<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1999
REGISTRATION STATEMENT NO. 333-90911
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIREPOND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7389 41-1462409
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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890 WINTER STREET
WALTHAM, MASSACHUSETTS 02451
(781) 487-8400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
KLAUS P. BESIER
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIREPOND, INC.
890 WINTER STREET
WALTHAM, MASSACHUSETTS 02451
(781) 487-8400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
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JOHN B. STEELE, ESQ. PATRICK J. RONDEAU, ESQ.
MCDERMOTT, WILL & EMERY HALE AND DORR LLP
28 STATE STREET 60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1775 BOSTON, MASSACHUSETTS 02109-1803
(617) 535-4000 (617) 526-6000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
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Common Stock, $.01 par value per share........ 5,750,000 $13.00 $74,750,000 $19,734
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(1) Includes 750,000 shares which the underwriters have an option to purchase
from FirePond and a stockholder to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) $20,850 was previously paid by FirePond in connection with the initial
filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 21, 1999
[FIREPOND LOGO]
5,000,000 SHARES
COMMON STOCK
FirePond, Inc. is offering 5,000,000 shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol FIRE. We anticipate that the initial
public offering price will be between $11.00 and $13.00 per share.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
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<CAPTION>
PER SHARE TOTAL
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Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to FirePond........................................ $ $
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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.
FirePond and one of its stockholders have granted the underwriters a 30-day
option to purchase up to 750,000 additional shares of common stock to cover
over-allotments. FleetBoston Robertson Stephens Inc. expects to deliver the
shares of common stock to purchasers on , 2000.
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ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
SG COWEN
E*OFFERING
The date of this prospectus is , 2000
<PAGE> 3
(inside front cover)
DESCRIPTION OF ARTWORK
At the top of the page is the name "FirePond" with the company's logo above
it. The following caption is beneath the name of the company and its logo:
"Integrated e-business sales and marketing." Beneath the caption is the text
"FirePond Application Suite(TM)."
In the center of the page is a small shaded circle with the following text:
"FirePond Business Rules Engine." There are two shaded quarter-circles
protruding from the top of the center circle on the left and right. The quarter
circle on the left is labeled: "FirePond Commerce, Internet Selling Software for
E-Commerce." The quarter circle on the right is labeled: "FirePond Sales, Guided
Internet Selling Software for Direct and Indirect Sales Channels."
There is one large rectangle protruding from the bottom of the center
circle. The rectangle is labeled: "FirePond Sales Manager, Enterprise Sales
Administration and Customer Information Management."
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Note on Forward Looking Statements.......................... 12
Use of Proceeds............................................. 12
Dividend Policy............................................. 12
Capitalization.............................................. 13
Dilution.................................................... 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 27
Management.................................................. 38
Certain Transactions........................................ 46
Principal Stockholders...................................... 48
Description of Capital Stock................................ 50
Shares Eligible for Future Sale............................. 53
Underwriting................................................ 55
Legal Matters............................................... 57
Experts..................................................... 57
Where You Can Find More Information......................... 57
Index to Consolidated Financial Statements.................. F-1
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PROSPECTUS SUMMARY
This is only a summary and may not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and our financial
statements and the related notes included in this prospectus. Unless otherwise
indicated, this prospectus assumes that the underwriters have not exercised
their option to purchase additional shares, that warrants to purchase series F
preferred stock have been automatically exercised on a net exercise basis and
that all shares of convertible preferred stock have been automatically converted
into shares of common stock. Unless otherwise indicated, this prospectus has
been adjusted to reflect a two-for-three reverse stock split of the common stock
to be effected on December , 1999.
FIREPOND, INC.
FirePond is a leading provider of integrated e-business sales and marketing
solutions that enable companies to optimize their customer relationships and
maximize the effectiveness of their Internet-based and traditional sales
channels. We provide software and services that allow companies to merge their
e-commerce selling, customer relationship management, and channel management
strategies on a single, Internet-based platform.
Our FirePond Application Suite allows companies to deliver highly
consistent and personalized interactive buying experiences to their customers
over the Internet, as well as in more traditional selling channels, to increase
customer conversion and retention. Our products are able to link information
obtained from business-to-business or business-to-consumer e-commerce
transactions into traditional sales channels, where it can dramatically improve
the effectiveness of both sales models. Our products can also deliver
information from these interactive, Internet-based transactions into the larger
enterprise, where real-time customer interactions and transactions trigger
coordinated, customer-focused processes based upon the company's common view of
the customer. This approach allows companies to manage their ongoing sales,
marketing, product planning and fulfillment activities in a fashion that
maximizes the lifetime value of each customer relationship.
We target the largest 2000 companies in the world, commonly known as Global
2000 companies, in selected industries characterized by complex products,
services or channel relationships, including health care/insurance, financial
services, high technology, telecommunications, automotive/trucking and
manufacturing. Our customers include ADP, Empire Blue Cross Blue Shield,
KLA-Tencor, Renault V.I. and Sprint.
Our goal is to be the leading provider of integrated e-business sales and
marketing solutions. To achieve this goal, key elements of our strategy are to:
- leverage our expertise to expand into new vertical markets;
- exploit our established international infrastructure to target leading
businesses worldwide;
- utilize our unique development organization to rapidly expand our
products' e-business application functionality;
- expand our relationships with system integrators and complementary
software vendors to expand our market reach and implementation capacity;
- provide a range of product packaging options to better penetrate Global
2000 accounts; and
- leverage our 16 years of implementation expertise to deliver optimized
solutions for our customers.
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We were incorporated in Minnesota in 1983 as a provider of custom developed
interactive selling solutions. We undertook a strategic restructuring in late
1996 to focus on providing more standardized software products. We later became
a Delaware corporation as a result of a reincorporation merger effected in
December 1999. Our principal executive offices are at 890 Winter Street,
Waltham, Massachusetts 02451 and our telephone number at that address is (781)
487-8400. Information contained on our web site at http://www.firepond.com does
not constitute part of this prospectus. We own or have rights to trademarks that
we use in conjunction with the sale of our products. FirePond, our logo and our
product names are our trademarks. All other trade names and trademarks used in
this prospectus are the property of their owners.
THE OFFERING
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Common stock offered by FirePond........................... 5,000,000 shares
Common stock to be outstanding after the offering.......... 32,485,652 shares
Use of proceeds............................................ For debt repayment, working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol..................... FIRE
</TABLE>
The number of shares of common stock outstanding after this offering
excludes:
- 9,408,825 shares issuable upon exercise of outstanding options as of
November 30, 1999 at a weighted average exercise price of $5.24 per
share; and
- 864,567 shares issuable upon exercise of outstanding warrants as of
November 30, 1999 at a weighted average price of $5.64 per share.
As of November 30, 1999, we have also reserved an additional 3,429,119
shares of common stock for future issuance under our stock option plans. We also
plan to issue warrants to purchase up to 500,000 shares of our common stock over
the next 12 months in connection with sales of our products as well as to our
present and future strategic partners.
2
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables are a summary of financial data for our business. The
pro forma net loss per share calculation reflects the conversion of our
convertible preferred stock into shares of common stock upon the completion of
this offering. See note 3 of notes to consolidated financial statements for an
explanation of the number of shares used in computing per share data.
The pro forma consolidated balance sheet data summarized below reflects:
- the exercise of warrants to purchase series F preferred stock on a net
exercise basis;
- the conversion of all outstanding shares of convertible preferred stock
into shares of common stock; and
- the payment of priority payments through the issuance of additional
shares of common stock to some common and preferred stockholders upon
completion of this offering.
The pro forma as adjusted consolidated balance sheet data summarized below
reflects the sale of the common stock in this offering at an assumed initial
public offering price of $12.00 per share, after deduction of estimated
underwriting discounts and commissions and our estimated offering expenses and
the use of net proceeds as described in "Use of Proceeds."
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<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
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1997 1998 1999
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product-related revenues.................................. $ 416 $ 8,281 $ 18,381
Custom development services............................... 26,114 22,354 15,904
-------- ------- --------
Total revenues......................................... 26,530 30,635 34,285
Loss from operations........................................ (27,198) (7,738) (28,047)
Net loss.................................................... $(28,789) $(8,064) $(28,678)
Net loss per share:
Basic and diluted net loss per share...................... $ (2.79) $ (0.81) $ (2.86)
Basic and diluted weighted average common shares
outstanding............................................ 10,319 9,925 10,024
Pro forma net loss per share (unaudited):
Pro forma net loss per share.............................. $ (1.11)
Pro forma basic and diluted weighted average common shares
outstanding............................................ 25,799
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OCTOBER 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. 2,120 2,120 49,630
Working capital (deficit)................................. (11,980) (11,980) 42,270
Total assets.............................................. 21,660 21,660 69,170
Long-term debt, less current portion...................... 702 702 702
Convertible preferred stock............................... 191 -- --
Total stockholders' equity (deficit)...................... (5,954) (5,954) 48,296
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<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our business,
financial condition or results of operations could be seriously harmed, the
trading price of our common stock could decline, and you may lose all or part of
your investment. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties, including those that we do not
know about now or that we currently do not believe to be material, may also
adversely affect our business.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A SOFTWARE COMPANY, OUR FUTURE
SUCCESS IS UNCERTAIN
Although FirePond was incorporated in 1983, we have only been focused on
providing software products since 1997. Because we have only been focused on
providing software products for a short time, we have a limited operating
history pursuing this business model. The revenue and income potential of the
market for e-business sales and marketing solutions is unproven. As a result,
our historical financial statements are not an accurate indicator of our future
operating results. In addition, we have limited insight into trends that may
emerge and affect our business, and we cannot forecast operating expenses based
on our historical results. In evaluating FirePond, you should consider the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets. If we are not able to successfully address these
risks, our business could be harmed.
WE EXPECT TO CONTINUE TO INCUR LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE
We have incurred quarterly and annual losses intermittently since we were
formed in 1983, and regularly since we undertook our strategic restructuring in
late 1996. We incurred net losses of $28.8 million for fiscal 1997, $8.1 million
for fiscal 1998 and $28.7 million for fiscal 1999. We expect to continue to
incur losses on both a quarterly and annual basis and we are not certain if or
when we will become profitable. Moreover, we expect to continue to incur
significant sales and marketing and research and development expenses, and, as a
result, we will need to generate significant revenues to achieve and maintain
profitability. Although our revenues have grown in recent quarters, we cannot be
certain that we can sustain this growth or that we will generate sufficient
revenues to attain profitability.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE BECAUSE WE DEPEND ON A SMALL
NUMBER OF LARGE ORDERS AND OUR SALES AND IMPLEMENTATION PROCESS CAN BE LENGTHY
AND COMPLEX
We currently derive a significant portion of our license revenues in each
quarter from a small number of relatively large orders, and we generally
recognize revenues from our licenses over the related implementation period. If
we are unable to recognize revenues from one or more substantial license sales
planned for a particular fiscal quarter, our operating results for that quarter
would be seriously harmed. In addition, the purchase of our products typically
involves a significant cost to our customers, including the purchase of related
hardware and software, as well as training and integration costs.
Implementations also require a substantial commitment of resources by our
customers or their consultants over an extended period of time. The time
required to complete an implementation may vary from customer to customer and
may be protracted due to unforeseen circumstances. As a result and because our
sales cycle is relatively long, we may have difficulty predicting when we will
recognize revenues.
DISAPPOINTING QUARTERLY REVENUES OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL
We have difficulty determining if and when we will receive license revenues
from a particular customer. In addition, because our revenues from
implementation, maintenance and training services are largely correlated with
our license revenues, a decline in license revenues would also cause a decline
in our services revenues in the same quarter and in subsequent quarters. If our
quarterly revenues or operating results fall below the expectations of investors
or securities analysts, the price of our common stock could fall substantially.
4
<PAGE> 9
As third parties are increasingly used for providing professional services,
our services revenues, which are generally more predictable than license
revenues, will not likely grow at the same rate as our license revenues. As
services revenues decline as a percentage of total net revenues, our total net
revenues could become less predictable.
Most of our expenses are relatively fixed in the short term and are based,
in part, on our expectations of future revenue levels. As a result, if revenues
for a particular quarter are below our expectations, we may be unable to
proportionately reduce operating expenses for that quarter, and therefore this
revenue shortfall would seriously harm our expected operating results for that
quarter.
A SIGNIFICANT PERCENTAGE OF OUR PRODUCT DEVELOPMENT IS PERFORMED BY A THIRD
PARTY INTERNATIONALLY, THE LOSS OF WHICH WOULD SUBSTANTIALLY HARM OUR PRODUCT
DEVELOPMENT EFFORTS
A significant percentage of our product development work, and some of our
implementation services, are performed by a third-party development organization
in Minsk, Belarus. Unpredictable developments in the political, economic and
social conditions in Belarus, or our failure to renew our consulting agreement
with this organization on terms similar to our current agreement with this
organization, could potentially eliminate or reduce the availability of these
product development and implementation services. If access to these services
were to be unexpectedly eliminated or significantly reduced, our ability to meet
development objectives vital to our ongoing strategy would be hindered, and our
business could be seriously harmed.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE NEW FIREPOND APPLICATION SUITE, WHICH
HAS BEEN RECENTLY INTRODUCED AND MAY NOT BE WIDELY ADOPTED BY OUR CUSTOMERS
We expect to derive substantially all of our product license revenues in
the future from sales of the newly announced FirePond Application Suite and its
component products, which were generally released in October 1999. While the
FirePond Business Rule Engine was also an element of our prior product line
offering, substantially all of the FirePond Application Suite represents new
functionality implemented in a new technical architecture.
Our business depends on the successful release, introduction and customer
acceptance of this new suite of products. Although our products are subject to
our internal testing procedures, customers may discover errors or other problems
with the product, which may adversely affect their acceptance. We expect that we
will continue to depend on revenues from new and enhanced versions of the
FirePond Application Suite for the foreseeable future, and our business would be
harmed if our target customers do not adopt and expand their use of the FirePond
Application Suite and its component products.
FAILURE TO INCREASE OUR INTERNATIONAL REVENUES COULD SERIOUSLY HARM OUR BUSINESS
International revenues currently account for a significant percentage of
our total revenues. We expect international revenues to continue to account for
a significant percentage of total revenues in the future and we believe that we
must continue to expand our international sales activities to be successful.
However, foreign markets for our products may develop more slowly than currently
anticipated. International revenues represented 11% in fiscal 1999. Our failure
to expand our international sales could have a significant negative impact on
our business.
Our international sales growth will be limited if we are unable to:
- expand international sales channel management and support organizations;
- develop additional relationships with international service providers; or
- establish additional relationships with additional distributors and
systems integrators.
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FAILURE TO EFFECTIVELY MANAGE OUR GEOGRAPHICALLY DISPERSED ORGANIZATION COULD
HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR BUSINESS OPERATIONS
If we fail to manage our geographically dispersed organization, we may fail
to meet or exceed our objectives and our revenues may decline. We perform
research and development activities in Minnesota, New Jersey, Massachusetts and
Belarus, and our executive officers and other key employees are similarly
dispersed throughout the United States, Europe and Asia to market and sell our
products in those regions. This geographic dispersion requires significant
management resources that our locally-based competitors do not need to devote to
their operations. In addition, the expansion of our existing international
operations and entry into additional international markets will require
significant management attention and financial resources.
INTEGRATION OF A NEW MANAGEMENT TEAM AND NEW PERSONNEL AS WELL AS CONTINUED
RAPID GROWTH MAY STRAIN OUR OPERATIONS
We have recently experienced a period of rapid growth and expansion. All
members of our senior management team have joined FirePond since March 1997.
From July 1997 to December 1998, significant turnover of our employees occurred
in conjunction with our change in focus from providing custom development
services to providing more standardized software products. A significant
increase in domestic and international personnel will likely be necessary to
address potential growth in our customer base and market opportunities. This may
place a significant burden on our management and our internal resources. If we
are not able to install adequate systems, procedures and controls to support our
future operations in an efficient and timely manner, or if we are unable to
otherwise manage growth effectively, our business could be harmed.
INTENSE COMPETITION FROM OTHER TECHNOLOGY COMPANIES COULD PREVENT US FROM
INCREASING OR SUSTAINING REVENUES AND PREVENT US FROM ACHIEVING OR SUSTAINING
PROFITABILITY
The market for integrated e-business sales and marketing solutions is
intensely competitive. Many of our current and potential competitors have longer
operating histories, greater name recognition and substantially greater
financial, technical, marketing, management, service and support resources than
we do. Therefore, they may be able to respond more quickly than we can to new or
changing opportunities, technologies, standards or customer requirements. If we
are unable to compete effectively, our revenues could significantly decline.
In addition, we expect that new competitors will enter the market with
competing products as the size and visibility of the market opportunity
increases. We also expect that competition will increase as a result of software
industry consolidation and formation of alliances among industry participants.
Increased competition could result in pricing pressures, reduced margins or the
failure of our products to achieve or maintain market acceptance.
FAILURE TO EXPAND OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS AND CONSULTING
FIRMS WOULD IMPEDE ACCEPTANCE OF OUR PRODUCTS AND DELAY THE GROWTH OF OUR
REVENUES
At times we rely on systems integrators and consulting firms to recommend
our products to their customers and to install and support our products for
their customers. To increase our revenues and implementation capabilities, we
must develop and expand our relationships with systems integrators and
consulting firms. In addition, systems integrators and consulting firms may
develop, market or recommend software applications that compete with our
products. Moreover, if these firms fail to implement our products successfully
for their clients, we may not have the resources to implement our products on
the schedule required by the client which would result in our inability to
recognize revenues from the license of our products to these customers.
IF E-BUSINESS SALES AND MARKETING SOLUTIONS ARE NOT WIDELY ADOPTED, WE MAY NOT
BE SUCCESSFUL
Our products address a new and emerging market for e-business sales and
marketing solutions. The failure of this market to develop, or a delay in the
development of this market, would seriously harm our
6
<PAGE> 11
business. The success of e-business sales and marketing solutions depends
substantially upon the widespread adoption of the Internet as a primary medium
for commerce and business applications. The Internet has experienced, and is
expected to continue to experience, significant user and traffic growth, which
has, at times, caused user frustration with slow access and download times. The
Internet infrastructure may not be able to support the demands placed on it by
the continued growth upon which our success depends. Moreover, critical issues
concerning the commercial use of the Internet, such as security, reliability,
cost, accessibility and quality of service, remain unresolved and may negatively
affect the growth of Internet use or the attractiveness of commerce and business
communication over the Internet. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased activity or due to increased government regulation
and taxation of Internet commerce.
IF WE ARE UNABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS THAT
RESPOND EFFECTIVELY TO CHANGING TECHNOLOGY, OUR REVENUES MAY DECLINE
To be competitive, we must develop and introduce new products and product
enhancements which meet the needs of companies seeking to deploy and manage
e-business applications over the Internet on a timely basis. Our market is
characterized by rapid technological change, changes in customer requirements,
frequent new product and service introductions and enhancements, and evolving
industry standards. Advances in Internet technology or in e-commerce software
applications, or the development of entirely new technologies to replace
existing software, could lead to new competitive products that have better
performance or lower prices than our products and could render our products
obsolete and unmarketable. In addition, if a new software language or operating
system becomes standard or is widely adopted in our industry, we may need to
rewrite portions of our products in another computer language or for another
operating system to remain competitive. If we are unable to develop new and
enhanced products on a timely basis that respond to changing technology, our
business could be seriously harmed.
It is common for software companies to acquire other companies as a means
of introducing new products or emerging technologies. Competitors with large
market capitalizations or cash reserves would be better positioned than we are
to acquire new technologies or products.
OUR CUSTOM DEVELOPMENT SERVICES REVENUES ARE EXPECTED TO CONTINUE TO REPRESENT A
SIGNIFICANT PERCENTAGE OF OUR TOTAL REVENUES, AND THE UNEXPECTED LOSS OF A
CONTRACT COULD REDUCE OUR REVENUES
Custom development services revenues represented 98% of total revenues for
fiscal 1997, 73% of total revenues for fiscal 1998 and 46% of total revenues for
fiscal 1999. While we anticipate that custom development services revenues will
decline as a percentage of total revenues as license revenues increase, we
expect that it will continue to represent a significant percentage of our total
revenues. We also expect that a limited number of customers will continue to
account for a substantial portion of these revenues. For example, for fiscal
1999, two custom development customers accounted for 32% of our total revenues
in the aggregate. An unexpected decrease in our custom development services
revenues could harm our business. Our professional services organization
supports several maintenance contracts related to our custom development
services business which continue to generate a significant percentage of our
revenues and some of which provide a substantial amount of high margin revenues.
The expiration or termination of current maintenance contracts by these
customers could adversely affect our overall revenues and our operating results,
and an unexpected cancellation of these contracts could hinder our ability to
rapidly redeploy our personnel dedicated to these projects.
CERTAIN CUSTOM DEVELOPMENT CONTRACTS MAY RESULT IN LOWER NET INCOME OR A LOSS
BECAUSE THE CONTRACTS ARE ON A FIXED-PRICE BASIS
In fiscal 1999, we derived 67% of our custom development services revenues
from fixed-price contracts. Because these service contracts relate to complex,
custom systems, it can be difficult to estimate the time and resources necessary
to complete a contract. If we are required to provide more services under those
fixed-priced contracts than anticipated, we may experience lower net income or a
loss.
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WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, THE LOSS OF WHICH COULD
ADVERSELY AFFECT OUR COMPETITIVE POSITION
We license technology from a small number of software providers for use
with our products. We anticipate that we will continue to license technology
from third parties in the future. This technology may not continue to be
available on commercially reasonable terms, if at all. Some of the technology we
license from third parties would be difficult to replace. The loss of any of
these technology licenses would result in delays in the license of our products
until equivalent technology, if available, is identified, licensed and
integrated. In addition, the effective implementation of our products depends
upon the successful operation of third-party licensed technology in conjunction
with our products. Therefore, any undetected errors in this licensed technology
could prevent the implementation or impair the functionality of our products,
delay new product introductions, or injure our reputation. The use of
replacement technology from other third parties would require us to enter into
license agreements with these third parties, which could result in higher
royalty payments and a loss of product differentiation.
WE DEPEND ON KEY PERSONNEL AND MUST ATTRACT AND RETAIN ADDITIONAL QUALIFIED
PERSONNEL TO BE SUCCESSFUL
Our success depends to a significant degree upon the continued
contributions of our senior sales, engineering and management personnel, who
perform important management functions, and would be difficult to replace.
Specifically, we believe that our future success is highly dependent on Klaus P.
Besier, our Chairman, President and Chief Executive Officer, and other senior
management personnel. The loss of the services of any key personnel,
particularly senior management and engineers, could seriously harm our business.
The demand for qualified personnel is particularly acute due to the large
number of software companies and the low unemployment rate. Our success depends
in large part upon our ability to attract, train, motivate and retain highly
skilled employees, particularly marketing personnel, software engineers and
other senior personnel. Our failure to attract and retain the highly-trained
technical personnel that are integral to our product development, professional
services and support teams may limit the rate at which we can develop new
products or product enhancements.
CLAIMS MAY BE BROUGHT AGAINST US IF WE HIRE FORMER EMPLOYEES OF OUR COMPETITORS
WHICH MAY CAUSE US TO INCUR SUBSTANTIAL COSTS
Companies in the software industry, whose employees accept positions with
competitors, frequently claim that those competitors have breached, or
encouraged the breach of, noncompetition and nondisclosure agreements. These
claims have been made against us in the past, and we may receive claims in the
future as we hire additional qualified personnel. If a claim were to be made
against us, it could result in material litigation. We could incur substantial
costs in defending ourselves against any of these claims, regardless of the
merits of these claims.
IF WE ARE UNABLE TO PROVIDE ADEQUATE PROFESSIONAL SERVICE AND CUSTOMER SUPPORT,
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS WILL BE HARMED
Our ability to continue to grow, to retain current and future customers and
to recognize revenues from our licenses depends in part upon the quality of our
professional service and customer support operations. Failure to offer adequate
integration, consulting and other professional services in connection with the
implementation of our products, and ongoing customer support, either directly or
through third parties, could materially and adversely affect our operating
results and reputation, and could cause demand for our products to decline.
IF OUR PRODUCTS FAIL TO PERFORM PROPERLY, OUR BUSINESS WOULD BE ADVERSELY
AFFECTED
Software products as complex as ours may contain undetected errors, or
bugs, which result in product failures, or may cause our products to fail to
meet our customers' expectations. Our products may be particularly susceptible
to bugs or performance degradation because of the evolving nature of Internet
8
<PAGE> 13
technologies and the stress that may be placed on our products by the full
deployment of our products over the Internet to thousands of end-users. In
addition, our primary product, the FirePond Application Suite, has only recently
been generally released and is built with a new technical architecture. As such,
this product may be particularly susceptible to bugs. Product performance
problems could result in loss of or delay in revenues, loss of market share,
failure to achieve market acceptance, diversion of development resources or
injury to our reputation.
PRODUCT LIABILITY CLAIMS REGARDING OUR CUSTOMERS' CRITICAL BUSINESS OPERATIONS
COULD RESULT IN SUBSTANTIAL COSTS
Our products are critical to the business operations of our customers. If
one of our products fails, a customer may assert a claim for substantial damages
against us, regardless of our responsibility for the failure. Product liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. Our agreements with customers typically contain
provisions intended to limit our exposure to liability claims. These limitations
may not, however, preclude all potential claims resulting from a defect in one
of our products. Although we maintain product liability insurance covering
damages arising from the implementation and use of our products, our insurance
may not cover any claims sought against us. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages.
Any product liability claims, whether or not successful, could seriously damage
our reputation and our business.
IF WE OR OUR KEY SUPPLIERS OR CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT, OUR
BUSINESS MAY BE SEVERELY DISRUPTED AND OUR RESULTS OF OPERATIONS MAY BE HARMED
The year 2000 problem creates a risk for us. The risk exists primarily in
five areas:
- potential warranty or other claims from our customers, which may result
in significant expense to us;
- failures of systems we use to run our business, which could disrupt our
business operations;
- potential failures of our products, particularly our central office-based
systems, which may require that we incur significant unexpected expenses;
and
- the possibility that our potential customers will reduce spending on
e-business software products such as ours as a result of significant
spending on year 2000 remediation.
