
|
(f)Use of Estimates in the 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 these estimates.
|
(g)
Fair Value of Financial Instruments
|
The Companys financial instruments include
accounts receivable, accounts payable, note payable, and capital
lease obligations. The fair value of these financial instruments
approximates their carrying values due to the short-term nature
of these instruments or the rates on these instruments
approximate current market rates.
Advertising expenses are charged to operations
during the year in which they are incurred. The total amount of
advertising expenses charged to operations was approximately
$10,000 and $29,000 in 1998 and 1999, respectively.
MERCANTEC, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation
(Statement 123). Statement 123 defines a fair value based method
of accounting for an employee stock option or similar equity
instrument. Statement 123 gives entities a choice of recognizing
related compensation expense using the fair value method or to
continue to measure compensation using the intrinsic value
approach under Accounting Principles Board Opinion No. 25 (APB
25). The Company continues to use the measurement prescribed by
APB 25 and provides the pro forma disclosures required by
Statement 123.
(3)
Stockholders Equity (Deficit)
Effective November 20, 1998, the Company declared a
4.5 to 1 stock split effective for all common stock and Series
A, Series B, and Series C preferred stock. All common stock,
preferred stock, and stock option information has been restated
to reflect this stock split on a retroactive basis.
The Company amended its articles of incorporation
and increased the authorized number of shares to 55,000,000 of
$.001 par value common stock, of which 50,000,000 shares are
designated as voting common stock and 5,000,000 shares are
designated as nonvoting common stock. All of the Companys
issued common stock has voting privileges as of December 31,
1998 and 1999. Also, the Company authorized 15,000,000 shares of
$.01 par value Preferred Stock, of which 6,075,000 shares have
been designated Series A Convertible Preferred Stock. Shares of
Series A Convertible Preferred Stock are convertible into shares
of common stock at a conversion price of $.82 per share but may
be adjusted for specified events.
During 1997, the Company acquired 2,632,500 shares
of its common stock for $175,545 (see notes 7 and 10).
Additionally, through a private placement offering, the Company
issued 2,432,434 shares of Series A Convertible Preferred Stock
(Series A) for $.82 per share or $2,000,000. The expenses
associated with the private placement were deducted from the
proceeds received. The Company also accrued through additional
paid in capital an additional $180,000 in expenses in 1997
related to a claim by the placement agent which was settled in
1999 for $45,000 resulting in additional paid in capital related
to the Series A offering of $135,000.
During 1998 through two separate private placements,
the Company issued Series B Convertible Preferred Stock (Series
B) and Series C Convertible Preferred Stock (Series C). The
Company issued 2,250,000 shares of Series B for $.44 per share
or $1,000,000. In connection with the Series B issuance of
preferred stock, the Company granted warrants to acquire 303,822
shares of common stock at an exercise price of $1.00 per share.
These warrants expire in June of 2003.
Also during 1998, the Company issued 6,980,000
shares of Series C for $1.00 per share. The Company recorded net
cash proceeds of $5,850,054 after the expenses associated with
the private placement of the Series C stock were deducted. In
connection with the Series C issuance of preferred stock, the
Company granted warrants to acquire 698,000 shares of common
stock at an exercise price of $1.00 per share. These warrants
expire in November of 2003.
In connection with the Series C issuance of
preferred stock, the Company granted an option to the placement
agent to purchase 1,396,000 Series C shares at $1.00 per share.
The placement agents option is exercisable immediately and
the option expires the later of November 20, 2005 or three years
following the closing of an initial public offering.
Additionally, the Company granted warrants to the placement
agent to acquire 139,600 shares of common stock at an exercise
price of $1.00 per share. These warrants expire in November of
2003.
The fair value of the warrants and options issued in
connection with the Series B and Series C issuances of preferred
stock are a direct cost of obtaining capital, and as such, have
been recorded as additional paid in capital.
MERCANTEC, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
The Company obtained $250,000 of bridge financing
during 1998 from the Series C placement agent. This bridge
financing was repaid with the proceed from the Series C
offering. The placement agent also received warrants to purchase
75,000 shares of common stock at an exercise price of $1.00 per
share with terms identical to the warrants issued to the holders
of the Series C. The fair value of the warrants was $-0-,
accordingly, the Company did not record any incremental interest
expense in connection with issuing these warrants.
All series of preferred stock are non-cumulative,
are convertible into shares of common stock at a ratio of
one-for-one, subject to certain anti-dilution and
price-protection adjustments as defined in the respective
Private Placement Memoranda, and have voting rights based on
common stock equivalents. Conversion will be automatic upon
closing of a qualified initial public offering of the
Companys common stock. Series A, Series B and Series C
preferred stockholders have a liquidation preference of $0.44
per share, $0.82 per share, and $1.00 per share,
respectively.
(4)
Stock Option Plan
In 1996 and 1998, the Company established the
Mercantec, Inc. Stock Option Plan and the 1998 Equity Incentive
Plan, respectively (the Plans), for all employees
and select non-employees who render services to the Company. The
options vest over a period of time approved and adopted by the
Board of Directors, but in no event shall exceed ten years from
the date of grant. Generally the options vest over a four year
period from the date of grant. The Company has reserved
4,500,000 common shares for issuance upon exercise of
options.
The Company applies APB 25 in accounting for its
Plans and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had
compensation cost for the plans been determined consistent with
SFAS No. 123, the Companys net loss would have been the
pro forma amounts indicated below:
|
|
1998
|
|
1999
|
Net
loss: |
|
|
|
|
|
|
As reported |
|
$(2,057,846 |
) |
|
$
(5,459,626 |
) |
Pro forma |
|
$(2,368,445 |
) |
|
$ (5,758,294 |
) |
For purposes of calculating the compensation cost
consistent with SFAS No. 123, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1999: dividend yield of
0%, risk free interest rates of 5.75%, volatility of 0% and
expected lives of 10 years.
The following is a summary of activity under the
stock option plans:
|
|
Options
outstanding
|
|
Weighted-
average
exercise
price
|
Outstanding at December 31, 1997 |
|
1,998,000 |
|
|
$ 0.80 |
Granted |
|
1,444,138 |
|
|
$ 0.82 |
Canceled |
|
(502,875 |
) |
|
$ 0.09 |
|
|
|
|
|
|
Outstanding at December 31, 1998 |
|
2,939,263 |
|
|
$ 0.82 |
Granted |
|
1,464,032 |
|
|
$ 1.00 |
Canceled |
|
(1,222,932 |
) |
|
$ 1.00 |
|
|
|
|
|
|
Outstanding at December 31, 1999 |
|
3,180,363 |
|
|
$ 0.96 |
|
|
|
|
|
|
|
|
|
|
1998
|
|
1999
|
Options
exercisable at December 31 |
|
752,013 |
|
|
858,190 |
Weighted-average exercise price of options
exercisable |
|
$
0.86 |
|
|
$ 0.88 |
Weighted-average minimum value of options
granted |
|
$
0.41 |
|
|
$ 0.43 |
MERCANTEC, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
At December 31, 1999, there were 1,319,637 options
available for grant. The weighted-average remaining life of the
3,180,363 outstanding options at December 31, 1999 was 9.2
years, and these options had exercise prices ranging from $0.09
to $1.00.
(5)
Leases
The Company is obligated under a capital lease for
office equipment that expires in December of 2003. The Company
was required, per the office equipment lease, to purchase a
$50,000 certificate of deposit and pledge the certificate of
deposit as collateral. The $50,000 certificate of deposit is
recorded as a non-current other asset. At December 31, 1999, the
gross amount of office equipment and related accumulated
amortization recorded under the capital lease were as
follows:
Office
equipment |
|
$108,668 |
Less
accumulated amortization |
|
16,818 |
|
|
|
|
|
$ 91,850 |
|
|
|
The Company leases its office space under an
operating lease expiring in 2003. Total rent expense for the
years ended December 31, 1998 and 1999 was approximately $64,800
and $103,200, respectively.
Commitments under leases at December 31, 1999 are as
follows:
|
|
Capitalized lease
|
|
Operating leases
|
2000 |
|
$ 27,267 |
|
|
105,700 |
2001 |
|
27,267 |
|
|
110,100 |
2002 |
|
27,267 |
|
|
114,400 |
2003 |
|
24,995 |
|
|
98,400 |
|
|
|
|
|
|
Total
minimum lease payments |
|
106,796 |
|
|
428,600 |
|
|
|
|
|
|
Less
amount representing interest |
|
18,166 |
|
|
|
|
|
|
|
|
|
Present
value of minimum lease payments |
|
88,630 |
|
|
|
Less current portion of capital lease
obligation |
|
(17,766 |
) |
|
|
|
|
|
|
|
|
Noncurrent portion of capital lease
obligation |
|
$ 70,864 |
|
|
|
|
|
|
|
|
|
(6)
Income Taxes
The tax effects of temporary differences between
financial and income tax reporting result in net deferred tax
assets as of December 31, 1998 and 1999, respectively, and
relate primarily to net operating loss carryforwards. At
December 31, 1998 and 1999, the Company has gross deferred tax
assets totaling $3,594,919 and $8,991,510. A valuation allowance
has been applied to reduce the deferred tax assets to zero at
December 31, 1998 and 1999. During 1998 and 1999, the valuation
allowance increased by $2,043,000 and $5,396,591,
respectively.
Realization is dependent upon generating sufficient
future taxable income to absorb the tax benefits. The amount of
deferred tax assets considered to be realizable could be
increased in the near term if estimates of future taxable income
during the carryforward period increase.
At December 31, 1999, the Company had $8,858,354 of
net operating loss carryforwards, which are available to reduce
taxable income in future years. If not used, the net operating
loss carryforwards will expire through 2019.
(7)
Note Payable
During 1997, the Company purchased 2,025,000 common
shares from a former employee with a $166,500 promissory note at
an interest rate of 8.25% and payable in five equal annual
installments of $41,625. The payments commence at the end of the
first annual period in which the Company achieves a positive
cash flow
in an amount in excess of the aggregate of (i) $41,625 plus (ii)
the amount of interest accrued and unpaid through the date of
the end of such annual period. See note 10 regarding related
litigation.
(8)
Convertible Note Payable
On November 24, 1999, the Company entered into an
agreement with a third party, whereby the third party agreed to
lend the Company $3,000,000 for a period of six months to
provide interim financing to the Company prior to the proposed
equity transaction described in note 11. The full amount is due
and payable on May 24, 2000, unless converted to Series D
preferred stock upon the execution of a definitive Series D
Preferred Stock Purchase Agreement. The note bears interest at a
rate of 8.5% per annum. Interest expense of approximately
$25,000 was included in accrued expenses at December 31, 1999.
In connection with this financing, the Company issued to the
third party a warrant to purchase 317,000 shares of common stock
at $2.36 per share as additional consideration. The fair value
of the warrant was $-0-. Accordingly, the Company did not record
any incremental interest expense in connection with issuing the
warrant.
(9)
Business and Credit Concentrations
During 1998, two customers accounted for 33% and 21%
of the Companys revenue. During 1999, three customers
accounted for 27%, 17% and 11% of the Companys revenue. At
December 31, 1999, three customers accounted for 46%, 17%, and
16% of the Companys accounts receivable.
(10)
Litigation
The Company is a defendant in a lawsuit, which
alleges wrongful termination. The plaintiff, a former employee
and stockholder of the Company, alleges damages of an
unspecified amount and seeks an equitable order for the return
of 2,025,000 shares of the Companys common stock which
were repurchased during 1997 and are included as treasury stock
in the financial statements. Although the ultimate resolution of
these proceedings cannot be ascertained, the Company believes
that it has meritorious defenses to the plaintiffs
claim.
(11)
Subsequent Events
On February 11, 2000, the Company entered into a
Series D Preferred Stock purchase agreement with a third party.
Under the terms of the agreement, the Company issued 15,501,319
shares of Series D convertible preferred stock for $1.516 per
share and warrants to purchase 1,550,132 shares of common stock
at $1.58 per share. The gross proceeds from issuance of Series D
preferred stock is payable by the third party as follows: $9
million on February 11, 2000, $6.5 million on April 1, 2000 and
$5 million on July 15, 2000. The second and third payments are
pursuant to a promissory note secured by the pledge of the
purchased Series D preferred shares. The convertible note
payable for $3 million described in note 8 was converted into
Series D preferred stock.
The Series D convertible preferred stock is subject
to rights of redemption for two thirds of the Series D shares
after six years and has supervoting rights (equal to 1.25
common) if converted into common shares, and other rights and
preferences as defined in the agreement. In addition, the Series
D convertible preferred stock has a liquidation preference to
all other classes of stock.
As of the closing of this agreement, the
Companys authorized capital stock consisted of 44,060,802
shares of $.0001 par value preferred stock and 70,051,451 shares
of $.001 par value common stock.
On January 31, 2000, the Company agreed to purchase,
upon closing the agreement above, 1,000,000 shares of Series A
convertible preferred stock from its Series A investors at $2.00
per share. The Company also agreed to secure offers, as defined
in the agreement, with respect to the purchase of the remaining
outstanding Series A preferred shares at an aggregate purchase
price not less than $2.00 per share. The Company is required to
redeem any remaining unsold Series A convertible preferred
shares no later than 9 months after closing the agreement above,
secured by a $2,864,868 irrevocable stand-by letter of credit
with American National Bank and Trust Company.
INDEPENDENT AUDITORS REPORT
The
Members of
The
Oilspot.com LLC:
We have audited the accompanying balance sheet of
The Oilspot.com LLC (a development stage enterprise) as of
December 31, 1999, and the related statements of operations,
members deficit, and cash flows for the period from
October 21, 1999 (inception) through December 31, 1999. These
financial statements are the responsibility of the
Companys 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 The Oilspot.com LLC (a development stage enterprise)
as of December 31, 1999, and the results of its operations and
its cash flows for the period from October 21, 1999 (inception)
through December 31, 1999, in conformity with generally accepted
accounting principles.
Chicago,
Illinois
March 13,
2000
THE
OILSPOT.COM LLC
(a
development stage enterprise)
December 31, 1999
Assets
Assets |
|
$ |
|
|
|
|
|
|
Liabilities and Members Deficit |
|
Current
liabilities: |
|
|
|
Accounts payable |
|
$ 12,145 |
|
Due to related parties |
|
37,056 |
|
|
|
|
|
Total current liabilities |
|
49,201 |
|
|
Members deficit |
|
(49,201 |
) |
|
|
|
|
Total liabilities and members
deficit |
|
$
|
|
|
|
|
|
See
accompanying notes to financial statements.
THE
OILSPOT.COM LLC
(a
development stage enterprise)
Period
from October 21, 1999 (inception) through December 31,
1999
Revenues |
|
$
|
|
|
|
|
|
Operating expenses: |
|
|
|
General and administrative expenses |
|
44,444 |
|
Sales and marketing expenses |
|
4,757 |
|
|
|
|
|
Total operating expenses |
|
49,201 |
|
|
|
|
|
Net loss |
|
$(49,201 |
) |
|
|
|
|
See
accompanying notes to financial statements.
THE
OILSPOT.COM LLC
(a
development stage enterprise)
STATEMENT OF MEMBERS DEFICIT
Period
from October 21, 1999 (inception) through December 31,
1999
|
|
Number
of Units
|
|
Members
deficit
|
Balance
at October 21, 1999 (inception) |
|
|
|
$
|
|
Issuance of units in formation of the limited liability
company |
|
444,400 |
|
|
|
Net
loss |
|
|
|
(49,201 |
) |
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
444,400 |
|
$(49,201 |
) |
|
|
|
|
|
|
See
accompanying notes to financial statements.
THE
OILSPOT.COM LLC
(a
development stage enterprise)
Period
from October 21, 1999 (inception) through December 31,
1999
Cash
flows from operating activities: |
|
|
Net loss |
|
$(49,201 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
Changes in liabilities: |
|
|
|
Accounts payable |
|
12,145 |
|
Due to related parties |
|
37,056 |
|
|
|
|
|
Net cash used in operating
activities |
|
|
|
|
|
|
|
Net increase in cash |
|
|
|
Cash at
beginning of period |
|
|
|
|
|
|
|
Cash at
end of period |
|
$
|
|
|
|
|
|
See
accompanying notes to financial statements.
THE
OILSPOT.COM LLC
(a
development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1)
Nature of the Business
The Oilspot.com LLC (the Company) was organized in
the State of Delaware on October 21, 1999, as a limited
liability company. The Company provides web-based services for
the oil and lubricant industry. The Companys web site,
www.oilspot.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, 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.
The Company 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
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
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company has adopted the provisions of Statement
of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Costs
qualifying for capitalization are initially capitalized and
amortized over the useful life of the asset. Costs initially
capitalized under SOP 98-1 have subsequently been expensed as
the useful life of the initial costs of the web site have
expired given that frequent modifications are being made to the
site.
Effective October 21, 1999, the Company elected to
become a limited liability company for income tax reporting
purposes. Accordingly, the Company is treated as a partnership
for Federal and state income tax purposes. For the period from
October 21, 1999 (inception) through December 31, 1999, no
provision has been made for income taxes, as the Company is not
directly subject to taxation. The Companys net loss is
allocated to and included in the income tax returns of its
members.
(3)
Related-party Transactions
During the period from October 21, 1999 (inception)
through December 31, 1999, the Company utilized office space
provided by a member, as needed. The Company incurred no rent or
utility expenses from October 21, 1999 (inception) through
December 31, 1999. The Company believes the value of the office
rent provided on an as needed basis by the member is not
material to the financial statements.
The Company maintains a significant relationship
with a member who provides development services for its web
site. For the period from October 21, 1999 (inception) through
December 31, 1999, the Company incurred costs of $31,300 for
such services. Management believes that the service fee charged
by the member is reasonable and that such fees are
representative of the expenses the Company would have incurred
with an unrelated third party.
THE
OILSPOT.COM LLC
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
The Company receives certain marketing services
from an affiliate, who is a related party through common
ownership. For the period from October 21, 1999 (inception)
through December 31, 1999, the Company incurred costs of $4,757
for such services. Management believes that the service fee
charged by the affiliate is reasonable and that such fees are
representative of the expenses the Company would have incurred
with an unrelated third party.
Certain expenses of the Company, such as hosting
fees for the web site, in the amount of $999 have been paid by
members and will be reimbursed by the Company.
(4)
Subsequent Events
Effective January 31, 2000, the Company amended and
restated its articles of incorporation and converted from a
limited liability company to a C-corporation, Oilspot.com, Inc.