Our products are generally integrated into computer systems involving
sophisticated hardware and complex software products, which may not be year 2000
compliant. The failure of our customers' systems to be year 2000 compliant could
limit our ability to remedy known defects in our products. Therefore, known or
unknown defects that affect the operation of our software, could result in delay
or loss of revenues, diversion of development resources, damage to our
reputation, or increased service or warranty costs and litigation costs, any of
which could harm our business.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY HARM OUR ABILITY TO
COMPETE
Our success and ability to compete is dependent in part upon our
proprietary technology. Any infringement of our proprietary rights could result
in significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues.
We rely on a combination of patent, copyright, trademark, trade secret and other
intellectual property laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. However, existing
patent, copyright, trademark and trade secret laws afford only limited
protection. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
Attempts may be made to copy or reverse engineer aspects of our products or to
obtain and use information that we regard as proprietary. Accordingly, we may
not be able to protect our proprietary rights against unauthorized third-party
copying or use. Furthermore, policing the unauthorized use of our products is
difficult. Some of our contractual arrangements provide third parties with
access to our source code and other intellectual property
9
<PAGE> 14
upon the occurrence of specified events. This access could enable these third
parties to use our intellectual property and source code to develop and
manufacture competing products, which would adversely affect our performance and
ability to compete. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and could materially
adversely affect our future operating results.
CLAIMS ALLEGING INFRINGEMENT OF A THIRD PARTY'S INTELLECTUAL PROPERTY COULD
RESULT IN SIGNIFICANT EXPENSE TO US AND RESULT IN OUR LOSS OF SIGNIFICANT RIGHTS
The software and other Internet-related industries are characterized by the
existence of frequent litigation of intellectual property rights. From time to
time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to our business.
This risk may increase as the number of entrants in our market increases and the
functionality of our products is enhanced and overlaps with the products of
other companies. Any claims against us or any purchaser or user of our products
asserting that our products infringe or may infringe proprietary rights of third
parties, if determined adversely to us, could have a material adverse effect on
our business, financial condition and results of operations. Any claims, with or
without merit, could be time-consuming, result in costly litigation, divert the
efforts of our technical and management personnel, cause product shipment
delays, disrupt our relationships with our customers or require us to enter into
royalty or licensing agreements, any of which could have a material adverse
effect upon our operating results. Royalty or licensing agreements, if required,
may not be available on terms acceptable to us, if at all. In the event a claim
against us is successful and we cannot obtain a license to the relevant
technology on acceptable terms, license a substitute technology or redesign our
products to avoid infringement, our business, financial condition and results of
operations would be materially adversely affected.
INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS
As e-commerce and the Internet continue to evolve, we expect that federal,
state and foreign governments will adopt laws and regulations covering issues
such as user privacy, taxation of goods and services provided over the Internet,
pricing, content and quality of products and services. If enacted, these laws
and regulations could limit the market for e-commerce, and therefore the market
for our products and services. Although many of these regulations may not apply
directly to our business, we expect that laws regulating the solicitation,
collection or processing of personal or consumer information could indirectly
affect our business.
ACQUISITIONS COULD HARM OUR BUSINESS
We may consider acquiring complementary businesses and technologies in the
future. In the event we make an acquisition, we could issue equity securities
which would dilute current stockholders' percentage ownership, incur substantial
debt, assume contingent liabilities, incur a one-time charge or be required to
amortize goodwill. Additionally, we may not be able to successfully integrate
any technologies, products, personnel or operations of companies that we may
acquire in the future. These difficulties could disrupt our ongoing business,
distract our management and employees, and increase our expenses. If we are
unable to successfully address any of these risks, our business could be
seriously harmed.
CONTROL BY OUR EXECUTIVE OFFICERS, DIRECTORS AND THEIR AFFILIATES MAY LIMIT YOUR
ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS
REQUIRING STOCKHOLDER APPROVAL
Upon completion of this offering, our executive officers, directors and
their affiliates will own shares, or approximately 58.6% of the
outstanding shares of common stock (57.3% if the underwriters' over-allotment
option is exercised in full). These stockholders can control substantially all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in our control or otherwise discouraging a potential
acquiror from attempting to obtain control of us,
10
<PAGE> 15
which in turn could have a material adverse effect on the market price of the
common stock or prevent our stockholders from realizing a premium over the
market prices for their shares of common stock. For information about the
ownership of common stock by our executive officers, directors and principal
stockholders please refer to "Principal Stockholders."
OUR STOCK PRICE MAY BE VOLATILE WHICH MAY LEAD TO LOSSES BY INVESTORS AND RESULT
IN SECURITIES LITIGATION
There has previously not been a public market for our common stock. We
cannot predict the extent to which investor interest will lead to the
development of a trading market for our common stock or how liquid that market
might become. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. The trading price of our common stock could be subject to wide
fluctuations.
In addition, the stock market in general, the Nasdaq National Market, and
securities of Internet and software companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of such companies. The trading
prices of many Internet and software companies' stocks are at or near historical
highs and these trading prices are substantially above historical levels. These
trading prices may not be sustained. These broad market and industry factors may
materially adversely affect the market price of our common stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class-action
litigation has often been instituted against such companies. Such litigation, if
instituted, could result in substantial costs and a diversion of management's
attention and resources, which would materially adversely affect our business,
financial condition and results of operations.
FUTURE SALES OF OUR STOCK COULD CAUSE OUR STOCK PRICE TO FALL
Sales of a substantial number of shares of our common stock in the public
market after this offering could cause the market price of our common stock to
decline. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional equity securities.
PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT AND LOWER THE VALUE OF OUR COMMON STOCK
Provisions in our certificate of incorporation and by-laws and in Delaware
corporate law may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt that is opposed by our
management. Public stockholders who might desire to participate in such a
transaction may not have an opportunity to do so, and the ability of public
stockholders to change our management could be substantially impeded by these
anti-takeover provisions. For example, we have a staggered board of directors
and the right under our charter documents to issue preferred stock without
further stockholder approval, which could adversely affect the holders of our
common stock.
11
<PAGE> 16
NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as anticipates, believes, plans, expects,
future, intends and similar expressions to identify forward-looking statements.
This prospectus also contains forward-looking statements attributed to third
parties relating to their estimates regarding the growth in the demand for
interactive e-business solution software. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by
us and described in the preceding pages and in other sections of this
prospectus.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the common stock
in this offering will be approximately $54.3 million, at an assumed initial
offering price of $12.00 per share, after deducting the estimated underwriting
discounts and commissions and offering expenses payable by us in connection with
the offering. If the underwriters' over-allotment option is exercised in full,
we estimate that our net proceeds will be approximately $62.6 million. We expect
to use the estimated net proceeds for the following purposes:
- to repay the outstanding principal balance of up to $5.0 million plus
accrued interest on our revolving line of credit, which bears interest
payable monthly at a rate equal to the prime rate plus 2.0% and is due
October 31, 2000;
- to repay a $2.0 million term loan, plus accrued interest, which bears
interest payable monthly at 10.25% and is due October 31, 2000; and
- to repay $6.0 million of subordinated promissory notes plus accrued
interest of approximately $160,000, assuming a repayment date of January
31, 2000, which bear interest at 12.0% and are due upon the earlier of
the closing of this offering or November 11, 2000.
The remainder of the net proceeds will be used for working capital and general
corporate purposes.
As of the date of this prospectus, other than the repayment of debt as
described above, we have not made any specific expenditure plans with respect to
the proceeds of this offering. Therefore, we cannot specify with certainty the
particular uses for the net proceeds to be received upon completion of this
offering.
DIVIDEND POLICY
Since we became a C corporation in May 1997, we have never declared or paid
cash dividends on our capital stock. We currently intend to retain any future
earnings to fund the development and growth of our business and do not currently
anticipate paying any cash dividends in the foreseeable future. Future
dividends, if any, will be determined by our board of directors after taking
into account various factors, including our financial condition, operating
results, and current and anticipated cash needs. Under the terms of our current
line of credit, there are restrictions on our ability to declare and pay
dividends.
12
<PAGE> 17
CAPITALIZATION
The following table presents our capitalization as of October 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the net exercise of warrants to purchase
series F preferred stock, the conversion of all outstanding shares of
convertible preferred stock into shares of common stock and the payment
of priority payments through the issuance of additional shares of common
stock to some common and preferred stockholders upon completion of this
offering; and
- on a pro forma as adjusted basis to reflect the sale of the common stock
in this offering at an assumed initial public offering price of $12.00
per share, after deduction of estimated underwriting discounts and
commissions and our estimated offering expenses and the use of net
proceeds as described in "Use of Proceeds" on page 12.
The adjusted information presented below is unaudited and should be read in
conjunction with our consolidated financial statements and notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 16.
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Line of credit.............................................. $ 6,740 $ 6,740 $ --
======== ========= =========
Long-term debt, less current portion........................ $ 702 $ 702 $ 702
Stockholders' equity (deficit):
Preferred stock, par value $0.01 per share; 50,000,000
shares authorized:
Series A convertible participating preferred stock, par
value $0.01 per share; 4,188,880 shares designated,
issued and outstanding, actual; no shares designated,
issued and outstanding, pro forma and pro forma as
adjusted................................................ 42 -- --
Series B convertible preferred stock, par value $0.01 per
share; 190,438 shares designated, no shares issued and
outstanding, actual; no shares designated, issued and
outstanding, pro forma and pro forma as adjusted........ -- -- --
Series C convertible participating preferred stock, par
value $0.01 per share; 570,342 shares designated, issued
and outstanding, actual; no shares designated, issued
and outstanding, pro forma and pro forma as adjusted.... 6 -- --
Series F convertible preferred stock, par value $0.01 per
share; 7,407,409 shares designated, 6,734,008 shares
issued and outstanding, actual; no shares designated,
issued and outstanding, pro forma and pro forma as
adjusted................................................ 67 -- --
Series G convertible participating preferred stock of
subsidiary, par value $0.01 per share; 7,604,563 shares
designated, issued and outstanding, actual; no shares
designated, issued and outstanding, pro forma and pro
forma as adjusted....................................... 76 -- --
Common stock, par value $0.01 per share, 100,000,000 shares
authorized; 10,072,817 shares issued and outstanding,
actual; 100,000,000 shares authorized, 27,537,895 shares
issued and outstanding, pro forma; and 100,000,000 shares
authorized, 32,537,895 shares issued and outstanding, pro
forma as adjusted......................................... 101 275 325
Additional paid-in capital.................................. 62,380 108,147 162,347
Accumulated deficit......................................... (62,393) (108,143) (108,143)
Deferred compensation....................................... (5,893) (5,893) (5,893)
Cumulative translation adjustment........................... (327) (327) (327)
Subscription receivables.................................... (13) (13) (13)
-------- --------- ---------
Total stockholders' equity (deficit)...................... (5,954) (5,954) 48,296
-------- --------- ---------
Total capitalization.................................. $ (5,252) $ (5,252) $ 48,998
======== ========= =========
</TABLE>
The table above excludes as of October 31, 1999:
- - 7,655,121 shares of common stock issuable upon exercise of outstanding stock
options at a weighted average exercise price of $4.17 per share under our
stock option plans;
- - 296,667 shares of common stock subject to outstanding warrants at a weighted
average exercise price of $5.02 per share; and
- - warrants to purchase 190,438 shares of series B convertible preferred stock at
an exercise price of $19.69 per share, which will convert into warrants to
purchase 634,794 shares of common stock at an exercise price of $5.91 per
share upon completion of this offering.
13
<PAGE> 18
DILUTION
As of October 31, 1999, we had a pro forma net tangible book deficit of
$6.2 million, or $(0.22) per share.
Pro forma net tangible book deficit per share is equal to:
- our total tangible assets minus total liabilities, divided by
- the number of outstanding shares of our common stock, after giving effect
to the net exercise of warrants to purchase series F preferred stock, the
conversion of all outstanding shares of our convertible preferred stock
into common stock and the payment of priority payments through the
issuance of additional shares of common stock to some common and
preferred stockholders.
Without taking into account any other changes in pro forma net tangible book
value after October 31, 1999, other than to give effect to our receipt of the
estimated net proceeds from the sale of the 5,000,000 shares of common stock in
this offering at an assumed initial public offering price of $12.00 per share
and after deducting the estimated underwriting discounts and commissions and the
estimated expenses relating to this offering, our pro forma as adjusted net
tangible book value as of October 31, 1999 would have been $48.1 million, or
$1.48 per share. This represents an immediate increase in pro forma net tangible
book value of $1.70 per share to existing stockholders and an immediate dilution
of $10.52 per share to new investors. If the initial public offering price is
higher or lower than $12.00 per share, the dilution to new investors will also
be higher or lower. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $12.00
Pro forma net tangible book deficit per share as of
October 31, 1999.......................................... $ (0.22)
Increase per share attributable to new investors.......... 1.70
-------
Pro forma as adjusted net tangible book value per share
after the offering...................................... 1.48
------
Dilution per share to new investors....................... $10.52
======
</TABLE>
The following table summarizes, as of October 31, 1999, on the pro forma
basis described above, the difference between the number of shares of common
stock purchased from us, the total consideration paid and the average price per
share paid by the existing stockholders and by new public investors purchasing
shares from us in this offering before deducting estimated underwriting
discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 27,537,895 84.6% $ 54,645,000 47.7% $ 1.98
New investors............ 5,000,000 15.4 60,000,000 52.3 12.00
----------- ----- ------------ ------
Total............... 32,537,895 100.0% $114,645,000 100.0%
=========== ===== ============ ======
</TABLE>
The foregoing computations are based on the number of common shares
outstanding as of October 31, 1999 and exclude:
- 7,655,121 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $4.17 per share under our
stock option plans;
- 296,667 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $5.02 per share; and
- warrants to purchase 190,438 shares of series B convertible preferred
stock at an exercise price of $19.69 per share, which will convert into
warrants to purchase 634,794 shares of common stock at an exercise price
of $5.91 per share upon completion of this offering.
To the extent stock is issued upon the exercise of outstanding warrants or
outstanding stock options under our stock option plans, there will be further
dilution to new investors.
14
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data are derived from our consolidated and
combined financial statements. The consolidated statement of operations data for
fiscal 1997, fiscal 1998 and fiscal 1999, and the consolidated balance sheet
data at October 31, 1998 and 1999, are derived from our audited consolidated
financial statements and are included in this prospectus. The combined
statements of operations data for fiscal 1995 and fiscal 1996, and the combined
balance sheet data at October 31, 1995, 1996 and 1997 are derived from our
audited combined financial statements and are not included in this prospectus.
When you read this selected financial data, it is important that you also read
the historical consolidated financial statements and related notes included in
this prospectus, as well as the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 16. The historical results are not necessarily
indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Revenues:
Product-related revenues:
License................................................. $ -- $ -- $ 416 $ 1,580 $ 9,777
Services and maintenance................................ -- -- -- 6,701 8,604
------- ------- -------- ------- --------
Total product-related revenues........................ -- -- 416 8,281 18,381
Custom development services............................... 31,150 34,158 26,114 22,354 15,904
------- ------- -------- ------- --------
Total revenues........................................ 31,150 34,158 26,530 30,635 34,285
Cost of revenues:
License................................................... -- -- -- 15 61
Product-related services and maintenance(1)............... -- -- -- 3,061 5,677
Custom development services............................... 19,749 20,036 31,664 9,230 10,636
------- ------- -------- ------- --------
Total cost of revenues................................ 19,749 20,036 31,664 12,306 16,374
------- ------- -------- ------- --------
Gross profit (loss)......................................... 11,401 14,122 (5,134) 18,329 17,911
Operating expenses:
Sales and marketing(1).................................... 3,643 5,290 8,080 13,680 23,609
Research and development(1)............................... 723 2,601 3,634 8,199 9,641
General and administrative(1)............................. 4,354 3,081 3,188 3,516 7,084
Stock-based compensation.................................. -- -- 450 672 2,597
Restructuring charge...................................... -- -- 6,712 -- 3,027
------- ------- -------- ------- --------
Total operating expenses.............................. 8,720 10,972 22,064 26,067 45,958
------- ------- -------- ------- --------
Income (loss) from operations............................... 2,681 3,150 (27,198) (7,738) (28,047)
Other expense, net.......................................... 1,039 1,306 1,591 326 631
------- ------- -------- ------- --------
Net income (loss)........................................... $ 1,642 $ 1,844 $(28,789) $(8,064) $(28,678)
======= ======= ======== ======= ========
Net income (loss) per share:
Basic and diluted net income (loss) per share............. $ 0.16 $ 0.18 $ (2.79) $ (0.81) $ (2.86)
======= ======= ======== ======= ========
Basic weighted average common shares outstanding.......... 10,348 10,401 10,319 9,925 10,024
Diluted weighted average common shares outstanding........ 10,379 10,432 10,319 9,925 10,024
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 467 $ 450 $10,147 $ 2,324 $ 2,120
Working capital (deficit)................................... (553) (3,417) (8,519) (6,840) (11,980)
Total assets................................................ 19,863 23,342 25,574 18,609 21,660
Long-term debt, net of current portion...................... 7,290 7,685 3,991 1,727 702
Total stockholders' equity (deficit)........................ 2,836 4,200 (2,740) 254 (5,954)
</TABLE>
- ------------------------------------
(1) Excludes charge for stock-based compensation. See note 9(g) in notes to
consolidated financial statements.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading provider of integrated e-business sales and marketing
solutions that enable companies to optimize customer relationships and maximize
the effectiveness of their Internet-based and traditional sales channels. From
our inception in 1983 through 1997, we generated revenues primarily through
providing custom development services. In early fiscal 1997, we undertook a plan
to change our strategic focus from a custom development services company to a
software product company providing more standardized solutions. As a result, we
exited certain unrelated business activities, changed our management team and
reduced our workforce to be in line with our newly defined business strategy.
Our first software product was introduced in May 1997 and we released the
FirePond Application Suite in October 1999. As a result of these efforts,
product-related revenues as a percentage of total revenues increased from 1.6%
in fiscal 1997 to 27.0% in fiscal 1998 to 53.6% in fiscal 1999. We anticipate
that product-related revenues from perpetual product licenses will continue to
grow as result of increased market acceptance of our products, the recent
introduction of the FirePond Application Suite, and increases in both the size
and productivity of our sales force. Therefore, we expect that a higher
percentage of total revenues will be attributable to product-related revenues in
the future. We also anticipate a decline in custom development services
revenues, as we have strategically de-emphasized that business and do not plan
to accept new custom development contracts. Custom development services revenues
will continue to represent a significant percentage of total revenues until
existing custom development contracts and related maintenance agreements are
completed. The rate of decline in custom development revenues depends in part on
our ability to convert custom development services customers to our software
products.
We derive revenues principally from the following sources:
- software product licenses;
- product-related consulting and training, support and maintenance
services; and
- custom development services and related support and maintenance.
We recognize revenues under Statement of Position, or SOP, No. 97-2,
Software Revenue Recognition, as amended by SOP 98-4. We generally recognize
revenues from license agreements over the implementation period. We recognize
these revenues following the percentage-of-completion method over the
implementation period because we have concluded that the implementation services
are essential to our customers' use of our software products. Percentage of
completion is measured by the percentage of implementation hours incurred to
date to total estimated implementation hours.
We recognize revenues from product-related support and maintenance services
ratably over the term of the contract, typically one year. Product-related
support and maintenance services include technical support and unspecified
upgrade and maintenance rights. We recognize consulting and training revenues as
the services are performed. Consulting and training revenues are primarily
related to implementation services performed on a time-and-materials basis under
separate service arrangements.
Revenues from custom software development projects can be either
fixed-price or on a time-and-materials basis. We recognize revenues as the
services are performed when the project is based on time-and-materials. We
recognize revenues on a percentage-of-completion method when the project is a
fixed-price contract. Percentage-of-completion is determined based on hours
incurred to date compared to total estimated hours. During fiscal 1997, we
lowered estimates of total contract revenues and increased estimates of total
contract costs on certain fixed-priced contracts and, accordingly, recorded a
$5.0 million provision for loss contracts, all of which was accrued as of
October 31, 1997. In fiscal 1998, $1.9 million was charged against the accrual
for loss contracts when the obligations to the customers were fulfilled, $2.0
million of the loss reserve was reversed when the estimated losses were revised
and a $480,000 provision was recorded for estimated losses on other contracts.
In fiscal 1999, an additional $500,000 was charged against the accrual for loss
contracts when the obligations to the customers were fulfilled.
16
<PAGE> 21
Since May 1998, we have been investing heavily in the infrastructure
necessary to expand our global operations, including the formation and staffing
of international subsidiaries. We expect to continue to invest in our
international operations as we expand our international direct sales channel and
enhance our marketing effort to increase our worldwide market share.
We have invested heavily in research and development. Research and
development expenses have been increasing since early fiscal 1997 when we began
the development of our software products. During fiscal 1996 and fiscal 1997, we
capitalized software development costs and amortized these costs over a period
of 18 to 36 months. During fiscal 1997, in connection with our change in focus
from providing custom development services to providing more standardized
software products, we reviewed the software development costs capitalized to
date, which principally related to components of custom solutions, and
determined that these costs were not realizable. Accordingly, we wrote off all
$4.5 million of our capitalized software development costs to costs of custom
development services revenues in fiscal 1997.
We have determined that technological feasibility of our software products
occurs late in the development cycle and close to general release of the
products, and that the development costs incurred between the time technological
feasibility is established and general release of the product are not material.
Therefore, we expense these costs as incurred to research and development
expense. To enhance our product offering and market position, we believe it is
essential for us to continue to make significant investment in research and
development. As a result, we anticipate our research and development expenses
will increase in the future.
We have granted stock options to employees and consultants that require us
to record stock-based compensation expense. We have also granted stock warrants
to a customer and to a strategic business partner. With respect to grants to
employees, stock-based compensation represents the amortization, over the
vesting period of the option, of the difference between the exercise price of
options granted to employees and the fair market value of our common stock for
financial reporting purposes. Regarding grants to non-employees, stock-based
compensation represents the fair market value of the options and warrants
granted as computed using an established option valuation formula. We recorded
stock-based compensation expense of approximately $450,000 in fiscal 1997,
$672,000 in fiscal 1998 and $2.6 million in fiscal 1999. As of October 31, 1999,
the deferred compensation balance was approximately $5.9 million and will be
amortized over the remaining vesting period of the options and warrants.
We have incurred quarterly and annual losses intermittently since we were
formed, and regularly since we began transitioning to a software product
business in early fiscal 1997. In addition, we moved our headquarters from
Mankato, Minnesota to Waltham, Massachusetts in the third quarter of fiscal
1999, and incurred increased costs associated with that relocation. We incurred
net losses of $28.8 million for fiscal 1997, $8.1 million for fiscal 1998, and
$28.7 million for fiscal 1999. We expect to continue to incur losses on both a
quarterly and annual basis for the foreseeable future.
Our series A, series C and series G preferred stock, as well as certain
shares of common stock, have rights that allow holders to receive a priority
payment upon the completion of this offering. These priority payments total
$35.8 million for the series A, series C and series G preferred stockholders and
$10.0 million for certain common stockholders. While we have the option of
settling this obligation either in cash or in shares of our common stock, we
will settle this obligation in shares of our common stock. This payment will be
accounted for as a stock dividend payment. In the period in which this offering
is completed and the payment is made, we will charge our accumulated deficit
account for the fair value of the shares of common stock issued. To the extent
that the payment relates to the preferred stock, we will also increase our net
loss and basic and diluted net loss per share attributable to common
stockholders.
Before May 1997, we had elected to be treated as an S corporation under the
Internal Revenue Code. As an S corporation, federal and certain state income tax
consequences of FirePond were passed through to the individual stockholders and
dividend distributions were made to the stockholders for payments of their
individual taxes related to our income. Accordingly, no provision for income
taxes had been provided prior to fiscal 1997. In May 1997, we changed from an S
corporation to a C corporation and, as such, taxes are
17
<PAGE> 22
payable at the corporate level. As of October 31, 1999, we had available a net
operating loss carryforward of approximately $36.0 million to reduce future
federal and state income taxes, if any. This carryforward expires beginning in
2012 and may be subject to review and possible adjustment by the Internal
Revenue Service. The Tax Reform Act of 1986 contains provisions that may limit
the amount of net operating loss carryforwards that we may utilize in any one
year in the event of certain cumulative changes in ownership over a three-year
period in excess of 50%.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, selected
consolidated financial data as a percentage of total net revenues:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Revenues:
Product-related revenues:
License................................................ 1.6% 5.1% 28.5%
Services and maintenance............................... -- 21.9 25.1
------ ------ -----
Total product-related revenues....................... 1.6 27.0 53.6
Custom development services............................... 98.4 73.0 46.4
------ ------ -----
Total revenues....................................... 100.0 100.0 100.0
------ ------ -----
Cost of revenues:
License................................................... -- -- 0.2
Product-related services and maintenance.................. -- 10.0 16.6
Custom development services............................... 119.4 30.1 31.0
------ ------ -----
Total cost of revenues............................... 119.4 40.1 47.8
------ ------ -----
Gross profit (loss)......................................... (19.4) 59.9 52.2
Operating expenses:
Sales and marketing....................................... 30.5 44.7 68.8
Research and development.................................. 13.7 26.8 28.1
General and administrative................................ 12.0 11.5 20.7
Stock-based compensation.................................. 1.7 2.2 7.6
Restructuring charge...................................... 25.3 -- 8.8
------ ------ -----
Total operating expenses............................. 83.2 85.2 134.0
------ ------ -----
Loss from operations........................................ (102.5) (25.3) (81.8)
Other expense, net.......................................... 6.0 1.0 1.8
------ ------ -----
Net loss.................................................... (108.5)% (26.3)% (83.6)%
====== ====== =====
</TABLE>
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1999 AND 1998
Revenues. Total revenues increased $3.7 million, or 11.9%, to $34.3
million in fiscal 1999 from $30.6 million in fiscal 1998. This increase is
attributable to a 122.0% increase in product-related revenues, offset by a
planned decrease in custom development services revenues, associated with our
change in focus from providing custom development services to providing more
standardized software products.
License. License revenues increased $8.2 million, or 518.8%, to $9.8
million in fiscal 1999 from $1.6 million in fiscal 1998. License revenues
as a percentage of total revenues increased to 28.5% in
18
<PAGE> 23
fiscal 1999 from 5.1% in fiscal 1998. The increase in license revenues in
absolute dollars and as a percentage of total revenues is primarily
attributable to the following factors:
- an increase in the number of licenses sold;
- an increase in average selling prices of licenses; and
- a higher volume of implementation services from which license revenues
are calculated.
We anticipate that license revenues will continue to grow as a result of
more license sales and increased average transaction size resulting from
increased market acceptance of our new products, a growing customer
reference base, increased marketing efforts, and increases in both the size
and productivity of our sales force.