The Company amended its articles of incorporation to authorize
600,000 shares of $0.001 par value Series A-1 preferred stock,
600,000 shares of $0.001 par value Series A-2 preferred stock
(collectively, the Series A Preferred Shares), 2,000,000 shares
of $0.001 par value Class A common stock, and 600,000 shares of
$0.001 par value Class B common stock. The Company issued
444,400 shares of the newly authorized Class A common stock to
the existing members and all 444,400 previously outstanding
units of the limited liability company were
canceled.
Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the shareholders of
Series A Preferred Shares are entitled to receive a cash
distribution prior to any distribution to a shareholder of Class
A common stock or Class B common stock (collectively, the Common
Shares). The cash distribution is equal to the greater of (i)
$8.99928 (the Series A Liquidation Value and the initial Series
A Conversion Price) plus all accrued and unpaid dividends and
(ii) the amount such shareholder would receive if all
shareholders of Series A Preferred Shares had converted their
shares into common stock immediately prior to such liquidation,
dissolution or winding up. The remaining assets available for
distribution are distributed to the shareholders of Common
Shares ratably in proportion to the number of shares of common
stock held.
The Series A Conversion Price will be reduced to the
extent of all accrued and unpaid dividends per share of Series A
Preferred Shares. The Series A Conversion Price will be adjusted
for events such as the issuance of rights, options, convertible
securities, dilutive events and stock splits. Each share of
Series A Preferred Shares accrues dividends on a daily basis
from the date of issuance at a rate of 7% per annum of the
Series A Liquidation Value per share. The board of directors may
declare a dividend on the Common Shares when the Series A
Preferred Shares are no longer outstanding.
Each share of Series A-1 preferred stock is
convertible anytime, at the election of the shareholder, into
Class A common stock by adding (i) the number of shares
determined by (a) multiplying the number of Series A-1 preferred
stock to be converted by the Series A Liquidation Value and (b)
dividing the resulting product by the Series A Conversion Price
then in effect, plus (ii) the number of shares determined by
dividing the total amount of accrued and unpaid dividends due
with respect to each Series A-1 preferred stock to be converted
by the Series A Conversion Price.
Each share of Series A-2 preferred stock is
convertible anytime, at the election of the shareholder, into
Class B common stock by adding (i) the number of shares
determined by (a) multiplying the number of Series A-2 preferred
stock to be converted by the Series A Liquidation Value and (b)
dividing the resulting product by the Series A Conversion Price
then in effect, plus (ii) the number of shares determined by
dividing the total amount of accrued and unpaid dividends due
with respect to each Series A-2 preferred stock to be
converted by the Series A Conversion Price. Alternatively, each
share of Series A-2 preferred stock is convertible anytime, at
the election of the shareholder, into one share of Series A-1
preferred stock. Each share of Series A-2 preferred stock will
automatically convert into one share of Series A-1 preferred
stock upon transfer of such share to a person other than a
permitted shareholder or any time the number of shares of Class
B common stock then outstanding or issuable upon conversion of
the Series A-2 preferred stock is less than 5% of the aggregate
number of Common Shares then outstanding.
The Series A-1 preferred stock will automatically
convert into Class A common stock and the Series A-2 preferred
stock will automatically convert into Class B common stock upon
the election of a majority of shareholders of Series A Preferred
Shares. Further, upon a qualified public offering, in which
certain criteria have been met, the Series A preferred stock
will automatically convert into Class A common stock and the
Series A-2 preferred stock will automatically convert into Class
B common stock.
Each share of Class B common stock is convertible
anytime, at the election of the shareholder, into one share of
Class A common stock. Each share of Class B common stock will
automatically convert into one share of Class A common stock
upon transfer of such share to a person other than a permitted
shareholder or any time the number of shares of Class B common
stock then outstanding or issuable upon conversion of the Series
A Preferred Shares is less than 5% of the aggregate number of
Common Shares then outstanding.
The Series A preferred shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders two-thirds of the Series
A preferred shares then outstanding may require the Company to
redeem all the Series A preferred shares then outstanding at the
Series A redemption price. The Series A redemption price per
share equals the greater of (i) the fair market value of such
Series A preferred share (assuming payment of the Series A
liquidation value, plus payment of accumulated but unpaid
dividends) and (ii) the sum of (a) the Series A liquidation
value plus (b) all accrued but unpaid dividends on such Series A
preferred share through the applicable redemption
date.
At any time or times on or after the earlier to
occur of (i) the fifth anniversary of issuance or (ii) the date
on which a holder of equity securities of the Company acquires a
voting interest in the Company that is greater than that of
divine, the holder or holders of two-thirds of the outstanding
Series A preferred shares may elect to require the Company to
redeem all or any portion of such holders Series A
preferred shares.
The shareholders of the Common Shares and the Series
A Preferred Shares vote together as a single class. The
shareholders of the Class A common stock and the Class B common
stock are entitled to one vote per share. The shareholders of
the Series A-1 preferred stock are entitled to the number of
votes each shareholder would have if all of the
shareholders Series A-1 preferred shares were converted
into Class A common stock as of the date of record. For the
purposes of voting, the Series A-1 preferred stock are
convertible into fractional shares. The shareholders of the
Series A-2 preferred stock are entitled to the number of votes
each shareholder would have if all of the shareholders
Series A-2 preferred shares were converted into Class B common
stock as of the date of record. For the purposes of voting, the
Series A-2 preferred stock are convertible into fractional
shares.
Notwithstanding the preceding paragraph, as long as
the shareholders of the Class B common stock outstanding and
issuable upon conversion of the Series A-2 preferred stock
together own at least five percent of the Companys issued
and outstanding Common Shares, upon conversion, exercise or
exchange of all outstanding options and convertible securities,
(i) such shareholders shall have the number of votes equal to
the greater of (a) the shareholders voting power as determined
in the preceding paragraph and (b) twenty-five and one tenth
percent of the voting power of the Company and (ii) the voting
rights of any shareholder other than
the shareholders of the Class B common stock and the Series A-2
preferred shares shall be limited to the number of votes equal
to the lesser of (a) such shareholders actual voting
interest as determined in accordance with the preceding
paragraph and (b) twenty-five percent of the voting power of the
Company.
On February 10, 2000, the Company entered into a
Series A Preferred Stock Purchase Agreement (the Agreement) with
divine interVentures, inc. (divine). Under the terms of the
Agreement, the Company issued 555,600 shares of Series A-2
preferred stock to divine for aggregate proceeds of $5,000,000.
The proceeds from the transaction include cash consideration and
a $2,500,000 secured promissory note from divine issued on
February 10, 2000. The note has a May 10, 2000 maturity date and
accrues interest at a rate equal to the lesser of 8.5% or the
maximum rate permitted under applicable law.
In conjunction with the Agreement, the Company has
reserved for issuance, 555,600 shares of Series A-1 preferred
stock for conversion of the Series A-2 preferred stock, 555,600
shares of Class B common stock for the conversion of the Series
A-2 preferred stock, and 555,600 shares of Class A common stock
for the conversion of the Class B common stock.
The Company entered into a Web-site Services
Agreement (Services Agreement) on February 9, 2000 for the
strategy, design, development and maintenance of its web site.
The Services Agreement is between the Company and a shareholder
of the Company. The Services Agreement will remain in effect
until the parties no longer have any unfulfilled obligations
under the Services Agreement. The Company will commit to obtain
services from the shareholder for a period of six months. After
July 10, 2000, the Company may terminate this agreement upon
thirty days written notice. The Company will pay the shareholder
a nonrefundable monthly fee of $50,000 for such services. On a
monthly basis, incurred costs will be credited against the
nonrefundable fee and any costs incurred in excess of the
nonrefundable fee will be paid by the Company. Any amount of the
nonrefundable fee not utilized within the month may be carried
forward for application against future costs.
The Company entered into an Interim Chief Technical
Officer (CTO) Agreement (CTO Agreement) on February 9, 2000 for
CTO services. The CTO Agreement is between the Company and a
shareholder of the Company. The Company will pay the shareholder
a nonrefundable monthly fee of $10,000 for such services. The
CTO Agreement has an initial term of one month which
automatically renews. The Company may terminate the CTO
Agreement upon two weeks written notice.
In February 2000, the Company established an
incentive and non-qualified stock option plan (the Plan) for
employees, officers and directors of the Company and any
consultant or advisor providing services to the Company. The
Company reserved 250,000 shares of Class A common stock for
issuance under the Plan.
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
Companys 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. (a development stage
enterprise) 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.
Minneapolis, Minnesota
November
24, 1999, except for note 8, which is as of December 8,
1999
OPINIONWARE.COM, INC.
(a
development stage enterprise)
September 30, 1999
ASSETS
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 |
|
|
|
|
|
See
accompanying notes to financial statements.
OPINIONWARE.COM, INC.
(a
development stage enterprise)
Period
from April 1, 1999 (inception) through September 30,
1999
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 |
|
|
|
See
accompanying notes to financial statements.
OPINIONWARE.COM, INC.
(a
development stage enterprise)
STATEMENT OF SHAREHOLDERS DEFICIT
Period
from April 1, 1999 (inception) through September 30,
1999
|
|
Common Stock
|
|
Additional
paid-in
capital
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
shareholders
deficit
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
OPINIONWARE.COM, INC.
(a
development stage enterprise)
Period
from April 1, 1999 (inception) through September 30,
1999
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 activitiespurchases 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 |
|
|
|
|
|
See
accompanying notes to financial statements.
OPINIONWARE.COM, INC.
(a
development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1)
Description of Business and Summary of Significant Accounting
Policies
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).
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.
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.
OPINIONWARE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
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:
|
|
Options
|
|
Weighted
average exercise
price per share
|
Outstanding at May 26, 1999 (date of
incorporation) |
|
|
|
|
Granted |
|
1,220,000 |
|
$0.05 |
|
|
|
|
|
Outstanding at September 30, 1999 |
|
1,220,000 |
|
$0.05 |
|
|
|
|
|
The following table summarizes information about
stock options outstanding at September 30, 1999:
Exercise
prices
|
|
Options Outstanding
|
|
Options exercisable
|
|
Number
outstanding
September 30,
1999
|
|
Weighted
average
remaining
contractual
life
|
|
Exercise
price
|
|
Number
exercisable
September 30,
1999
|
|
Exercise
price
|
$0.05 |
|
1,220,000 |
|
9.1 |
|
$0.05 |
|
100,000 |
|
$0.05 |
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 Companys stock-based awards was estimated using the
Black-Scholes option pricing model with the following
assumptions:
Expected life in years |
|
9.33 |
|
Risk-free interest rates |
|
5.5 to
6.4 |
% |
Expected volatility |
|
0 |
% |
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
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.
Net
loss: |
|
|
As reported |
|
$543,588 |
Fair value of stock-based compensation |
|
1,990 |
|
|
|
Pro forma net loss |
|
$545,578 |
|
|
|
(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 Companys 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.
OPINIONWARE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
(7)
Commitments and Contingencies
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.
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 Companys 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 November 19, 1999, the Company amended and
restated its certificate of incorporation thereby authorizing
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. Upon liquidation, each holder of Series A-1 and Series
A-2 preferred shares (collectively, Series A preferred
shares) shall be entitled to receive an amount equal to
the greater of (i) $.90, subject to adjustment in the event such
shares are subdivided through a stock split, stock dividend, or
otherwise (the Series A liquidation value), plus all
accrued and unpaid dividends, and (ii) the amount such holder
would receive if all holders of Series A preferred shares had
converted their Series A preferred shares into common stock
immediately prior to liquidation.
Upon liquidation, and after payment of preferential
amounts to holders of Series A preferred shares, the remaining
assets of the Company shall be distributed to the holders of
common shares. The Company shall pay preferential dividends to
the holders of Series A preferred shares, when and if declared
by the board of directors, at an annual rate of 8% of the sum of
the Series A liquidation value plus all accrued and unpaid
dividends. In the event any dividend or other distribution
payable in cash, stock, or other property is declared on the
common stock, each holder of Series A preferred shares on the
record date for such dividend or distribution shall be entitled
to receive the same cash, stock or other property which such
holder would have received if on such record date such holder
was the holder of record of the number of common shares into
which such Series A preferred shares then held by such holder
are then convertible.
Series A-1 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class A common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-1
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price ($.90 initially, subject to adjustment upon
certain dilutive events), plus (y) the number of shares
determined by dividing the total amount of accrued and unpaid
dividends
with respect to each Series A-1 preferred share to be converted by
the Series A conversion price. If the holders of more than
two-thirds of the Series A-1 preferred shares then outstanding
shall so elect, by vote or written consent, all of the
outstanding Series A-1 preferred shares shall automatically
convert into shares of Class A common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class B common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-2
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price, plus (y) the number of shares determined by
dividing the total amount of accrued and unpaid dividends with
respect to each Series A-2 preferred share to be converted by
the Series A conversion price. If the holders of more than
two-thirds of the Series A-2 preferred shares then outstanding
shall so elect, by vote or written consent, all of the
outstanding Series A-2 preferred shares shall automatically
convert into shares of Series A-1 preferred stock or Class B
common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into an equal number of
shares of Series A-1 preferred stock. Each Series A-2 preferred
share shall automatically convert into one Series A-1 preferred
share if the aggregate number of Series A-2 preferred shares and
Class B common shares then outstanding is less than five percent
of the aggregate number of common shares outstanding, assuming
conversion or exercise of all outstanding convertible securities
and options.
Class B common shares may be converted at any time,
at the election of the holder, into an equal number of Class A
common shares. Each Class B common share shall automatically
convert into one Class A common share if the aggregate number of
Series A-2 preferred shares and Class B common shares then
outstanding is less than five percent of the aggregate number of
common shares then outstanding, assuming conversion or exercise
of all outstanding convertible securities and
options.
If a firm commitment underwritten public offering of
shares of common stock is effected in which (a) the aggregate
price paid by the public for the shares is at least $20,000,000
and (b) the price per share paid by the public for such shares
is at least 300% of the Series A conversion price in effect
immediately prior to such offering, then all of the outstanding
Series A preferred shares shall be automatically converted into
shares of common stock upon the closing of the public
offering.
The Series A preferred shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of two-thirds of the
Series A preferred shares then outstanding may require the
Company to redeem all the Series A preferred shares then
outstanding at the Series A redemption price. The Series A
redemption price per share equals the greater of (i) the fair
market value of such Series A preferred share (assuming payment
of the Series A liquidation value, plus payment of accumulated
but unpaid dividends, plus the value of the common stock into
which such Series A preferred share is convertible) and (ii) the
sum of (a) $0.90 (such amount to be adjusted proportionately in
the event the Series A preferred shares are subdivided by any
means into a greater number or combined by any means into a
lesser number) plus (b) all accrued but unpaid dividends on such
Series A preferred share through the applicable redemption
date.
At any time or times on or after the earlier to
occur of (i) the fifth anniversary of issuance or (ii) the date
on which a holder of equity securities of the Company acquires a
voting interest in the Company which is greater than that of the
Permitted Holders (as defined in the amended and restated
certificate of incorporation), the holder or holders of
two-thirds of the outstanding Series A preferred shares may
elect to require the Company to redeem all or any portion of
such holders Series A preferred shares.
OPINIONWARE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
Holders of Class A common stock, Class B common
stock, Series A-1 preferred stock, and Series A-2 preferred
stock vote together as a single class on all matters submitted
to a vote before the stockholders of the Company. Holders of
Class A and Class B common stock are entitled to one vote per
share. Holders of Series A-1 preferred stock are entitled to the
number of votes of Class A common shares such holders would have
been entitled to had they converted all of their Series A-1
preferred shares to Class A common shares. Holders of Series A-2
preferred stock are entitled to the number of votes of Class B
common shares such holders would have been entitled to had they
converted all of their Series A-2 preferred shares to Class B
common shares.
Provided that holders of Class B common stock
outstanding and issuable upon conversion of Series A-2 preferred
stock own at least 5% of the Companys Class A common stock
and Class B common stock and assuming conversion of all
securities convertible into such shares, (i) such holders shall
have the number of votes equal to the greater of (a) the voting
rights determined in accordance with the preceding paragraph,
and (b) 25.1% of the voting power of the Company, and (ii) the
voting rights of any person or group other than holders of Class
B common shares and Series A-2 preferred shares shall be limited
to the number of votes equal to the lesser of (x) such
holders voting rights in accordance with the preceding
paragraph, and (y) 25% of the voting power of the
Company.
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.
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.
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
Companys 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.
McLean,
Virginia
November
5, 1999, except as to note 8,
which is as of December 10,
1999
OUTTASK.COM INC.
(a
development stage enterprise)
September 30, 1999
ASSETS
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 |
|
|
|
|
|
See
accompanying notes to financial statements.
OUTTASK.COM INC.
(a
development stage enterprise)
Period
from April 6, 1999 (inception) through September 30,
1999
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 |
|
|
|
See
accompanying notes to financial statements.
OUTTASK.COM INC.
(a
development stage enterprise)
STATEMENT OF STOCKHOLDERS DEFICIT
Period
from April 6, 1999 (inception) through September 30,
1999
|
|
Common Stock
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
stockholders
deficit
|
|
|
Shares
|
|
Amount
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
OUTTASK.COM INC.
(a
development stage enterprise)
Period
from April 6, 1999 (inception) through September 30,
1999
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 |
|
|
|
|
|
See
accompanying notes to financial statements.
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 Companys
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:
Computer hardware |
|
3
years |
Video
hardware |
|
3
years |
Furniture and fixtures |
|
5
years |
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.
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.
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.
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 Companys 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:
Computer hardware |
|
$51,920 |
|
Video
hardware |
|
13,995 |
|
Furniture and fixtures |
|
7,569 |
|
|
|
|
|
|
|
73,484 |
|
Less
accumulated depreciation |
|
(978 |
) |
|
|
|
|
|
|
$72,506 |
|
|
|
|
|
(5)
Capital Stock
In April 1999, the Company issued an aggregate of
117,500 shares of common stock to the Companys founders at
a price of $1.00 per share.
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:
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 |
) |
|
|
|
|
|
|
$
|
|
|
|
|
|
The tax effects of temporary differences that give
rise to significant portions of the Companys deferred tax
assets and liabilities as of September 30, 1999 are as
follows:
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 |
|
$
|
|
|
|
|
|
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 Companys 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 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.