Product service and maintenance. Product service and maintenance
revenues increased $1.9 million, or 28.4%, to $8.6 million in fiscal 1999
from $6.7 million in fiscal 1998. Product services revenues as a percentage
of total revenues increased to 25.1% in fiscal 1999 from 21.9% in fiscal
1998. The increase in absolute dollars and as a percentage of total
revenues is attributable to the increase in the number of consulting
engagements and maintenance agreements related to the increased license
sales in fiscal 1999.
Custom development services. Custom development services revenues
decreased $6.5 million, or 28.9%, to $15.9 million in fiscal 1999 from
$22.4 million in fiscal 1998. Custom development services revenues as a
percentage of total revenues decreased to 46.4% in fiscal 1999 from 73.0%
in fiscal 1998. The decrease in absolute dollars and as a percentage of
total revenues is due to the change of our strategic focus. We expect
custom development services revenues to continue to decline in absolute
dollars and as a percentage of total revenues.
Cost of revenues. Total cost of revenues increased $4.1 million, or 33.1%,
to $16.4 million in fiscal 1999 from $12.3 million in fiscal 1998. Total cost of
revenues as a percentage of total revenues increased to 47.8% in fiscal 1999
from 40.1% in fiscal 1998.
Cost of license revenues. Cost of license revenues consists primarily
of costs of royalties, media, product packaging, documentation and other
production costs. Cost of license revenues increased $46,000, or 306.7%, to
$61,000 in fiscal 1999 from $15,000 in fiscal 1998. Cost of license
revenues as a percentage of license revenues was less than 1% in both
periods.
Cost of product-related services and maintenance revenues. Cost of
product-related services and maintenance revenues consists primarily of
salaries and related costs for consulting, training and customer support
personnel, including cost of services provided by third-party consultants
engaged by us. Cost of product-related services and maintenance revenues
increased $2.6 million, or 85.5%, to $5.7 million in fiscal 1999 from $3.1
million in fiscal 1998. Cost of product-related services and maintenance
revenues as a percentage of product-related services and maintenance
revenues increased to 66.0% in fiscal 1999 from 45.7% in fiscal 1998. The
increase was primarily due to increased staff to support a higher number of
product-related engagements as well as associated hiring and training
costs.
Cost of custom development services revenues. Cost of custom
development services revenues consists primarily of salaries and related
costs for development, consulting, training and customer support personnel
as it relates to our custom development projects, including cost of
services provided by third-party consultants engaged by us. Cost of custom
development services revenues increased $1.4 million, or 15.2%, to $10.6
million in fiscal 1999 from $9.2 million in fiscal 1998. Cost of custom
development services as a percentage of custom development services
revenues increased to 66.9% in fiscal 1999 from 41.3% in fiscal 1998. The
increase resulted primarily from the following factors:
- in fiscal 1999 we incurred higher payroll and related costs associated
with professional services personnel;
19
<PAGE> 24
- due to uncertainties with two contracts in fiscal 1997, we recorded
approximately $2.0 million of revenues in fiscal 1998 related to work
that had been performed and charged to cost of custom development
services in fiscal 1997;
- we reduced the estimated losses on contracts in fiscal 1998 by a net
amount of approximately $1.5 million; and
- we charged costs incurred of $1.9 million on loss contracts in fiscal
1998 to the accrual for loss contracts.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of salaries, commissions and bonuses for sales and marketing personnel
and promotional expenses. Sales and marketing expenses increased $9.9 million,
or 72.6%, to $23.6 million in fiscal 1999 from $13.7 million in fiscal 1998.
Sales and marketing expenses as a percentage of total revenues increased to
68.8% in fiscal 1999 from 44.7% in fiscal 1998. Sales and marketing expenses
increased in absolute dollars and as a percentage of total revenues primarily
due to increased headcount in our sales operations, particularly our
international direct sales channel and the infrastructure of our global
operations, as well as increased marketing programs to promote the new FirePond
Application Suite. We believe sales and marketing expenses will continue to
increase as we expand our sales and marketing organization and initiate
additional marketing programs.
Research and development expenses. Research and development expenses
consist primarily of salaries and personnel-related costs and the costs of
contractors associated with the development of new products, the enhancement of
existing products, and the performance of quality assurance and documentation
activities. Research and development expenses increased $1.4 million, or 17.6%
to $9.6 million in fiscal 1999 from $8.2 million in fiscal 1998. Research and
development expenses as a percentage of total revenues increased to 28.1% in
fiscal 1999 from 26.8% in fiscal 1998. These expenses increased in absolute
dollars and as a percentage of total revenues as a result of increased
engineering and product development activities associated with our investment in
the FirePond Application Suite, partially offset by our increased use of a
lower-cost offshore development organization. We expect research and development
expenses will continue to increase as we maintain and enhance our existing
products and conduct research for new products.
General and administrative expenses. General and administrative expenses
consist primarily of salaries, and other personnel-related cost for executive,
financial, human resource, information services, and other administrative
functions, as well as legal and accounting costs. General and administrative
expenses increased $3.6 million, or 101.5%, to $7.1 million in fiscal 1999 from
$3.5 million in fiscal 1998. General and administrative expenses as a percentage
of total revenues increased to 20.7% in fiscal 1999 from 11.5% in fiscal 1998.
These expenses increased in absolute dollars and as a percentage of total
revenues as a result of increased costs including moving costs resulting from
the relocation of our corporate headquarters from Minnesota to Massachusetts and
associated expenses necessary to manage and support the growth in our
operations. We expect that general and administrative expenses will continue to
increase as we continue to add personnel to support our expanding operations,
incur additional costs related to the growth of our business, and assume the
responsibility and the costs associated with becoming a public company.
Stock-based compensation expense. Stock-based compensation expense
increased $1.9 million, or 286.5%, to $2.6 million in fiscal 1999 from $672,000
in fiscal 1998. Stock-based compensation expense as a percentage of total
revenues increased to 7.6% in fiscal 1999 from 2.2% in fiscal 1998. If we had
allocated our stock-based compensation to our functional departments, general
and administrative expenses would have increased by $672,000 in fiscal 1998. In
fiscal 1999, the allocation would have increased cost of revenues by $40,000,
sales and marketing expenses by $1,327,000, research and development expenses by
$913,000 and general and administrative expenses by $317,000. The increase in
stock-based compensation expense related to sales and marketing activities in
fiscal 1999 resulted from $622,000 in awards to employees at exercise prices
below fair market value, $474,000 in awards to terminated employees, and
$231,000 in awards to consultants and in connection with strategic business
alliances. The increase in stock-based compensation expense related to research
and development activities in fiscal 1999 resulted from $237,000 in awards to
consultants and $676,000 in awards to employees at exercise prices below fair
market value.
20
<PAGE> 25
Restructuring charge. During fiscal 1999, we undertook a plan to relocate
our corporate offices from Minnesota to Massachusetts. In connection with this
plan, we incurred $3.0 million of restructuring charges, which included $1.5
million for asset impairments, $1.0 million for idle lease space and $500,000
for employee severance costs.
Other expense, net. Other expense, net consists of interest expense,
interest income, bank fees, and foreign currency transaction gains/losses. Other
expense, net increased $305,000, or 93.6%, to $631,000 in fiscal 1999 from
$326,000 in fiscal 1998 and represented less than 2.0% of total revenues in each
period.
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1998 AND 1997
Revenues. Total revenues increased $4.1 million, or 15.5%, to $30.6
million in fiscal 1998 from $26.5 million in fiscal 1997. The increase in total
revenues from fiscal 1997 to fiscal 1998 was primarily due to the increased
number of user license sales and related consulting and training engagements
related to the release of our first software product in May 1997.
License. License revenues increased $1.2 million, or 279.8%, to $1.6
million in fiscal 1998 from $416,000 in fiscal 1997. License revenues as a
percentage of total revenues increased to 5.1% in fiscal 1998 from 1.6% in
fiscal 1997. The increase in absolute dollars and as a percentage of total
revenues was primarily due to the introduction of our first software
product in May 1997, and the subsequent market acceptance of these
products.
Product service and maintenance. Product service and maintenance
revenues increased to $6.7 million in fiscal 1998 from $0 in fiscal 1997.
Product service and maintenance revenues as a percentage of total revenues
was 21.9% in fiscal 1998. The increase in absolute dollars and as a
percentage of total revenues was primarily due to the increased customer
support, consulting services and training programs we provided for our
customers as we increased the number of software license sales upon the
release of our new product.
Custom development services. Custom development services revenues
decreased $3.8 million, or 14.4%, to $22.4 million in fiscal 1998 from
$26.1 million in fiscal 1997. Custom development services revenues as a
percentage of total revenues decreased to 73.0% in fiscal 1998 from 98.4%
in fiscal 1997. The decrease in absolute dollars and as a percentage of
total revenues is due to the change of our strategic focus.
Cost of revenues. Total cost of revenues decreased $19.4 million, or
61.1%, to $12.3 million in fiscal 1998 from $31.7 million in fiscal 1997. Total
cost of revenues as a percentage of total revenues decreased to 40.1% in fiscal
1998 from 119.4% in fiscal 1997.
Cost of license revenues. Cost of license revenues increased to
$15,000 in fiscal 1998 from $0 in fiscal 1997. Cost of license revenues as
a percentage of license revenues was less than 1.0% in fiscal 1998.
Cost of product-related services and maintenance revenues. Cost of
product-related services and maintenance revenues increased to $3.1 million
in fiscal 1998 from $0 in fiscal 1997. Cost of product-related services and
maintenance revenues as a percentage of product-related service and
maintenance revenues was 45.7% in fiscal 1998. The increase was primarily
due to the increased number of contracts for our new software product in
fiscal 1998.
Cost of custom development services revenues. Cost of custom
development services revenues decreased $22.4 million, or 70.9%, to $9.2
million in fiscal 1998 from $31.7 million in fiscal 1997. Cost of custom
development services as a percentage of custom development services
revenues decreased to 41.3% in fiscal 1998 from 121.3% in fiscal 1997. This
decrease is partially because cost of custom development services revenues
in fiscal 1997 included the following:
- a $5.0 million provision for loss contracts reserve;
- a $4.5 million write-off of our capitalized software development costs;
and
21
<PAGE> 26
- amortization of $1.1 million of capitalized software development costs.
In addition, due to uncertainties with a contract in fiscal 1997, we
recorded approximately $2.0 million of revenues in fiscal 1998 related to
work that had been performed and charged to cost of custom development
services in fiscal 1997.
Sales and marketing expenses. Sales and marketing expenses increased $5.6
million, or 69.3%, to $13.7 million in fiscal 1998 from $8.1 million in fiscal
1997. Sales and marketing expenses as a percentage of total revenues increased
to 44.7% in fiscal 1998 from 30.5% in fiscal 1997. These expenses increased in
absolute dollars and as a percentage of total revenues primarily due to
increased headcount in our sales operations, especially as we began to increase
the size of our international direct sales channel and the infrastructure of our
global operations in fiscal 1998.
Research and development expenses. Research and development expenses
increased $4.6 million, or 125.6%, to $8.2 million in fiscal 1998 from $3.6
million in fiscal 1997. Research and development expenses as a percentage of
total revenues increased to 26.8% in fiscal 1998 from 13.7% in fiscal 1997.
These expenses increased in absolute dollars and as a percentage of total
revenues as a result of increased engineering and product development activity
associated with our investment in our new products. In addition, all development
costs were expensed as incurred in fiscal 1998; while in fiscal 1997, $2.6
million of software development costs were capitalized.
General and administrative expenses. General and administrative expenses
increased $328,000, or 10.3%, to $3.5 million in fiscal 1998 from $3.2 million
in fiscal 1997. General and administrative expenses as a percentage of total
revenues decreased to 11.5% in fiscal 1998 from 12.0% in fiscal 1997. The
increase in absolute dollars was largely due to additional costs necessary to
support the growth in our operations.
Stock-based compensation expense. Stock-based compensation expense
increased $222,000, or 49.3%, to $672,000 in fiscal 1998 from $450,000 in fiscal
1997. Stock-based compensation expense as a percentage of total revenues
increased to 2.2% in fiscal 1998 from 1.7% in fiscal 1997. This expense
increased primarily due to a higher number of stock options granted to
non-employees in fiscal 1998. If we had allocated our stock-based compensation
to our functional departments, general and administrative expenses would have
increased by $450,000 in fiscal 1997 and $672,000 in fiscal 1998, resulting from
stock option awards to consultants.
Restructuring charge. In May 1997, we undertook a plan to change our
strategic focus and, in connection with this change, decided to exit certain
unrelated business activities, change our management team and reduce our
workforce. In connection with this plan, we incurred $6.7 million of
restructuring charges in fiscal 1997, which includes $2.7 million of employee
severance costs, $1.2 million of costs to exit certain business activities, and
$2.8 million of asset impairments.
Other expense, net. Other expense, net decreased $1.3 million, or 79.5%,
to $326,000 in fiscal 1998 from $1.6 million in fiscal 1997. Other expense, net
as a percentage of total revenues decreased to 1.0% in fiscal 1998 from 6.0% in
fiscal 1997 due primarily to a $920,000 decrease in interest expense resulting
from a decrease in outstanding borrowings.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited consolidated statement of
operations data for the eight quarters in the period ended October 31, 1999, as
well as the percentage of our total revenues represented by each item. We have
prepared this unaudited consolidated information on a basis consistent with our
audited consolidated financial statements, and in the opinion of our management,
this information reflects all normal recurring adjustments necessary for a fair
presentation of our operating results for the quarters presented.
22
<PAGE> 27
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product-related revenues:
License.......................... $ 24 $ 259 $ 706 $ 591 $ 1,607 $ 2,410 $ 2,615 $ 3,145
Services and maintenance......... 1,828 1,424 1,660 1,789 1,296 1,950 2,359 2,999
------- ------- ------- ------- ------- ------- ------- -------
Total product-related
revenues.................... 1,852 1,683 2,366 2,380 2,903 4,360 4,974 6,144
Custom development services...... 5,141 8,448 4,683 4,082 4,283 4,066 3,712 3,843
------- ------- ------- ------- ------- ------- ------- -------
Total revenues................. 6,993 10,131 7,049 6,462 7,186 8,426 8,686 9,987
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Licenses........................... -- 2 7 6 2 3 1 55
Product-related services and
maintenance...................... 890 749 742 680 998 1,405 1,487 1,787
Custom development services........ 2,669 2,253 2,248 2,060 3,001 2,733 2,888 2,014
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues......... 3,559 3,004 2,997 2,746 4,001 4,141 4,376 3,856
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......................... 3,434 7,127 4,052 3,716 3,185 4,285 4,310 6,131
Operating expenses:
Sales and marketing................ 3,098 3,211 3,456 3,915 4,758 6,541 5,736 6,574
Research and development........... 1,933 1,950 2,047 2,269 1,997 1,828 2,547 3,269
General and administrative......... 907 704 995 910 1,531 1,717 1,814 2,022
Stock-based compensation........... 36 36 244 356 232 423 143 1,799
Restructuring charge............... -- -- -- -- -- -- 2,625 402
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 5,974 5,901 6,742 7,450 8,518 10,509 12,865 14,066
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........ (2,540) 1,226 (2,690) (3,734) (5,333) (6,224) (8,555) (7,935)
Other expense, net................... 34 209 51 32 235 78 92 226
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $(2,574) $ 1,017 $(2,741) $(3,766) $(5,568) $(6,302) $(8,647) $(8,161)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product-related revenues:
License............................ 0.3% 2.6% 10.0% 9.1% 22.4% 28.6% 30.1% 31.5%
Services and maintenance........... 26.2 14.0 23.6 27.7 18.0 23.1 27.2 30.0
----- ----- ----- ----- ----- ----- ----- -----
Total product-related revenues... 26.5 16.6 33.6 36.8 40.4 51.7 57.3 61.5
Custom development services........ 73.5 83.4 66.4 63.2 59.6 48.3 42.7 38.5
----- ----- ----- ----- ----- ----- ----- -----
Total revenues................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Licenses............................. -- -- 0.1 0.1 -- -- -- 0.5
Product-related services and
maintenance........................ 12.7 7.4 10.5 10.5 13.9 16.7 17.1 17.9
Custom development services.......... 38.2 22.3 31.9 31.9 41.8 32.4 33.3 20.2
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues........... 50.9 29.7 42.5 42.5 55.7 49.1 50.4 38.6
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........................... 49.1 70.3 57.5 57.5 44.3 50.9 49.6 61.4
Operating expenses:
Sales and marketing.................. 44.3 31.7 49.0 60.6 66.2 77.6 66.0 65.8
Research and development............. 27.6 19.2 29.0 35.1 27.8 21.7 29.3 32.7
General and administrative........... 13.0 6.9 14.1 14.1 21.3 20.4 20.9 20.2
Stock-based compensation............. 0.5 0.4 3.5 5.5 3.2 5.0 1.6 18.0
Restructuring charge................. -- -- -- -- -- -- 30.3 4.0
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses......... 85.4 58.2 95.6 115.3 118.5 124.7 148.1 140.7
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations.......... (36.3) 12.1 (38.1) (57.8) (74.2) (73.8) (98.5) (79.3)
Other expense, net..................... 0.5 2.1 0.8 0.5 3.3 1.0 1.1 2.4
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)...................... (36.8)% 10.0% (38.9)% (58.3)% (77.5)% (74.8)% (99.6)% (81.7)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
23
<PAGE> 28
Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate in the future. The quarterly fluctuations
are caused by a number of factors, including demand for our products and
services, size and timing of specific sales, level of product and price
competition, timing and market acceptance of new product introductions and
product enhancements by us and our competitors, the length of our sales cycle,
personnel changes, budgeting cycles of our customers, the impact of our revenue
recognition policies, changes in technology and changes caused by the rapidly
evolving e-business market and the impact of year 2000 investments by us and our
customers. Many of these factors are beyond our control. Therefore, we believe
that results of operations for interim periods should not be relied upon as any
indication of the results to be expected in any future period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and met our capital
expenditure requirements primarily through the sale of private equity
securities, borrowings on our line of credit and capital equipment leases.
As of October 31, 1999, we had $2.1 million of cash and cash equivalents,
compared with $2.3 million as of October 31, 1998. Our working capital deficit
at October 31, 1999 was $12.0 million, compared to a working capital deficit of
$6.8 million at October 31, 1998.
Net cash used in operating activities was $19.9 million in fiscal 1999,
$10.5 million in fiscal 1998, and $3.0 million in fiscal 1997. Cash used in
operating activities in fiscal 1999 was primarily attributable to our net loss
and increases in accounts receivable and prepaid expense, offset in part by an
increase in deferred revenues, accounts payable and accrued liabilities and
non-cash expenses including depreciation, amortization, stock-based compensation
expense and a restructuring charge.
Net cash used in investing activities was $2.1 million in fiscal 1999, $1.5
million for fiscal 1998, and $6.6 million for fiscal 1997. Net cash used in
investing activities in fiscal 1999 was primarily attributable to purchases of
property and equipment to support our expanding operations, offset in part by
proceeds from the sale of our Mankato, Minnesota facility.
Net cash provided by financing activities provided net cash of $21.9
million in fiscal 1999, $4.1 million in fiscal 1998, and $19.3 million for
fiscal 1997. Proceeds from financing activities for fiscal 1999 were primarily
from the sale of our Series F preferred stock and net borrowings on our line of
credit and term note, offset in part by payments on long-term debt.
On July 31, 1998, we established a $5.0 million line of credit with a
financial institution to replace our $4,300,000 line of credit which expired on
April 1, 1998. Effective September 29, 1999, we amended our line of credit
agreement to increase the commitment by $2.0 million. This additional commitment
was reached through the conversion of outstanding borrowings on the existing
line of credit to a $2.0 million term loan. The entire unpaid principal balance
of the term loan is payable upon the termination of the agreement. The line of
credit expires on October 31, 2000. The amount available for borrowing is based
on 80% of accounts receivable, as defined. Interest on the line of credit is at
the prime rate plus 2.0% limited to a minimum of 8.0% per year, and is payable
monthly. We also pay a monthly fee of 0.5% per year on the unused line of
credit. As of October 31, 1999, we had $4.7 million outstanding under the line
of credit and available borrowing capacity of $37,000.
On November 12, 1999, we borrowed $6.0 million of subordinated indebtedness
from an outside investor and two of our existing stockholders. The indebtedness
bears interest at 12.0% and is due upon the earlier of the closing of this
offering or November 11, 2000. We also issued to these lenders warrants to
purchase an aggregate of 360,000 shares of our common stock at an exercise price
of $5.25 per share. We will record the warrants as a discount totaling
$1,904,000 against the carrying value of the subordinated notes payable.
We anticipate a substantial increase in our capital expenditures consistent
with anticipated growth in operations, infrastructure and personnel. We believe
that existing cash and cash equivalents, together with the net proceeds of this
offering, will be sufficient to meet our anticipated cash need for working
capital and capital expenditures for at least the next 12 months. However, we
may need to raise additional funds in the next 12 months or in the longer term
in order to support more rapid expansion of our sales force, develop
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new or enhanced products or services, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
requirements. If we seek to raise additional funds, we may not be able to obtain
funds on terms which are favorable or acceptable to us. If we raise additional
funds through the issuance of equity securities, the percentage ownership of our
stockholders would be reduced. Furthermore, these securities may have rights,
preferences or privileges senior to our common stock.
YEAR 2000 READINESS
Background of Year 2000 Issue
The year 2000 issue refers generally to the problems that some software may
have in determining the correct date as a result of the millennium change. We
define year 2000 ready to mean that testing has revealed that the electronic
components at issue will recognize and properly perform date sensitive functions
into and beyond the year 2000. Software with date sensitive information that is
not year 2000 ready may not be able to distinguish whether 00 means 1900 or
2000, which may result in system failures or the creation of erroneous results.
We are subject to potential year 2000 issues affecting our products, our
internal systems and the systems of our suppliers and customers, any of which
could harm our business.
State of Readiness
We organized a year 2000 task force to address our year 2000 issues. The
task force concluded all testing and remediation efforts in relation to year
2000 issues on December 15, 1999 as discussed below.
We have tested all custom and product implementations currently being
utilized by customers and, as necessary, have remediated and made all of these
implementations year 2000 ready. We have further tested all existing and past
FirePond products for year 2000 issues and, as necessary, remediated and made
all of these products year 2000 ready. However, we have not tested independently
installed third-party software which may be integrated within our customer's
systems. Integrated software could be susceptible to year 2000 issues and the
failure of our customers' systems to be year 2000 ready could impede the success
of our applications in their systems.
We have tested all internal hardware and software for 2000 issues and, as
necessary, have remediated and made all such systems year 2000 ready. For our
non-information technology, we have obtained year 2000 ready statements from all
of our material suppliers and do not anticipate any year 2000 problems.
The Cost to Address the Company's Year 2000 Issues
We have incurred costs in replacing hardware as well as labor in assessing,
testing and remediating all of our software and hardware. All costs incurred in
our process to be year 2000 ready are covered by our general budget to fund the
activities of the year 2000 task force. These costs are divided into two
categories:
- our internal systems and hardware, and
- custom and product customer implementations.
The majority of costs were incurred during calendar year 1999. We incurred
approximately:
- 2000 employee hours,
- $10,000 in contract fees; and
- $75,000 in capital expenditures remediating our internal hardware and
software systems.
We anticipate no further material costs associated with remediating year 2000
issues.
The Risk of the Company's Year 2000 Issues
We have assessed, tested and remediated all anticipated year 2000 issues.
Therefore, currently we are not aware of any material operational issues or
costs associated with year 2000 issues. The only potential problems we
anticipate in relation to the year 2000 are minor internal or customer
associated year 2000 issues
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which may have been overlooked by our year 2000 task force or year 2000 issues
which are beyond our control.
The Company's Contingency Plan
We have prepared a contingency plan in the event we are not year 2000
ready. All key personnel will either be in the office or on-call during the
millennium change to address all potential problems which may occur with our own
internal systems as well as unanticipated problems with our customers with
respect to the use of our software products and implementations. We have taken
further contingency plans designed to protect software code with is material to
our business operation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on our consolidated financial statements.
In December 1998, the AICPA issued Statement of Position 98-9, Modification
of SOP 97-2 Software Revenue Recognition, With Respect to Certain Transactions.
SOP 98-9 requires use of the residual method of recognition of revenues when
vendor-specific objective evidence exists for undelivered elements but does not
exist for delivered elements of a software arrangement. We will be required to
comply with the provisions of SOP 98-9 for transactions entered into beginning
January 1, 2000. We do not expect the adoption of SOP 98-9 will have a material
effect on our financial position or operating results.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We develop products in the United States and Belarus and sell them
worldwide. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Since our sales are currently priced in U.S. dollars and are
translated to local currency amounts, a strengthening of the dollar could make
our products less competitive in foreign markets. Interest income and expense
are sensitive to changes in the general level of U.S. interest rates,
particularly since our investments are in short-term instruments and our
long-term debt and available line of credit require interest payments calculated
at variable rates. Based on the nature and current levels of our investments and
debt, however, we have concluded that there is no material market risk exposure.
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BUSINESS
INDUSTRY BACKGROUND
In today's highly competitive global marketplace, it is increasingly
critical for companies to prioritize their businesses around the attraction,
conversion and retention of customers. As a result, many companies are
redirecting their technology investments toward systems that will maximize their
long-term revenue streams by increasing the lifetime value of individual
customer relationships. Within industries that are characterized by complex
products, services, or channel relationships, competitive advantage often
results from a company's ability to provide products, services and content that
are specific to the preferences of individual customers, particularly when they
are making a buying decision. Companies are also realizing that existing and
potential customers often access their organization via multiple business
channels, including e-commerce channels, traditional direct sales forces, and
indirect channel partners. It is therefore important that companies not only
equip these channels with systems that provide competitive differentiation when
a customer's buying decision is being made, but that they provide the customer
with consistent, valuable service across all channels.
In response to this shift toward customer-oriented systems, companies
originally invested heavily in traditional customer relationship management, or
CRM, software, which was designed to automate administrative support for
traditional corporate sales, call center, and service employees to more
effectively manage customer relationships. These solutions, which traditionally
have included functionality such as customer contact management, sales force
administration, call center service and support, and marketing automation, have
helped to eliminate cost inefficiencies within a company's sales and marketing
organization by streamlining and consolidating customer information and other
internal administrative tasks. However, because these applications are focused
on administrative aspects of a company's sales and marketing efforts, they
generally have not directly enhanced the customer's buying experience.