OUTTASK.COM INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
On December 9, 1999, the Company amended and
restated its certificate of incorporation thereby authorizing
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 $.01 par value Series A-1 preferred stock,
and 8,101,852 shares of $.01 par value Series A-2 preferred
stock. Upon liquidation, each holder of Series A-1 and Series
A-2 preferred shares (collectively, Series A preferred
shares) shall be entitled to receive an amount equal to
the greater of (i) $.864, subject to adjustment in the event
such shares are subdivided through a stock split, stock
dividend, or otherwise (the Series A liquidation
value), plus all accrued and unpaid dividends, and (ii)
the amount such holder would receive if all holders of Series A
preferred shares had converted their Series A preferred shares
into common stock immediately prior to liquidation.
Upon liquidation, and after payment of preferential
amounts to holders of Series A preferred shares, the remaining
assets of the Company shall be distributed to the holders of
common shares. The Company shall pay preferential dividends to
the holders of Series A preferred shares, when and if declared
by the board of directors, at an annual rate of 8% of the sum of
the Series A liquidation value plus all accrued and unpaid
dividends. In the event any dividend or other distribution
payable in cash, stock, or other property is declared on the
common stock, each holder of Series A preferred shares on the
record date for such dividend or distribution shall be entitled
to receive the same cash, stock or other property which such
holder would have received if on such record date such holder
was the holder of record of the number of common shares into
which such Series A preferred shares then held by such holder
are then convertible.
Series A-1 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class A common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-1
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price ($.864 initially, subject to adjustment upon
certain dilutive events), plus (y) the number of shares
determined by dividing the accrued and unpaid dividends with
respect to each Series A-1 preferred share to be converted by
the Series A conversion price. If the holders of more than
two-thirds of the Series A-1 preferred shares then outstanding
shall so elect, by vote or written consent, all of the
outstanding Series A-1 preferred shares shall automatically
convert into shares of Class A common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class B common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-2
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price, plus (y) the number of shares determined by
dividing the total amount of accrued and unpaid dividends with
respect to each Series A-2 preferred share to be converted by
the Series A conversion price. If the holders of more than
two-thirds of the Series A-2 preferred shares then outstanding
shall so elect, by vote or written consent, all of the
outstanding Series A-2 preferred shares shall automatically
convert into shares of Series A-1 preferred stock or Class B
common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into an equal number of
shares of Series A-1 preferred stock. Each Series A-2 preferred
share shall automatically convert into one Series A-1 preferred
share if the aggregate number of Class B common shares then
outstanding is less than ten percent of the aggregate number of
common shares outstanding, assuming conversion or exercise of
all outstanding convertible securities and options.
Class B common shares may be converted at any time,
at the election of the holder, into an equal number of Class A
common shares. Each Class B common share shall automatically
convert into one Class A common share if the aggregate number of
Class B common shares then outstanding is less than ten percent
of the
aggregate number of common shares then outstanding, assuming
conversion or exercise of all outstanding convertible securities
and options.
If a firm commitment underwritten public offering of
shares of common stock is effected in which (a) the aggregate
price paid by the public for the shares is at least $20,000,000
and (b) the price per share paid by the public for such shares
is at least 300% of the Series A conversion price in effect
immediately prior to such offering, then all of the outstanding
Series A preferred shares shall be automatically converted into
shares of common stock upon the closing of the public
offering.
The Series A preferred shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of at least two-thirds
of the Series A preferred shares then outstanding may require
the Company to redeem all the Series A preferred shares then
outstanding at the Series A redemption price. The Series A
redemption price per share equals the sum of the Series A
liquidation value plus all accrued but unpaid dividends on such
Series A preferred share through the applicable redemption
date.
At any time or times on or after the earlier to
occur of (i) the fifth anniversary of issuance or (ii) the date
on which the Company undergoes a fundamental change or change in
ownership, the holder or holders of at least two-thirds of the
outstanding Series A preferred shares may elect to require the
Company to redeem all or any portion of such holders
Series A preferred shares.
Holders of Class A common stock, Class B common
stock, Series A-1 preferred stock, and Series A-2 preferred
stock vote together as a single class on all matters submitted
to a vote before the stockholders of the Company. Holders of
Class A and Class B common stock are entitled to one vote per
share. Holders of Series A-1 preferred stock are entitled to the
number of votes of Class A common shares such holders would have
been entitled to had they converted all of their Series A-1
preferred shares to Class A common shares. Holders of Series A-2
preferred stock are entitled to the number of votes of Class B
common shares such holders would have been entitled to had they
converted all of their Series A-2 preferred shares to Class B
common shares.
Provided that holders of Class B common stock
outstanding and issuable upon conversion of Series A-2 preferred
stock own at least 15% of the Companys Class A common
stock and Class B common stock and assuming conversion of all
securities convertible into such shares, (i) such holders shall
have the number of votes equal to the greater of (a) the voting
rights determined in accordance with the preceding paragraph,
and (b) 25.1% of the voting power of the Company, and (ii) the
voting rights of any person or group other than holders of Class
B common shares and Series A-2 preferred shares shall be limited
to the number of votes equal to the lesser of (x) such
holders voting rights in accordance with the preceding
paragraph, and (y) 25% of the voting power of the
Company.
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.
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 Companys founder.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
Perceptual Robotics, Inc.:
We have audited the accompanying balance sheets of
Perceptual Robotics, Inc. as of December 31, 1998 and 1999, and
the related statements of operations, stockholders equity
(deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the
Companys 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 Perceptual Robotics, Inc. as of December 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.
Chicago,
Illinois
January
21, 2000, except for note 10, which is as of February 14,
2000
PERCEPTUAL ROBOTICS, INC.
December 31, 1998 and 1999
Assets |
|
1998
|
|
1999
|
Current
assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ 33,893 |
|
|
577,358 |
|
Accounts receivable, net of allowance for doubtful
accounts of $10,000 in 1998 and $20,000 in 1999 |
|
302,953 |
|
|
535,378 |
|
Inventory |
|
23,674 |
|
|
151,323 |
|
Prepaid
expenses |
|
47,809 |
|
|
108,398 |
|
|
|
|
|
|
|
|
Total current
assets |
|
408,329 |
|
|
1,372,457 |
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
Equipment and furnishings |
|
81,129 |
|
|
130,961 |
|
Less
accumulated depreciation |
|
(35,846 |
) |
|
(64,918 |
) |
|
|
|
|
|
|
|
Net property and
equipment |
|
45,283 |
|
|
66,043 |
|
|
|
|
|
|
|
|
Other
assets: |
|
|
|
|
|
|
Incorporation costs |
|
689 |
|
|
689 |
|
Patents |
|
|
|
|
36,571 |
|
Less
accumulated amortization |
|
(413 |
) |
|
(1,312 |
) |
|
|
|
|
|
|
|
Net other
assets |
|
276 |
|
|
35,948 |
|
|
|
|
|
|
|
|
Total
assets |
|
$ 453,888 |
|
|
1,474,448 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
(Deficit) |
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Note
payablebank |
|
$ 100,000 |
|
|
|
|
Notes
payablestockholders |
|
100,000 |
|
|
|
|
Accounts payable |
|
129,336 |
|
|
221,215 |
|
Due to
stockholders and employees |
|
33,562 |
|
|
|
|
Customer deposits |
|
34,756 |
|
|
41,080 |
|
Accrued
expenses |
|
68,149 |
|
|
133,411 |
|
Accrued
payroll taxes |
|
15,679 |
|
|
800 |
|
Warranty reserve |
|
10,048 |
|
|
24,976 |
|
Deferred revenues |
|
107,000 |
|
|
143,106 |
|
|
|
|
|
|
|
|
Total current
liabilities |
|
598,530 |
|
|
564,588 |
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock: |
|
|
|
|
|
|
Series
A8% cumulative; stated value $3.00 per share; 175,000
shares authorized; 169,591 shares issued
and outstanding, with a $3.00 per share
redemption value plus accrued 8% annual cumulative
dividends |
|
553,931 |
|
|
598,245 |
|
Series
B8% cumulative; stated value $5.00 per share; 400,000
shares authorized in 1999; 361,125 shares
issued and outstanding in 1999, with a $5.00
per share redemption value plus accrued 8% annual
cumulative dividends |
|
|
|
|
1,853,756 |
|
Stockholders equity (deficit): |
|
|
|
|
|
|
Convertible preferred stock: |
|
|
|
|
|
|
Junior Series
Onenon-cumulative; stated value $0.47 per share; 63,830
shares authorized; 63,830
shares issued and outstanding |
|
30,000 |
|
|
30,000 |
|
Junior Series
Twonon-cumulative; stated value $0.8225 per share;
30,396 shares authorized; 30,396
shares issued and outstanding |
|
25,001 |
|
|
25,001 |
|
Common
stock: |
|
|
|
|
|
|
Votingno
par value; 100,000,000 shares authorized; 1,000,000 shares
issued and outstanding in
1998; 1,121,584 shares issued and outstanding in
1999 |
|
2,800 |
|
|
102,803 |
|
Nonvotingno par value; 100,000,000 shares
authorized, no shares issued and outstanding |
|
|
|
|
|
|
Accumulated
deficit |
|
(756,374 |
) |
|
(1,699,945 |
) |
|
|
|
|
|
|
|
Total
stockholders equity (deficit) |
|
(698,573 |
) |
|
(1,542,141 |
) |
|
|
|
|
|
|
|
Total liabilities
and stockholders equity (deficit) |
|
$ 453,888 |
|
|
1,474,448 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
PERCEPTUAL ROBOTICS, INC.
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Net
revenues |
|
$1,011,152 |
|
|
1,732,734 |
|
Cost of
revenues |
|
336,866 |
|
|
688,972 |
|
|
|
|
|
|
|
|
Gross profit |
|
674,286 |
|
|
1,043,762 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
General and administrative |
|
253,781 |
|
|
565,663 |
|
Selling |
|
413,678 |
|
|
839,441 |
|
Research and development |
|
321,714 |
|
|
476,836 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
989,173 |
|
|
1,881,940 |
|
|
|
|
|
|
|
|
Loss from operations |
|
(314,887 |
) |
|
(838,178 |
) |
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
Interest income |
|
1,694 |
|
|
25,154 |
|
Interest expense |
|
(9,835 |
) |
|
(10,331 |
) |
|
|
|
|
|
|
|
Other income (expense), net |
|
(8,141 |
) |
|
14,823 |
|
|
|
|
|
|
|
|
Loss before income taxes |
|
(323,028 |
) |
|
(823,355 |
) |
Income
taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ (323,028 |
) |
|
(823,355 |
) |
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
PERCEPTUAL ROBOTICS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Years
ended December 31, 1998 and 1999
|
|
Preferred stock
|
|
Common stock
|
|
Accumulated
deficit
|
|
Total
stockholders
equity
(deficit)
|
|
|
Junior Series One
|
|
Junior Series Two
|
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
Balance
at December 31, 1997 |
|
$30,000 |
|
63,830 |
|
$25,001 |
|
30,396 |
|
$ 2,800 |
|
1,000,000 |
|
$ (392,314 |
) |
|
$ 334,513 |
|
Accrued
dividends on redeemable convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,032 |
) |
|
(41,032 |
) |
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(323,028 |
) |
|
(323,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1998 |
|
30,000 |
|
63,830 |
|
25,001 |
|
30,396 |
|
2,800 |
|
1,000,000 |
|
(756,374 |
) |
|
(698,573 |
) |
Issuance of common stock |
|
|
|
|
|
|
|
|
|
100,003 |
|
121,584 |
|
|
|
|
100,003 |
|
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,381 |
|
|
12,381 |
|
Accrued
dividends on redeemable convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(132,597 |
) |
|
(132,597 |
) |
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(823,355 |
) |
|
(823,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
$30,000 |
|
63,830 |
|
$25,001 |
|
30,396 |
|
$102,803 |
|
1,121,584 |
|
$(1,699,945 |
) |
|
$(1,542,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
PERCEPTUAL ROBOTICS, INC.
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$(323,028 |
) |
|
(823,355 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
24,065 |
|
|
29,971 |
|
Provision for doubtful accounts |
|
10,000 |
|
|
10,000 |
|
Issuance of warrants |
|
|
|
|
12,381 |
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
(243,660 |
) |
|
(252,425 |
) |
Inventory |
|
(4,564 |
) |
|
(127,650 |
) |
Prepaid expenses |
|
(6,113 |
) |
|
(60,589 |
) |
Accounts payable |
|
66,700 |
|
|
91,879 |
|
Accrued liabilities |
|
141,542 |
|
|
101,417 |
|
Due to stockholders and
employees |
|
26,479 |
|
|
|
|
Customer deposits |
|
34,756 |
|
|
6,324 |
|
|
|
|
|
|
|
|
Net cash used in operating
activities |
|
(273,823 |
) |
|
(1,012,047 |
) |
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
Payments of patent costs |
|
|
|
|
(36,571 |
) |
Purchases of property and equipment |
|
(16,310 |
) |
|
(39,832 |
) |
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
(16,310 |
) |
|
(76,403 |
) |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
Proceeds from sale of common stock |
|
|
|
|
100,003 |
|
Net proceeds from sale of preferred
stock |
|
|
|
|
1,631,912 |
|
Proceeds from notes payable |
|
200,000 |
|
|
|
|
Payments on notes payable |
|
|
|
|
(100,000 |
) |
|
|
|
|
|
|
|
Net cash provided by financing
activities |
|
200,000 |
|
|
1,631,915 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents |
|
(90,133 |
) |
|
543,465 |
|
Cash
and cash equivalents, beginning of year |
|
124,026 |
|
|
33,893 |
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year |
|
$ 33,893 |
|
|
577,358 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
Interest paid |
|
$ 5,653 |
|
|
12,703 |
|
|
|
|
|
|
|
|
Noncash
financing activity: |
|
|
|
|
|
|
Conversion of note payable-stockholders and due to
stockholders to Series B
redeemable convertible
preferred stock |
|
$
|
|
|
133,561 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
PERCEPTUAL ROBOTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(1)
Description of Business
Perceptual Robotics, Inc. (the Company) develops and
sells software which enables users to control and view images
from live video cameras over the Internet. In conjunction with
selling the software, hardware is purchased from various
manufacturers and resold to customers.
(2)
Summary of Significant Accounting Policies
|
(a)
Cash and cash equivalents
|
The Company considers all investments with an
original maturity of three months or less to be cash
equivalents. The cash equivalents are maintained by one
financial institution and are insured by the Federal Deposit
Insurance Corporation up to $100,000. At December 31, 1999, the
Companys uninsured cash balance was approximately
$450,000.
Inventory is stated using the moving average cost
basis. At December 31, 1998 and 1999, the inventory consisted of
hardware and third party software.
|
(c)
Property and Equipment
|
Property and equipment consisting of office
equipment and furnishings are stated at cost and depreciated
using the straight-line method with useful lives ranging from 3
to 7 years. Depreciation expense of $23,927 and $29,072 was
recorded in 1998 and 1999, respectively.
The Company recognizes revenue associated with
hardware upon delivery to the customer. Revenue from software is
recognized upon delivery provided no significant production,
customization or modification of the software is
required.
The Company provides custom software development to
some of its customers. Revenue is recognized on the
percentage-of-completion method for these contracts and for
software sales involving significant production, customization
or modification.
The Company also sells upgrade and service contracts
related to its software. The revenue related to these contracts
is recognized over the life of the contract.
The Company provides a warranty reserve equal to two
percent of hardware sales during the year to voluntarily cover
claims made by customers after expiration of the hardware
manufacturers warranty.
Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer
Software to Be Sold Leased or Otherwise Marketed. Costs
associated with the planning and designing phase of software
development, including coding and testing activities necessary
to establish technological feasibility, are classified as
research and development costs and are charged to expense as
incurred. Once technological feasibility has been established,
software
development costs would be capitalized, however, the Company has
not capitalized any costs to date given the initial software
product was technologically feasible upon inception of the
Company and subsequent enhancements and version releases thereto
did not qualify for capitalization pursuant to the provisions of
SFAS No. 86.
|
(g)
Fair Value of Financial Instruments
|
The Companys financial instruments include
accounts receivable, accounts payable and notes payable. The
fair value of these financial instruments approximates their
carrying values due to the short term nature of these
instruments or the rates on these instruments approximate
current market rates.
Advertising expenses are charged to operations
during the year in which they are incurred. The total amount of
advertising expenses charged to operations was approximately
$80,000 and $154,000 for the years ended December 31, 1998 and
1999, respectively.
In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, Accounting for Stock Based
Compensation which defines a fair value based method of
accounting for employee stock options and similar equity
instruments. SFAS No. 123 gives entities a choice of recognizing
related compensation expense by adopting the new fair value
method or to continue to measure compensation using the
intrinsic value approach under Accounting Principles Board
Opinion No. 25 (APB No. 25). The Company continues to use the
measurement approach prescribed by APB No. 25 but provides the
pro forma disclosures required by SFAS No. 123.
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.
|
(k)
Impairment of Long-lived Assets
|
The Company evaluates the carrying value of its
intangible and other long-lived assets periodically in
compliance with the provisions of SFAS No. 121, Accounting
for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of.
(3)
Income Taxes
The Company, prior to August 31, 1997, with the
consent of its shareholders, elected to be taxed as an S
corporation under the provisions of the Internal Revenue Code.
Under these provisions, the shareholders were taxed on the
Companys taxable income in lieu of the corporate income
tax. Therefore, no provision or liability for federal or state
income taxes is reflected in the financial statements prior to
August 31, 1997.
Due to the sale of stock on August 31, 1997 to an
entity which disqualified the corporation for the S corporation
election under the Internal Revenue Code, the Company revoked
the election as of that date.
PERCEPTUAL ROBOTICS, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
Subsequent to September 1, 1997, the Company
accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and/or liabilities are computed annually for
differences between the financial statement and income tax bases
of assets and liabilities that will result in taxable income or
deductible expenses in future years. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amount anticipated to be realized.
At December 31, the Company had the following
deferred tax assets and liabilities:
|
|
1998
|
|
1999
|
Deferred tax assets: |
|
|
|
|
|
|
Net operating loss carryforwards |
|
$174,000 |
|
|
504,000 |
|
Depreciation |
|
11,000 |
|
|
14,000 |
|
Legal expenses |
|
13,000 |
|
|
12,000 |
|
Other |
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
200,000 |
|
|
530,000 |
|
Valuation allowance |
|
(200,000 |
) |
|
(530,000 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes |
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 1999, the Company has net operating
loss carryforwards of $1,228,000 available to reduce future
years taxable income. These carryforwards will begin to
expire, if unused, in 2012. The valuation allowance increased
$78,000 and $330,000 in 1998 and 1999, respectively. It is
managements judgement that a full valuation allowance is
deemed necessary given managements belief that it is more
likely than not that the deferred tax assets will not be
realized prior to expiration of the net operating loss
carryforwards or prior to forfeiture.