Traditional CRM solutions are further prevented from providing value directly to
customers because they were typically designed prior to the widespread
commercial use of the Internet, and were not intended for large scale,
Internet-based customer-driven transactions. Many companies that implemented
traditional CRM systems therefore have found themselves with systems that do not
interactively engage the customer in ways that add value to those relationships
or enhance individual buying decisions.
The rapid evolution and acceptance of the Internet as a means for
communicating, sharing information, and transacting directly with customers
worldwide has dramatically changed the focus of customer relationship
management. The Internet offers new opportunities for increased interactivity
and self-service, enabling companies to create new approaches for initiating,
developing and managing customer relationships over time. The Internet enables
the creation of powerful new revenue channels, while simultaneously improving
the effectiveness with which existing distribution channels market, sell and
support product and service offerings. Forrester Research, Inc. estimates that
the total value of U.S. business trade on the Internet will grow to
approximately $1.3 trillion in 2003. International Data Corporation, or IDC,
estimates that the market for Internet Commerce applications will grow 280% to
$1.7 billion in 1999 and projects the market to top $13 billion by 2003.
(Source: Internet Commerce Software Applications Market Review and Forecast,
1998-2003, April 1999).
As a result of these developments, the market for sales and marketing
oriented e-business software offerings has also evolved rapidly. The first
generation of e-business software was primarily focused on providing the back
office infrastructure to enable secure commerce transactions. More recently, a
variety of niche e-business software applications have been introduced,
including Internet content management and personalization offerings, which
target a specific aspect of the customer relationship or buying process. These
point solutions have provided tactical value in encouraging the adoption of the
Internet for the purchase of more basic, consumer-oriented goods. However, they
have typically not provided the advanced, integrated functionality necessary to
offer targeted products, services and content based upon a customer's individual
profile or stated requirements, which we believe is a critical success factor
for companies using e-commerce to sell complex products and services. In
addition, these Internet applications typically do not interact with a company's
traditional sales and distribution channels. Because these applications were
designed to support only Internet-based interactions, they typically are unable
to capture and deliver more complete customer
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information throughout a company and all of its established sales channels. This
inability to enable a common view of a customer limits a company's ability to
consistently service individual customers and to maximize the value of those
relationships.
Companies that sell complex products and services require a new generation
of e-business sales and marketing applications to offer targeted products,
services, and content to individual customers. Without these applications,
companies with complex selling activities may not be able to execute successful
e-commerce strategies, and may be forced to rely exclusively on traditional
human-assisted selling channels for their revenue streams. To achieve effective
management of individual customer relationships, these companies must utilize
advanced, Internet-based technologies that offer enhanced customer interactivity
and can support the creation of personalized solutions in a highly scalable and
reliable fashion at the time of customer buying decisions. These capabilities
must support the rapid deployment of an effective e-commerce channel, and must
also support traditional direct and indirect selling channels, so that the
effectiveness of all revenue channels is maximized and a common view of the
customer can be established. This next-generation software must also capitalize
on the highly interactive nature of the Internet to capture and provide
real-time customer information throughout the enterprise, enabling
customer-focused processes that maximize the lifetime value of each customer
relationship.
THE FIREPOND SOLUTION
FirePond is a leading provider of integrated e-business sales and marketing
solutions that enable companies to optimize customer relationships and maximize
the effectiveness of their Internet-based and traditional sales channels. The
FirePond Application Suite enables companies to increase customer conversion and
retention by delivering highly consistent and personalized interactive buying
experiences to their customers over the Internet, as well as through more
traditional selling channels. Using our software applications, companies are
able to link information obtained from business-to-business or business-to-
consumer e-commerce transactions into traditional sales channels, where it can
dramatically improve the effectiveness of each sales model. Our products can
also deliver real-time information from these interactive, Internet-based
transactions across the enterprise, and thus enable more responsive and targeted
sales efforts and business planning. These capabilities allow companies to
effectively manage their ongoing sales, marketing, product planning and
fulfillment activities in a fashion that maximizes the lifetime value of each
customer relationship.
Using our integrated e-business sales and marketing solutions, companies
that offer complex products and services are able to:
- quickly develop an effective e-commerce sales channel by delivering
interactive, personalized, guided selling capabilities to
business-to-business and business-to-consumer e-commerce sites;
- provide powerful assisted selling functionality to direct and indirect
selling channels to maximize the effectiveness of each customer
interaction with those channels;
- develop a common view of each customer across all Internet and
traditional sales channels to bring intelligence and consistency to every
customer interaction;
- leverage the interactivity of the Internet to capture and deliver to the
entire enterprise real-time customer transaction information, enabling a
true customer-centric business model; and
- achieve high reliability, performance and scalability in e-commerce
environments, as well as in broader enterprise environments that support
multiple selling channels.
STRATEGY
Our goal is to be the leading provider of integrated e-business sales and
marketing solutions. To achieve this goal, key elements of our strategy include:
Leverage Targeted Vertical Market Focus. We currently focus on industries
that are typically characterized by complex products, services or channel
relationships, including health care/insurance, financial
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services, high technology, telecommunications, automotive/trucking and
manufacturing. We believe that our focused pursuit of these targeted markets
allows us to tailor robust industry-specific solutions that best address the
needs of our customers and ensure customer satisfaction. To further our vertical
market focus, our sales efforts are organized around complementary industry
segments so that we may offer more specialized, consultative expertise when
customers evaluate and license our products. We will continue to deepen our
penetration of our target markets and utilize our customer-focused development
organization to quickly and effectively translate customer requirements into
industry-specific product features and functions, which we believe will create
barriers to entry for our competitors. During fiscal 2000, we also plan to
expand into new vertical industries with similar characteristics and will target
leading companies in those industries.
Exploit Established International Infrastructure to Gain Global Market
Share. During fiscal 1999, we invested heavily in a global infrastructure to
target leading businesses worldwide. We have increased the number of FirePond
employees internationally to 78 as of November 30, 1999 from 24 on October 31,
1998. Our international revenues as a percentage of total revenues were 11% in
fiscal 1999. Our leading international customers include Ford Motor
Company-Europe, Hitachi, Packard Bell/NEC, Renault V.I, Ricoh Europe and Scania.
We plan to use customer wins and existing and new partner relationships to
leverage our infrastructure and grow market share in international markets.
Utilize Unique Development Model to Aggressively Expand Our E-Business
Solutions. Our internal development organization, combined with our strategic
relationship with an offshore development organization, creates a highly
scalable product delivery model that allows us to rapidly introduce significant
new product features and functionality. We believe these combined resources
provide us with significant advantages, including ready access to a
highly-skilled labor pool, reduced turnover and rapid development cycles. The
use of this model was integral to the rapid development and timely release of
the FirePond Application Suite, which includes functionality, features, and
underlying architecture not available in our prior product offerings. We intend
to continue to use this combined organization to aggressively expand the
functionality of our products and incorporate new technologies to meet the
demands of the marketplace.
Expand Relationships with Partners. We have established strategic
marketing alliances with industry leading systems integrators, including Ernst &
Young, Viant, EDS and Intelligroup, and with complementary software vendors,
such as E.piphany, Talus Software, Silverstream and Oberon Software and
application service providers such as GTE Internetworking. These alliances help
extend our market coverage and provide us with new business leads and access to
a large pool of highly trained implementation personnel. On an ongoing basis, we
will aggressively seek to expand the number of partners we work with to further
penetrate the market and accelerate our growth.
Leverage Packaging Flexibility to Strategically Penetrate Global 2000
Accounts. We offer a suite of e-business products, which may be purchased as
separate components or as an enterprise platform for integrated e-business sales
and marketing solutions. This has allowed us to penetrate accounts that differ
greatly in their current stages of developing and implementing their e-business
strategies. We intend to leverage our success in selling our independent
component offerings to create future opportunities for up-selling customers to
our enterprise platform. In addition, we offer a migration path to an enterprise
platform for integrated e-business sales and marketing solutions to increase the
likelihood that we will successfully sell our independent components to accounts
that are not yet ready for enterprise-wide solutions. We also offer innovative
pricing alternatives such as annual licensing and transaction-based pricing that
provide our customers with a wide variety of licensing options. We will continue
to package and price our product offerings in a fashion designed to remove sales
barriers and create recurring revenue streams.
Capitalize on Expertise from Prior Custom Development Business. We have
been engaged for 16 years in the development of custom interactive selling
solutions for Global 2000 companies and have leveraged that expertise in
developing and implementing the FirePond Application Suite. We have successfully
transitioned the majority of our business from providing custom development
services to providing more standardized software products, while maintaining the
technical expertise and knowledge developed in providing customized solutions.
We believe that our historical expertise in this area represents a significant
competitive advantage, and we intend on an ongoing basis to expand upon this
expertise through targeted product
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development, translation of installed custom functionality to packaged software
functionality, and the expansion of highly specialized implementation
methodologies to provide optimized solutions to companies in our targeted
markets.
FIREPOND PRODUCTS
The FirePond Application Suite provides Internet-based guided selling and
customer information management capabilities, enabling companies to deploy
integrated e-business sales and marketing initiatives. These companies can use
the FirePond Application Suite to offer intelligently targeted products,
services, and content to customers across e-commerce and traditional selling
channels. With our software, companies can record customer interactions that
occur in an e-commerce channel and apply that information to traditional sales
channels, where it can dramatically improve selling effectiveness. Our products
also take advantage of a process workflow architecture that enables customer
information and transactional events to be distributed across the larger
enterprise in real time, linking systems and organizations to enable
coordinated, customer-focused processes. By coordinating a company's
organizational strategies around a common view of its customers, our software
enables companies to maximize the lifetime value of each customer relationship.
The table below describes the components of the FirePond Application Suite
all of which, other than the FirePond Business Rule Engine, were released in
October 1999. Previous versions of the FirePond Business Rule Engine have been
used in our custom software development implementations as well as in our prior
software products.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FIREPOND APPLICATION SUITE
COMPONENT COMPONENT DESCRIPTION
- ---------------------------------------------------------------------------------------------------
<S> <C>
FirePond Business Rule Engine Industry-leading business intelligence engine for
rules-based product configuration, pricing, customer needs
analysis and transactional personalization across every
customer interaction
- ---------------------------------------------------------------------------------------------------
FirePond Commerce Guided selling application for business-to-business or
business-to-consumer e-commerce, leveraging capabilities of
the FirePond Business Rule Engine
- ---------------------------------------------------------------------------------------------------
FirePond Sales Guided selling application for assisted direct and indirect
selling channels, leveraging capabilities of the FirePond
Business Rule Engine
- ---------------------------------------------------------------------------------------------------
FirePond Sales Manager Sales administration and customer information management
system
- ---------------------------------------------------------------------------------------------------
FirePond Process Server Transaction-based process workflow engine, enabling
companies to coordinate connected systems and individuals in
organized, customer driven processes
- ---------------------------------------------------------------------------------------------------
FirePond Enterprise Workbench Application administration platform, including tools for
managing functionality, content, business rules, enterprise
process flows and system administration activities
- ---------------------------------------------------------------------------------------------------
</TABLE>
FirePond Product Packaging and Pricing
We offer a variety of packaging and pricing options for the FirePond
Application Suite, to achieve flexibility in aligning our technology with
companies in different stages of executing their e-business strategies.
Customers seeking an enterprise platform for integrated e-business sales and
marketing may license the entire FirePond Application Suite, including all
associated components. Those companies pursuing less comprehensive initiatives,
but which are still focused on making strategic investments in guided selling,
channel management or customer information management solutions, may license
FirePond Commerce or FirePond Sales, each bundled with the FirePond Business
Rule Engine, as well as FirePond Sales Manager, as standalone applications.
Companies interested in making a strategic investment in configuration or
business rule engine technology to serve a variety of enterprise requirements
may license the FirePond Business Rule
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Engine as a standalone application. By offering this variety of packaging
options, we allow our customers to make strategic investments in our technology,
without necessarily committing to a larger enterprise platform.
We also offer a wide variety of pricing options to our customers. We
currently offer our packaged software on a price per user or group of concurrent
users basis, which customers can then license on a perpetual or annual basis. We
also offer transaction-based pricing that ties the overall cost of owning our
software to the value provided to the company. To date, substantially all of our
licenses have been perpetual licenses. License fees for our products typically
range from approximately several hundred thousand dollars to several million
dollars.
FirePond Business Rule Engine
The FirePond Business Rule Engine, or FirePond BRE, is an industry-leading
business intelligence engine for executing rules-based product configuration,
pricing, customer needs analysis and transactional personalization across every
customer interaction. The FirePond BRE was originally utilized in our previous
business model, as the centerpiece of custom software developments, and was
incorporated in the FirePond Application Suite. As such, the FirePond BRE has
proven highly scalable in large-scale enterprise environments. The FirePond BRE
evaluates customer requirements and characteristics, then matches them to
specific products, pricing and content, all at the time of purchase. Using
accompanying tools in the FirePond Enterprise Workbench, companies create
multi-tiered business rule models that govern how products are configured,
offered and sold to individual customers, customer types, or market segments, in
both e-commerce and traditional channels. At the time of evaluation or purchase,
the FirePond BRE will evaluate customer input, draw from the underlying business
rule models, dynamically configure targeted products, generate customer-specific
pricing, and offer relevant content to facilitate the customer buying decision.
This interactive information exchange, or customer needs analysis, shields
customers from the complexity of the product being sold, allowing targeted
solutions to be configured based on customers' high level descriptions of
intended use, personal preferences, business priorities, or price sensitivities,
rather than detailed option selection.
FirePond Commerce
FirePond Commerce allows companies to quickly deploy highly interactive,
consultative e-commerce web sites. Companies receive the base version of
FirePond Commerce, then collaborate with FirePond or third-party implementation
partners, to brand the application and assemble the selling functionality in
ways that reflect their strategies and best practices for selling. Associated
tools allow for the tailoring of this functionality in rapid time frames. Using
the FirePond Business Rule Engine to apply intelligence to independent
components of functionality, companies can easily construct comprehensive
e-commerce selling sites that emulate the consultative nature of traditional
sales channels. Customers accessing a FirePond Commerce-enabled site can
navigate through an entire sales process, beginning with an interactive needs
analysis session, create a targeted product configuration with a personalized
price quote, explore optimal financing recommendations, compare relevant
competitive offerings, obtain individualized product content, generate a
company-branded proposal, and complete the order. FirePond Commerce then logs
these interactions to share real-time information with other FirePond
applications as well as with the larger enterprise.
FirePond Sales
FirePond Sales is a comprehensive guided selling application targeted for
use by sales people in traditional selling channels, including direct sales
forces, distributors, dealers, agents and others who deal interactively with
customers. Similar to FirePond Commerce, companies receive the base version of
FirePond Sales, then use associated tools to tailor the application to represent
their unique branding and best practices for selling. FirePond Sales draws from
the same functionality offered in FirePond Commerce to offer targeted products,
services and content to individual customers when they are ready to buy.
However, the functionality is utilized differently due to the presence of human
interaction in the sales process. The underlying data model and process
architecture that supports FirePond Sales are also the same as that which
supports
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FirePond Commerce, allowing for collaboration between the two applications. For
example, when a customer creates and saves a solution on a FirePond
Commerce-enabled site, a sales person can access that solution and use FirePond
Sales to optimize the solution and further develop the opportunity.
FirePond Sales Manager
FirePond Sales Manager is an integrated, web-based sales administration and
customer information management system. FirePond Sales Manager allows sales
people and their managers to perform a wide variety of customer information
management activities, including managing customer contacts and profiles,
coordinating activities, defining and assessing opportunities, managing a sales
pipeline, aligning sales territories, and generating and analyzing forecasts.
Because it is typically linked to FirePond Commerce and FirePond Sales, FirePond
Sales Manager can be automatically populated with data from real-time customer
events and interactions, rather than rely solely on the salesperson to populate
it with meaningful data. For example, if a customer engages in a buying session
on a FirePond Commerce-enabled web site, that event, along with all of the
customer profile information associated with that session, is delivered to
FirePond Sales Manager, where assigned next steps will be presented to the sales
person for effective pursuit of the sale.
FirePond Process Server
FirePond Process Server is a transaction-based workflow engine that enables
companies to coordinate connected systems and individuals in organized,
customer-driven processes. Using intuitive visual tools in FirePond Enterprise
Workbench, companies can design high-level processes for addressing real-time
events generated from interactive sessions occurring within FirePond Commerce or
FirePond Sales. Using FirePond Process Server and its related tools, companies
can identify organizational roles, assign tasks, and connect systems to each
process. Companies then apply logic that defines how and when these
organizational roles, tasks, and systems will be invoked, based on different
events. When events trigger these processes, FirePond Process Server ensures
that the process unfolds across the enterprise, while maintaining the integrity
of underlying corporate databases. Companies then use FirePond Process Server
tools to test, analyze and optimize these processes for maximum benefit. For
example, companies use FirePond Process Server to define the processes that will
be triggered when an individual customer creates a solution on a FirePond
Commerce-enabled web site. Using the associated tools, companies may create
processes that inform the appropriate sales person of this event, attach
relevant customer information from the session, update the corporate database,
or send an e-mail to that customer's service team.
FirePond Enterprise Workbench
FirePond Enterprise Workbench is a maintenance and development platform for
defining, analyzing, and managing functions, data, content and processes within
the FirePond Application Suite. FirePond Enterprise Workbench is comprised of
several tools, which allow companies to:
- visually create, manage, and monitor transaction-based business processes
that span multiple applications;
- author and manage business rules that support product configuration,
pricing and transactional personalization in the FirePond Business Rule
Engine;
- assemble and tailor packaged FirePond selling functionality to comply
with their strategies and best practices for selling;
- develop and deploy e-business functionality that complements the packaged
application functions of the FirePond Application Suite;
- define connectivity and data flows between the FirePond Application Suite
and third-party applications via the use of standardized connectors; and
- assign users, manage security, and troubleshoot the distributed
components of a FirePond Application Suite deployment.
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PROFESSIONAL SERVICES AND SUPPORT
We offer a range of professional services that help companies create unique
deployments of the FirePond Application Suite that are highly specific to their
businesses. Our professional services personnel typically have extensive
experience in the deployment of enterprise-scale selling systems, as many have
participated in projects associated with our prior custom development services
business model. When we assist companies in the implementation of the FirePond
Application Suite, or one of its components, we help them map their individual
strategies to our technology, then provide targeted resources that assist in the
development of a functional application workflow, data models, automated
enterprise processes, highly branded user interfaces, and functional extensions
to our applications to support those strategies. Our professional services
implementation teams are organized around the following roles:
- Project Manager -- Business manager of the FirePond Application Suite
implementation, responsible for leading project strategies and
coordinating our resources in support of those strategies
- Business Analyst -- Strategic business consultant responsible for mapping
a company's corporate selling strategies to product functionality in the
FirePond Commerce and FirePond Sales applications, and for architecting
customer-focused business processes within FirePond Process Server
- Product Architect -- Technical architecture specialist responsible for
tailoring the FirePond Application Suite to the technical infrastructure
of individual companies, including strategies for data management,
communication, and integration between the FirePond Application Suite and
third party applications
- BRE Engineer -- Highly specialized resource responsible for implementing
business rule models within the FirePond Business Rule Engine that
reflect a company's product configuration, pricing and transactional
personalization strategies
- Interactive Consultant -- Graphic design specialist responsible for
creating a user interface for the FirePond Application Suite, which
reflects both a company's individual brand identity, as well as the best
practices for selling developed in conjunction with the company
We may also involve third-party systems integrators to perform these roles
and supplement our professional services personnel on particular accounts.
We provide support services, as well as software upgrades, under annual
software maintenance contracts. These annual maintenance contracts are renewable
at the company's option. Our support services are available seven days per week,
24 hours per day, and 365 days per year.
In addition to the services provided in connection with the FirePond
Application Suite, we also provide custom development and support services. From
our inception through 1997, we generated revenues primarily through custom
development services, and the ongoing support of the implementations from our
prior business model continues to represent a significant portion of our
revenues. Although we do not offer custom development services to new customers
and we expect revenues from our custom development services to decline as a
percentage of overall revenues over time, we intend to continue to provide these
services for the foreseeable future in support of our established custom
development services contracts.
SALES AND MARKETING
We market and sell our products primarily through our direct sales force,
which is located throughout North America, Europe and Asia. In North America,
the FirePond sales organization is focused on our targeted vertical markets,
with resources assigned to health care/insurance, financial services, high
technology, telecommunications, automotive/trucking and manufacturing. In Europe
and Asia, the FirePond sales organization is deployed by geographic region, but
focuses on the same vertical markets that we target in North America, leveraging
our local implementation expertise as well as our global industry knowledge.
We have multi-disciplined sales teams that consist of sales, technical and
support professionals. Our senior management also takes an active role in our
sales efforts. Because our applications have rich packaged functionality, we can
easily develop custom demonstrations which we or our partners then use to design
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<PAGE> 38
models for full-scale implementations. We typically direct our sales efforts to
the chief executive officer, the chief information officer, the vice presidents
of sales and marketing and other senior executives responsible for e-business
strategy at our customers' organizations.
FirePond has sales offices in the Boston, Chicago, Detroit, Minneapolis,
Pittsburgh, San Francisco, St. Louis, Amsterdam, Dusseldorf, London, Paris,
Stockholm, Hong Kong and Tokyo areas. As of November 30, 1999, our world-wide
sales organization consisted of 62 employees.
A key element of our growth strategy is the formation of strategic
relationships with industry leaders whose business offerings complement our own.
We believe that these relationships allow us to scale our business rapidly and
effectively, by enabling the expansion of our:
- global brand exposure;
- pipeline of qualified sales opportunities;
- capacity to effectively implement our software offerings for new
customers; and
- ability to deliver enhanced value propositions to our customers.
FirePond has successfully established relationships with large,
international systems integrators and consulting services companies, including
Ernst & Young, Viant, EDS, Intelligroup, Debis Systemhaus, and WM Data. We
intend to aggressively seek to expand these relationships and add new
relationships in this area to increase our capacity to sell and implement our
products on a global basis. With certain existing partners, such as Ernst &
Young and Intelligroup, we align our relationships to coincide with our target
vertical markets, including the healthcare/insurance, telecommunications, and
automotive market sectors. We will continue to aggressively pursue relationships
that augment our vertical market strategy.
FirePond also has relationships with vendors whose products are generally
believed to be complementary to our own, including E.piphany, Talus Solutions,
Silverstream, Sun Microsystems and Oberon Software. On an ongoing basis, we will
pursue additional technology relationships that increase our value proposition
to potential customers, expand our ability to offer integrated enterprise
solutions, and increase our market opportunities.
Recently, several companies have emerged that offer outsourced software
application hosting services to a wide variety of companies that may not want to
incur the cost of hosting and maintaining enterprise software applications
within their internal technology infrastructure. We believe that these
alternative hosting models provide a strong opportunity to expand our market
reach, because they offer a lower ownership cost to companies that might not
otherwise be able to justify a large software investment. We have commenced
pursuit of this opportunity by establishing a relationship with GTE
Internetworking that provides the FirePond Application Suite on a GTE hosted
platform. We will expand our pursuit of partners that offer alternative software
hosting models in order to expand our market reach into companies outside the
Global 2000.
As of November 30, 1999, FirePond had 3 employees focused on the
development of corporate partnerships and strategic alliances. In addition, our
senior management takes an active role in the development of these key
relationships.
FirePond's marketing organization utilizes a variety of programs to support
our sales efforts, including:
- market and product research and analysis;
- product and strategy updates with industry analysts;
- public relations activities and speaking engagements;
- internet-based and direct mail marketing programs;
- seminars and trade shows;
- brochures, data sheets and white papers; and
- web site marketing.
As of November 30, 1999, FirePond's marketing organization consisted of 11
employees.
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<PAGE> 39
CUSTOMERS
FirePond has targeted and will continue to target selected vertical
industries with complex products, services or channel relationships, including
health care/insurance, financial services, high technology, telecommunications,
automotive/trucking and manufacturing. The following is a list of some of our
better-known customers to whom we have provided our products or services in
fiscal 1998 or fiscal 1999:
ADP
American Isuzu Motors*
Bell Atlantic Network Integration
Blue Cross Blue Shield
Minnesota
Compaq
Cummins Power Generation Group
DAF Trucks N.V.*
Empire Blue Cross Blue Shield
Ford Motor Company -- Europe
Freightliner*
General Motors
Hitachi
IBM*
Ingersoll-Rand
Isuzu-General Motors Australia*
JI Case*
John Deere*
Johnson Controls*
KLA-Tencor
Norwest Services
Packard Bell/NEC
Peugeot SA
Renault V.I.
Ricoh Europe
Savings Bank Life Insurance
Scania
Sprint
Subaru
Sunds Defibrator
- ------------
* Customer relationships based on custom development services exclusively
The following table is a list of customers from whom we derived revenues
equal to 10% or more of our total revenues during fiscal 1997, fiscal 1998 or
fiscal 1999, the loss of either of which would seriously harm our business:
<TABLE>
<CAPTION>
FISCAL 1997 REVENUES FISCAL 1998 REVENUES FISCAL 1999 REVENUES
--------------------------- --------------------------- ---------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
CUSTOMER AMOUNT TOTAL REVENUES AMOUNT TOTAL REVENUES AMOUNT TOTAL REVENUES
-------- ---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
General Motors....... $6,005,000 23% $7,152,000 23% $8,143,000 24%
Blue Cross Blue
Shield Minnesota..... -- -- 147,000 1% 4,993,000 15%
</TABLE>
RESEARCH AND DEVELOPMENT
As of November 30, 1999, FirePond employed 87 people in research and
development throughout its U.S. offices. This team is responsible for product
planning and design, development of particular functionality within the FirePond
Application Suite and general release and quality assurance functions.
We contract with a third party, Soft OS, to provide software development
and implementation services on an outsourced basis. Soft OS subcontracts to have
these services provided to us by Effective Programming, a development
organization located in Minsk, Belarus, and EPAM Systems, a related development
organization located in New Jersey. Under this arrangement, Effective
Programming and EPAM Systems provide software developers dedicated to our
projects to develop products and application functionality based on
specifications provided by us and to provide implementation services to our
customers. The agreement expires in February 2002. As of November 30, 1999,
approximately 85 employees and contractors of Effective Programming and EPAM
Systems were performing services for us. Each of Effective Programming and EPAM
Systems is majority owned by one of our employees, Arkadiy Dobkin, our Vice
President of Product Research and Development. We believe our relationship with
Effective Programming and EPAM Systems is a significant competitive advantage
and provides us with ready access to a highly-skilled labor pool, reduced
turnover, rapid development cycles and a cost-effective solution to our research
and development needs.