(4)
Lease Commitments
The Company leases its offices in Evanston, Illinois
on a month-to-month basis. The lease may be cancelled by either
party with 30-days notice. The provisions of the lease require
monthly rental and real estate tax payments. Total lease
payments aggregated $20,577 and $52,782 in 1998 and 1999,
respectively.
The Company signed a lease agreement dated March 3,
1999 for certain computer and video equipment. The agreement
provides for periodic purchases of equipment up to $50,000 by
the lessor, at the direction of and for use by the Company. The
Company is obligated to make monthly rental payments, the amount
and number to be determined at the time of each equipment
purchase based on an interest rate of prime + 1%. The Company,
as additional consideration, has granted the lessor 1,000
warrants to purchase Series B redeemable convertible preferred
stock at $5.00 per share, which was based on the sale price for
the Series B redeemable convertible preferred stock offering
that took place in 1999 (see note 8). The fair value of this
equity instrument using the Black-Scholes option-pricing model
was immaterial. Accordingly, the Company did not record
additional operating expense as a result of issuing the
warrants. During 1999, the Company leased approximately $44,000
in equipment under this agreement. Payments for this leased
equipment of $2,057 per month are being made over twenty-four
months.
The agreement was amended on November 15, 1999 to
increase available purchases of equipment up to
$120,000.
PERCEPTUAL ROBOTICS, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(5)
Concentrations
In 1998, the Company had revenues of approximately
$296,000 to its four largest customers representing
approximately 29% of total revenues. In 1999, the Company had
revenues of approximately $674,000 to its two largest customers
representing approximately 39% of total revenues. The Company
had a receivable from one customer of approximately $85,000 at
December 31, 1999 and receivables from two customers
approximating $158,000 at December 31, 1998.
(6)
Notes PayableBank
The Company has a working capital loan through a
credit and security agreement with the Associated Bank. The
agreement matured on March 25, 1999 and was renewed until March
25, 2000. The note is secured by all corporate assets and
guaranteed by two of the Companys officers and
stockholders. On April 2, 1999, the Company repaid the $100,000
balance outstanding under this agreement.
(7)
Notes PayableStockholders
On May 15, 1998, the Company issued convertible
promissory notes to certain stockholders aggregating $100,000
due on demand. The notes are subordinated to bank debt. Interest
accrues monthly at 6% per annum on the outstanding principal
balance. The lenders, as additional consideration for extending
credit to the Company, have the right to convert the notes plus
accrued interest into fully paid shares of Series B redeemable
convertible preferred stock. On March 30, 1999 the lenders
converted the notes plus accrued interest into shares of Series
B redeemable convertible preferred stock (see note 8). In
conjunction with these notes, the Company also issued warrants
to the lenders for the purchase of 21,005 shares of Series B
preferred stock. The fair value of the warrants of $5,102 was
recorded as additional interest expense.
(8)
Redeemable Convertible Preferred Stock
The Company sold 361,125 shares of Series B
redeemable convertible preferred stock at $5 per share for total
capital of $1,805,625. The consideration received on the sale
consisted of $133,561 converted from shareholder loans and
$1,631,912 of net proceeds at closing for net capital raised of
$1,765,473. Similar to the other authorized series of preferred
stock, Series B redeemable convertible is convertible to voting
common stock on a one-for-one basis and has voting rights based
on common share equivalents.
Series A redeemable convertible preferred stock is
redeemable in one-third increments on December 31, 2002, 2003
and 2004. Outstanding shares as of the redemption dates will be
redeemed at $3.00 per share plus accrued 8% annual cumulative
dividends. Accordingly, the Series A redeemable convertible
preferred stock value of $508,773 at the November 1997 purchase
date has been increased by $4,126, $41,032 and $44,314 in 1997,
1998 and 1999, respectively, to accrue for accumulated unpaid
dividends.
Series B redeemable convertible preferred stock is
redeemable in one-third increments on December 31, 2003, 2004
and 2005. Outstanding shares as of the redemption dates will be
redeemed at $5.00 per share plus accrued 8% annual cumulative
dividends. Accordingly, the Series B redeemable convertible
preferred stock value of $1,765,473 at the 1999 purchase dates
has been increased by $88,283 to accrue for accumulated unpaid
dividends.
(9)
Preferred Stock
During 1998, the Company had three series of
authorized preferred stock: Series A, Junior Series One and
Junior Series Two. The Company authorized 300,000 shares of
preferred stock of which 30,774 shares remained undesignated at
December 31, 1998. All series of authorized preferred stock have
voting rights based on common share equivalents and are
convertible into voting common stock at any time at the
discretion of the holder, on a one-for-one basis.
During 1999, the Company authorized an additional
1,700,000 shares of preferred stock and designated 400,000 of
these shares as Series B resulting in 1,330,774 shares of
preferred stock remaining undesignated at December 31,
1999.
PERCEPTUAL ROBOTICS, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(10)
Employee Stock Option Plan
In 1997, the Company adopted a stock option plan
authorizing the grant of incentive or nonqualified options for
the purchase of common stock of the Company. The Company has
reserved 600,000 common shares for issuance upon exercise of
options. Incentive stock options may only be granted to
employees of the Company whereas nonqualified options may be
granted to employees, officers, directors or consultants of the
Company. Options are exercisable based on vesting schedules
stipulated in the individual grant which are typically four
years. All options expire ten years from the grant
date.
The following summarizes activity under the
Companys stock option plan in 1998 and 1999:
|
|
Number
|
|
Weighted
average
exercise
price
|
Options
outstanding at December 31, 1997 |
|
201,006 |
|
|
$0.36 |
Options granted to employees and directors during
1998 |
|
144,532 |
|
|
0.30 |
Options forfeited |
|
(107,548 |
) |
|
0.94 |
|
|
|
|
|
|
Options
outstanding at December 31, 1998 |
|
237,990 |
|
|
$0.61 |
Options granted to employees and directors during
1999 |
|
141,125 |
|
|
0.50 |
Options exercised |
|
(121,584 |
) |
|
0.82 |
|
|
|
|
|
|
Options
outstanding at December 31, 1999 |
|
257,531 |
|
|
$0.45 |
|
|
|
|
|
|
At December 31, 1999, there were 55,515 vested
options which had a weighted average exercise price of $0.44 per
option.
At December 31, 1999, there were 220,885 options
available for grant. The weighted average remaining life of the
257,531 outstanding options at December 31, 1999 was 8.9 years
and the options had exercise prices ranging from
$0.300.82.
The Company applied APB No. 25 in accounting for all
options granted during 1998 and 1999. Accordingly, no
compensation cost has been recognized in the financial
statements. Had the Company determined compensation cost based
on the fair value at the grant date as prescribed by SFAS No.
123, the Companys pro forma net loss would have been
$326,325 in 1998 and $830,534 in 1999. The fair values were
determined using the Black-Scholes option-pricing model assuming
risk free interest rates ranging from 5-6%, zero dividends, no
volatility and expected lives ranging from 3-4
years.
During 1999, the Company issued warrants to a
consultant for the purchase of 25,000 shares of Series B
preferred stock. The fair value of the warrants of $7,279 was
recorded as compensation expense in 1999.
(11)
Subsequent Event
On February 14, 2000, the Company sold 1,083,333
shares of Series C-2 preferred stock at $12 per share to an
investor in exchange for $10,000,000 cash and 1,000,000 shares
of the investors preferred stock. The Series C-2 preferred
stock accumulates dividends at a rate of 8% and has rights
similar to the other classes of preferred stock including the
right to convert to common shares on a one-for-one basis.
However, the Series
C-2 preferred stock carries non-dilutive voting rights, as defined
in the preferred stock purchase agreement. Concurrent with the
sale of stock, the Company reincorporated under a new charter in
the State of Delaware. As part of the reincorporation, the
number of authorized shares was reduced to 10,000,000 for common
and 5,000,000 for preferred, including all prior series, Series
C-2 (sold in this transaction and available for sale) and Series
C-1 (currently being marketed to current shareholders and other
private investors). Concurrent with the reincorporation, the
Company amended its certificate of incorporation. In the amended
and restated certificate of incorporation, the redemption dates
for Series A and B redeemable convertible preferred stock (see
note 8) were changed to December 31, 2004, 2005 and 2006 to be
consistent with the stated redemption dates for Series C-1 and
C-2 preferred stock. Series C-1 and C-2 preferred stock is
redeemable in one-third increments on December 31, 2004, 2005
and 2006 at $12 per share plus accrued 8% annual cumulative
dividends.
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
Companys 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.
Chicago,
Illinois
November
5, 1999, except for note 7,
which is as of November 23,
1999
POCKETCARD INC.
(a
development stage enterprise)
December 31, 1998 and September 30,
1999
ASSETS
|
|
December 31,
1998
|
|
September 30,
1999
|
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 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
DEFICIT
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
Series
A-1 redeemable convertible preferred stock, $.0000001 par
value;
16,863,905 shares authorized; none
issued and outstanding |
|
|
|
|
|
|
Series
A-2 redeemable convertible preferred stock, $.0000001 par
value;
14,792,899 shares authorized; none
issued and outstanding |
|
|
|
|
|
|
|
Stockholders deficit (see notes 3 and
7): |
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
POCKETCARD INC.
(a
development stage enterprise)
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
|
|
Period from
September 3,
1998
(inception)
through
December 31,
1998
|
|
Nine months
ended
September 30,
1999
|
|
Period from
September 3,
1998
(inception)
through
September 30,
1999
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
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 from
September 3, 1998 (inception) through September 30,
1999
|
|
Class A common stock
|
|
Additional
paid-in
capital
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
stockholders
deficit
|
|
|
Shares
|
|
Amount
|
Balance
at September 3, 1998 (inception) |
|
|
|
$ |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
20,000,000 |
|
2 |
|
9,998 |
|
|
|
|
10,000 |
|
Net
loss |
|
|
|
|
|
|
|
(306,720 |
) |
|
(306,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1998 |
|
20,000,000 |
|
2 |
|
9,998 |
|
(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 |
|
$ 2 |
|
62,081 |
|
(600,795 |
) |
|
(538,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
POCKETCARD INC.
(a
development stage enterprise)
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
|
|
Period from
September 3,
1998
(inception)
through
December 31,
1998
|
|
Nine months
ended
September 30,
1999
|
|
Period from
September 3,
1998
(inception)
through
September 30,
1999
|
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 activitiescapital
expenditures |
|
|
|
|
(28,118 |
) |
|
(28,118 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
|
|
|
(28,118 |
) |
|
(28,118 |
) |
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activitiesproceeds 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 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
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.
The Companys customers pay an annual
membership fee for the right to receive and use Company issued
debit cards that allow real-time funding, control, and reporting
over the Internet. Revenues from annual 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.
Customer deposits consist of amounts received from
customers for the purpose of loading available funds onto the
Company issued debit cards held by such customers. 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 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 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.
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.
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:
Computer equipment |
|
$20,376 |
|
Software |
|
7,742 |
|
|
|
|
|
|
|
28,118 |
|
Less
accumulated depreciation |
|
(2,774 |
) |
|
|
|
|
|
|
$25,344 |
|
|
|
|
|
(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.
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 Companys net loss would have been
the pro forma amounts indicated below:
|
|
Period from
September 3, 1998
(inception)
through
December 31, 1998
|
|
Nine
months
ended
September 30,
1999
|
Net
loss: |
|
|
|
|
As reported |
|
$306,720 |
|
294,075 |
Pro forma |
|
306,720 |
|
303,603 |
|
|
|
|
|
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:
|
|
Shares
|
|
Weighted-average
exercise price
|
Outstanding on January 1, 1998 |
|
|
|
|
$
|
Granted |
|
4,652,590 |
|
|
.01 |
Exercised |
|
(4,629,629 |
) |
|
.01 |
|
|
|
|
|
|
Outstanding on September 30, 1999 |
|
22,961 |
|
|
$ .02 |
|
|
|
|
|
|
The following table summarizes information about
stock options outstanding at September 30, 1999.
Range of exercise prices
|
|
Options outstanding
|
|
Options exercisable
|
|
Shares
|
|
Weighted-average
exercise price
|
|
Shares
|
|
Weighted-average
exercise price
|
$0.01
to $0.025 |
|
22,961 |
|
$.02 |
|
5,841 |
|
$.01 |
|
|
|
|
|
|
|
|
|
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:
|
|
Period from
September 3, 1998
(inception)
through
December 31, 1998
|
|
Nine
months
ended
September 30, 1999
|
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 |
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
December 31,
1998
|
|
September 30,
1999
|
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 liabilitiesdepreciation |
|
|
|
|
(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 |
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
Period from
September 3, 1998
(inception)
through
December 31, 1998
|
|
Nine
months
ended
September 30, 1999
|
Product
development |
|
$291,920 |
|
220,818 |
Selling
and marketing |
|
8,250 |
|
16,886 |
General
and administrative |
|
6,450 |
|
27,150 |
|
|
|
|
|
Total |
|
$306,620 |
|
264,854 |
|
|
|
|
|
POCKETCARD INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
(7)
Subsequent Events
On November 22, 1999, the Company amended and
restated its certificate of incorporation thereby authorizing
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 preferred
stock, and 14,792,899 shares of $.0000001 par value Series A-2
preferred stock. Upon liquidation, each holder of Series A-1 and
Series A-2 preferred shares (collectively, Series A
preferred shares) shall be entitled to receive an amount
equal to the sum of (i) $1.014, subject to adjustment in the
event such shares are subdivided through a stock split, stock
dividend, or otherwise (the Series A liquidation
value), plus all accrued and unpaid dividends, and (ii)
the amount such holder would receive if all holders of Series A
preferred shares had converted their Series A preferred shares
into common stock immediately prior to liquidation.
Upon liquidation, and after payment of preferential
amounts to holders of Series A preferred shares, the remaining
assets of the Company shall be distributed to the holders of
common shares. The Company shall pay preferential dividends to
the holders of Series A preferred shares, when and if declared
by the board of directors, at an annual rate of 8% of the sum of
the Series A liquidation value plus all accrued and unpaid
dividends. In the event any dividend or other distribution
payable in cash, stock, or other property is declared on the
common stock, each holder of Series A preferred shares on the
record date for such dividend or distribution shall be entitled
to receive the same cash, stock or other property which such
holder would have received if on such record date such holder
was the holder of record of the number of common shares into
which such Series A preferred shares then held by such holder
are then convertible.
Series A-1 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class A common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-1
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price ($1.014 initially, subject to adjustment upon
certain dilutive events), plus (y) the number of shares
determined by dividing the total amount of accrued and unpaid
dividends with respect to each Series A-1 preferred share to be
converted by the Series A conversion price. If the holders of
more than a majority of the Series A-1 preferred shares then
outstanding shall so elect, by vote or written consent, all of
the outstanding Series A-1 preferred shares shall automatically
convert into shares of Class A common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class B common stock determined by adding (x) the number of
shares determined by (i) multiplying the number of Series A-2
preferred shares to be converted by the Series A liquidation
value and (ii) dividing the resulting product by the Series A
conversion price, plus (y) the number of shares determined by
dividing the total amount of accrued and unpaid dividends with
respect to each Series A-2 preferred share to be converted by
the Series A conversion price. If the holders of more than a
majority of the Series A-2 preferred shares then outstanding
shall so elect, by vote or written consent, all of the
outstanding Series A-2 preferred shares shall automatically
convert into shares of Series A-1 preferred stock or Class B
common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into an equal number of
shares of Series A-1 preferred stock. Each Series A-2 preferred
share shall automatically convert into one Series A-1 preferred
share if the aggregate number of Series A-2 preferred shares and
Class B common shares then outstanding is less than five percent
of the aggregate number of common shares outstanding, assuming
conversion or exercise of all outstanding convertible securities
and options.
POCKETCARD INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
Class B common shares may be converted at any time,
at the election of the holder, into an equal number of Class A
common shares. Each Class B common share shall automatically
convert into one Class A common share if the aggregate number of
Series A-2 preferred shares and Class B common shares then
outstanding is less than five percent of the aggregate number of
common shares then outstanding, assuming conversion or exercise
of all outstanding convertible securities and
options.
If a firm commitment underwritten public offering of
shares of common stock is effected in which (a) the aggregate
price paid by the public for the shares is at least $20,000,000
and (b) an implied pre-money valuation equal to at least
$120,000,000, then all of the outstanding Series A preferred
shares shall be automatically converted into shares of common
stock upon the closing of the public offering.
The Series A preferred shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of a majority of the
Series A preferred shares then outstanding may require the
Company to redeem all the Series A preferred shares then
outstanding at the Series A redemption price. The Series A
redemption price per share equals the sum of (x) $1.014 (such
amount to be adjusted proportionately in the event the Series A
preferred shares are subdivided by any means into a greater
number or combined by any means into a lesser number) plus (y)
all declared but unpaid dividends on such Series A preferred
shares through the applicable redemption date.
At any time or times on or after the fifth
anniversary of issuance, the holder or holders of two-thirds of
the outstanding Series A preferred shares may elect to require
the Company to redeem all or any portion of such holders
Series A preferred shares.
Holders of Class A common stock, Class B common
stock, Series A-1 preferred stock, and Series A-2 preferred
stock vote together as a single class on all matters submitted
to a vote before the stockholders of the Company. Holders of
Class A and Class B common stock are entitled to one vote per
share. Holders of Series A-1 preferred stock are entitled to the
number of votes of Class A common shares such holders would have
been entitled to had they converted all of their Series A-1
preferred shares to Class A common shares. Holders of Series A-2
preferred stock are entitled to the number of votes of Class B
common shares such holders would have been entitled to had they
converted all of their Series A-2 preferred shares to Class B
common shares.
Provided that holders of Class B common stock
outstanding and issuable upon conversion of Series A-2 preferred
stock own at least 5% of the Companys Class A common stock
and Class B common stock and assuming conversion of all
securities convertible into such shares, (i) such holders shall
have the number of votes equal to the greater of (a) the voting
rights determined in accordance with the preceding paragraph,
and (b) 25.1% of the voting power of the Company, and (ii) the
voting rights of any person or group other than holders of Class
B common shares and Series A-2 preferred shares shall be limited
to the number of votes equal to the lesser of (x) such
holders voting rights in accordance with the preceding
paragraph, and (y) 25% of the voting power of the
Company.
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.