Our research and development expenses were $9.6 million for fiscal 1999,
$8.2 million for fiscal 1998 and $3.6 million for fiscal 1997. We expect to
continue to invest significantly in research and development in the future.
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<PAGE> 40
COMPETITION
The market for e-business sales and marketing solutions is intensely
competitive, fragmented and subject to rapid technological change. The principal
competitive factors in this market include:
- adherence to emerging Internet-based technology standards;
- comprehensiveness of applications;
- adaptability, flexibility and scalability;
- real-time, interactive capability with customers, partners, vendors and
suppliers;
- ability to support vertical industry requirements;
- ease of application use and deployment;
- speed of implementation;
- customer service and support; and
- initial price and total cost of ownership.
Because we offer both independent packaged applications, as well as an
enterprise platform for integrated e-business sales and marketing solutions, we
consider a number of companies in different market categories to be our
competitors. Companies focused on providing advanced selling applications for
e-commerce and traditional sales channels include Calico Commerce, Selectica and
Trilogy Software. Companies offering e-commerce software that focuses on a
specific aspect of the customer relationship or buying process, including
personalization, content management or self-service applications, include
BroadVision, Vignette, and Silknet. Finally, companies that offer enterprise
platforms for customer information management include Siebel Systems and Oracle
Corporation. There are a substantial number of other companies focused on
providing Internet-based software applications for customer relationship
management that may offer competitive products in the future. We believe that
the market for integrated e-business sales and marketing solutions is still in
its formative stage, and that no currently identified competitor represents a
dominant presence in this market.
We expect competition to increase as a result of software industry
consolidation. For example, a number of enterprise software companies have
acquired point solution providers to expand their product offerings. Our
competitors may also package their products in ways which may discourage users
from purchasing our products. Current and potential competitors may establish
alliances among themselves or with third parties or adopt aggressive pricing
policies to gain market share. In addition, new competitors could emerge and
rapidly capture market share.
Although we believe we have advantages over our competitors in terms of the
comprehensiveness of our solution, as well as our targeted vertical focus, there
can be no assurance that we can maintain our competitive position against
current and potential competitors, especially those with longer operating
histories, greater name recognition and substantially greater financial,
technical, marketing, management, service, support and other resources.
INTELLECTUAL PROPERTY
We believe our intellectual property rights are significant and that the
loss of all or a substantial portion of our intellectual property rights could
seriously harm our success and ability to compete. We rely on a combination of
copyright, patent, trade secret, trademark, and other intellectual property law,
nondisclosure agreements and other protective measures to protect our
proprietary rights. There can be no assurance that our intellectual property
protection measures will be sufficient to prevent misappropriation of our
technology. Some of our contracts with our customers contain escrow arrangements
with a third party escrow agent which provide these companies with access to our
source code, and other intellectual property upon the occurrence of specified
events. This access could enable these companies to use our intellectual
property and source code creating a risk of disclosure or other inappropriate
use. Our third-party development organization located in Minsk, Belarus and New
Jersey has access to our source code and other intellectual property rights.
Despite our contractual protections, this access could enable them to use our
intellectual property and source code to
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<PAGE> 41
wrongfully develop and manufacture competing products, which would adversely
affect our performance and ability to compete. In addition, we cannot be certain
that others will not independently develop substantially equivalent intellectual
property, gain access to our trade secrets or intellectual property, or disclose
our intellectual property or trade secrets. Furthermore, the laws of many
foreign countries do not protect our intellectual property to the same extent as
the laws of the United States. From time to time, we may desire or be required
to renew or to obtain licenses from others to enable us to develop and market
commercially viable products effectively. There can be no assurances that any
necessary licenses will be available on reasonable terms, if at all.
From time to time, third parties may assert claims or initiate litigation
against us or our technology partners alleging infringement of their proprietary
rights with respect to our existing or future products. We could be increasingly
subject to infringement claims as the number of products and competitors in the
market for our technology grows and the functionality of products overlaps. In
addition, we may in the future initiate claims or litigation against third
parties for infringement of our proprietary rights to determine the scope and
validity of our proprietary rights. Any claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology or enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.
EMPLOYEES
At November 30, 1999, we had a total of 350 employees, of which 87 were in
research and development, 73 were in sales and marketing, 58 were in finance and
administration, and 132 were in professional services and support. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
FACILITIES
Our corporate headquarters are located in Waltham, Massachusetts and occupy
approximately 29,500 square feet. Our lease for this facility expires on
December 31, 2004. In addition, we have two facilities located in Minnesota. Our
facility in Mankato, Minnesota currently occupies approximately 63,250 square
feet. Our lease for this facility expires on December 1, 2008. In connection
with the relocation of our corporate headquarters in fiscal 1999, we will take
actions to reduce the lease commitment by 50% as of December 1, 2000 and
terminate the lease as of December 1, 2003. We are currently operating under two
separate leases in Bloomington, Minnesota. Both of these suites are in the same
building. One occupies approximately 12,100 square feet and our lease for this
facility expires on January 31, 2002. The other suite occupies approximately
2,500 square feet and our lease for this facility expires on March 31, 2002. We
believe these existing facilities will be adequate to meet our needs for the
next 12 months. If our growth continues, we may need larger facilities after
that time. Suitable additional facilities may not be available as needed on
commercially reasonable terms. We also lease sales offices in Chicago, Illinois;
Bloomfield Hills, Michigan; Oakland, California; Sewickly, Pennsylvania;
Chesterfield, Missouri; Hoofddorp, The Netherlands; Duesseldorf, Germany; Fleet,
England; Paris, France; Stockholm, Sweden; Hong Kong and Tokyo, Japan.
LEGAL PROCEEDINGS
We are engaged in legal proceedings incidental to the normal course of
business. Although the ultimate outcome of these matters cannot be determined,
we believe that the final outcome of these proceedings will not seriously harm
our business.
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<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of November 30,
1999, are as follows:
<TABLE>
<CAPTION>
AGE POSITION
--- --------
<S> <C> <C>
Klaus P. Besier........................... 48 Chairman, President, Chief Executive Officer and
Director
Ilya G. Gorelik........................... 38 Senior Vice President of Product Strategy and
Development
Edwin B. Lange............................ 43 Senior Vice President of North American Sales
Graham S. Williams........................ 44 Senior Vice President and Managing Director of
Europe and Asia
Paul K. McDermott......................... 38 Chief Financial Officer and Vice President of
Finance and Administration
Steven J. Waters.......................... 31 Vice President of Marketing
Thomas F. Carretta........................ 41 General Counsel and Secretary
Paul R. Butare............................ 48 Director
J. Michael Cline.......................... 39 Director
William O. Grabe.......................... 61 Director
Gerhard Schulmeyer........................ 61 Director
</TABLE>
Klaus P. Besier has served as chairman of our board of directors since
October 1999 and has served as our president, chief executive officer and a
director since June 1997. Before joining FirePond, from February 1996 to May
1997, Mr. Besier was chairman, president and chief executive officer of Primix
Solutions, Inc., an internet-enabled software company. From 1994 to 1996, Mr.
Besier was the chief executive officer of SAP America, Inc., a subsidiary of SAP
AG, a leading provider of business application software. From 1992 to 1993, he
was the president of SAP America, Inc. From 1991 to 1992, Mr. Besier was vice
president of sales of SAP America, Inc. From 1977 to 1990, Mr. Besier held
various senior management positions including general manager and corporate vice
president with various affiliates of Hoechst Celanese, a specialty chemicals
company. Mr. Besier is also a director of Intelligroup, a global professional
services firm.
Ilya G. Gorelik has served as our senior vice president of product strategy
and development since October 1998. Before joining FirePond, from 1989 to 1998
Mr. Gorelik held various senior management positions with Parametric Technology
Corporation, most recently as senior vice president of product engineering, and
chief technology officer. Parametric Technology Corporation is a leading
software supplier for the mechanical design automation market.
Edwin B. Lange has served as our senior vice president of North American
sales since September 1999. Before joining FirePond, from 1993 to 1999, Mr.
Lange held various senior management positions with SAP America, Inc., most
recently senior vice president and general manager of the discrete manufacturing
sector. From 1990 to 1993 he was a sales director at Andersen Consulting.
Graham S. Williams has served as our senior vice president and managing
director of Europe and Asia since June 1998. Before joining FirePond, from 1996
to June 1998, Mr. Williams was president and chief executive officer of
SuperNova, an application and component development tool firm. From 1993 to
1996, Mr. Williams was vice president, European operations and vice president,
European and Asia Pacific operations for Compuware Corp/Uniface International, a
provider of enterprise and client/server systems. From 1992 to 1993 he was the
vice president and managing director, Europe of Seer Technologies, a provider of
integrated CASE systems.
Paul K. McDermott has served as our chief financial officer since January
1999. Before joining FirePond, from 1995 to 1999, Mr. McDermott was chief
financial officer, treasurer, and secretary of ServiceWare, Inc., an Internet
software company specializing in knowledge management. From 1990 to 1995,
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<PAGE> 43
he held various positions in finance, including controller, with Legent
Corporation, a supplier of software and services for distributed enterprise
computing.
Steven J. Waters has served as our vice president of marketing since
September of 1997. Before joining FirePond, from 1993 to 1997, he held various
marketing positions at Trilogy Software, Inc., a sales technology company,
including director of sales and marketing from 1996 to 1997. Before Trilogy, Mr.
Waters worked in the national high-technology investment banking group of Bear,
Stearns & Co., Inc.
Thomas F. Carretta has served as our general counsel since May 1998. He was
elected to serve in the additional capacity of secretary in November 1998.
Before joining FirePond, from 1988 to 1998, Mr. Carretta was general counsel for
Comtrol Corporation and affiliated companies.
Paul R. Butare has been a director of FirePond since July 1999. Mr. Butare
is the chairman and chief executive officer of Richter Systems International
Inc., a leader in global supply chain enterprise solutions. Before joining
Richter, Mr. Butare served as executive vice president for Policy Management
Systems Corporation, a developer of insurance industry software, which he joined
in 1984, and president of CYBERTEK, a life insurance financial systems and
services company of Policy Management Systems.
J. Michael Cline has been a director of FirePond since May 1997. Mr. Cline
is a private investor. From 1989 to 1999, Mr. Cline was a managing member of
General Atlantic Partners, LLC, or its predecessor, a private equity firm that
invests globally in software, Internet services and related information
technology companies. Before joining General Atlantic, Mr. Cline helped found
AMC, a software company subsequently sold to Legent Corporation. Prior to
founding AMC, Mr. Cline was an associate at McKinsey and Company. Mr. Cline is a
trustee of the Wildlife Conservation Society and a director of Brio Technology,
Manugistics, OptiMark Technologies, EXE, Richter Systems, XChanging, Talus and
Rebus.
William O. Grabe has been a director of FirePond since May 1997. Mr. Grabe
is a managing member of General Atlantic Partners, LLC and has been with General
Atlantic since April 1992. Before joining General Atlantic, Mr. Grabe was
corporate vice president and general manager, marketing & services for IBM US.
His outside affiliations include being a member of the UCLA Foundation board of
trustees and a trustee of Outward Bound USA. He is also a director of Baan
Company, N.V., LHS Group, Inc., Compuware Corporation, Gartner Group Inc., Exact
Holdings N.V., Meta4, TDS AG and several other private software and services
companies.
Gerhard Schulmeyer has been a director of FirePond since November 1999. Mr.
Schulmeyer is president and chief executive officer of Siemens Corporation in
the United States of America, having been president and chief executive officer
of Siemens Nixdorf Informationssysteme AG and chairman of its managing board
since 1994. Before joining Siemens Nixdorf, Mr. Schulmeyer was executive vice
president and a member of the executive committee of Asea Brown Boveri Ltd. as
well as president and chief executive officer of ABB Inc., U.S.A. From 1980 to
1989, he held various senior positions with Motorola Inc., culminating with that
of executive vice president, deputy to the chief executive officer, responsible
for European business. He is a member of the boards of Korn Ferry International,
Ingram Micro, Inc., Alcan Aluminum Ltd., Allied Zurich p.l.c., Zurich Financial
Services and Arthur D. Little, Inc.
Following this offering, the board of directors will consist of five
directors divided into three classes, with each class serving for a term of
three years. At each annual meeting of stockholders, directors will be elected
by the holders of common stock to succeed the directors whose terms are
expiring. The members of the board of directors are currently classified as
follows:
- Mr. Cline and Mr. Schulmeyer are Class I directors whose terms will
expire in 2000;
- Mr. Grabe is a Class II director whose term will expire in 2001; and
- Mr. Besier and Mr. Butare are Class III directors whose terms will expire
in 2002.
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<PAGE> 44
BOARD COMMITTEES
The board of directors has a compensation committee composed of Messrs.
Butare and Cline, which makes recommendations concerning salaries and incentive
compensation for our employees and administers our stock option plans. The board
of directors also has an audit committee composed of Messrs. Cline and Grabe,
which recommends the engagement of our outside auditors and reviews our
accounting controls, the results and scope of the audit and other services
provided by our outside auditors. The board of directors may establish, from
time to time, other committees to facilitate the management of our business.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable and necessary expenses
incurred in connection with attendance at meetings of the board of directors or
its committees. Members of the board who are not employees receive stock options
under our 1999 director plan. Our directors are also eligible to participate in
our 1997 stock option plan and 1999 stock option and grant plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of our board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the fiscal 1999
compensation earned for services rendered to us by our current chief executive
officer and each of our four other most highly compensated executive officers
whose salary and bonus compensation for fiscal 1999 exceeded $100,000,
collectively referred to below as the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME & PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
- ------------------------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Klaus P. Besier............................. $200,000 $ -- $ -- --
Chairman, President and Chief Executive
Officer
Graham S. Williams.......................... 213,850 8,910 19,740(1) 100,000
Senior Vice President and Managing
Director of Europe and Asia
Ilya G. Gorelik............................. 175,000 -- -- 133,334
Senior Vice President of Product Strategy
and Development
Paul K. McDermott........................... 132,060 25,000 36,674(2) 340,001
Chief Financial Officer and Vice President
of Finance and Administration
Steven J. Waters............................ 156,766 -- 41,429(2) 133,334
Vice President of Marketing
</TABLE>
- ---------------
(1) Represents a car allowance of $1,645 per month paid on behalf of Mr.
Williams.
(2) Represents amounts paid to the executive officer as reimbursement for
relocation expenses.
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<PAGE> 45
The following table sets forth information regarding stock options granted
during fiscal 1999 to the named executive officers. The percent of total options
granted to employees in the last fiscal year is based on options to purchase an
aggregate of 3,567,189 shares granted to officers and employees during fiscal
1999. The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term using
the 0%, 5% and 10% appreciation rates above the exercise price established in
regulations of the SEC, compounded annually. The potential realizable value is
not intended to predict future appreciation of the price of our common stock and
do not give effect to any actual appreciation after the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED
NUMBER OF SHARES % OF TOTAL ANNUAL RATES OF STOCK PRICE
UNDERLYING OPTIONS GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 0%($) 5%($) 10%($)
- ---- ---------------- ------------------ -------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Klaus P. Besier...... -- -- -- -- $ -- $ -- $ --
Graham S. Williams... 100,000(1) 2.8% $4.46 6/1/09 155,500 533,466 1,113,339
Ilya G. Gorelik...... 133,334(2) 3.7 4.46 6/16/09 207,334 711,291 1,484,460
Paul K. McDermott.... 283,334(1) 7.9 3.95 1/11/09 -- 702,949 1,781,410
56,667(1) 1.6 7.22 10/27/09 107,951 432,965 931,602
Steven J. Waters..... 100,000(1) 2.8 3.95 11/1/08 -- 248,099 628,731
33,334(3) 0.9 4.46 6/16/09 51,834 177,825 371,121
</TABLE>
- ------------
(1) Vest as to 25% of the underlying shares on each anniversary of the date of
grant so long as the holder remains as an employee.
(2) Vest upon the occurrence of preestablished performance goals related to the
development of our new product, the FirePond Application Suite.
(3) Vest as to 100% of the underlying shares immediately upon grant.
The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held by the named executive
officers. The named executive officers did not exercise any stock options during
fiscal 1999. There was no public trading market for our common stock as of
October 31, 1999. Accordingly, the values of the unexercised in-the-money
options have been calculated on the basis of the fair market value at that time
of $9.12 per share, as determined by the Company.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Klaus P. Besier........................... 986,163 938,839 $5,103,394 $4,858,492
Graham S. Williams........................ 54,167 262,500 280,314 1,307,438
Ilya G. Gorelik........................... 241,667 325,000 1,182,627 1,681,875
Paul K. McDermott......................... -- 340,000 -- 1,574,204
Steven J. Waters.......................... 75,000 158,334 371,125 819,378
</TABLE>
1999 STOCK OPTION AND GRANT PLAN
Our 1999 stock option and grant plan was adopted by our board of directors
in September 1999 and received stockholder approval in December 1999. The 1999
stock option and grant plan permits us to grant incentive stock options,
non-qualified stock options and restricted and unrestricted stock. These grants
may be
41
<PAGE> 46
made to our officers, employees, directors, consultants, advisors and key
persons. The 1999 stock option and grant plan allows for the issuance of
3,000,000 shares of common stock. No shares have been issued under the 1999
stock option and grant plan.
The 1999 stock option and grant plan is administered by the board of
directors or a committee designated by the board of directors. Subject to the
provisions of the 1999 stock option and grant plan, the board of directors or
the committee may select the individuals eligible to receive awards, determine
the terms and conditions of the awards granted, accelerate the vesting schedule
of any award and generally administer and interpret the plan.
The exercise price of options granted under the 1999 stock option and grant
plan is determined by the board of directors or the committee, however, under
present law, incentive stock options may not be granted at an exercise price
less than the fair market value of the common stock on the date of grant, or
less than 110% of the fair market value in the case of incentive stock options
granted to persons holding more than 10% of the voting power of our stock.
Non-qualified stock options may be granted at prices which are less than the
fair market value of the underlying shares on the date granted. Options are
typically subject to vesting schedules, terminate ten years from the date of
grant and may be exercised for specified periods after the termination of the
holder's employment or other service relationship with us. Upon the exercise of
options, the option exercise price must be paid in full by one of the following
means:
- cash;
- by certified or bank check;
- by another instrument acceptable to the board of directors or the
committee; or
- in the sole discretion of the board of directors or the committee, by
delivery of shares of common stock that have been owned by the holder
free of restrictions for at least six months.
The exercise price may also be delivered to us by a broker under irrevocable
instructions to the broker selling the underlying shares from the holder.
The purchase price, and vesting dates and/or requirements of restricted
stock awards are determined by the board of directors or the committee. The
board of directors or the committee may place conditions on the restricted stock
awards, such as continued employment or the achievement of performance goals or
objectives in a grant document. Restricted stock may not be sold, assigned,
transferred or pledged except as specifically provided in the grant document. If
a restricted stock award recipient's employment or other relationship with us
terminates or other events specified in the grant document occur, we have the
right to repurchase some or all of the shares of stock subject to the award at
the purchase price of the stock.
When we become subject to Section 162(m) of the Internal Revenue Code,
which denies a deduction to publicly held corporations for compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000 for any covered employee, no person may be granted options
under the 1999 stock option and grant plan covering more than 1,500,000 shares
of common stock in any calendar year.
In the event of any merger, reorganization or sale in which the outstanding
awards issued under the 1999 stock option and grant plan are generally not
assumed by the surviving entity, or equivalent substitute awards are not issued
by such issuing entity, all of the outstanding awards issued under the 1999
stock option and grant plan that are not then vested will become fully vested
and exercisable upon the closing of the transaction. Upon a merger,
reorganization or sale, all awards issued under the 1999 stock option and grant
plan will terminate upon closing of the transaction. All participants under the
1999 stock option and grant plan will be permitted to exercise, for a period of
15 days before any such termination, all awards held by them which are then
exercisable or will become exercisable upon the closing of the transaction.
1999 DIRECTOR PLAN
Our 1999 director plan was adopted by our board of directors in September
1999 and received stockholder approval in December 1999. A total of 500,000
shares of common stock have been authorized of issuance under the 1999 director
plan.
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<PAGE> 47
The 1999 director plan is administered by our compensation committee. The
term of the 1999 director plan is ten years, unless sooner terminated by vote of
the board of directors. Under the 1999 director plan, each non-employee director
who is or becomes a member of the board of directors is automatically granted on
September 9, 1999 or, if not a director on that date, the date first elected to
the board of directors, an option to purchase 50,000 shares of our common stock.
In addition, provided that the director continues to serve as a member of the
board of directors, each continuing non-employee director will be automatically
granted on the date of our annual stockholders meeting an option to purchase
12,500 shares of our common stock.
Options granted under the 1999 director plan are subject to the following
terms:
- the exercise price will be equal to the fair market value of the common
stock on the date of grant;
- 25% of the options in each grant will become exercisable on each of the
first, second, third and fourth anniversaries of the date of grant and
will have a term of ten years from the date of grant;
- unexercisable options terminate when the director ceases to be a director
for any reason other than death or permanent disability;
- exercisable options may be exercised at any time during the option term;
and
- in the event of a change in control transaction in which a director is
not retained as a director of the surviving corporation, options granted
to that director will become 100% vested and exercisable in full.
The terms of the 1999 director plan is ten years, unless sooner terminated by
vote of the board of directors.
1997 STOCK OPTION PLAN
Our board of directors and stockholders adopted the 1997 stock option plan
in May 1997. The 1997 stock option plan permits us to grant incentive stock
options, non-qualified stock options, stock appreciation rights, restricted
stock and deferred stock awards to our officers, employees, directors,
consultants, and advisors. The 1997 stock option plan allows for the issuance of
9,396,815 shares of common stock. Of the shares reserved for issuance under the
1997 stock option plan, 112,452 shares remain available for future issuance as
of November 30, 1999.
The 1997 stock option plan may be administered by the board of directors or
a committee designated by the board of directors. Subject to the provisions of
the 1997 stock option plan, the board of directors or the committee may select
the individuals eligible to receive awards, determine the terms and conditions
of the awards granted, accelerate the vesting schedule of any award and
generally administer and interpret the 1997 stock option plan.
The exercise price of options granted under the 1997 stock option plan is
determined by the board of directors or the committee, however, under present
law, incentive stock options may not be granted at an exercise price less than
the fair market value of the common stock on the date of grant, or less than
110% of the fair market value in the case of incentive stock options granted to
persons holding more than 10% of the voting power of our stock. Non-qualified
stock options may be granted at prices which are less than the fair market value
of the underlying shares on the date granted. Options are typically subject to
vesting schedules, terminate ten years from the date of grant and may be
exercised for specified periods after the termination of the holder's employment
or other service relationship with us. Upon the exercise of options, the option
exercise price must be paid in full by one of the following means:
- cash;
- by certified or bank check;
- by another instrument acceptable to the board of directors or the
committee; or
- in the sole discretion of the board of directors or the committee, by
delivery of shares of common stock that have been owned by the holder
free of restrictions for at least six months.
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<PAGE> 48
The purchase price, and vesting dates and requirements of restricted stock
awards are determined by the board of directors or the committee. The board of
directors or the committee may place conditions on the restricted stock awards,
such as continued employment or the achievement of performance goals or
objectives in a grant document. Restricted stock may not be sold, assigned,
transferred or pledged except as specifically provided in the grant document. If
a restricted stock award recipient's employment or other relationship with us
terminates or other events specified in the grant document occur, we have the
right to repurchase some or all of the shares of stock subject to the award at
the purchase price of the stock.
When we become subject to Section 162(m) of the Internal Revenue Code, no
person may be granted options under the 1997 stock option plan covering more
than 1,750,000 shares of common stock in any calendar year.
On November 8, 1999, Mr. Besier received stock options under the 1997 stock
option plan to purchase 1,500,000 shares of our common stock at an exercise
price of $9.90 per share. The options vest monthly over four years and will be
fully vested on November 8, 2003.
EMPLOYMENT AGREEMENTS
Mr. Besier's employment agreement, dated April 2, 1998, provides for an
initial annual salary of $200,000 and an annual bonus of up to $150,000 based on
FirePond's achievement, during the applicable fiscal year, of certain
performance goals agreed upon by Mr. Besier and our board of directors prior to
the beginning of each fiscal year. The agreement also provides that he will be
eligible to earn an additional bonus of up to $100,000 if FirePond achieves or
surpasses performance targets in excess of the performance goals. Mr. Besier
received stock options under our 1997 stock option plan to purchase 1,417,960
shares of our common stock at an exercise price of approximately $3.95 per
share. These options vest as to 29,494 shares monthly commencing on August 7,
1997 and shall be fully vested on July 7, 2001. Upon the occurrence of specified
liquidity events, such as a merger or acquisition of FirePond, 80% of the then
unvested options will become vested at the time of the event, increasing to 100%
if there shall be a reduction in the scope of Mr. Besier's employment
responsibilities in connection with the liquidity event. Mr. Besier was also
granted registration rights for all shares of our common stock which he
acquires.
In the event of Mr. Besier's death during the term of his employment, his
legal representative will receive Mr. Besier's annual salary for 12 months, an
amount equal to his most recent annual bonus, payable in quarterly installments,
and 75% of Mr. Besier's options to purchase shares of our common stock shall
become fully vested and exercisable, with the remaining 25% percent terminating.
If Mr. Besier is terminated without cause, or he voluntarily resigns for good
reason, he shall receive severance payments equal to his annual salary payable
in equal monthly installments for a period of 12 months and the term of his
vested options shall be extended until the earlier of three months following the
termination, the effectiveness of specified liquidity events, or nine months
after an initial public offering.
Mr. Williams' offer letter, dated May 11, 1998, provides for an initial
annual salary of $213,850 commencing on June 1, 1998 and an annual bonus of up
to 50% of his annual salary based on our performance and individual performance
objectives. Mr. Williams received stock options to purchase 216,667 shares of
our common stock at an exercise price of approximately $3.95 per share under the
1997 stock option plan, which options shall vest annually over four years
commencing on June 1, 1998. Upon the occurrence of a change of control event,
50% of the then unvested options will become immediately vested and exercisable.
Mr. Gorelik's offer letter, dated October 21, 1998, provides for an initial
annual salary of $175,000 commencing on October 2, 1998 and an annual bonus of
up to 50% of his annual salary based on our performance and individual
performance objectives. Mr. Gorelik received stock options to purchase 433,334
shares of our common stock at an exercise price of approximately $3.95 per share
under the 1997 stock option plan, which options shall vest annually over four
years commencing on October 2, 1998. Upon the occurrence of a change of control
event, if Mr. Gorelik is not retained as an employee of the surviving company,
with responsibilities similar to his responsibilities with FirePond, 80% of the
then unvested options will become immediately vested and exercisable.