On November 2, 1999, 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.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
ViaChange.com, Inc.:
We have audited the accompanying balance sheet of
ViaChange.com, Inc. (a development stage enterprise) (the
Company) as of December 31, 1999, and the related statements of
operations, shareholders deficit and cash flows for the
period from June 28, 1999 (inception) through December 31, 1999.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on
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 ViaChange.com, Inc. (a development stage enterprise)
as of December 31, 1999 and the results of its operations and
its cash flows for the period from June 28, 1999 (inception)
through December 31, 1999 in conformity with generally accepted
accounting principles.
Los
Angeles, California
February
28, 2000
VIACHANGE.COM, INC.
(a
development stage enterprise)
December 31, 1999
Assets
|
Total
assets |
|
$
|
|
|
|
|
|
|
Liabilities and Shareholders
Deficit |
|
Current
liabilitiesdue to related party |
|
$ 42,207 |
|
|
|
|
|
Shareholders deficit: |
Preferred stock, $0.001 par value. Authorized
5,000,000 shares; issued and outstanding none |
|
|
|
Common stock, $0.001 par value. Authorized
15,000,000 shares; issued and outstanding
1,000,000
shares |
|
1,000 |
|
Less receivable for common stock |
|
(1,000 |
) |
Additional paid-in capital |
|
53,522 |
|
Deficit accumulated during the development
stage |
|
(95,729 |
) |
|
|
|
|
Total shareholders deficit |
|
(42,207 |
) |
|
|
|
|
Total liabilities and shareholders
deficit |
|
$
|
|
|
|
|
|
See
accompanying notes to financial statements.
VIACHANGE.COM, INC.
(a
development stage enterprise)
Period
from June 28, 1999 (inception) through December 31,
1999
Revenues |
|
$
|
|
|
|
|
|
Operating expenses: |
General and administrative |
|
79,729 |
|
Research and development |
|
16,000 |
|
|
|
|
|
Total operating expenses |
|
95,729 |
|
|
|
|
|
Net loss |
|
$(95,729 |
) |
|
|
|
|
See
accompanying notes to financial statements.
VIACHANGE.COM, INC.
(a
development stage enterprise)
STATEMENT OF SHAREHOLDERS DEFICIT
Period
from June 28, 1999 (inception) through December 31,
1999
|
|
Common stock
|
|
Receivable for
common stock
|
|
Additional
paid-in
capital
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
shareholders
deficit
|
|
|
Shares
|
|
Amount
|
Balance
at June 28, 1999 (inception) |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock at September
10, 1999 |
|
1,000,000 |
|
1,000 |
|
|
|
|
|
|
|
|
|
1,000 |
|
Receivable for common stock |
|
|
|
|
|
(1,000 |
) |
|
|
|
|
|
|
(1,000 |
) |
Nonreimbursable expenses paid by
ViaSpace.com LLC |
|
|
|
|
|
|
|
|
53,522 |
|
|
|
|
53,522 |
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
(95,729 |
) |
|
(95,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
1,000,000 |
|
$1,000 |
|
(1,000 |
) |
|
53,522 |
|
(95,729 |
) |
|
(42,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
VIACHANGE.COM, INC.
(a
development stage enterprise)
Period
from June 28, 1999 (inception) through December 31,
1999
Cash
flows from operating activities: |
Net loss |
|
$(95,729 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities |
Increase in due to related party |
|
42,207 |
|
Operating expense paid by ViaSpace.com LLC
on behalf of ViaChange.com, Inc. |
|
53,522 |
|
|
|
|
|
Net cash used in operating
activities |
|
|
|
Cash
flows from investing activities |
|
|
|
Cash
flows from financing activities |
|
|
|
|
|
|
|
Net increase in cash |
|
|
|
Cash,
beginning of period |
|
|
|
|
|
|
|
Cash,
end of period |
|
$
|
|
|
|
|
|
Supplemental disclosure of noncash financing
activitiesnonreimbursable operating expenses paid
by ViaSpace.com LLC on behalf of
ViaChange.com, Inc. |
|
$ 53,522 |
|
|
|
|
|
See
accompanying notes to financial statements.
VIACHANGE.COM, INC.
(a
development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(1) Description of Business and
Summary of Significant Accounting Policies
ViaChange.com, Inc. (the Company) commenced
operations and was incorporated in the state of Delaware on June
28, 1999, under the name ViaChange.com, Inc. The Company is a
development stage enterprise that plans to offer an Internet
based secondary mortgage exchange that will provide the
following value-added benefits:
|
|
State-of-the-art e-commerce tools to list
auctions
|
|
|
Automation of trading of secondary mortgage
loans
|
|
|
Valuation and arbitrage services online
|
|
|
Multiple pricing alternatives
|
|
|
Qualification of buyers and sellers.
|
The Company currently conducts operations in
California.
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 advances from
ViaSpace Technologies, LLC (ViaSpace), a company under common
ownership with the Company. The accumulated loss from inception
through December 31, 1999 was $95,729.
|
(b) Research and
Development
|
The cost of research and development is expensed in
the period in which it is incurred.
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) Stock-Based
Compensation
|
The Company applies the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 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 Statement of
Financial Accounting Standards No. 123 Accounting for
Stock-based Compensation, (SFAS No. 123), 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 3.
VIACHANGE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109). Under the asset
and liability method of SFAS 109, deferred income 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 tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, 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.
In assessing the realizability of deferred tax
assets, the Company considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the period in which those temporary differences become
deductible. We consider the scheduled reversals of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment.
(2) Related Party
Transactions
ViaSpace funded all operating expenses of the
Company from the date of inception through December 31, 1999.
These expenses have been allocated to the Company at the actual
amount paid by ViaSpace, or at allocated arms-length amounts for
shared services such as office space and administrative
services.
Certain of these expenses amounting to $42,207 are
reflected as amounts due to ViaSpace on the accompanying balance
sheet. In addition, $53,522 of expenses paid by ViaSpace are not
reimbursable by the Company under the terms of the Series A
Preferred Stock Purchase Agreement entered into in January 2000
(see note 5). Accordingly, these expenses have been reflected as
a deemed capital contribution in the accompanying financial
statements for the period ended December 31, 1999.
(3) Stock
Options
Effective December 27, 1999, the Company adopted the
1999 Stock Plan of ViaChange.com, Inc. (the 1999 Plan). Under
the 1999 Plan, incentive stock options and nonqualified options
may be granted for the purchase of up to 833,333 shares of
common stock. Options granted under the 1999 Plan vest 25% one
year from the date of grant, and the remaining options vest
monthly in increments of 1/48 of the remaining 75% of the total
options granted.
As of December 31, 1999, no options had been granted
under the 1999 Plan. Subsequent to December 31, 1999, a total of
353,333 options were granted at prices ranging from $0.50 to
$1.80 per share.
The Company has adopted the disclosure provisions
only of SFAS No. 123, for employees and directors, and will
account for the 1999 Plan in accordance with the provisions of
APB No. 25.
(4) Income
Taxes
The income tax benefit differs from the expected
income tax benefit computed using the statutory Federal income
tax rate of 34% applied to pretax loss as a result of the
following:
Computed expected tax benefit |
|
$(32,548 |
) |
State
income taxes |
|
(5,564 |
) |
Increase in the beginning of the period valuation
allowance |
|
38,112 |
|
|
|
|
|
|
|
$
|
|
|
|
|
|
VIACHANGE.COM, INC.
(a
development stage enterprise)
NOTES
TO FINANCIAL STATEMENTS(Continued)
The tax effects of temporary differences that give
rise to significant portions of the Companys deferred tax
assets and liabilities as of December 31, 1999 are as
follows:
Deferred tax assets: |
Start-up and organizational costs |
|
$31,712 |
Net operating loss carryforward |
|
6,400 |
|
|
|
Total deferred tax assets |
|
38,112 |
Valuation allowance |
|
38,112 |
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
The Company had net operating loss carryforwards of
approximately $16,000 at December 31, 1999 for income tax
purposes. These carryforwards expire, if unused, in
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 deferred tax assets at December 31, 1999.
No income tax payments were made during the period from June 28,
1999 (inception) through December 31, 1999.
(5) Subsequent
Events
In January 2000, the Company amended and restated
its articles of incorporation. As a result of this amendment,
the total number of available shares of stock of the Company was
revised to include the following:
|
|
2,333,333 shares of Series A-1 Preferred Stock, $.001
par value per share
|
|
|
2,333,333 shares of Series A-2 Preferred Stock, $.001
par value per share
|
|
|
10,000,000 shares of Class A Common Stock, $.001 par
value per share
|
|
|
2,333,333 shares of Class A Common Stock, $.001 par
value per share.
|
All previously issued common stock was converted to
Class A Common Stock.
Also in January 2000, the Company entered into a
Series A-2 Preferred Stock Purchase Agreement (the Agreement)
with a third party. Under the terms of the Agreement, the
Company issued 2,333,333 shares of Series A Preferred Stock for
aggregate consideration of $5,000,000. The Series A-2 Preferred
Stock is convertible to shares of Class B Common Stock at the
option of the holders of the Series A-2 Preferred Stock, and
automatically converts at the earlier of a public offering of
common stock or at December 31, 2001. The number of shares of
Class B Common Stock issuable upon conversion is dependent upon
several factors, including the value of the Company, as defined
in the Agreement, and accrued and unpaid dividends. In addition,
the Series A-2 Preferred Stock is redeemable upon the occurrence
of certain events, such as a change in control of the Company.
Series A-2 Preferred Stock has voting rights equal to the
if-converted number of Class B Common Shares on the voting
record date. In connection with the consummation of the sale of
Series A Preferred Stock, the Company was obligated to pay
finders fees of $200,000 to an advisor to the
transaction.
In February, 2000, the Company entered into an
employment agreement with an officer of the Company. The
agreement provides for minimum payments of $170,000 initially
for the first year with minimum increases of 5% annually,
terminating in February, 2004.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
Web
Design Group, Inc.:
We have audited the accompanying balance sheets of
Web Design Group, Inc. (the Company) as of December 31, 1998 and
1999, and the related statements of operations,
stockholders equity (deficit), and cash flows for the
years then ended. These financial statements are the
responsibility of the Companys 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 Web Design Group, Inc. as of December 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.
Chicago,
Illinois
March 3,
2000
WEB
DESIGN GROUP, INC.
December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Assets |
Current
assets: |
Cash and cash equivalents |
|
$ 67,230 |
|
|
96,721 |
|
Accounts receivable |
|
43,731 |
|
|
254,546 |
|
Revenue earned on contracts in progress in excess
of billings |
|
82,108 |
|
|
207,469 |
|
|
|
|
|
|
|
|
Total current assets |
|
193,069 |
|
|
558,736 |
|
|
|
|
|
|
|
|
Property and equipment, at cost: |
Office equipment |
|
129,706 |
|
|
215,582 |
|
Furniture and fixtures |
|
12,039 |
|
|
98,171 |
|
Vehicles |
|
|
|
|
22,870 |
|
|
|
|
|
|
|
|
Total property and equipment |
|
141,745 |
|
|
336,623 |
|
Less accumulated depreciation and
amortization |
|
(126,095 |
) |
|
(166,411 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
15,650 |
|
|
170,212 |
|
|
|
|
|
|
|
|
Total assets |
|
$ 208,719 |
|
|
728,948 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
(Deficit) |
Current
liabilities: |
Accrued expenses |
|
$ 34,796 |
|
|
96,567 |
|
Billings in excess of revenues earned on contracts
in progress |
|
|
|
|
12,500 |
|
Due to former shareholder |
|
250,000 |
|
|
250,000 |
|
Current portion of note payable |
|
|
|
|
3,780 |
|
Line of credit |
|
59,500 |
|
|
|
|
Current maturities of obligations under capital
leases |
|
1,008 |
|
|
34,235 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
345,304 |
|
|
397,082 |
|
Capital
lease obligations, less current portion |
|
2,723 |
|
|
90,647 |
|
Note
payable, less current portion |
|
|
|
|
8,066 |
|
|
|
|
|
|
|
|
Total liabilities |
|
348,027 |
|
|
495,795 |
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
Class B common stock, $.001 par; 14,000,000 shares
authorized, 12,142,860
shares issued and
outstanding in 1998 and 1999 |
|
12,143 |
|
|
12,143 |
|
Retained earnings (accumulated deficit) |
|
(151,451 |
) |
|
221,010 |
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit) |
|
(139,308 |
) |
|
233,153 |
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity (deficit) |
|
$ 208,719 |
|
|
728,948 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
WEB
DESIGN GROUP, INC.
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Revenues |
|
$ 927,237 |
|
|
2,470,834 |
|
Cost of
revenues |
|
458,512 |
|
|
1,150,523 |
|
|
|
|
|
|
|
|
Gross margin |
|
468,725 |
|
|
1,320,311 |
|
|
|
|
|
|
|
|
Operating expenses: |
Sales and marketing |
|
6,446 |
|
|
44,470 |
|
Compensation and benefits |
|
322,115 |
|
|
185,341 |
|
General and administrative |
|
259,785 |
|
|
660,055 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
588,346 |
|
|
889,866 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
(119,621 |
) |
|
430,445 |
|
|
|
|
|
|
|
|
Other
income (expense): |
Interest income |
|
|
|
|
4,758 |
|
Interest expense |
|
(3,235 |
) |
|
(7,766 |
) |
|
|
|
|
|
|
|
Total other expense |
|
(3,235 |
) |
|
(3,008 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$(122,856 |
) |
|
427,437 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
WEB
DESIGN GROUP, INC.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Years
ended December 31, 1998 and 1999
|
|
Class B Common Stock
|
|
Retained
earnings
(accumulated
deficit)
|
|
Total
stockholders
equity
(deficit)
|
|
|
Shares
|
|
Amount
|
Balance
at December 31, 1997 |
|
12,142,860 |
|
$12,143 |
|
(28,595 |
) |
|
(16,452 |
) |
Net
income |
|
|
|
|
|
(122,856 |
) |
|
(122,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1998 |
|
12,142,860 |
|
12,143 |
|
(151,451 |
) |
|
(139,308 |
) |
Distribution to shareholders |
|
|
|
|
|
(54,976 |
) |
|
(54,976 |
) |
Net
income |
|
|
|
|
|
427,437 |
|
|
427,437 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
12,142,860 |
|
$12,143 |
|
221,010 |
|
|
233,153 |
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
WEB
DESIGN GROUP, INC.
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Cash
flows from operating activities: |
Net income (loss) |
|
$(122,856 |
) |
|
427,437 |
|
Adjustments to reconcile net income (loss) to net
cash provided by operating
activities: |
Depreciation and amortization |
|
31,606 |
|
|
31,629 |
|
Change in assets and liabilities: |
Accounts receivable |
|
(15,352) |
|
|
(210,815 |
) |
Billings less than revenues earned on
contracts in progress |
|
(66,151 |
) |
|
(112,861 |
) |
Accrued expenses |
|
267,109 |
|
|
61,771 |
|
|
|
|
|
|
|
|
Net cash provided by operating
activities |
|
94,356 |
|
|
197,161 |
|
|
|
|
|
|
|
|
Cash
flows from investing activitiespurchases of property and
equipment |
|
(4,239 |
) |
|
(52,168 |
) |
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
(4,239 |
) |
|
(52,168 |
) |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
Net repayments on line of credit |
|
(40,500 |
) |
|
(59,500 |
) |
Issuance of note payable |
|
|
|
|
11,846 |
|
Payments under capital lease
obligations |
|
(3,584 |
) |
|
(12,872 |
) |
Distribution to shareholders |
|
|
|
|
(54,976 |
) |
|
|
|
|
|
|
|
Net cash used in financing
activities |
|
(44,084 |
) |
|
(115,502 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents |
|
46,033 |
|
|
29,491 |
|
Cash
and cash equivalents at beginning of year |
|
21,197 |
|
|
67,230 |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year |
|
$ 67,230 |
|
|
96,721 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
informationinterest paid |
|
$ 3,235 |
|
|
7,766 |
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing
activitycapital lease obligations
assumed |
|
$
|
|
|
134,023 |
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
WEB
DESIGN GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Description of the
Business
Web Design Group, Inc. (Company) is a professional
Internet service firm established in 1994 to provide web
development and e-business transformation services. The Company
was originally established as a C-Corporation and in July 1996,
elected S Corporation status.
(2) Summary of Significant
Accounting Policies
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.
The Company considers all highly liquid debt
instruments with an original maturity of three months or less to
be cash equivalents.
The Company derives its revenues primarily from web
development service agreements and hosting and maintenance of
web sites. Revenues are recognized over the period of each
agreement based upon the percentage of completion method.
Provisions for contract adjustments and losses are recorded in
the periods such items are identified. Revenue earned on
contracts in progress in excess of billings, as reflected on the
accompanying balance sheet, comprise amounts of revenue
recognized on contracts for which billings have not been
rendered. Billings in excess of revenues earned on contracts in
progress comprise amounts of billings recognized on contracts
for which revenues have not been earned. Service revenues from
maintenance contracts and hosting of web sites are recognized as
services are performed.
|
(d) Property and
Equipment
|
Property and equipment are stated at cost.
Depreciation is computed using the straight-line method based on
the estimated useful lives of the various classes of property
ranging from three to five years. Property and equipment under
capital leases are stated at the present value of minimum lease
payments and are amortized using the straight-line method over
the shorter of the lease term or the estimated useful lives of
the assets.
The Company operates as an S Corporation, whereby
all income, deductions, and credits pass through to the
Companys shareholders for Federal and state income tax
purposes. The Company is subject to the Illinois Replacement
Tax.
|
(f) Fair Value of Financial
Instruments
|
The fair value of the Companys financial
instruments approximates their carrying value due to the
short-term nature of these instruments.
Advertising expenses are charged to operations
during the year in which they are incurred. The total amount of
advertising expenses charged to operations was $2,585 and
$13,061 for the years ended December 31, 1998 and 1999,
respectively.
Cost of revenues includes compensation and benefits
for employees performing services to clients and an allocation
of facilities expense and technology costs.
WEB
DESIGN GROUP, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(3) Leases
The Company leases its office space in Chicago under
a seven year, noncancelable operating lease. Additionally, the
Company leases certain computer and office equipment under
capital leases expiring at various dates through
2003.
Future minimum annual lease payments under capital
and noncancelable operating leases as of December 31, 1999 are
as follows:
|
|
Capital
leases
|
|
Operating
leases
|
2000 |
|
$43,657 |
|
|
108,140 |
2001 |
|
42,432 |
|
|
108,140 |
2002 |
|
34,771 |
|
|
105,589 |
2003 |
|
23,158 |
|
|
103,037 |
2004 |
|
|
|
|
103,037 |
Thereafter |
|
|
|
|
206,074 |
|
|
|
|
|
|
Total minimum lease payments |
|
144,018 |
|
|
$734,017 |
|
|
|
|
|
|
Less
amount representing interest |
|
(19,136 |
) |
|
|
|
|
|
|
|
|
Present
value of minimum lease payments |
|
124,882 |
|
|
|
Less
current portion |
|
(34,235 |
) |
|
|
|
|
|
|
|
|
Noncurrent portion of capital lease
obligations |
|
$90,647 |
|
|
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 1998
and 1999 was $24,977 and $42,659, respectively.
(4) Line of Credit and Note
Payable
The Company maintains an operating line of credit
with a bank with a borrowing limit of $250,000 as of December
31, 1999. Borrowings under the line of credit accrue interest at
the prime rate plus 0.5% (9.0% at December 31, 1999). The
Company had outstanding borrowings of $59,500 at December 31,
1998. No amounts were outstanding under the line of credit at
December 31, 1999.
As of December 31, 1999, the Company had an
outstanding note payable for an automobile used by an officer
and shareholder of the Company. The note requires monthly
principal payments of approximately $300, bears interest at 0.9%
per annum, and matures in January 2003.
(5) 401(k) Savings
Plan
During 1999, the Company established a 401(k)
savings plan for its employees. Under the plan, employees may
defer 2% to 15% of their compensation up to the maximum limits
set by the Internal Revenue Code. The Company does not match
employee contributions.
(6) Significant
Customers
The Company had three customers that collectively
accounted for 47% of accounts receivable and individually
accounted for 21%, 16% and 10% of accounts receivable as of
December 31, 1998. During 1998, the Companys three largest
customers accounted for 31% of total revenue.
The Company had three customers that collectively
accounted for 42% of accounts receivable and individually
accounted for 17%, 14% and 11% of accounts receivable as of
December 31, 1999. One customer accounted for 11% of revenues
during 1999.
WEB
DESIGN GROUP, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(7) Due to Former
Shareholder
As of December 31, 1998 and 1999, the Company had a
commitment to a former shareholder for their 1998 severance from
the Company. This amount was subsequently paid in February
2000.
(8) Subsequent
Events
On February 10, 2000, the Company was reincorporated
and affected a 12,142.86 for one stock split and exchange of its
then outstanding shares of common stock into Class B Common
Shares. All share information included in these financial
statements has been retroactively adjusted to reflect the stock
split, exchange and increase in authorized shares of Class B
Common Stock.
On February 11, 2000, the Company entered into a
Series A Preferred Stock Purchase Agreement with a third party
(Purchaser). In connection with this transaction, the Company
amended its certificate of incorporation to increase the
Companys authorized shares to 26,000,000, comprised of
6,000,000 shares of Series A Preferred Stock, 6,000,000 shares
of Class A Common Stock and 14,000,000 shares of Class B Common
Stock and authorized the issuance of 6,000,000 shares of the
Companys Series A Preferred Stock, par value $0.001 per
share. The Series A Preferred Stock is convertible on a
one-for-one basis for shares of $0.001 par value Class A Common
Stock at any time by the holder. In the event of an initial
public offering of common stock by the Company, the outstanding
Series A Preferred Shares shall be automatically converted into
Class A Common Stock. The Company issued 6,000,000 shares of
Series A Preferred Stock to the Purchaser for
$7,000,000.
The Series A preferred shares have certain
redemption rights. The holder or holders of two-thirds of the
Series A preferred shares then outstanding may elect, on the
fifth anniversary of the initial issuance of such Series A
preferred shares, to require the Company to redeem all Series A
preferred shares then outstanding at the Series A redemption
price. The Series A redemption price per share equals the sum of
(x) $1.167 (such amount to be adjusted proportionately in the
event the Series A preferred shares are subdivided by any means
into a greater number or combined by any means into a lesser
number) plus (y) all accrued and unpaid dividends on such Series
A preferred share through the applicable redemption
date.
The holder or holders of two-thirds of the
outstanding Series A preferred shares may elect, on the fifth
anniversary of issuance, to require the Company to redeem all
Series A preferred shares then outstanding at the Series A
redemption price.
The common shares and Series A Preferred Stock shall
vote together as a single class. Holders of Series A Preferred
Stock are entitled to the number of votes equal to the number of
common shares which the holder would have been entitled to
receive had such holder converted all of its Series A Preferred
Stock into common shares on that date.
In addition, so long as the Purchaser owns at least
(5%) of the Companys issued and outstanding common shares
(assuming conversion, exercise or exchange of all outstanding
options and convertible securities, including the Series A
Preferred Shares), (i) the Class A Common Stock shall have the
number of votes equal to the greater of (x) one (1) vote per
share, and (y) twenty-five and one tenth percent (25.1%) of the
voting power of the Company and (ii) the voting rights of any
person or group other than holders of
Class A Common Stock shall be limited to the number of votes
equal to the lessor of (x) such persons or groups
actual voting interest and (y) twenty-five percent (25%) of the
voting power of the Company.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
Westbound
Consulting, Inc.:
We have audited the accompanying consolidated
balance sheets of Westbound Consulting, Inc. and subsidiary as
of December 31, 1998 and 1999, and the related consolidated
statements of operations, equity (deficit) and cash flows for
the years then ended. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Westbound Consulting, Inc.
and subsidiary as of December 31, 1998 and 1999, and the results
of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting
principles.
Chicago,
Illinois
March 10,
2000
WESTBOUND CONSULTING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Assets |
Current
assets: |
Cash |
|
$ 63,089 |
|
|
|
|
Accounts receivable, net of allowance of $0 and
$7,700 in 1998 and 1999,
respectively |
|
8,040 |
|
|
117,174 |
|
Deferred offering costs |
|
|
|
|
20,310 |
|
Member contributions receivable |
|
12,200 |
|
|
1,434 |
|
|
|
|
|
|
|
|
Total current assets |
|
83,329 |
|
|
138,918 |
|
|
|
|
|
|
|
|
Property and equipment, at cost: |
Computers and equipment |
|
3,061 |
|
|
78,697 |
|
Software |
|
515 |
|
|
1,249 |
|
Furniture and fixtures |
|
|
|
|
91,696 |
|
|
|
|
|
|
|
|
|
|
3,576 |
|
|
171,642 |
|
Less accumulated depreciation and
amortization |
|
(716 |
) |
|
(30,808 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
2,860 |
|
|
140,834 |
|
|
|
|
|
|
|
|
Goodwill, net of accumulated amortization of $669 in
1999 |
|
|
|
|
39,444 |
|
Deposit
on investment in affiliate |
|
140,000 |
|
|
|
|
Other
assets |
|
|
|
|
10,594 |
|
|
|
|
|
|
|
|
Total assets |
|
$226,189 |
|
|
329,790 |
|
|
|
|
|
|
|
|
Liabilities and Equity |
Current
liabilities: |
Bank overdraft |
|
$
|
|
|
9,160 |
|
Accounts payable |
|
|
|
|
44,255 |
|
Accrued expenses |
|
7,445 |
|
|
24,914 |
|
Current portion of loan payable |
|
|
|
|
5,683 |
|
Current portion of note payable to related
party |
|
34,671 |
|
|
37,999 |
|
Note payable to related party and accrued
interest |
|
|
|
|
30,988 |
|
Due to officers |
|
9,532 |
|
|
61,439 |
|
Due to related parties |
|
|
|
|
17,237 |
|
Deposit on membership interest |
|
130,000 |
|
|
|
|
Deferred income and other current
liabilities |
|
|
|
|
8,194 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
181,648 |
|
|
239,869 |
|
|
|
|
|
|
|
|
Note
payable to related party, less current portion |
|
40,329 |
|
|
12,221 |
|
Loan
payable, less current portion |
|
|
|
|
28,326 |
|
|
|
|
|
|
|
|
Total liabilities |
|
221,977 |
|
|
280,416 |
|
Minority interest |
|
|
|
|
1,440 |
|
Equity: |
Common stock, no par value: 1,000 and 100,000,000
shares authorized, issued,
and outstanding in 1998
and 1999, respectively |
|
1 |
|
|
186,009 |
|
Members interests |
|
11,146 |
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
(2,580 |
) |
Accumulated deficit |
|
(6,935 |
) |
|
(135,495 |
) |
|
|
|
|
|
|
|
Total equity |
|
4,212 |
|
|
47,934 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$226,189 |
|
|
329,790 |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
WESTBOUND CONSULTING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Revenue |
|
$ 52,006 |
|
|
338,844 |
|
Operating expenses: |
Compensation |
|
39,657 |
|
|
222,847 |
|
Development |
|
|
|
|
155,211 |
|
General and administrative |
|
71,202 |
|
|
191,918 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
110,859 |
|
|
569,976 |
|
|
|
|
|
|
|
|
Loss from operations |
|
(58,853 |
) |
|
(231,132 |
) |
Interest expense, net |
|
5,000 |
|
|
10,216 |
|
Foreign
currency gains |
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
Net loss before minority interest |
|
(63,853 |
) |
|
(241,258 |
) |
Minority interest |
|
|
|
|
1,440 |
|
|
|
|
|
|
|
|
Net loss |
|
$(63,853 |
) |
|
(242,698 |
) |
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
WESTBOUND CONSULTING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
Years
ended December 31, 1998 and 1999
|
|
Westbound
Consulting, Inc.
Common Stock
|
|
Westbound
Consulting, L.L.C.
|
|
Westbound
Consulting, Inc.
|
|
Total
equity (deficit)
|
|
|
Shares
|
|
Amount
|
|
Members
interests
|
|
Accumulated other
comprehensive loss
|
|
Accumulated
deficit
|
Balance
at December 31, 1997 |
|
1,000 |
|
$
1 |
|
|
|
|
|
|
|
(6,935 |
) |
|
(6,934 |
) |
Issuance of membership
interests |
|
|
|
|
|
74,999 |
|
|
|
|
|
|
|
|
74,999 |
|
Net
loss |
|
|
|
|
|
(63,853 |
) |
|
|
|
|
|
|
|
(63,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1998 |
|
1,000 |
|
1 |
|
11,146 |
|
|
|
|
|
(6,935 |
) |
|
4,212 |
|
Issuance of membership
interests |
|
|
|
|
|
130,000 |
|
|
|
|
|
|
|
|
130,000 |
|
Net
loss for the period from
January 1, 1999 through June 7,
1999 |
|
|
|
|
|
(114,138 |
) |
|
|
|
|
|
|
|
(114,138 |
) |
Exchange of membership interests
for common stock |
|
84,999,000 |
|
27,008 |
|
(27,008 |
) |
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
15,000,000 |
|
159,000 |
|
|
|
|
|
|
|
|
|
|
159,000 |
|
Net
loss for the period from
June 8, 1999 through December
31, 1999 |
|
|
|
|
|
|
|
|
|
|
|
(128,560 |
) |
|
(128,560 |
) |
Foreign
currency translation
adjustment |
|
|
|
|
|
|
|
|
(2,580 |
) |
|
|
|
|
(2,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
(2,580 |
) |
|
(128,560 |
) |
|
(131,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
100,000,000 |
|
$186,009 |
|
|
|
|
(2,580 |
) |
|
(135,495 |
) |
|
47,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
WESTBOUND CONSULTING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years
ended December 31, 1998 and 1999
|
|
1998
|
|
1999
|
Cash
flows from operating activities: |
Net loss |
|
$(63,853 |
) |
|
(242,698 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
Depreciation and amortization |
|
716 |
|
|
4,359 |
|
Provision for bad debt |
|
|
|
|
9,495 |
|
Minority interest |
|
|
|
|
1,440 |
|
Foreign exchange gain |
|
|
|
|
(90 |
) |
Membership interest issued as expense
reimbursement to officer |
|
3,249 |
|
|
|
|
Changes in assets and liabilities, net of
acquisition: |
Accounts receivable |
|
(8,040 |
) |
|
(115,216 |
) |
Other assets |
|
|
|
|
(2,320 |
) |
Accounts payable |
|
|
|
|
44,255 |
|
Accrued expenses |
|
7,445 |
|
|
11,108 |
|
Accrued interest |
|
5,000 |
|
|
(1,155 |
) |
|
|
|
|
|
|
|
Net cash used in operating
activities |
|
(55,483 |
) |
|
(290,822 |
) |
|
|
|
|
|
|
|
Cash
flows from investing activities: |
Investment in affiliate, net of cash
acquired |
|
(140,000 |
) |
|
(18,543 |
) |
Purchases of property and equipment |
|
(3,035 |
) |
|
(10,949 |
) |
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
(143,035 |
) |
|
(29,492 |
) |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
Increase in bank overdraft |
|
|
|
|
9,160 |
|
Issuance of loan payable |
|
|
|
|
35,000 |
|
Issuance of notes payable to related
parties |
|
70,000 |
|
|
40,000 |
|
Principal repayments of notes payable to related
parties and loan payable |
|
|
|
|
(33,632 |
) |
Net increase in due to officers |
|
7,451 |
|
|
35,497 |
|
Deposits on membership interests |
|
130,000 |
|
|
|
|
Issuance of membership interests |
|
52,990 |
|
|
12,200 |
|
Issuance of common stock |
|
|
|
|
159,000 |
|
|
|
|
|
|
|
|
Net cash provided by financing
activities |
|
260,441 |
|
|
257,225 |
|
|
|
|
|
|
|
|
Net increase (decrease) in
cash |
|
61,923 |
|
|
(63,089 |
) |
Cash at
beginning of year |
|
1,166 |
|
|
63,089 |
|
|
|
|
|
|
|
|
Cash at
end of year |
|
$ 63,089 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information |
cash paid during the year for interest |
|
$
|
|
|
11,546 |
|
Supplemental disclosure of noncash financing
activities: |
Membership interest issued as expense
reimbursement to officer |
|
$ 3,249 |
|
|
|
|
Membership interest issued as reduction of amounts
due to officers |
|
6,560 |
|
|
|
|
Member contributions receivable |
|
12,200 |
|
|
|
|
Offering costs accrued but not paid |
|
|
|
|
20,310 |
|
Membership interest issued for which refundable
deposit was received in prior
year |
|
|
|
|
130,000 |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
WESTBOUND CONSULTING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and
Basis of Presentation
Westbound Consulting, Inc. and subsidiary (the
Company) are a software consulting firm that specializes in
developing customized e-commerce software solutions. The
Companys Chicago-based consultants work directly with
clients to determine their business requirements and facilitate
implementation. The Companys development team, based in
Hyderabad, India, performs programming work. Substantially all
of the Companys revenue is derived from customers located
in the United States.
Westbound Consulting, Inc. was originally
incorporated in the State of Illinois on August 25, 1997, under
the name Beyond 2000, Inc., which it was known as until February
28, 1998. Westbound Consulting, L.L.C. was incorporated in the
State of Illinois as a limited liability company on March 31,
1998. The historical consolidated financial statements of
Westbound Consulting, Inc. and subsidiary include the financial
position and the results of operations of Westbound Consulting,
L.L.C. Westbound Consulting, Inc. and Westbound Consulting,
L.L.C. have common owners and substantially the same management
teams. In a conversion (the Conversion) that was effected on
June 7, 1999, (i) all of the assets and liabilities of Westbound
Consulting, L.L.C. were transferred to the Company, (ii) all of
the members equity interests in Westbound Consulting,
L.L.C. were transferred to Westbound Consulting, Inc. in
exchange for 84,999,000 shares of the common stock of Westbound
Consulting, Inc., and (iii) Westbound Consulting, L.L.C. was
dissolved. At the time of the Conversion, Westbound Consulting,
Inc. was a non-operating entity with nominal net assets. The
transfer of assets and liabilities of Westbound Consulting,
L.L.C. to Westbound Consulting, Inc. has been recorded by
Westbound Consulting, Inc. using the historical carrying values
of Westbound Consulting, L.L.C.
(2) Summary of Significant
Accounting Policies
|
(a) Principles of
Consolidation
|
In December 1998 and November 1999, the Company
remitted $140,000 and $20,000, respectively, as deposits for an
investment in Westbound Consulting Services Pvt. Ltd. (WBCS Pvt.
Ltd.), a Hyderabad, India-based entity whose majority
shareholder was a Westbound Consulting, L.L.C. member in 1998
and is currently a stockholder of the Company. The Company
purchased 29,799 equity shares of WBCS Pvt. Ltd. on December 6,
1999, representing 70% of WBCS Pvt. Ltd.s outstanding
equity shares. The acquisition has been accounted for under the
purchase method of accounting. From December 6, 1999, the
Company has accounted for its investment in WBCS Pvt. Ltd. under
the consolidation method. Under this method, WBCS Pvt.
Ltd.s results of operations are reflected within the
Companys consolidated statement of operations. Income
attributable to other stockholders of WBCS Pvt. Ltd. is
identified as minority interest in the Companys
consolidated statement of operations. Minority interest adjusts
the Companys consolidated net results of operations to
reflect only its share of the income of WBCS Pvt. Ltd.
Transactions between the Company and WBCS Pvt. Ltd. occurring
between December 6, 1999 and December 31, 1999 have been
eliminated in consolidation. Amounts incurred for development
work performed by WBCS Pvt. Ltd. prior to December 6, 1999 have
not been eliminated and are recorded as development
expense.
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.
Consulting fees are generally billed at a contracted
hourly rate and the Company recognizes this revenue over the
period during which the work is performed.
WESTBOUND CONSULTING, INC. AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
(d) Property and Equipment
|
Property and equipment are stated at cost.
Depreciation and amortization is provided over the estimated
useful lives of the assets, ranging from 3 to 6 years, using the
straight-line 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 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.
Prior to the Conversion, the only true operating
entity of the Company was Westbound Consulting, L.L.C., a
limited liability company, whereby all income, deductions, and
credits were passed through to the L.L.C. members for Federal
and state income tax purposes.
Goodwill represents the excess of cost over the fair
value of the Companys interest in the net assets of WBCS
Pvt. Ltd. and is being amortized on a straight-line basis over
five years.
(3) Debt
The Company issued a $70,000 promissory note to a
related party in June 1998. The note accrued interest at 12.0%
and was initially payable in 23 monthly installments of $3,500,
commencing in January 1999. The Company borrowed an additional
$10,000 from the related party in October 1999, which was to be
repaid through additional monthly payments added to the original
term. Pursuant to the promissory note agreement, two officers of
the Company each pledged 51.5% of their respective ownership
interests in the Company as security to the lender. The Company
repaid this note in February 2000.