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<PAGE> 49
Mr. McDermott's offer letter, dated December 11, 1998, provides for an
initial annual salary of $160,000 commencing on January 4, 1999, an initial
bonus of $25,000 and an annual bonus of up to $50,000 based on our performance
and individual performance objectives. Mr. McDermott received stock options to
purchase 283,334 shares of our common stock at an exercise price of
approximately $3.95 per share under the 1997 stock option plan, which options
shall vest annually over four years commencing on January 4, 1999. In addition,
in accordance with the offer letter, Mr. McDermott was granted an additional
stock option to purchase 56,667 shares of our common stock on similar terms,
upon the achievement of performance objectives before this initial public
offering. Upon the occurrence of a change of control event, if Mr. McDermott is
not retained as an employee of the surviving company, with responsibilities
similar to his responsibilities with FirePond, 80% of the unvested portion of
these options will become immediately vested and exercisable.
Mr. Waters' offer letter, dated September 5, 1997, provides for an initial
annual salary of $120,000 commencing on September 10, 1997. Mr. Waters received
stock options to purchase 16,667 shares of our common stock at an exercise price
of approximately $3.95 per share under the 1997 stock option plan, which options
shall vest annually over four years commencing on September 16, 1997. In
addition, in accordance with the offer letter, Mr. Waters received a cash
payment of $50,000 and stock options to purchase 33,334 shares of our common
stock in substitution for commissions Mr. Waters would have received from his
previous employer.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors to FirePond or
our stockholders for monetary damages for breaches of their fiduciary duty,
including breaches involving negligence or gross negligence in business
combinations, unless the director has:
- breached his duty of loyalty;
- failed to act in good faith;
- engaged in intentional misconduct or a knowing violation of law;
- paid a dividend or approved a stock repurchase in violation of the
Delaware General Corporation Law; or
- obtained an improper personal benefit.
This provision does not alter a director's liability under the federal
securities laws or to parties other than FirePond or our stockholders and does
not affect the availability of equitable remedies, such as an injunction or
rescission, for breach of fiduciary duty.
Our by-laws provide that directors and officers shall be, and in the
discretion of the board of directors, non-officer employees may be, indemnified
by us to the fullest extent authorized by Delaware law, as it now exists or may
in the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on our behalf. The by-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
later acquired under any by-law, agreement, vote of stockholders or otherwise.
We also have directors' and officers' insurance against certain liabilities.
We have been advised that in the opinion of the SEC, although
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers or controlling persons of FirePond as
described above, this indemnification is against public policy as expressed in
the Securities Act and may be unenforceable.
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<PAGE> 50
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS
We have issued preferred stock in private placement transactions as
follows. The tables below gives effect to a five-for-one stock split which
occurred in July 1997 and affected only the series A convertible participating
preferred stock.
<TABLE>
<CAPTION>
NUMBER OF PRICE PER AGGREGATE
DATE OF ISSUANCE SERIES SHARES SHARE CONSIDERATION
- ---------------- ------ --------- --------- -------------
<S> <C> <C> <C> <C>
May 1997........................... Series A Convertible 4,188,880 $ 2.63 $11,000,000(1)
Participating Preferred
July 1997.......................... Series C Convertible 570,342 2.63 1,500,000
Participating Preferred
October 1997....................... Series D Convertible 100,000 100.00 10,000,000
Participating Preferred
April 1998......................... Series E Convertible 7,604,563 2.63 20,000,000(2)
Participating Preferred
February 1999...................... Series F Convertible 6,734,008 2.97 20,000,000(3)
Preferred
February 1999...................... Series G Convertible 7,604,563 2.63 20,000,000(4)
Participating Preferred
</TABLE>
- ------------
(1) Warrants to purchase 190,438 shares of series B preferred stock, at an
exercise price of $19.69 per share, were issued to the purchasers of our
series A preferred stock in connection with the sale of series A preferred
stock. The aggregate consideration received for these warrants was $1,000.
(2) The aggregate consideration received for the series E preferred stock
consisted of the exchange of all of the outstanding shares of series D
preferred stock and the payment of an additional $10,000,000.
(3) Warrants to purchase 673,401 shares of series F preferred stock, at an
exercise price of $3.56 per share, were issued to the purchasers of our
series F preferred stock in connection with the sale of our series F
preferred stock. The aggregate consideration received for the warrants was
$1,000.
(4) The aggregate consideration received for the series G preferred stock
consisted only of the exchange of all of the outstanding shares of series E
preferred stock.
The following table summarizes the shares of our preferred stock purchased
by our named executive officers, directors and 5% stockholders, and persons and
entities associated with them.
<TABLE>
<CAPTION>
SERIES A SERIES D SERIES E SERIES G
CONVERTIBLE CONVERTIBLE CONVERTIBLE SERIES F CONVERTIBLE
PARTICIPATING PARTICIPATING PARTICIPATING CONVERTIBLE PARTICIPATING
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
- -------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
General Atlantic.............. 4,188,880 100,000 7,604,563 841,751 7,604,563
Technology Crossover
Ventures...................... -- -- -- 4,208,755 --
Lehman Brothers............... -- -- -- 1,683,502 --
</TABLE>
In connection with the sale of our series F convertible preferred stock, we
agreed to use our reasonable best efforts to cause the underwriter of our
initial public offering to offer to sell to the series F stockholders 7.5% of
the shares sold to the public in the offering. The shares are to be allocated
among the series F stockholders on a pro rata basis based upon the number of
series F shares held. General Atlantic, Technology Crossover Ventures and Lehman
Brothers are the series F stockholders.
On September 30, 1999, we sold 33,334 shares of common stock to Edwin B.
Lange, our senior vice president of North American sales, for an aggregate
purchase price of $148,500.
On November 12, 1999, we borrowed $6.0 million of subordinated indebtedness
from an outside investor, and General Atlantic and Technology Crossover
Ventures, existing stockholders of FirePond. The
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<PAGE> 51
indebtedness bears interest at 12.0% and is due upon the earlier of the closing
of this offering or November 11, 2000. If we have not closed an initial public
offering of our stock by May 11, 2000 or if we enter into a sale transaction
before May 11, 2000, the subordinated indebtedness is convertible into shares of
our preferred stock having rights equivalent to our existing series F preferred
stock at a rate of $2.97 per share. FirePond also issued to these lenders
warrants to purchase an aggregate of 360,000 shares of our common stock at an
exercise price of $5.25 per share.
PAYMENTS TO STOCKHOLDERS
In connection with the sales of our preferred stock, we agreed to make
payments to some of our stockholders upon consummation of this offering as
follows:
- an aggregate amount of $10,000,000 to holders of our common stock on May
20, 1997, other than General Atlantic;
- an aggregate amount of $15,000,000 to holders of our series A preferred
stock;
- an aggregate amount of $750,000 to holders of our series C preferred
stock; and
- an aggregate of up to $20,000,000 to holders of our series G preferred
stock.
These amounts are payable in cash, or, at our option, a number of shares of
our common stock determined by dividing the amount payable by $12.00. Our board
of directors has elected to make these payments in 3,812,524 shares of common
stock upon consummation of this offering.
REGISTRATION RIGHTS AGREEMENTS
After this offering holders of shares of our common stock and
preferred stock have registration rights with respect to their shares of common
stock, including shares of common stock issuable upon conversion of their
preferred stock. See "Description of Capital Stock -- Registration Rights of
Certain Holders."
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<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock as of November 30, 1999 and as adjusted to reflect the
sale of the common stock offered by this prospectus, by:
- all persons who own beneficially 5% or more of our common stock;
- each of the named executive officers;
- each of our directors; and
- all directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned,
subject to community property laws, where applicable. Beneficial ownership is
determined in accordance with the rules issued by the SEC. Under these rules,
beneficial ownership includes any shares which the individual or entity has sole
or shared voting or investment power and shares of common stock subject to
options held that are currently exercisable or exercisable within 60 days of
November 30, 1999. The data below give effect to the issuance of 3,812,524
shares of common stock as priority payments to some of our existing stockholders
upon consummation of this offering and 507,500 shares of common stock issuable
upon the net exercise of warrants to purchase series F preferred stock upon
consummation of this offering. The percentage of beneficial ownership is based
upon 27,485,652 shares of common stock outstanding, plus, in the case of the
after the offering calculations, the 5,000,000 shares issued in this offering,
plus any shares subject to options held by that individual or entity.
The address of General Atlantic is General Atlantic Partners, LLC, 3
Pickwick Plaza, Greenwich, Connecticut 06830. The address of Technology
Crossover Ventures is Technology Crossover Ventures, 575 High Street, Suite 400,
Palo Alto, California 54301. The address of Jerome Johnson is 2409 Northridge
Drive, North Mankato, Minnesota 56003.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------
BENEFICIALLY BEFORE THE AFTER THE
OWNED OFFERING OFFERING
---------------- ------------ ------------
<S> <C> <C> <C>
General Atlantic (1).............................. 17,304,167 63.0% 52.3%
Technology Crossover Ventures (2)................. 3,455,778 12.6 10.6
Jerome D. Johnson (3)............................. 2,946,032 10.7 9.1
Klaus P. Besier (4)............................... 1,189,525 4.2 3.5
Ilya G. Gorelik (5)............................... 263,858 1.0 less than 1%
Graham S. Williams (6)............................ 58,649 less than 1% less than 1%
Paul K. McDermott (7)............................. 70,833 less than 1% less than 1%
Steven J. Waters (8).............................. 100,000 less than 1% less than 1%
Paul R. Butare.................................... -- -- --
J. Michael Cline.................................. -- -- --
William O. Grabe (9).............................. 17,304,167 63.0 52.3
Gerhard Schulmeyer................................ -- -- --
All executive officers and directors as a group
(10 persons) (10)............................... 1,732,866 5.9 5.1
</TABLE>
- ------------
(1) Represents:
- 2,517,561 shares held by GAP Coinvestment Partners, L.P. and includes
96,857 shares underlying warrants exercisable within 60 days of November
30, 1999;
- 117,440 shares held by GAP Coinvestment Partners II L.P.;
- 10,619,840 shares held by General Atlantic Partners 40, L.P. and includes
537,957 shares underlying warrants exercisable within 60 days of November
30, 1999;
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<PAGE> 53
- 2,822,118 shares held by General Atlantic Partners 46, L.P.;
- 567,717 shares held by General Atlantic Partners 52, L.P.; and
- 24,697 shares held by General Atlantic Partners 59, L.P.
GAP Coinvestment Partners, L.P., GAP Coinvestment Partners II, L.P.,
General Atlantic Partners 40, L.P., General Atlantic Partners 46, L.P.,
General Atlantic Partners 52, L.P. and General Atlantic Partners, 59, L.P.
are part of an affiliated group of investment partnerships referred to,
collectively, as General Atlantic.
(2) Represents:
- 25,101 shares held by TCV III (GP);
- 119,223 shares held by TCV III, L.P.;
- 3,168,775 shares held by TCV III (Q), L.P.; and
- 142,679 shares held by TCV III Strategic Partners, L.P.
TCV III (GP), TCV III, L.P., TCV III(Q), L.P. and TCV III Strategic
Partners L.P. are part of an affiliated group of investment partnerships
referred to, collectively, as Technology Crossover Ventures.
(3) Includes 83,334 shares which may be sold in the event the underwriters
exercise their over-allotment option.
(4) Includes 1,159,973 shares underlying options granted to Mr. Besier
exercisable within 60 days of November 30, 1999.
(5) Includes 241,667 shares underlying options granted to Mr. Gorelik
exercisable within 60 days of November 30, 1999.
(6) Includes 54,166 shares underlying options granted to Mr. Williams
exercisable within 60 days of November 30, 1999.
(7) Includes 70,833 shares underlying options granted to Mr. McDermott
exercisable within 60 days of November 30, 1999.
(8) Includes 100,000 shares underlying options granted to Mr. Waters
exercisable within 60 days of November 30, 1999.
(9) Represents shares described in Note (1) above, beneficially owned by
General Atlantic. Mr. Grabe disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest in GAP Coinvestment
Partners, L.P. and GAP Coinvestment Partners II, L.P.
(10) Includes 1,643,306 shares underlying options granted to the executive
officers exercisable within 60 days of November 30, 1999.
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Immediately following the offering, our authorized capital stock will
consist of 100,000,000 shares of common stock of which 32,485,652 will be issued
and outstanding; and 2,000,000 shares of undesignated preferred stock issuable
in one or more series to be designated by our board of directors, of which no
shares will be issued and outstanding.
As of November 30, 1999, there were outstanding:
- 10,073,943 shares of common stock held by approximately 75 stockholders
of record;
- 19,097,793 shares of convertible preferred stock, convertible into
13,317,523 shares of common stock upon completion of this offering;
- warrants to purchase 190,438 shares of series B convertible preferred
stock, convertible into 634,794 shares of common stock upon completion of
this offering;
- warrants to purchase 673,401 shares of series F convertible preferred
stock, convertible into 281,662 shares of common stock upon completion of
this offering if exercised on a net exercise basis.
- warrants to purchase 864,567 shares of common stock; and
- options to purchase an aggregate of 9,408,825 shares of common stock.
These outstanding shares do not include the 3,812,524 shares of common stock to
be issued as priority payments to some of our existing stockholders upon
consummation of this offering.
COMMON STOCK
The holders of common stock have one vote per share. Holders of common
stock are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority, or, in the case of election of directors, by a plurality, subject to
any voting rights granted to holders of any then outstanding preferred stock.
Except as otherwise provided by law, amendments to our certificate of
incorporation, which will be effective upon consummation of the offering, must
be approved by a majority of the voting power of the common stock.
Holders of common stock share ratably in any dividends declared by the
board of directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock. In the event of our merger or consolidation
with or into another company as a result of which shares of common stock are
converted into or exchangeable for shares of stock, other securities or
property, including cash, all holders of common stock will be entitled to
receive the same kind and amount, on a per share of common stock basis, of such
shares of stock and other securities and property, including cash. On our
liquidation, dissolution or winding up, all holders of common stock are entitled
to share ratably in any assets available for distribution to the holders of
shares of common stock. No shares of common stock are subject to redemption or
have preemptive rights to purchase additional shares of common stock.
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock
may be issued from time to time in one or more series. Our board of directors is
authorized to establish the voting rights, if any, and the designations, powers,
preferences, qualifications, limitations and restrictions applicable to the
shares of each series. Our board of directors may, without stockholder approval,
issue preferred stock with voting and other rights that could adversely affect
the voting power and other rights of the holders of the common stock and could
have anti-takeover effects. The ability of our board of directors to issue
preferred stock without stockholder approval could have the effect of delaying,
deferring or preventing a change of control or the removal of our existing
management. We have no present plans to issue any shares of preferred stock.
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<PAGE> 55
WARRANTS
As of November 30, 1999, there were outstanding:
- warrants to purchase up to 190,438 shares of series B preferred stock at
an exercise price of $19.69 per share that were issued to General
Atlantic, which will be automatically converted upon the closing of this
offering into a warrant to purchase 634,794 shares of common stock at an
exercise price of $5.91 per share;
- warrants to purchase up to 673,401 shares of series F preferred stock at
an exercise price of $3.56 per share that were issued to the purchasers
of series F preferred stock;
- a warrant to purchase up to 200,000 shares of common stock at an exercise
price of approximately $3.95 per share that was issued to a vendor;
- warrants to purchase an aggregate of up to 304,567 shares of common stock
at an exercise price of $7.22 per share that were issued to strategic
partners and a customer; and
- In addition, warrants to purchase 360,000 shares of common stock with an
exercise price of $5.25 per share were issued to lenders in November
1999.
We plan to issue additional warrants to purchase up to 500,000 shares of
our common stock over the next 12 months in connection with future sales of our
products as well as to our present and future strategic partners.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Under the terms of our registration rights agreement, after the closing of
this offering, several of our shareholders may demand that we file a
registration statement for the registration of all or any portion of their
shares, subject to minimum thresholds, under the Securities Act. We are not
required to effect more than a total of two of these demand registrations per
year. Upon completion of this offering, holders of an aggregate of
shares will be party to the registration rights agreement. At any time after we
become eligible to file a registration statement on Form S-3, these stockholders
may require us to file up to two registration statements on Form S-3 in any
given 12-month period under the Securities Act covering their shares of common
stock.
In addition, after the closing of this offering, these and other
stockholders holding an aggregate of shares will be entitled to
registration rights in connection with any registration by us of securities for
our own account or the account of other stockholders. If we propose to register
any shares of common stock under the Securities Act, we are required to give
those stockholders notice of the registration and to include their shares in the
registration statement.
The registration rights of these stockholders, subject to some limitations,
will terminate when the shares held by them may be sold under Rule 144 under the
Securities Act. We are generally required to bear all of the expenses of all
registrations, except underwriting discounts and commissions. We also have
agreed to indemnify those stockholders under the terms of the registration
rights agreement.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any amendment to our certificate of incorporation must first be approved by
a majority of the board of directors and thereafter approved by a majority of
the total votes eligible to be cast by holders of voting stock with respect to
the amendment.
DELAWARE ANTI-TAKEOVER LAW AND OUR CHARTER AND BY-LAW PROVISIONS
Statutory Business Combination Provision. Following the offering, we will
be subject to Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from
51
<PAGE> 56
consummating a business combination with an interested stockholder for a period
of three years after the date that person became an interested stockholder
unless:
- before that person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
- following the transaction in which that person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66.67% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term interested stockholder is generally defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned 15% or more of a corporation's outstanding voting stock. The term business
combination includes mergers, asset sales and other similar transactions
resulting in a financial benefit to an interested stockholder. Section 203 makes
it more difficult for an interested stockholder to effect various business
combinations with a corporation for a three-year period. A Delaware corporation
may opt out of Section 203 with an express provision in its original certificate
of incorporation or an express provision in its certificate of incorporation or
by-laws resulting from an amendment approved by holders of at least a majority
of the outstanding voting stock. Neither our certificate of incorporation nor
our by-laws contains any such exclusion.
Charter and By-law Provisions. Our certificate of incorporation provides
that any action required or permitted to be taken by our stockholders at an
annual or special meeting of stockholders may only be taken if it is properly
brought before the meeting and may not be taken by written action in lieu of a
meeting. Our by-laws provide that a special meeting of stockholders may be
called only by the president or the board of directors unless otherwise required
by law. Our by-laws provide that only those matters included in the notice of
the special meeting may be considered or acted upon at that special meeting
unless otherwise provided by law. In addition, our by-laws include advance
notice and informational requirements and time limitations on any director
nomination or any new proposal which a stockholder wishes to make at an annual
meeting of stockholders.
Ability to Adopt Stockholder Rights Plan. The board of directors may in
the future resolve to issue shares of preferred stock or rights to acquire
shares of preferred stock to implement a stockholder rights plan. A stockholder
rights plan typically creates voting or other impediments that would discourage
persons seeking to gain control of FirePond by means of a merger, tender offer,
proxy contest or otherwise if the board of directors determines that a change in
control is not in the best interests of our stockholders. The board of directors
has no present intention of adopting a stockholder rights plan and is not aware
of any attempt to obtain control of FirePond.
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
The shares being sold in the offering have been approved for quotation on
the Nasdaq National Market under the symbol FIRE.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be EquiServe.
52
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price.
After this offering, 32,485,652 shares of common stock will be outstanding,
assuming the issuance of an aggregate of 5,000,000 shares of common stock. The
number of shares outstanding after this offering is based on the number of
shares outstanding as of November 30, 1999, and assumes no exercise of
outstanding options. The 5,000,000 shares sold in this offering will be freely
tradable without restriction under the Securities Act.
The remaining shares of common stock held by existing
stockholders are restricted shares or are subject to the contractual
restrictions described below. Restricted shares may be sold in the public market
only if registered or if they qualify for an exception from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Of these restricted shares,
- shares will be available for resale in the public market in
reliance on Rule 144(k) immediately following this offering, of which
shares are subject to lock-up agreements described below;
- shares will be available for resale in the public market in
reliance on Rule 144 beginning 90 days following this offering, of which
shares are subject to lock-up agreements; and
- shares become eligible for resale in the public market at
various dates thereafter, all of which shares are subject to lock-up
agreements.
Each of our executive officers and directors, and other stockholders who
will own in the aggregate shares of common stock after the offering,
have entered into lock-up agreements generally providing that 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 of the shares of common stock or any securities
convertible into, or exercisable or exchangeable for, common stock owned by
them, or enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the common
stock, for a period of 180 days after the date of this prospectus, without the
prior written consent of FleetBoston Robertson Stephens Inc.
FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. When determining whether or not to release shares from the
lock-up agreements, FleetBoston Robertson Stephens Inc. will consider the
stockholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Following the
expiration of the 180 day lock-up period, additional shares of common stock will
be available for sale in the public market subject to compliance with Rule 144
or Rule 701.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after this
offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 concerning that 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
FirePond.
53
<PAGE> 58
Under Rule 144(k) as currently in effect, a person who has not been one of
our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the
completion of this offering.
In general, our employees, officers, directors and consultants who
purchased shares of our common stock in connection with written compensatory
benefit plans or written contracts relating to the compensation of the
purchaser, may rely on Rule 701 to resell those shares. The Securities and
Exchange Commission has indicated that Rule 701 will apply to stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Exchange Act, along with the shares acquired upon exercises of those
options, including exercises after the date of this offering. Securities issued
in reliance on Rule 701 are restricted securities and beginning 90 days after
the date of this prospectus,:
- may be sold by persons other than affiliates subject only to the manner
of sale provisions of Rule 144; and
- may be sold by affiliates under Rule 144 without regard to its one-year
minimum holding requirement.
At November 30, 1999:
- we had reserved an aggregate of 9,337,944 shares of common stock for
issuance pursuant to the 1997 stock option plan, and options to purchase
approximately 9,225,492 shares were outstanding under the 1997 stock
option plan;
- we had reserved an aggregate of 3,000,000 shares of common stock for
issuance pursuant to the 1999 stock option and grant plan, and no options
were outstanding under the 1999 stock option and grant plan, and
- we had reserved an aggregate of 500,000 shares of common stock for
issuance pursuant to the 1999 director plan, and options to purchase
183,333 shares were outstanding under the 1999 director plan.
As soon as practicable following the offering, we intend to file a registration
statement under the Securities Act to register shares of common stock reserved
for issuance under our stock option plans. This registration statement will
automatically become effective immediately upon filing. Any shares issued upon
the exercise of stock options will be eligible for immediate public sale,
subject to the lock-up agreements noted above.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, except we
may issue, and grant options to purchase, shares of common stock under our stock
option plans.
Following the offering, some of our stockholders will have rights to
require us to register their shares of common stock under the Securities Act,
and they will have rights to participate in any future registration of
securities by us. See "Description of Capital Stock -- Registration Rights of
Certain Holders."
54
<PAGE> 59
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Dain Rauscher Incorporated, SG Cowen
Securities Corporation and E*OFFERING Corp., have each agreed with us, subject
to the terms and conditions of the underwriting agreement, to purchase from us
the number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all of the shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ----------
<S> <C>
FleetBoston Robertson Stephens Inc. ........................
Dain Rauscher Incorporated..................................
SG Cowen Securities Corporation.............................
E*OFFERING Corp. ...........................................
--------
Total..................................................
========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $ per share, of which $ may be reallowed to other
dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
reduction in this price will change the amount of proceeds to be received by us
as indicated on the cover page of this prospectus.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed 5% of the total number of shares offered.
Over-Allotment Option. We and one of our stockholders have granted to the
underwriters an option, exercisable during the 30-day period after the date of
this prospectus, to purchase up to 750,000 additional shares of common stock at
the same price per share as we will receive for the 5,000,000 shares that the
underwriters have agreed to purchase. If the underwriters exercise the option in
full, we will sell 666,666 additional shares and the selling stockholder will
sell 83,334 additional shares. If the underwriters exercise this option only in
part, the option shares will be sold first by the selling stockholder, and we
will sell only if, and to the extent, the underwriters exercise the option to
purchase more than 83,334 shares. To the extent that the underwriters exercise
this option, each of the underwriters will have a commitment to purchase
approximately the same percentage of additional shares that the number of shares
of common stock to be purchased by it shown in the above table represents as a
percentage of the 5,000,000 shares offered by this prospectus. If purchased, the
additional shares will be sold by the underwriters on the same terms as those on
which the 5,000,000 shares are being sold. We and the selling stockholder will
be obligated, under this option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of the 5,000,000 shares of
common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. This information is
presented assuming either no exercise or full exercise by the underwriters of
their over-allotment option.
<TABLE>
<CAPTION>
PER WITHOUT OVER-ALLOTMENT WITH OVER-ALLOTMENT
SHARE OPTION OPTION
-------- ---------------------- -------------------
<S> <C> <C> <C>
Assumed public offering price.............. $ $ $
Underwriting discounts and commissions..... $
Proceeds, before expenses, to us........... $
</TABLE>
The expenses of the offering payable by us are estimated at
$ . FleetBoston Robertson Stephens Inc. expects to deliver the
shares of common stock to purchasers on , 2000.
55
<PAGE> 60
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters, us and the selling stockholder against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
Lock-Up Agreements. Each of our executive officers, directors and other
stockholders of record have agreed with the representatives, for a period of 180
days after the date of this prospectus, 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 owned as of the date of this prospectus or acquired directly from
us by these holders or with respect to which they have or may acquire the power
of disposition, without the prior written consent of FleetBoston Robertson
Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. There are no agreements between the
representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the 180-day
lock-up period.
Future Sales. In addition, we have generally agreed that, during the
180-day lock-up period, we will not, without the prior written consent of
FleetBoston Robertson Stephens Inc., (a) consent to the disposition of any
shares held by the stockholders prior to the expiration of the 180-day lock-up
period or (b) issue, sell, contract to sell or otherwise dispose of, any shares
of common stock, any options or warrants to purchase any shares of common stock,
or any securities convertible into, exercisable for or exchangeable for shares
of common stock, other than our sale of shares in the offering, our issuance of
common stock upon the exercise of currently outstanding options and warrants,
and our issuance of incentive stock awards under our stock incentive plans. See
"Shares Eligible for Future Sale."