The Company borrowed $35,000 under a business loan
agreement in July 1999. The loan accrued interest at 12.9% and
was payable in 60 monthly installments commencing in August
1999. The Company repaid this loan in February 2000.
The Company issued a $30,000 promissory note to a
related party in October 1999 as a bridge loan until permanent
financing could be obtained. The note accrued interest at 15%
and was repaid by the Company in February 2000.
Upon acquisition of WBCS Pvt. Ltd., the Company
assumed $17,237 of borrowings from certain related parties.
These borrowings were non-interest bearing and due on demand,
and were repaid by the Company in February 2000.
(4) Due to
Officers
The due to officers balance reflects amounts owed to
officers of the Company for advances remitted to fund operating
costs. These advances were non-interest bearing and due on
demand and were repaid by the Company in February
2000.
WESTBOUND CONSULTING, INC. AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(5) Stockholders
Equity
At the Companys inception on August 25, 1997,
1,000 shares of common stock were issued for $1.
In 1998, Westbound Consulting L.L.C. issued
membership interests for capital contributions of $74,999, and
received $130,000 as a deposit for a membership interest that
was issued in 1999.
In 1999, the Company issued 15,000,000 shares of no
par value common stock for capital contributions of
$159,000.
In conjunction with the Conversion, the Company
issued 94,999,000 common shares to holders of Westbound
Consulting, L.L.C. membership interests and Westbound
Consulting, L.L.C. was dissolved.
(6) Income
Taxes
Loss before provision for income taxes from
continuing operations was taxed in the following
jurisdictions:
|
|
1998
|
|
1999
|
Domestic |
|
$(63,853 |
) |
|
(224,057 |
) |
Foreign |
|
|
|
|
(18,641 |
) |
|
|
|
|
|
|
|
|
|
$(63,853 |
) |
|
(242,698 |
) |
|
|
|
|
|
|
|
No provision for Federal or state income taxes was
recorded prior to the Conversion as such liability was the
responsibility of the members of Westbound Consulting, L.L.C.,
rather than the Company. Upon the Conversion, the Company
recorded an initial net deferred tax liability of $11,720,
resulting in deferred income tax expense of $11,720. This
deferred income tax expense was offset by a deferred income tax
benefit of $11,720 incurred from June 8, 1999 through December
31, 1999 as a result of establishment of deferred tax assets
available to offset the entire deferred tax liability. The
remaining change in deferred income taxes for the year ended
December 31, 1999 relates to the period subsequent to the
Conversion.
There is no provision for income taxes during 1998
or 1999 due to the Companys net losses before income
taxes.
The Companys operations in India are subject
to a five year tax holiday, which will terminate in
2003.
The total tax provision for the year ended December
31, 1999 differs from the amount computed by applying the
Federal income tax rate of 34% to the loss before income taxes
for the following reasons:
Expected income tax benefit at statutory
rate |
|
$(82,517 |
) |
State
income tax benefit, net of Federal taxes |
|
(6,082 |
) |
Permanent differences |
|
571 |
|
Loss
prior to conversion to C-Corporation |
|
40,172 |
|
Establishment of deferred tax balances upon
C-Corporation conversion |
|
11,720 |
|
Foreign
income not subject to tax |
|
(1,142 |
) |
Increase in valuation allowance |
|
37,278 |
|
|
|
|
|
Income
tax provision |
|
$
|
|
|
|
|
|
WESTBOUND CONSULTING, INC. AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The tax effects of the temporary differences that
give rise to the deferred tax assets and liabilities at December
31, 1999 are presented below:
Deferred tax assets: |
|
|
Intangible assets |
|
$ 731 |
|
Net operating loss carryforward |
|
54,895 |
|
|
|
|
|
Gross deferred tax assets |
|
55,626 |
|
Less valuation allowance |
|
(37,278 |
) |
|
|
|
|
Net deferred tax assets |
|
18,348 |
|
Deferred tax liabilities: |
|
|
|
Cash to accrual adjustment |
|
(18,348 |
) |
Total deferred tax liabilities |
|
(18,348 |
) |
|
|
|
|
Net deferred income taxes |
|
$
|
|
|
|
|
|
The Company has Federal and state net operating loss
carryforwards of approximately $141,000 which begin to expire in
2019 if not used to offset future taxable income. The Company
has recorded a full valuation allowance of $37,278 against its
net deferred tax assets acquired and established during 1999 as
the Company has not yet determined that it is more likely than
not that the net deferred tax assets will be
realizable.
(7) Significant
Customers
The Company had one customer that accounted for 100%
of accounts receivable at December 31, 1998. The Company had
three customers that collectively accounted for 100% of revenue
and individually accounted for 57%, 32%, and 11% of revenue for
the year ended December 31, 1998. The Company had three
customers that collectively accounted for 87% of accounts
receivable and individually accounted for 51%, 25%, and 11% of
accounts receivable at December 31, 1999. The Company had three
customers that collectively accounted for 65% of revenue and
individually accounted for 33%, 17%, and 15% of revenue for the
year ended December 31, 1999.
(8) Leases
The Company incurred $4,600 and $5,839 of rent
expense leasing office space in the home of an officer of the
Company during 1998 and 1999, respectively. The Company
subsequently entered into an operating lease for office space
with future non-cancelable rental payments of $4,620 in 2000.
The Company incurred $1,980 of rent expense under this lease for
the period from November 15, 1999 through December 31,
1999.
(9) Subsequent
Events
The Company re-incorporated in the State of Delaware
in February 2000, thereby authorizing 185,714,286 shares of
$0.001 par value Series A-1 preferred stock, 185,714,286 shares
of $0.001 par value Series A-2 preferred stock, 400,000,000
shares of $0.001 par value Class A common stock, and 185,714,286
shares of $0.001 par value Class B common stock. Upon
liquidation, each holder of Series A-1 and Series A-2 preferred
shares (collectively, Series A preferred shares)
shall be entitled to receive an amount equal to the greater of
(i) $0.005384615, subject to adjustment in the event such shares
are subdivided through a stock split, stock dividend, or
otherwise (the Series A liquidation value), plus all
accrued and unpaid dividends, and (ii) the amount such holder
would receive if all holders of Series A preferred shares had
converted their Series A preferred shares into common stock
immediately prior to liquidation.
Upon liquidation, and after payment of preferential
amounts to the holders of Series A preferred shares, the
remaining assets of the Company shall be distributed to the
holders of common shares. The Company shall pay preferential
dividends to the holders of Series A preferred shares, when and
if declared by the board of directors, at a rate of 8% annually
of the sum of the Series A liquidation value plus all accrued
and unpaid dividends. In the event any dividend or other
distribution payable in cash, stock, or other property which such
holder would have received if on such record date such holder was
the holder of record of the number of common shares into which
such Series A preferred shares then held would be
convertible.
Series A-1 preferred shares may be converted into
the number of shares of Class A common stock determined by
adding (x) the number of shares determined by (i) multiplying
the number of Series A-1 preferred shares to be converted by the
Series A liquidation value and (ii) dividing the resulting
product by the Series A conversion price ($0.005384615
initially, subject to adjustment upon certain dilutive events),
plus (y) the number of shares determined by dividing the total
amount of accrued and unpaid dividends with respect to each
Series A-1 preferred share to be converted by the Series A
conversion price.
Series A-2 preferred shares may be converted into
the number of shares of Class B common stock determined by
adding (x) the number of shares determined by (i) multiplying
the number of Series A-2 preferred shares to be converted by the
Series A liquidation value and (ii) dividing the resulting
product by the Series A conversion price, plus (y) the number of
shares determined by dividing the total amount of accrued and
unpaid dividends with respect to each Series A-2 preferred share
to be converted by the Series A conversion price.
Series A-2 preferred shares may be converted into an
equal number of shares of Series A-1 preferred stock. Each
Series A-2 preferred share shall automatically convert into one
Series A-1 preferred share if the number of Class B common
shares then outstanding or issuable upon conversion of Series
A-2 preferred shares is less than five percent of the aggregate
number of common shares then outstanding, assuming conversion or
exercise of all outstanding convertible securities and
options.
Class B common shares may be converted into an equal
number of Class A common shares. Each Class B common share shall
automatically convert into one Class A common share if the
number of Class B common shares then outstanding or issuable
upon conversion of Series A preferred shares is less than five
percent of the aggregate number of common shares then
outstanding, assuming conversion or exercise of all outstanding
convertible securities and options.
On February 11, 2000, the Company entered into a
Series A Preferred Stock Purchase Agreement (the Agreement) with
Xqsite, Inc., a wholly owned subsidiary of divine interVentures,
inc. (divine). In conjunction with the Agreement, the Company
issued 185,714,286 shares of Series A-2 preferred stock, for
aggregate proceeds of $1,000,000. The proceeds from this
issuance consist of (i) $500,000 cash, less principal and
interest owed to divine under a $50,000 bridge loan executed
January 14, 2000, (ii) a $250,000 promissory note payable to the
Company on May 11, 2000, and (iii) a $250,000 promissory note
payable to the Company on August 11, 2000.
The Series A preferred shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of a majority of the
Series A preferred shares then outstanding may require the
Company to redeem all the Series A preferred shares then
outstanding at the Series A redemption price. The Series A
redemption price per share equals the sum of the Series A
liquidation value plus all accrued but unpaid dividends on such
Series A preferred share through the applicable redemption
date.
At any time or times on or after the earlier to
occur of (i) the fifth anniversary of issuance or (ii) the date
on which a holder of equity securities of the Company acquires a
voting interest in the Company that is greater than that of
divine and its affiliates or other permitted holders, the holder
or holders of two-thirds of the outstanding Series A preferred
shares may elect to require the Company to redeem all or any
portion of such holders Series A preferred
shares.
WESTBOUND CONSULTING, INC. AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Holders of Class A common stock, Class B common
stock, Series A-1 preferred stock, and Series A-2 preferred
stock vote together as a single class on all matters submitted
to a vote before the stockholders of the Company. Holders of
Class A common stock are entitled to one vote per share and
holders of Class B common stock are entitled to five votes per
share. Holders of Series A-1 preferred stock are entitled to the
number of votes of Class A common shares such holders would have
been entitled to had they converted all of their Series A-1
preferred shares to Class A common shares. Holders of Series A-2
preferred stock are entitled to five times the number of votes
of Class B common shares such holders would have been entitled
to had they converted all of their Series A-2 preferred shares
to Class B common shares.
Provided that holders of Class B common stock
outstanding and issuable upon conversion of Series A-2 preferred
stock own at least 5% of the Companys Class A common stock
and Class B common stock and assuming conversion of all
securities convertible into such shares, (i) such holders shall
have the number of votes equal to the greater of (a) voting
rights determined in accordance with the preceding paragraph,
and (b) 25.1% of the voting power of the Company, and (ii) the
voting rights of any person or group other than holders of Class
B common shares and Series A-2 preferred shares shall be limited
to the number of votes equal to the lesser of (x) such
holders voting rights in accordance with the preceding
paragraph, and (y) 25% of the voting power of the
Company.
INDEPENDENT AUDITORS REPORT
The 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 Companys 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.
Chicago,
Illinois
December
10, 1999
WHIPLASH, INC.
(a
development stage enterprise)
December 31, 1997 and 1998 and September 30, 1999
(unaudited)
ASSETS
|
|
December 31,
|
|
September 30,
1999
|
|
1997
|
|
1998
|
|
|
|
|
|
|
(unaudited) |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT)
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
WHIPLASH, INC.
(a
development stage enterprise)
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)
|
|
Years ended
December 31,
|
|
Period from
March 7, 1996
(inception)
through
December 31,
1998
|
|
Nine
months ended
September 30,
|
|
|
1997
|
|
1998
|
|
|
1998
|
|
1999
|
|
|
|
|
|
|
|
|
(unaudited) |
|
(unaudited) |
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 |
|
|
110,926 |
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
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)
|
|
Common Stock
|
|
Additional
paid-in capital
|
|
Deficit
accumulated
during the
development
stage
|
|
Total
stockholders
equity (deficit)
|
|
|
Shares
|
|
Amount
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
WHIPLASH, INC.
(a
development stage enterprise)
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)
|
|
Years ended
December 31,
|
|
Period from
March 7, 1996
(inception)
through
December 31,
1998
|
|
Nine
months ended
September 30,
|
|
|
1997
|
|
1998
|
|
|
1998
|
|
1999
|
|
|
|
|
|
|
|
|
(unaudited) |
|
(unaudited) |
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 activitiespurchase
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
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
Companys management, the unaudited interim financial
statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the
Companys 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.
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. The cost of computer software is amortized using
the straight-line method over an estimated useful life of three
years.
The Companys 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
|
The Company has adopted the provisions of Statement
of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.
Accordingly, certain costs to develop internal-use computer
software may be capitalized. Since inception, the Companys
product development costs have consisted primarily of payroll
and payroll related expenses for personnel dedicated to
developing the Companys global distribution network and
have been expensed as incurred as they have not met the
capitalization requirements of SOP 98-1.
|
(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
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.
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.
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 and amortization, are summarized as follows at
December 31, 1997 and 1998:
|
|
December 31,
|
|
|
1997
|
|
1998
|
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 |
|
|
|
|
|
|
|
|
(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.
WHIPLASH, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
The Company applies APB No. 25 in accounting for
its plan and accordingly, no compensation expense has been
recognized in the financial statements for its stock options.
Had the Company determined compensation expense based on the
fair value at the grant date for its stock-based compensation
plans under SFAS No. 123, the Companys net loss would have
been the pro forma amounts indicated below:
|
|
December 31,
|
|
|
1997
|
|
1998
|
Net
loss: |
As reported |
|
$(848,690 |
) |
|
(909,518 |
) |
Pro forma |
|
(854,046 |
) |
|
(915,669 |
) |
|
|
|
|
|
|
|
Stock option activity for the periods indicated is
as follows:
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
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 |
|
|
|
|
|
The following table summarizes information about
stock options outstanding at December 31, 1998:
Exercise price
|
|
Options outstanding
|
|
Options exercisable
|
|
Shares
|
|
Weighted-
average
remaining
contractual
life
|
|
Weighted-
average
exercise
price
|
|
Shares
|
|
Weighted-
average
exercise
price
|
$0.20 |
|
790,000 |
|
7.8
years |
|
$0.20 |
|
320,000 |
|
$0.20 |
|
|
|
|
|
|
|
|
|
|
|
(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 Companys 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
Companys income tax expense (benefit) is as
follows:
|
|
1997
|
|
1998
|
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 |
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
1997
|
|
1998
|
Deferred tax assets: |
Capitalized start-up costs |
|
$
509,935 |
|
|
858,618 |
|
Accrued expenses |
|
|
|
|
11,772 |
|
Property and equipmentdepreciation and
amortization |
|
|
|
|
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 equipmentdepreciation and
amortization |
|
1,917 |
|
|
|
|
Other |
|
164 |
|
|
273 |
|
|
|
|
|
|
|
|
Total gross deferred tax
liabilities |
|
2,081 |
|
|
273 |
|
|
|
|
|
|
|
|
Net deferred tax asset
(liability) |
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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 October 27, 1999, the Company amended and
restated its certificate of incorporation thereby authorizing
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 redeemable
convertible preferred stock, and 3,726,708 shares of $.001 par
value Series A-2 redeemable convertible preferred stock. Upon
liquidation, each holder of Series A-1 and Series A-2 preferred
shares (collectively, Series A preferred shares)
shall be entitled to receive an amount equal to the greater of
(i) $1.61, subject to adjustment in the event such shares are
subdivided through a stock split, stock dividend, or otherwise
(the Series A liquidation value), plus all accrued
and unpaid dividends, and (ii) the amount such holder would
receive if all holders of Series A preferred shares had
converted their Series A preferred shares into common stock
immediately prior to liquidation.
Upon liquidation, and after payment of preferential
amounts to holders of Series A preferred shares, the remaining
assets of the Company shall be distributed to the holders of
common shares. The Company shall pay preferential dividends to
the holders of Series A preferred shares, when and if declared
by the board of directors, at an annual rate of $0.13 per share
(as adjusted for any stock splits and like events). In the event
any dividend or other distribution payable in cash, stock, or
other property is declared on the common stock, each holder of
Series A preferred shares on the record date for such dividend
or distribution shall be entitled to receive the same cash,
stock or other property which such holder would have received if
on such record date such holder was the holder of record of the
number of common shares into which such Series A preferred
shares then held by such holder are then
convertible.
Series A-1 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class A common stock determined by (i) multiplying the number
of Series A-1 preferred shares to be
converted by $1.61 and (ii) dividing the resulting product by the
Series A conversion price ($1.61 initially, subject to
adjustment upon certain dilutive events) then in effect. If the
holders of more than two-thirds of the Series A-1 preferred
shares then outstanding shall so elect, by vote or written
consent, all of the outstanding Series A-1 preferred shares
shall automatically convert into shares of Class A common
stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into the number of shares
of Class B common stock determined by (i) multiplying the number
of Series A-2 preferred shares to be converted by $1.61 and (ii)
dividing the resulting product by the Series A conversion price
then if effect. If the holders of more than two-thirds of the
Series A-2 preferred shares then outstanding shall so elect, by
vote or written consent, all of the outstanding Series A-2
preferred shares shall automatically convert into shares of
Series A-1 preferred stock or Class B common stock.
Series A-2 preferred shares may be converted at any
time, at the election of the holder, into an equal number of
shares of Series A-1 preferred stock. Each Series A-2 preferred
share shall automatically convert into one Series A-1 preferred
share if the aggregate number of Series A-2 preferred shares and
Class B common shares then outstanding is less than five percent
of the aggregate number of common shares outstanding, assuming
conversion or exercise of all outstanding convertible securities
and options.
Class B common shares may be converted at any time,
at the election of the holder, into an equal number of Class A
common shares. Each Class B common share shall automatically
convert into one Class A common share if the aggregate number of
Series A-2 preferred shares and Class B common shares then
outstanding is less than five percent of the aggregate number of
common shares then outstanding, assuming conversion or exercise
of all outstanding convertible securities and
options.
If a firm commitment underwritten public offering of
shares of common stock is effected in which (a) the aggregate
price paid by the public for the shares is at least $20,000,000
and (b) the price per share paid by the public for such shares
is at least 300% of the Series A conversion price in effect
immediately prior to such offering, then all of the outstanding
Series A preferred shares shall be automatically converted into
shares of common stock upon the closing of the public
offering.
The Series A preferred shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of at least two-thirds
of the Series A preferred shares then outstanding may require
the Company to redeem all the Series A preferred shares then
outstanding at the Series A redemption price. The Series A
redemption price per share equals the sum of the Series A
liquidation value plus all declared but unpaid dividends on such
Series A preferred shares through the applicable redemption
date.