Internet Distribution. E*OFFERING Corp. is the exclusive Internet
underwriter for this offering. E*OFFERING Corp. has agreed to allocate a portion
of the shares that it purchases to E*TRADE Securities, Inc. E*OFFERING Corp. and
E*TRADE will allocate shares to their respective customers in accordance with
usual and customary industry practices. A prospectus in electronic format will
be made available on Internet sites maintained by E*OFFERING Corp. and E*TRADE.
Other than the prospectus in electronic format, the information on these
Internet sites is not part of this prospectus or the registration statement of
which the prospectus forms a part.
Directed Shares. We have requested that the underwriters reserve up to 5%
of the shares of common stock for sale at the initial public offering price to
directors, officers, employees and other persons designated by us.
Listing. The shares being sold in the offering have been approved for
quotation on the Nasdaq National Market under the symbol FIRE.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price for
the common stock offered by this prospectus will be determined through
negotiations between us and the representatives. Among the factors to be
considered in these negotiations are prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
Stabilization. The representatives have advised us that, under Regulation
M under the Securities Exchange Act of 1934, some persons participating in this
offering may engage in transactions that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. These transaction may include
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, as described below:
- A stabilizing bid is a bid for or the purchase of common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of
the common stock.
- A syndicate covering transaction is the bid for or the purchase of common
stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering.
56
<PAGE> 61
- A penalty bid is an arrangement permitting the representatives to reclaim
the selling concession otherwise accruing to an underwriter or syndicate
member in connection with this offering if the common stock originally
sold by that underwriter or syndicate member is purchased by the
representatives in a syndicate covering transaction and has therefore not
been effectively placed by that underwriter or syndicate member.
These transactions may be effected on the Nasdaq National Market or through
other means such as privately negotiated transactions. If commenced, these
transactions may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for FirePond by McDermott, Will & Emery, Boston, Massachusetts.
Various legal matters related to the sale of the common stock offered by this
prospectus will be passed upon for the underwriters by Hale and Dorr LLP,
Boston, Massachusetts.
EXPERTS
The consolidated balance sheets as of October 31, 1998 and 1999 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended October 31, 1999
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and is included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 for the
registration of the common stock offered by this prospectus. This prospectus,
which forms a part of the registration statement, does not contain all the
information included in the registration statement, parts of which have been
omitted as permitted by the SEC rules and regulations. For further information
about us and our common stock, you should refer to the registration statement.
Statements contained in this prospectus as to any contract or other document are
not necessarily complete. Where the contract or other document is an exhibit to
the registration statement, each statement is qualified by the provisions of
that exhibit.
The registration statement can be inspected and copied at the Securities
and Exchange Commission's following locations:
<TABLE>
<S> <C> <C>
Public Reference Room Office New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Washington, D.C. 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
Copies of all or any portion of the registration statement can be obtained from
the public reference section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the registration statement is
publicly available through the SEC's site on the Internet's World Wide Web,
located at http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC.
57
<PAGE> 62
FIREPOND, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of October 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the Fiscal Years
Ended October 31, 1997, 1998 and 1999..................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Fiscal Years Ended October 31, 1997, 1998 and
1999...................................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended October 31, 1997, 1998 and 1999..................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 63
After the two-for-three stock split discussed in Note 9(b) to FirePond, Inc.'s
consolidated financial statements is effected, we expect to be in a position to
render the following audit report.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 21, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
FirePond, Inc.:
We have audited the accompanying consolidated balance sheets of FirePond,
Inc. (a Minnesota corporation) and subsidiaries as of October 31, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended October
31, 1999. These consolidated financial statements are the responsibility of the
Company's 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 consolidated financial position of
FirePond, Inc. and subsidiaries as of October 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1999, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
December 10, 1999
F-2
<PAGE> 64
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31, 1999
OCTOBER 31, ----------------
-------------------- PRO FORMA
1998 1999 (NOTE 2(b))
-------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,324 $ 2,120 $ 2,120
Accounts receivable, net of allowance for doubtful
accounts of $290 and $410 in 1998 and 1999,
respectively............................................ 6,214 9,910 9,910
Unbilled services......................................... 845 1,191 1,191
Prepaid expenses and other current assets................. 405 1,265 1,265
-------- -------- ---------
9,788 14,486 14,486
Property and equipment, net................................. 8,443 6,048 6,048
Restricted cash............................................. -- 550 550
Other assets................................................ 378 576 576
-------- -------- ---------
$ 18,609 $ 21,660 $ 21,660
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit............................................ -- $ 6,740 $ 6,740
Current portion of long-term debt......................... 4,769 1,313 1,313
Accounts payable.......................................... 1,832 3,833 3,833
Accrued liabilities....................................... 5,413 6,300 6,300
Deferred revenue.......................................... 4,614 8,280 8,280
-------- -------- ---------
16,628 26,466 26,466
Long-term debt, less current portion........................ 1,727 702 702
Restructuring accrual, less current portion................. -- 446 446
Commitments and contingencies (Note 8)
Stockholders' equity (deficit):
Preferred stock, $0.01 par value --
Authorized -- 50,000,000 shares;
Issued and outstanding -- 12,363,785 and 19,097,793
shares in 1998 and 1999, respectively, and no shares
on a pro forma basis (liquidation preference of
$71,500,000 as of October 31, 1999)................... 124 191 --
Common stock, $0.01 par value --
Authorized -- 100,000,000 shares;
Issued and outstanding -- 10,004,315 and 10,072,817
shares in 1998 and 1999, respectively, and 27,537,895
shares on a pro forma basis........................... 100 101 275
Additional paid-in capital................................ 33,745 62,380 108,147
Accumulated deficit....................................... (33,715) (62,393) (108,143)
Deferred compensation..................................... -- (5,893) (5,893)
Cumulative translation adjustment......................... -- (327) (327)
Subscription receivables.................................. -- (13) (13)
-------- -------- ---------
Total stockholders' equity (deficit).................... 254 (5,954) (5,954)
-------- -------- ---------
$ 18,609 $ 21,660 $ 21,660
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 65
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------------------
1997 1998 1999
---------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Product-related revenues:
License.............................................. $ 416 $ 1,580 $ 9,777
Services and maintenance............................. -- 6,701 8,604
-------- -------- --------
Total product-related revenues..................... 416 8,281 18,381
Custom development services............................. 26,114 22,354 15,904
-------- -------- --------
Total revenues..................................... 26,530 30,635 34,285
-------- -------- --------
Cost of revenues:
License................................................. -- 15 61
Product-related services and maintenance(1)............. -- 3,061 5,677
Custom development services............................. 31,664 9,230 10,636
-------- -------- --------
Total cost of revenues............................. 31,664 12,306 16,374
-------- -------- --------
Gross profit (loss)....................................... (5,134) 18,329 17,911
Operating expenses:
Sales and marketing(1).................................. 8,080 13,680 23,609
Research and development(1)............................. 3,634 8,199 9,641
General and administrative(1)........................... 3,188 3,516 7,084
Stock-based compensation................................ 450 672 2,597
Restructuring charge.................................... 6,712 -- 3,027
-------- -------- --------
Total operating expenses........................... 22,064 26,067 45,958
-------- -------- --------
Loss from operations...................................... (27,198) (7,738) (28,047)
Interest expense.......................................... (1,536) (616) (850)
Other income (expense), net............................... (55) 290 219
-------- -------- --------
Net loss.................................................. $(28,789) $ (8,064) $(28,678)
======== ======== ========
Net loss per share (Note 3(a)):
Basic and diluted net loss per share.................... $ (2.79) $ (0.81) $ (2.86)
======== ======== ========
Basic and diluted weighted average common shares
outstanding.......................................... 10,319 9,925 10,024
======== ======== ========
Pro forma net loss per share (unaudited) (Note 3(b)):
Pro forma net loss per share............................ $ (1.11)
========
Pro forma basic and diluted weighted average common
shares outstanding................................... 25,799
========
</TABLE>
- ---------------
(1) Excludes charge for stock-based compensation, see Note 9(g).
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 66
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ----------------------
$0.01 ADDITIONAL
PAR $0.01 PAR MEMBERSHIP PAID-IN
SHARES VALUE SHARES VALUE UNITS CAPITAL
----------- ------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996 -- Combined....... -- $ -- 10,362,870 $103 112,278 $1,365
Issuance of Series A preferred stock....... 4,188,880 42 -- -- -- 9,321
Issuance of warrants to purchase Series B
preferred stock.......................... -- -- -- -- -- 1
Issuance of Series C preferred stock....... 570,342 6 -- -- -- 1,494
Issuance of Series D preferred stock....... 100,000 1 -- -- -- 9,988
Issuance of common stock................... -- -- 69,167 1 -- 149
Repurchase and retirement of common
stock.................................... -- -- (172,633) (2) -- (146)
Elimination of subsidiaries, net of
issuances................................ -- -- (353,617) (3) (112,278) 3
Payments by stockholders................... -- -- -- -- -- --
Exchange of stockholder receivable for
consulting services...................... -- -- -- -- -- --
Distributions to stockholders.............. -- -- -- -- -- --
Stock-based compensation expense........... -- -- -- -- -- 600
Net loss................................... -- -- -- -- -- --
Comprehensive loss for the year ended
October 31, 1997.........................
----------- ----- ---------- ---- -------- ------
<CAPTION>
RETAINED TOTAL
EARNINGS CUMULATIVE STOCKHOLDERS'
(ACCUMULATED DEFERRED TRANSLATION SUBSCRIPTION EQUITY
DEFICIT) COMPENSATION ADJUSTMENT RECEIVABLES (DEFICIT)
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1996 -- Combined....... $ 3,305 $ -- $ -- $(573) $ 4,200
Issuance of Series A preferred stock....... -- -- -- -- 9,363
Issuance of warrants to purchase Series B
preferred stock.......................... -- -- -- -- 1
Issuance of Series C preferred stock....... -- -- -- -- 1,500
Issuance of Series D preferred stock....... -- -- -- -- 9,989
Issuance of common stock................... -- -- -- -- 150
Repurchase and retirement of common
stock.................................... -- -- -- -- (148)
Elimination of subsidiaries, net of
issuances................................ -- -- -- -- --
Payments by stockholders................... -- -- -- 361 361
Exchange of stockholder receivable for
consulting services...................... -- -- -- 200 200
Distributions to stockholders.............. (167) -- -- -- (167)
Stock-based compensation expense........... -- -- -- -- 600
Net loss................................... (28,789) -- -- -- (28,789)
Comprehensive loss for the year ended
October 31, 1997.........................
-------- ----- ----- ----- --------
<CAPTION>
COMPREHENSIVE
INCOME (LOSS)
-------------
<S> <C>
Balance, October 31, 1996 -- Combined.......
Issuance of Series A preferred stock.......
Issuance of warrants to purchase Series B
preferred stock..........................
Issuance of Series C preferred stock.......
Issuance of Series D preferred stock.......
Issuance of common stock...................
Repurchase and retirement of common
stock....................................
Elimination of subsidiaries, net of
issuances................................
Payments by stockholders...................
Exchange of stockholder receivable for
consulting services......................
Distributions to stockholders..............
Stock-based compensation expense...........
Net loss................................... $(28,789)
--------
Comprehensive loss for the year ended
October 31, 1997......................... $(28,789)
========
</TABLE>
F-5
<PAGE> 67
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ----------------------
$0.01 ADDITIONAL
PAR $0.01 PAR MEMBERSHIP PAID-IN
SHARES VALUE SHARES VALUE UNITS CAPITAL
----------- ------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1997 -- Consolidated... 4,859,222 49 9,905,787 99 -- 22,775
Exercise of common stock options........... -- -- 20,067 -- -- 79
Issuance of common stock................... -- -- 86,061 1 -- 339
Repurchase and retirement of common
stock.................................... -- -- (7,600) -- -- (30)
Stock-based compensation expense........... -- -- -- -- -- 672
Series D preferred stock exchanged for
Series E preferred stock................. 3,702,281 37 -- -- -- (37)
Issuance of Series E preferred stock....... 3,802,282 38 -- -- -- 9,947
Payments by stockholders................... -- -- -- -- -- --
Net loss................................... -- -- -- -- -- --
Comprehensive loss for the year ended
October 31, 1998.........................
----------- ----- ---------- ---- -------- --------
Balance, October 31, 1998 -- Consolidated... 12,363,785 124 10,004,315 100 -- 33,745
Exercise of common stock options........... -- -- 35,169 -- -- 139
Issuance of common stock................... -- -- 33,333 1 -- 278
Issuance of warrants to purchase common
stock to a customer...................... -- -- -- -- -- 106
Issuance of Series F preferred stock....... 6,734,008 67 -- -- -- 19,774
Issuance of warrants to purchase Series F
preferred stock.......................... -- -- -- -- -- 1
Cost of exchanging Series E for Series G
preferred stock.......................... -- -- -- -- -- (23)
Deferred stock-based compensation.......... -- -- -- -- -- 8,360
Stock-based compensation expense........... -- -- -- -- -- --
Cumulative translation adjustment.......... -- -- -- -- -- --
Net loss................................... -- -- -- -- -- --
Comprehensive loss for the year ended
October 31, 1999.........................
----------- ----- ---------- ---- -------- --------
Balance, October 31, 1999 --Consolidated... 19,097,793 191 10,072,817 101 -- 62,380
Conversion of preferred stock into common
stock (unaudited)........................ (19,097,793) (191) 13,403,396 134 -- 57
Issuance of common stock in settlement of
priority payments (unaudited)............ -- -- 3,812,524 38 -- 45,712
Exercise of Series F preferred stock
warrant and conversion into common stock
(unaudited).............................. -- -- 249,158 2 -- (2)
----------- ----- ---------- ---- -------- --------
Pro forma balance, October 31, 1999
(unaudited).............................. -- $ -- 27,537,895 $275 -- $108,147
=========== ===== ========== ==== ======== ========
<CAPTION>
RETAINED TOTAL
EARNINGS CUMULATIVE STOCKHOLDERS'
(ACCUMULATED DEFERRED TRANSLATION SUBSCRIPTION EQUITY
DEFICIT) COMPENSATION ADJUSTMENT RECEIVABLES (DEFICIT)
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1997 -- Consolidated... (25,651) -- -- (12) (2,740)
Exercise of common stock options........... -- -- -- -- 79
Issuance of common stock................... -- -- -- -- 340
Repurchase and retirement of common
stock.................................... -- -- -- -- (30)
Stock-based compensation expense........... -- -- -- -- 672
Series D preferred stock exchanged for
Series E preferred stock................. -- -- -- -- --
Issuance of Series E preferred stock....... -- -- -- -- 9,985
Payments by stockholders................... -- -- -- 12 12
Net loss................................... (8,064) -- -- -- (8,064)
Comprehensive loss for the year ended
October 31, 1998.........................
--------- ------- ----- ----- --------
Balance, October 31, 1998 -- Consolidated... (33,715) -- -- -- 254
Exercise of common stock options........... -- -- -- (13) 126
Issuance of common stock................... -- (130) -- -- 149
Issuance of warrants to purchase common
stock to a customer...................... -- -- -- -- 106
Issuance of Series F preferred stock....... -- -- -- -- 19,841
Issuance of warrants to purchase Series F
preferred stock.......................... -- -- -- -- 1
Cost of exchanging Series E for Series G
preferred stock.......................... -- -- -- -- (23)
Deferred stock-based compensation.......... -- (8,360) -- -- --
Stock-based compensation expense........... -- 2,597 -- -- 2,597
Cumulative translation adjustment.......... -- -- (327) -- (327)
Net loss................................... (28,678) -- -- -- (28,678)
Comprehensive loss for the year ended
October 31, 1999.........................
--------- ------- ----- ----- --------
Balance, October 31, 1999 --Consolidated... (62,393) (5,893) (327) (13) (5,954)
Conversion of preferred stock into common
stock (unaudited)........................ -- -- -- -- --
Issuance of common stock in settlement of
priority payments (unaudited)............ (45,750) -- -- -- --
Exercise of Series F preferred stock
warrant and conversion into common stock
(unaudited).............................. -- -- -- -- --
--------- ------- ----- ----- --------
Pro forma balance, October 31, 1999
(unaudited).............................. $(108,143) $(5,893) $(327) $ (13) $ (5,954)
========= ======= ===== ===== ========
<CAPTION>
COMPREHENSIVE
INCOME (LOSS)
-------------
<S> <C>
Balance, October 31, 1997 -- Consolidated...
Exercise of common stock options...........
Issuance of common stock...................
Repurchase and retirement of common
stock....................................
Stock-based compensation expense...........
Series D preferred stock exchanged for
Series E preferred stock.................
Issuance of Series E preferred stock.......
Payments by stockholders...................
Net loss................................... $ (8,064)
--------
Comprehensive loss for the year ended
October 31, 1998......................... $ (8,064)
========
Balance, October 31, 1998 -- Consolidated...
Exercise of common stock options...........
Issuance of common stock...................
Issuance of warrants to purchase common
stock to a customer......................
Issuance of Series F preferred stock.......
Issuance of warrants to purchase Series F
preferred stock..........................
Cost of exchanging Series E for Series G
preferred stock..........................
Deferred stock-based compensation..........
Stock-based compensation expense...........
Cumulative translation adjustment.......... $ (327)
Net loss................................... (28,678)
--------
Comprehensive loss for the year ended
October 31, 1999......................... $(29,005)
========
Balance, October 31, 1999 --Consolidated...
Conversion of preferred stock into common
stock (unaudited)........................
Issuance of common stock in settlement of
priority payments (unaudited)............
Exercise of Series F preferred stock
warrant and conversion into common stock
(unaudited)..............................
Pro forma balance, October 31, 1999
(unaudited)..............................
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 68
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(28,789) $ (8,064) $(28,678)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash restructuring charges........................... 8,475 -- 1,532
Issuance of warrants to a customer...................... -- -- 106
Exchange of stockholder receivable for consulting
services............................................... 200 -- --
Stock-based compensation expense........................ 450 672 2,597
Loss on disposal of property and equipment.............. 557 259 49
Depreciation and amortization........................... 3,241 2,105 2,674
Changes in assets and liabilities:
Accounts receivables.................................. (171) (1,699) (4,024)
Unbilled services..................................... 2,339 (51) (346)
Prepaid expenses and other current assets............. (236) (57) (860)
Accounts payable...................................... (352) 138 2,001
Accrued liabilities................................... 8,599 (4,110) 1,334
Deferred revenue...................................... 1,982 2,639 3,666
Billings in excess of costs........................... 717 (2,305) --
-------- -------- --------
Net cash used in operating activities.............. (2,988) (10,473) (19,949)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (3,606) (1,470) (3,916)
Proceeds from sale of property and equipment.............. -- -- 2,557
Additions to trademarks and patents....................... (101) -- --
Additions to capitalized computer software development
costs................................................... (2,648) -- --
Increase in restricted cash............................... -- -- (550)
Increase in investments and deposits...................... (235) (16) (236)
-------- -------- --------
Net cash used in investing activities.............. (6,590) (1,486) (2,145)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) on line of credit............... (877) (2,790) 6,740
Payments on long-term debt................................ (4,248) (3,460) (4,959)
Proceeds from long-term debt.............................. 3,351 -- --
Proceeds from sale of preferred stock and warrants........ 20,853 9,985 19,842
Proceeds from common stock issuance....................... 150 419 288
Costs associated with exchange of preferred stock......... -- -- (23)
Distributions to stockholders............................. (167) -- --
Common stock repurchased.................................. (148) (30) --
Decrease (increase) in subscription receivables........... 361 12 (13)
-------- -------- --------
Net cash provided by financing activities.......... 19,275 4,136 21,875
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... -- -- 15
Net increase (decrease) in cash and cash equivalents........ 9,697 (7,823) (204)
Cash and cash equivalents, beginning of year................ 450 10,147 2,324
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 10,147 $ 2,324 $ 2,120
======== ======== ========
Supplemental cash flow information:
Interest paid............................................. $ 1,552 $ 777 $ 695
======== ======== ========
Noncash investing and financing activities:
Series D preferred stock exchanged for Series E preferred
stock................................................... $ -- $ 9,989 $ --
======== ======== ========
Series E preferred stock exchanged for Series G preferred
stock................................................... -- -- 19,974
======== ======== ========
Equipment acquired under capital lease obligations........ -- 179 477
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 69
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
FirePond, Inc. and its wholly owned subsidiaries, collectively known as the
Company, is a leading provider of integrated e-business sales and marketing
solutions that enable companies to optimize their customer relationships and
maximize the effectiveness of their Internet-based and traditional sales
channels. The Company provides software and services that allow its customers to
merge their e-commerce selling, customer relationship management, and channel
management strategies on a single, Internet-based platform.
(a) Liquidity
On November 12, 1999, the Company issued subordinated notes payable
totaling $6,000,000 to an outside investor and certain existing stockholders of
the Company. The subordinated notes bear interest at 12.0% per annum and are due
upon the earlier of the closing of the Company's proposed initial public
offering or November 11, 2000. If an initial public offering is not completed by
May 11, 2000 or in the event of a sale transaction, as defined, prior to May 11,
2000, the subordinated notes, including accrued interest, are convertible into
shares of the Company's preferred stock having rights equivalent of FirePond
Inc.'s existing Series F Preferred Stock at a rate of $2.97 per share. The
Company also issued to the holders of the subordinated notes payable warrants to
purchase an aggregate of 360,000 shares of common stock at an exercise price of
$5.25 per share. The estimated fair value of these warrants totaling $2,789,000
was determined using the Black-Scholes valuation model with the following
variables: risk-free interest rate of 6.0%, dividend yield rate of 0%, term of
five years, and volatility of 80%. The Company has allocated the proceeds from
the subordinated notes payable of $6,000,000 in proportion to the relative fair
values of both the warrants and the subordinated notes payable. As a result, the
Company will record the warrants as a discount totaling $1,904,000 against the
carrying value of the subordinated notes payable. The discount will be amortized
to interest expense over the term of the subordinated notes payable.
During September 1999, the Company modified its line of credit to provide
for additional borrowing availability (see Note 6).
The Company continues to incur losses from operations and had an
accumulated deficit and a working capital deficit of $62,393,000 and $11,980,000
at October 31, 1999, respectively. As a result of its significant research and
development, customer support, and selling and marketing efforts, the Company
has required substantial working capital to fund its operations. To date, the
Company has financed its operations principally through its equity offerings.
Management believes that under its current business plan, funds available from
borrowing arrangements are sufficient to fund its operations and capital
requirements through at least October 31, 2000. Any substantial inability to
achieve the current business plan could have a material adverse impact on the
Company's financial position, liquidity, or results of operations and may
require the Company to reduce expenditures to enable it to continue operations
through October 2000.
(b) Change in Control
In May 1997, investment funds associated with General Atlantic Partners
(GAP) acquired a majority interest in the Company through acquisition of shares
from the Company and shares directly from certain stockholders. In addition, the
Company granted warrants to purchase preferred stock from the Company and
options to purchase common stock from certain stockholders to these investment
funds. In October 1997, April 1998 and February 1999, these investment funds
acquired an additional equity interest in the Company through the purchase of
preferred stock (see Note 9).
F-8
<PAGE> 70
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation and Presentation
The financial statements include the accounts of FirePond, Inc. and its
subsidiaries. In connection with the GAP investment in May 1997, FirePond, Inc.
acquired all of the outstanding stock of the subsidiaries in a stock-for-stock
exchange. Prior to this event, the entities were under common control. All
periods presented are reported on a consolidated basis. All significant
intercompany balances and transactions have been eliminated in the accompanying
combined and consolidated financial statements.
(b) Unaudited Pro Forma Presentation
The unaudited pro forma balance sheet as of October 31, 1999 and the pro
forma net loss per share for the fiscal year ended October 31, 1999 reflect the
automatic exercise of warrants to purchase 673,401 shares of Series F preferred
stock and the subsequent automatic conversion of all outstanding shares of
convertible preferred stock into an aggregate of 12,981,021 shares of common
stock, which will occur upon the closing of the proposed initial public offering
of the Company's common stock. This reflects the settlement of priority payments
totaling $45,750,000 due to the Series A, Series C and Series G preferred
stockholders and certain common stockholders through the issuance of 3,812,524
shares of common stock, based on the mid-point of the filing range for the
proposed initial public offering (see Note 9(d)). In addition, the Series F
preferred stockholders will receive an additional 671,533 shares of common stock
upon the conversion of their preferred stock based upon their pro rata
percentage of the priority payments made to the Series A, Series C and Series G
preferred stockholders and certain common stockholders (see Note 9(d)).
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(d) Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by
SOP 98-4. Additionally, the American Institute of Certified Public Accountants
recently issued SOP 98-9, which provides certain amendments to SOP 97-2, which
is effective for transactions entered into beginning January 1, 2000. This
pronouncement is not expected to materially impact the Company's revenue
recognition practices.
The Company generates revenues from two primary sources: (1)
product-related license and service revenues and (2) custom development service
revenues.
Product-Related Revenues
Product-related license revenues are generated from licensing the rights to
the perpetual use of the Company's software products. Product-related service
revenues are generated from sales of maintenance, consulting and training
services performed for customers that license the Company's products.
Revenues from software license agreements are generally recognized over the
software implementation period if persuasive evidence of an arrangement exists,
collection is probable, the fee is fixed or determinable, and vendor-specific
objective evidence exists to allocate the total fee to all elements of the
arrangement. The Company has concluded that the implementation services are
essential to the customer's use of the software
F-9
<PAGE> 71
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in arrangements where implementation services are provided. As such, the Company
recognizes revenue for these arrangements following the percentage-of-completion
method over the implementation period. Percentage of completion is measured by
the percentage of implementation hours incurred to date to estimated total
implementation hours. This method is used because management has determined that
past experience has shown expended hours to be the best measure of progress on
these engagements.
Vendor-specific objective evidence is based on the price charged when an
element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple-element arrangements could consist of software
products, upgrades, enhancements, maintenance, consulting and training services.
Revenues from maintenance services are recognized ratably over the term of
the contract, typically one year. Consulting revenues are primarily related to
implementation services performed on a time-and-materials basis under separate
service arrangements. Revenues from consulting and training services are
recognized as services are performed.
Deferred revenue comprises amounts billed or collected by the Company prior
to satisfying the above revenue recognition criteria and relate principally to
product-related license fees, maintenance service contracts, and consulting and
training services.
Custom Development Services Revenues
The Company also performs custom development services under fixed-price
contracts, for which revenue is recognized in accordance with the
percentage-of-completion method. These contracts typically range in terms of one
to five years. Percentage of completion is measured by the percentage of
implementation hours incurred to date to estimated total implementation hours.
This method is used because management considers expended hours to be the best
measure of progress on these engagements. When the current estimates of total
contract revenue and contract cost indicate a loss, a provision for the entire
loss on the contract is recorded (see Note 12).