At any time or times on or after the fifth
anniversary of issuance, the holder or holders of two-thirds of
the outstanding Series A preferred shares may elect to require
the Company to redeem all or any portion of such holders
Series A preferred shares.
Holders of Class A common stock, Class B common
stock, Series A-1 preferred stock, and Series A-2 preferred
stock vote together as a single class on all matters submitted
to a vote before the stockholders of the Company. Holders of
Class A and Class B common stock are entitled to one vote per
share. Holders of Series A-1 preferred stock are entitled to the
number of votes of Class A common shares such holders would have
been entitled to had they converted all of their Series A-1
preferred shares to Class A common shares. Holders of Series A-2
preferred stock are entitled to the number of votes of Class B
common shares such holders would have been entitled to had they
converted all of their Series A-2 preferred shares to Class B
common shares.
WHIPLASH, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
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.
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.
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.
INDEPENDENT AUDITORS REPORT
The Board
of Directors
Xippix,
Inc.:
We have audited the accompanying balance sheet of
Xippix, Inc. as of December 31, 1999, and the related statements
of operations, stockholders deficit, and cash flows for
the period from April 14, 1999 (inception) through December 31,
1999. These financial statements are the responsibility of the
Companys 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 Xippix, Inc. as of December 31, 1999, and the
results of its operations and its cash flows for the period from
April 14, 1999 (inception) through December 31, 1999, in
conformity with generally accepted accounting
principles.
Chicago,
Illinois
March 14,
2000
XIPPIX, INC.
December 31, 1999
Assets
Current
assets: |
Cash |
|
$ 175,327 |
|
Accounts receivable |
|
60,804 |
|
Security deposits |
|
23,505 |
|
Prepaid expenses and other current
assets |
|
27,566 |
|
|
|
|
|
Total current assets |
|
287,202 |
|
Property and equipment, net |
|
261,747 |
|
|
|
|
|
Total assets |
|
$ 548,949 |
|
|
|
|
|
|
Liabilities and Stockholders
Deficit |
|
Current
liabilities: |
Capital lease obligation |
|
$ 153,274 |
|
Accounts payable |
|
69,321 |
|
Accrued expenses |
|
149,503 |
|
Due to shareholders |
|
68,444 |
|
Deferred revenue |
|
766,611 |
|
|
|
|
|
Total current liabilities |
|
1,207,153 |
|
|
|
|
|
Stockholders deficit: |
Common stock, no par value. 100,000,000 shares
authorized; 55,277,778 shares issued and
outstanding |
|
1,106 |
|
Due from shareholders |
|
(1,050 |
) |
Accumulated deficit |
|
(658,260 |
) |
|
|
|
|
Total stockholders deficit |
|
(658,204 |
) |
|
|
|
|
Total liabilities and
stockholders deficit |
|
$ 548,949 |
|
|
|
|
|
See
accompanying notes to financial statements.
XIPPIX, INC.
Period
from April 14, 1999 (inception) through December 31,
1999
Revenues |
|
$1,726,250 |
|
Cost of
revenues |
|
953,600 |
|
|
|
|
|
Gross profit |
|
772,650 |
|
|
|
|
|
Operating expenses: |
Product development |
|
104,275 |
|
Selling, general and administrative |
|
1,377,062 |
|
|
|
|
|
Total operating expenses |
|
1,481,337 |
|
|
|
|
|
Loss from operations |
|
(708,687 |
) |
|
|
|
|
Other
income: |
Interest income |
|
2,927 |
|
Other |
|
47,500 |
|
|
|
|
|
Total other income |
|
50,427 |
|
|
|
|
|
Net loss |
|
$ (658,260 |
) |
|
|
|
|
See
accompanying notes to financial statements.
XIPPIX, INC.
STATEMENT OF STOCKHOLDERS DEFICIT
Period
from April 14, 1999 (inception) through December 31,
1999
|
|
Common stock
|
|
Due
from
shareholders
|
|
Accumulated
deficit
|
|
Total
stockholders
deficit
|
|
|
Shares
|
|
Amount
|
Balance
at April 14, 1999 (inception) |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
55,277,778 |
|
1,106 |
|
(1,050 |
) |
|
|
|
|
56 |
|
Net
loss |
|
|
|
|
|
|
|
|
(658,260 |
) |
|
(658,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999 |
|
55,277,778 |
|
$1,106 |
|
(1,050 |
) |
|
(658,260 |
) |
|
(658,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
XIPPIX, INC.
Period
from April 14, 1999 (inception) through December 31,
1999
Cash
flows from operating activities: |
Net loss |
|
$(658,260 |
) |
Adjustments to reconcile net loss to net cash
provided by operating activities: |
Depreciation and amortization |
|
92,566 |
|
Changes in assets and
liabilities: |
Accounts receivable |
|
(60,804 |
) |
Security deposits |
|
(23,505 |
) |
Prepaid expenses and other current
assets |
|
(27,566 |
) |
Accounts payable |
|
69,321 |
|
Accrued expenses |
|
149,503 |
|
Due to shareholders |
|
68,444 |
|
Deferred revenue |
|
766,611 |
|
|
|
|
|
Net cash provided by operating
activities |
|
376,310 |
|
|
|
|
|
Cash
flows from investing activities |
Purchases of property and equipment |
|
(51,043 |
) |
|
|
|
|
Net cash used in investing
activities |
|
(51,043 |
) |
|
|
|
|
Cash
flows from financing activities: |
Payment of obligation under capital
lease |
|
(149,996 |
) |
Proceeds from issuance of common stock |
|
56 |
|
|
|
|
|
Net cash used in financing
activities |
|
(149,940 |
) |
|
|
|
|
Net
increase in cash |
|
175,327 |
|
Cash at
beginning of period |
|
|
|
|
|
|
|
Cash at
end of period |
|
$ 175,327 |
|
|
|
|
|
Supplemental disclosure of non cash investing and
financing activities: |
Equipment acquired through capital
lease |
|
$ 303,270 |
|
Issuance of common stock for amounts due from
shareholders |
|
$ 1,050 |
|
See
accompanying notes to financial statements.
XIPPIX, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Organization and
Business
Xippix, Inc. (the Company) was incorporated as a
C-corporation in the state of California on April 14, 1999. The
Company specializes in the design and development of Internet
imaging and services for e-commerce websites. The Companys
product under development is intended to enable users to view
images on Internet websites with greater resolution.
The Company has adopted a March 31 fiscal year
end.
(2) Summary of Significant
Accounting Policies and Practices
|
(a) 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.
Property and equipment under capital leases are
stated at the fair value of the leased item at the inception of
the lease. Property and equipment held under capital leases are
amortized using the straight-line method over the estimated
useful life of the related asset.
Deferred revenue consists of $266,667 in billings
for services that have not yet been rendered and a $499,944
prepayment by a third party for future purchases of the
Companys software products. The $266,667 of deferred
revenue for services that have not yet been rendered will be
recognized as revenue as the services are performed. The
$499,944 prepayment from a third party will be recognized as
revenue as the third party purchases software products from the
Company at a discount of 40% from the Companys standard
list prices then in effect. The third party may purchase
software products for sale to end users or for its own use and
is not required to make any cash payments to the Company for
purchases of software products until after the entire $499,944
prepayment has been utilized.
The Companys revenues since inception consist
primarily of contracted software development services provided
to third parties. Service revenues are recognized as services
are rendered. Revenue from product and software sales are
recognized upon product delivery and customer acceptance, when
all significant contractual obligations are satisfied and the
collection of the resulting receivables is reasonably assured.
Revenue from royalties is recognized based upon sales of the
Companys products at agreed upon royalty
rates.
Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed. Costs associated
with the planning and designing phase of software development,
including coding and testing activities necessary to establish
technological feasibility, are classified as product development
and expensed as incurred. Once technological feasibility has
been established, additional costs incurred in development,
including coding, testing, and documentation writing, are
capitalized until the softwares general release.
Capitalized costs are evaluated for net realizability by
estimating the future gross revenues from that product reduced
by the estimated future costs of completing and disposing of
that product, including costs of performing maintenance and
customer support required to satisfy the Companys
responsibility set forth at the time of sale. During the period
from April 14, 1999 (inception) through December 31, 1999 all
development costs were expensed due to the uncertainty of
realizability.
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.
The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for its fixed plan
stock options. As such, compensation expense would be recorded
on the date of grant only if the fair value of the underlying
stock exceeded the exercise price. SFAS No. 123, Accounting
for Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to
apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No.
123.
|
(g) 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.
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 these estimates.
(3) Property and
Equipment
Property and equipment, at cost, less accumulated
depreciation and amortization, are summarized as follows at
December 31, 1999:
Equipment under capital lease |
|
$303,270 |
|
Equipment and purchased software |
|
51,043 |
|
|
|
|
|
|
|
354,313 |
|
Less
accumulated depreciation and amortization |
|
(92,566 |
) |
|
|
|
|
|
|
$261,747 |
|
|
|
|
|
(4) Leases
The Company is obligated under a capital lease for
equipment that expires on May 30, 2000. At December 31, 1999,
the gross amount of equipment and related accumulated
amortization recorded under this lease was $303,270 and $88,452,
respectively.
The Company also has several operating leases,
primarily for office facilities and storage, that expire in
2000. Rental expense, including common area maintenance expense,
was $183,739 for the period from April 14, 1999 (inception)
through December 31, 1999.
Future minimum lease payments under noncancelable
operating leases as of December 31, 1999 are $228,629 for 2000.
Future minimum capital lease payments as of December 31, 1999
are $153,274 for 2000.
XIPPIX, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(5) Income Taxes
The reconciliation of income tax expense (benefit)
computed using the Federal statutory rate of 34% to the
Companys income tax expense (benefit) is as
follows:
Expected income tax benefit |
|
$(223,808 |
) |
State
income tax benefit, net of Federal taxes |
|
(39,496 |
) |
Other |
|
1,461 |
|
Effect
of change in valuation allowance |
|
261,843 |
|
|
|
|
|
|
|
$
|
|
|
|
|
|
The tax effects of temporary differences that give
rise to significant portions of deferred taxes at December 31,
1999 is presented below.
Deferred tax assets: |
Property and equipment |
|
$ 27,855 |
|
Net operating loss carryforward |
|
233,988 |
|
|
|
|
|
Total gross deferred tax assets |
|
261,843 |
|
Valuation allowance |
|
(261,843 |
) |
|
|
|
|
Net deferred tax asset |
|
$
|
|
|
|
|
|
The Company incurred a net operating loss from April
14, 1999 (inception) through December 31, 1999, which can
potentially be carried forward twenty years and will expire in
2020.
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.
(6) Capital
Stock
In May 1999, the Company issued an aggregate of
42,500,000 shares of common stock to the Companys founders
at a price of $0.00002 per share.
In July 1999, the Company received $500,000 from a
third party representing a $499,944 prepayment toward future
purchases of the Companys software products and $56 for
the purchase of 2,777,778 shares of common stock of the Company.
The Company has recorded the $56 fair value of the shares of
common stock as equity and the $499,944 prepayment as deferred
revenue in the accompanying financial statements. The deferred
revenue will be recognized as the third party purchases software
products from the Company for sale to end users or for its own
use, which is anticipated to occur over the next 12 to 24
months.
In October 1999, the Company issued 10,000,000
shares of common stock to an officer of the Company at a price
of $0.00002 per share.
(7) Stock Option
Plan
In 1999, the Company adopted a stock option plan
(the Plan) pursuant to which the Companys Board of
Directors may grant stock options to employees. The Plan
authorizes grants of options to purchase up to 15,000,000 shares
of authorized but unissued common stock. Stock options granted
can have a maximum term
of 10 years and a maximum vesting period of 20% per year over the
five-year period commencing on the date of grant. Terms for
specific stock option grants are to be determined by the Board
of Directors within the above guidelines.
At December 31, 1999, there were 10,557,500
additional shares available for grant under the Plan. The per
share weighted-average minimum value of stock options granted
during 1999 was de minimus on the date of grant using the
Black Scholes option-pricing model (excluding a volatility
assumption) with the following weighted-average assumptions:
1999expected dividend yield 0%, risk-free interest rate of
5.72%, and an expected life of 4.28 years.
The Company applies APB Opinion No. 25 in accounting
for its Plan and, accordingly, no compensation cost has been
recognized in the financial statements for its stock options
grants.
Stock option activity during the period indicated is
as follows:
|
|
Number of
shares
|
|
Weighted-average
exercise price
|
Outstanding at April 14, 1999 (inception) |
|
|
|
$ |
Granted |
|
4,442,500 |
|
.00002 |
|
|
|
Outstanding at December 31, 1999 |
|
4,442,500 |
|
.00002 |
|
|
|
At December 31, 1999, all options outstanding are
exercisable. Shares received through the exercise of options are
subject to repurchase at the option exercise price. The
repurchase right lapses on shares acquired through option
exercise over a period of up to 48 months. All options have an
exercise price of $.00002 and a weighted-average remaining life
of 9.5 years.
(8) Employee
Benefits
The Company has a 401(k) retirement plan covering
substantially all of its employees. The participants may
contribute up to 15% of their salary, subject to Federal tax
limitations. The Company matches 50% of the employees
contribution up to 6% of the employees contribution rate.
During 1999, the Company contributed $33,765 in matching
contributions.
(9) Related-party
Transactions
In the ordinary course of its business, the Company
conducted certain transactions with one of its shareholders,
principally software development services, which resulted in
revenues of $41,250 for the period from April 14, 1999
(inception) through December 31, 1999.
At December 31, 1999, the Company accrued $68,444
related to certain significant shareholders of the Company for
employee services performed for the period from October 15, 1999
through December 31, 1999.
(10) Significant
Customers
During the period from April 14, 1999 (inception)
through December 31, 1999, two customers accounted for 45% and
41% of the Companys revenues. At December 31, 1999, one
customer accounted for 99% of the Companys accounts
receivable.
XIPPIX, INC.
NOTES
TO FINANCIAL STATEMENTS(Continued)
(11) Subsequent Events
The Company entered into a short term promissory
note in the amount of $400,000 with a third party on January 7,
2000. The principal amount and all the accrued but unpaid
interest were due on February 8, 2000. The Company satisfied its
principal and interest obligation under the promissory note on
February 4, 2000 through the issuance of stock as described
below.
Effective February 3, 2000, the Company amended and
restated its articles of incorporation to authorize 27,000,000
shares of $0.001 par value Series A Preferred Stock and
200,000,000 shares of $0.00001 par value Common
Stock.
Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, each shareholder of
Series A Preferred Shares is entitled to receive a cash
distribution prior to any distribution to a shareholder of
Common Stock. The cash distribution is equal to the greater of
(i) $0.3343925 per Series A Preferred Share (Series A Purchase
Price or Series A Conversion Price) plus all accrued and unpaid
dividends and (ii) the amount such shareholder would receive if
all shareholders of Series A Preferred Shares had converted
their shares into Common Stock immediately prior to such
liquidation, dissolution or winding up (the Series A Liquidation
Value). The remaining assets available for distribution are
distributed to the shareholders of Common Stock ratably in
proportion to the number of shares of Common Stock
held.
At any time, a holder of Series A Preferred Shares
may convert all or any portion of the Series A preferred shares
held by such holder into the number of shares of Common Stock
computed by multiplying the number of Series A Preferred Shares
to be converted by the Series A Liquidation Value and dividing
the resulting product by the Series A Conversion Price then in
effect. No accrued and unpaid dividends may be included in the
Series A Liquidation Value or converted into Common Stock in
conjunction with the conversion of the Series A Preferred
Shares.
The Series A Conversion Prices will be adjusted for
events such as the issuance of rights, options, and convertible
securities, dilutive events and stock splits. Each share of
Series A Preferred Shares accrues dividends on a daily basis
from the date of issuance at a rate of 8% per annum of the
Series A Purchase Price. The board of directors may declare a
dividend on the Common Stock only when all accrued and unpaid
dividends on the Series A Preferred Shares have been paid. Then,
in the event any dividend or other distribution payable in cash,
stock or other property is declared on the Common Stock, each
holder of Series A Preferred Shares on the record date for such
dividend or distribution shall be entitled to receive such
dividend or distribution such holder would have received if on
such record date such holder was the holder of the number of
shares of Common Stock into which such Series A Preferred Shares
then held by such holder are convertible.
If an underwritten public offering of shares of
Common Stock is effected in which (a) the aggregate price paid
by the public for the shares is at least $25,000,000 and (b) the
price per share paid by the public for such shares is at least
300% of the Series A Conversion Price in effect immediately
prior to such offering, then all of the outstanding Series A
Preferred Shares shall be automatically converted into shares of
Common Stock upon the closing of the public
offering.
The Series A Preferred Shares have certain
redemption rights. If a fundamental change or change in
ownership occurs, the holder or holders of at least two-thirds
of the Series A Preferred Shares then outstanding
may require the Company to redeem all the Series A Preferred
Shares then outstanding at the Series A Redemption Price. The
Series A Redemption Price equals the Series A Liquidation Value
as of the redemption date.
The holder or holders of two-thirds of the
outstanding Series A Preferred Shares may elect, on the fifth
anniversary of issuance, to require the Company to redeem all
Series A Preferred Shares then outstanding at the Series A
Redemption Price.
Holders of Common Stock and Series A Preferred Stock
vote together as a single class on all matters submitted to a
vote before the stockholders of the Company. Holders of Common
Stock are entitled one vote per share. Holders of Series A
Preferred Stock are entitled to the number of votes of Common
Shares such holders would have been entitled to had they
converted all of their Series A Preferred Shares to Common
Shares.
On February 4, 2000, 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 26,914,481 shares of Series A preferred stock for
proceeds of $9,000,000. The proceeds from the transaction
include cash of $4,598,556, satisfaction of the principal and
interest due under the promissory note issued on January 7, 2000
and a promissory note in the amount of $4,000,000 due May 1,
2000 and bearing interest at the rate of 8% per
annum.
In conjunction with the agreement, the Company has
reserved 55,000,000 shares of Common Stock for issuance upon
conversion of the Series A Preferred Shares.
On February 15, 2000, the Company entered into a
facility operating lease that commences on March 1, 2000 and
extends through November 30, 2003. The Companys future
minimum lease payments under the lease are as
follows:
2000 |
|
$ 254,079 |
2001 |
|
316,329 |
2002 |
|
330,564 |
2003 |
|
316,443 |
|
|
|
Total |
|
$1,217,415 |
|
|
|
[Inside Back Cover]
The
triple helix graphic represents the interwoven relationships
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