Unbilled services represent amounts due to the Company under custom
development service agreements for work performed that had not been billed as of
the period-end. Billings in excess of costs represent the amounts billed under
custom development service agreements in advance of the performance of the work
as of the period-end. The Company bills customers under custom development
contracts upon achieving performance milestones or billing dates, as specified
in the contracts.
(e) Cost of Revenues
Cost of licenses includes the cost of media, product packaging,
documentation and other production costs.
Cost of product-related services and maintenance and cost of custom
development services revenues consist primarily of salaries, related costs for
development, consulting, training and customer support personnel, including cost
of services provided by third-party consultants engaged by the Company and the
amortization of capitalized software development costs (see Note 2(i)).
(f) Cash and Cash Equivalents
The Company accounts for cash equivalents in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Cash equivalents are short-term,
highly liquid investments with original maturity dates of three months or less.
F-10
<PAGE> 72
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash equivalents are carried at cost, which approximates fair market value. Cash
equivalents at October 31, 1998 and 1999 consist of interest-bearing bank
deposits.
(g) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
The Company provides for depreciation of its property and equipment using the
accelerated and straight-line methods over their estimated useful lives.
Property and equipment, at cost, and their estimated useful lives are as
follows:
<TABLE>
<CAPTION>
OCTOBER 31,
ESTIMATED ------------------
USEFUL LIFE 1998 1999
------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Computer equipment...................... 2-5 years $ 7,488 $ 7,251
Furniture and fixtures.................. 7 years 905 1,791
Leasehold improvements.................. Life of lease -- 541
Building................................ 30 years 3,624 --
------- -------
12,017 9,583
Accumulated depreciation................ (3,574) (3,535)
------- -------
$ 8,443 $ 6,048
======= =======
</TABLE>
Depreciation expense for fiscal 1997, fiscal 1998 and fiscal 1999 was
$1,748,000, $2,081,000 and $2,590,000, respectively.
(h) Other Assets
Other assets consist primarily of patents, which are being amortized using
the straight-line method over an estimated benefit period of ten years.
Accumulated amortization as of October 31, 1998 and 1999 totaled $40,000 and
$64,000, respectively.
(i) Computer Software Development Costs and Research and Development Expenses
During fiscal 1996 and fiscal 1997, the Company capitalized software
development costs in accordance with SFAS No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed, and amortized these
costs over a period of 18 to 36 months. During fiscal 1997, in connection with
the Company's change in strategic focus from providing custom development
services to providing more standardized software solutions, the Company reviewed
the software development costs capitalized to date, which principally related to
components of custom development services, and determined that these costs were
not realizable. Accordingly, the Company wrote off all of its capitalized
software development costs of $4,491,000 as a charge to cost of custom
development services revenues in fiscal 1997.
The Company continues to incur software development costs associated with
its licensed products. In fiscal 1997, the Company determined that technological
feasibility occurs late in the development cycle and close to general release of
the products. The development costs incurred between the time technological
feasibility is established and general release of the product are not material;
accordingly, the Company expenses these costs as incurred.
Amortization of capitalized software development costs charged to cost of
custom development services prior to the write-off discussed above was
$1,080,000 for fiscal 1997.
F-11
<PAGE> 73
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Impairment of Long-Lived Assets
The Company evaluates the carrying value 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's evaluation considers
nonfinancial data such as changes in the operating environment and business
strategy, competitive information, market trends and operating performance.
Based on this evaluation, the Company recorded a charge of approximately
$3,683,000 related to assets that were impaired as a result of the plan for
restructuring during fiscal 1997 (see Note 5(a)). In addition, the Company
recorded an asset impairment charge of $1,532,000 during fiscal 1999 in
connection with the relocation of the Company's corporate headquarters from
Minnesota to Massachusetts (see Note 5(b)).
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet risks and credit
risk concentrations. The Company has no significant off-balance-sheet risks or
credit risk concentrations. Financial instruments that potentially subject the
Company to concentrations of credit risk are principally cash equivalents,
accounts receivable and unbilled services. The Company maintains its cash and
cash equivalents with established financial institutions. Concentration of
credit risk with respect to accounts receivable and unbilled services is limited
to certain customers to whom the Company makes substantial sales. The Company
performs periodic credit evaluations of its customers and has recorded
allowances for estimated losses.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenue and/or total accounts receivable and
their aggregate percentage of the Company's total revenues and accounts
receivable.
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
REVENUE -----------------------
----------------------- PERCENT OF
PERCENT OF TOTAL
NUMBER OF TOTAL NUMBER OF ACCOUNTS
CUSTOMERS REVENUE CUSTOMERS RECEIVABLE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Fiscal year ended:
October 31, 1997........................ 1 28% 3 42%
October 31, 1998...................... 4 54 3 48
October 31, 1999...................... 2 38 3 42
</TABLE>
(l) Financial Instruments
The estimated fair values of the Company's financial instruments, which
include cash equivalents, accounts receivable, unbilled services, restricted
cash, line of credit and long-term debt, approximate their carrying value.
(m) Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of employee and director stock options or warrants
to be included in the statement of operations or disclosed in the notes to
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees and directors under the
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and elect the disclosure-only alternative under SFAS No. 123 (see
Note 9(f)). The Company accounts for options and warrants granted to
non-employees using the fair-value method prescribed by SFAS No. 123 and
Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments that
are Issued to other than Employees for Acquiring, or in Conjunction with
Selling, Goods, or Services.
F-12
<PAGE> 74
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(n) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS No. 133 is not expected to have a material impact on the Company's
consolidated financial statements.
(o) Foreign Currency Translation
Assets and liabilities of the foreign subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation. In accordance with
SFAS No. 52, assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at current exchange rates, and income and expense
items are translated at average rates of exchange prevailing during the year.
Gains and losses arising from translation are accumulated as a separate
component of stockholders' equity (deficit). Gains and losses arising from
transactions denominated in foreign currencies are included in other income and
were not material for the periods presented.
(p) Comprehensive Income (Loss)
As of November 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130, requires disclosure of all components of
comprehensive income (loss) on an annual and interim basis. Comprehensive income
(loss) is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources.
3. NET LOSS PER SHARE
(a) Net Loss Per Share
Net loss per share is computed in accordance with SFAS No. 128, Earnings
per Share. SFAS No. 128 requires companies to report both basic loss per share,
which is based on the weighted average number of common shares outstanding, and
diluted loss per share, which is based on the weighted average number of common
shares outstanding and the weighted average dilutive potential common shares
outstanding using the treasury stock method. As a result of the losses incurred
by the Company for fiscal 1997, fiscal 1998 and fiscal 1999, all potential
common shares were antidilutive and were excluded from the diluted net loss per
share calculations.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, common stock and convertible preferred stock issued or granted for
nominal consideration prior to the anticipated effective date of a company's
initial public offering must be included in the calculation of basic and diluted
net loss per share as if they had been outstanding for all periods presented.
The Company has determined that there were no issuances of common stock and
convertible preferred stock for nominal consideration.
The following table summarizes securities outstanding as of each period-end
which were not included in the calculation of diluted net loss per share since
their inclusion would be antidilutive.
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1997 1998 1999
------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock options and warrants......................... 1,683 5,089 7,952
====== ===== ======
Convertible preferred stock............................... 4,859 12,364 19,098
====== ===== ======
Preferred stock warrants (Note 9(d))...................... 190 190 864
====== ===== ======
</TABLE>
F-13
<PAGE> 75
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of preferred stock that will convert upon the
completion of the Company's proposed initial public offering (using the
if-converted method) from the original date of issuance.
The following table reflects the reconciliation of the shares used in the
computation of pro forma loss per share.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
OCTOBER 31,
1999
-----------------
(IN THOUSANDS)
<S> <C>
Pro forma basic and diluted:
Weighted average common shares outstanding used in
computing basic and diluted net loss per share......... 10,024
Weighted average common shares issuable upon the
conversion of preferred stock.......................... 11,792
Weighted average common shares issuable upon settlement of
the priority payments.................................. 3,812
Weighted average common shares issuable upon exercise of
Series F preferred stock warrants...................... 171
------
Weighted average common shares outstanding used in
computing pro forma basic and diluted net loss per
share.................................................. 25,799
======
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Loss contracts reserve...................................... $1,600 $1,100
Current portion of restructuring accrual.................... 304 799
Payroll and related costs................................... 1,101 1,740
Other....................................................... 2,408 2,661
------ ------
$5,413 $6,300
====== ======
</TABLE>
5. RESTRUCTURING CHARGE
(a) Change in Strategic Focus
During fiscal 1997, the Company undertook a plan to change the strategic
focus of the Company from a custom development services company to a software
product company providing more standardized solutions. In addition, the Company
decided to exit certain business activities, change its management team and
reduce its workforce to be in line with its newly defined business strategy. In
connection with this plan, the Company incurred significant charges associated
with employee severance costs, costs to exit certain business activities and
asset impairments (see Note 5(c)). The costs to exit business activities are
related to the Company's investment in a virtual reality lab. These costs
included $813,000 in specialized equipment that was abandoned and $425,000 in
equity investments in a privately-held company assisting with the project that
was deemed worthless and was written off. The Company does not anticipate any
future benefit from the costs incurred.
F-14
<PAGE> 76
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the restructuring charge were as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Employee severance costs.................................... $ 2,729
Costs to exit business activities (including asset
impairments)................................................ 1,238
Impairment of property and equipment........................ 2,595
Other costs................................................. 150
-------
$ 6,712
=======
</TABLE>
The employee severance cost component of the restructuring charge was
related to reductions in headcount. In accordance with the plan, the Company
terminated seven sales and marketing, 17 general and administrative and 27
software development personnel.
(b) Corporate Relocation
During fiscal 1999, the Company undertook a plan to relocate its corporate
offices from Mankato, Minnesota to Waltham, Massachusetts. In connection with
this plan, the Company incurred charges associated with asset impairments, idle
lease space and employee severance costs (see Note 5(c)). The Company does not
anticipate any future benefit from the costs incurred.
The significant components of the restructuring charge were as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Impairment of property and equipment........................ $1,532
Idle lease space............................................ 993
Employee severance costs.................................... 502
------
$3,027
======
</TABLE>
The Company is subject to a ten-year lease arrangement on its Mankato,
Minnesota facility that permits (1) a 50% reduction in the monthly lease
obligation by providing notice one year in advance, and (2) early termination of
the lease agreement at the end of the fifth year by giving notice prior to the
fourth anniversary of the lease agreement. The Company has determined that
approximately 72% of the office space in Mankato was rendered idle as part of
the relocation plan. The idle lease space cost was determined in anticipation of
the Company exercising its option to reduce the lease obligation within one year
and terminating the remaining lease obligation at the end of the fifth year.
Accordingly, the present value of the portion of future lease payments for which
the Company does not anticipate any future benefit has been accrued as of
October 31, 1999. As of October 31, 1999, approximately $367,000 of the
restructuring accrual relates to amounts reserved for idle lease space costs
extending beyond 12 months and, accordingly, has been classified as a long-term
obligation in the accompanying consolidated balance sheet.
The employee severance cost component of the restructuring charge was
related to reductions in headcount. In accordance with the plan, the Company
terminated 12 general and administrative personnel. In October 1999, the
Company's chairman, who was located in the Mankato office, resigned. As part of
his resignation, the Company agreed to pay severance costs of $402,000. These
costs have been included as part of the severance component of the restructuring
reserve.
F-15
<PAGE> 77
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Restructuring Reserve
A summary of the restructuring reserve is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
---------------------------------
1997 1998 1999
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Restructuring reserve:
Balance, beginning of period...................... $ -- $ 1,583 $ 304
Provision...................................... 6,712 -- 3,027
Asset impairment write-offs.................... (3,833) -- (1,532)
Severance and other payments................... (1,296) (1,279) (552)
------- ------- -------
Balance, end of period............................ $ 1,583 $ 304 $ 1,247
======= ======= =======
</TABLE>
The Company estimates that $799,000, $208,000, $109,000, $118,000, and
$13,000, of the restructuring accrual will be paid in fiscal 2000, 2001, 2002,
2003, and 2004, respectively.
6. FINANCINGS
Effective September 29, 1999, the Company amended its line of credit
agreement with a financial institution to increase the total commitment to
$7,000,000. This additional commitment was reached through the conversion of
$2,000,000 outstanding borrowings on the existing line of credit to a term loan
and establishing a new line of credit. Borrowings under the new line of credit
will be limited to the lesser of $5,000,000 or 80% of qualifying accounts
receivable, as defined. The amended line of credit and term loan matures on
October 31, 2000 and is subject to automatic renewal for successive additional
one-year terms unless cancelled by either party. Interest on the original line
and the amended line is charged at the prime rate (8.25% at October 31, 1999)
plus 2.0%, limited to a minimum of 8.0% per annum, and is payable monthly. The
Company also pays a fee of 0.5% per year on the unused line of credit.
Substantially all of the Company's tangible and intangible assets are pledged as
collateral against the line of credit. At October 31, 1999, $4,740,000 was
outstanding under the line and the Company had approximately $37,000 available
for future borrowings.
Long-term debt obligations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Mortgage notes payable in varying monthly installments,
including interest at 8.0% to 9.0%........................ $2,618 $ --
Notes payable in varying monthly installments, including
interest at 6.0% to 11.0%, through June 2001................ 3,708 1,644
Capital lease obligations payable in varying monthly
installments, including interest at 8.0% to 11.0%, through
August 2004............................................... 170 371
------ ------
6,496 2,015
Less -- current portion..................................... 4,769 1,313
------ ------
$1,727 $ 702
====== ======
</TABLE>
The mortgage notes were due to a municipality, secured by the building,
personally guaranteed by a stockholder of the Company and became due upon a
change in control which occurred in May 1997. On December 2, 1998, the Company
sold the building which secured the property and repaid the notes (see Note 8).
F-16
<PAGE> 78
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled annual maturities of long-term debt are as follows as of October
31, 1999:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
FOR THE FISCAL YEAR ENDED OCTOBER 31,
2000.................................................... $1,556
2001.................................................. 606
2002.................................................. 48
2003.................................................. 34
2004.................................................. 28
------
2,272
Less -- amounts representing interest................... 257
------
$2,015
======
</TABLE>
7. INCOME TAXES
Prior to May 1997, the Company had elected to be treated as an S
corporation under the Internal Revenue Code. As an S corporation, federal and
certain state income tax consequences of the Company were passed through to the
individual stockholders and dividend distributions were made to the stockholders
for payments of their individual taxes related to the Company's income.
Accordingly, no provision (benefit) for income taxes has been provided in fiscal
1996. In May 1997, the Company was reorganized from an S corporation to a C
corporation and, as such, taxes are payable at the corporate level.
Since conversion to a taxable corporation, income taxes are accounted for
in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No.
109, deferred income tax liabilities and assets are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities using currently enacted tax rates.
The income tax provisions, assuming that the Company was subject to income
taxes as a C corporation for the entirety of each period, are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal.................................................... $(9,788) $(1,032) $(5,882)
State taxes, net of federal benefits....................... (1,862) (156) (1,053)
Foreign.................................................... -- -- (3,982)
Other...................................................... 60 216 1,099
Net operating loss not benefited........................... 11,590 972 9,818
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-17
<PAGE> 79
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes as of October 31, 1998 and 1999 relate to the
following temporary differences:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss and credit carryforwards................. $ 7,947 $ 17,765
Nondeductible reserves and accruals......................... 1,398 2,722
Depreciation and amortization............................... (147) (1,365)
Valuation allowance......................................... (9,198) (19,122)
------- --------
$ -- $ --
======= ========
</TABLE>
As of October 31, 1999, the Company has available a net operating loss
carryforward of approximately $36,000,000 to reduce future federal and state
income taxes, if any. This carryforward expires beginning in 2012 and may be
subject to review and possible adjustment by the Internal Revenue Service. The
Tax Reform Act of 1986 contains provisions that may limit the amount of net
operating loss carryforwards that the Company may utilize in any one year in the
event of certain cumulative changes in ownership over a three-year period in
excess of 50%, as defined. The Company has completed several equity financing
transactions since it became a C corporation. The Company has not assessed
whether these equity transactions have resulted in a cumulative ownership change
in excess of 50%. The Company's wholly owned foreign subsidiaries have net
operating loss carryforwards of approximately $12 million.
(8) COMMITMENTS AND CONTINGENCIES
(a) Litigation
The Company is engaged in legal proceedings incidental to the normal course
of business. Although the ultimate outcome of these matters cannot be
determined, management believes that the final disposition of these proceedings
will not have a material adverse effect on the consolidated financial position
or the results of operations of the Company.
(b) Leases
The Company leases its office space under operating leases expiring at
various dates through December 2004. Rent expense under these agreements for
fiscal 1997, fiscal 1998 and fiscal 1999 totaled approximately $406,000,
$746,000 and $2,349,000, respectively.
At October 31, 1999, the minimum future obligations under operating leases
are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
(IN THOUSANDS)
<S> <C>
FOR THE FISCAL YEAR ENDED OCTOBER 31,
2000................................................... $ 2,558
2001................................................. 2,402
2002................................................. 2,052
2003................................................. 1,935
2004................................................. 1,861
Thereafter........................................... 3,172
-------
$13,980
=======
</TABLE>
On December 2, 1998, the Company sold its office building located in
Mankato, Minnesota, for $2,700,000 and entered into an agreement to lease the
facility back over ten years. The Company recognized
F-18
<PAGE> 80
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an insignificant loss on the sale. Proceeds from the sale were used to repay the
notes payable as described in Note 6.
(c) Letter of Credit
The Company is obligated to maintain an irrevocable standby letter of
credit of approximately $550,000, which would be payable upon default of the
Company's noncancelable facility lease that was entered into in May 1999. The
letter of credit will be collateralized by cash, which has been classified as
restricted cash in the accompanying consolidated balance sheet as of October 31,
1999.
(9) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Authorized Shares
As of July 31, 1999, the Company has authorized the issuance of 100,000,000
shares of $0.01 par value common stock and 50,000,000 shares of $0.01 par value
convertible preferred stock.
(b) Recapitalization
On November 8, 1999, the Company's Board of Directors approved a
two-for-three reverse stock split of its common stock. The stock split was
effective on , 1999. All shares and per-share amounts of common
stock for all periods presented have been retroactively adjusted to reflect the
stock split. Prior to the closing of the Company's proposed initial public
offering, its certificate of incorporation will be amended and restated to
change its authorized capital stock to shares of $0.01 par value
common stock and shares of $0.01 par value preferred stock.
(c) Reserved Shares
As of October 31, 1999, the Company has reserved the following number of
shares of common stock for the conversion of preferred stock and issuance of
stock options and warrants:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Series A Preferred Stock.................................... 2,792,587
Series B Preferred Stock.................................... 634,794
Series C Preferred Stock.................................... 380,228
Series F Preferred Stock.................................... 4,938,273
Series G Preferred Stock.................................... 5,069,709
Stock options and warrants.................................. 8,635,737
----------
22,451,328
==========
</TABLE>
In addition, the information above excludes 4,484,057 shares of common
stock that the Company expects to issue with respect to the payment of priority
payments to certain common stockholders and preferred stockholders (see Note
9(d)).
F-19
<PAGE> 81
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Preferred Stock
The following table summarizes the number of shares designated, issued and
outstanding:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Series A convertible preferred stock (Series A Preferred Stock) --
4,188,880 shares designated...................................... 4,188,880 4,188,880
Series B convertible preferred stock (Series B Preferred Stock) --
190,438 shares designated.......................................... -- --
Series C convertible preferred stock (Series C Preferred Stock) --
570,342 shares designated........................................ 570,342 570,342
Series D convertible preferred stock (Series D Preferred Stock) --
100,000 shares designated........................................ -- --
Series E convertible preferred stock (Series E Preferred Stock) --
7,604,563 shares designated...................................... 7,604,563 --
Series F convertible preferred stock (Series F Preferred Stock) --
7,407,409 shares designated...................................... -- 6,734,008
Series G convertible preferred stock (Series G Preferred Stock) --
7,604,563 shares designated...................................... -- 7,604,563
---------- ----------
12,363,785 19,097,793
========== ==========
</TABLE>
In May 1997, the Company sold 4,188,880 shares of Series A Preferred Stock
at $2.63 per share. In addition, the Company issued warrants to purchase 190,438
shares of Series B Preferred Stock at an exercise price of $19.69 per share.
In July 1997, the Company sold 570,342 shares of Series C Preferred Stock
at $2.63 per share.
In October 1997, the Company sold 100,000 shares of Series D Preferred
Stock at $100.00 per share.
In April 1998, the Company sold 3,802,282 shares of Series E Preferred
Stock at $2.63 per share. In connection with the Series E Preferred Stock
financing, the Company exchanged 100,000 outstanding shares of Series D
Preferred Stock for 3,802,281 shares of Series E Preferred Stock.
In February 1999, the Company sold 6,734,008 shares of Series F Preferred
Stock at $2.97 per share. In addition, the Company issued warrants to purchase
673,401 shares of Series F Preferred Stock at an exercise price of $3.56 per
share. In connection with the Series F Preferred Stock financing, the Company
exchanged 7,604,563 outstanding shares of Series E Preferred Stock for 7,604,563
shares of Series G Preferred Stock.
The rights and preferences of Series A, Series B, Series C, Series F and
Series G Preferred Stock (collectively, the Preferred Stock) are as follows:
Conversion
Each outstanding share of Series A, Series C, Series F and Series G
Preferred Stock is convertible at the option of the holder and shall
automatically be converted into 0.67 shares of common stock upon the closing of
a qualified initial public offering of the Company's common stock, subject to
adjustments. Upon a Liquidity Event, as defined below, the conversion rate of
Series F Preferred Stock will be adjusted for additional shares equal to their
pro rata percentage of the Priority Payments, as defined below. Each share of
Series B Preferred Stock is convertible at the option of the holder into 3.33
shares of common stock, subject to adjustments.
F-20
<PAGE> 82
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends
Each outstanding share of Preferred Stock shall be entitled to dividends
when and if declared by the Company's Board of Directors.
Voting Rights
Each outstanding share of Preferred Stock is entitled to the number of
votes equal to the number of votes the share would be entitled to if converted
into common stock. Holders of Series A Preferred Stock are entitled to elect one
member to the Company's Board of Directors as long as GAP and its affiliates own
3% or greater of the number of common shares on a fully diluted basis.
Liquidation
In the event of liquidation, each share of Series A, Series B, Series C,
Series F and Series G Preferred Stock shall be entitled to be paid an amount
equal to $7.16, $19.69, $2.63, $2.97 and $2.63, respectively, per share plus all
declared and unpaid dividends prior to any payments to common stockholders. If
the amount is insufficient to pay all of the liquidation preferences, then
payments will be made to all remaining series of preferred stock based on the
relationship of the series' total liquidation value to the total of the
liquidation values of the Preferred Stock. As of October 31, 1999, the aggregate
liquidation value of all outstanding shares of preferred stock was $71,500,000.
Priority Payments
In the event of a sale of assets, a merger, or an initial public offering
(each a Liquidity Event), the holders of Series A and Series C Preferred Stock
and certain common stock shall be entitled to receive $15,000,000, $750,000 and
$10,000,000 respectively. Holders of Series G preferred stock shall be entitled
to a priority payment not to exceed $20,000,000 provided the liquidity event
does not result in a certain minimum company valuation. The Company does not
expect that the proposed initial public offering will satisfy the minimum
valuation requirements and expects to accrue the maximum priority payment
obligation of $20,000,000. The Company intends to pay the priority payments to
holders of Series A, Series C, and Series G Preferred Stock and certain common
stock (the Priority Payments) in shares of common stock.
If the amount available for the Priority Payments is insufficient, then
payments shall be made based on the relationship of the respective stockholder
group's total Priority Payments to the total of all remaining Priority Payments
if each were paid in full.
(e) Stock Options
In May 1997, the Company adopted the 1997 Stock Option Plan (the 1997 Plan)
for the grant of stock options to key employees, nonemployee directors and
consultants. The Company has reserved 7,896,815 shares of common stock for
issuance under the 1997 Plan. The exercise price and vesting are determined by
the Board of Directors at the date of grant. Options generally vest over two to
four years and expire ten years after the date of grant. As of October 31, 1999,
317,282 shares were available for future issuance under the 1997 Plan.
In September 1999, the Company adopted the 1999 Director Stock Option Plan
(the 1999 Plan) for the grant of stock options to non-employee directors. The
Company has reserved 500,000 shares of common stock for issuance under the 1999
Plan. As of October 31, 1999, 366,667 shares were available for future issuance
under the 1999 Plan.
In August 1997, the Company granted an option to purchase 66,667 shares of
common stock to two individuals as a settlement of a claim. These options are
fully vested and expire in fiscal 2007. The estimated
F-21
<PAGE> 83
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of these options totaling $150,000 has been included as a component
of the restructuring charge in the accompanying statement of operations for the
fiscal 1997. The Company granted options to purchase 159,579 shares of common
stock to consultants for services performed during fiscal 1998. The estimated
fair value of these options totaling $593,000 has been recorded as stock-based
compensation expense in the accompanying fiscal 1998 consolidated statement of
operations.
In connection with stock option and stock warrant grants to employees and
nonemployees during the fiscal year ended October 31, 1999, the Company recorded
deferred compensation of $8,360,000, which represents the aggregate difference
between the option exercise price and the deemed fair market value of the common
stock determined for financial reporting purposes for grants to employees and
the fair value of the options for the nonemployees. In accordance with EITF
96-18, the fair value of the nonemployee grants will be marked to market over
the vesting term of the warrants. The deferred compensation will be recognized
as an expense over the vesting period of the underlying stock options and
warrants. The Company recorded stock-based compensation expense of $2,597,000 in
the fiscal year ended October 31, 1999, related to these options and warrants.
Option activity for fiscal 1997, fiscal 1998 and fiscal 1999 was as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE
--------- ------------- --------
<S> <C> <C> <C>
Outstanding, October 31, 1996.................... 66,667 $ 2.10 $2.10
Granted........................................ 1,490,701 3.95 3.95
Exercised...................................... (69,167) 2.10 - 3.95 2.16
Canceled....................................... (5,167) 3.95 3.95
--------- ------------- -----
Outstanding, October 31, 1997.................... 1,483,034 3.95 3.95
Granted........................................ 3,961,213 3.95 3.95
Exercised...................................... (20,067) 3.95 3.95
Canceled....................................... (535,603) 3.95 3.95
--------- ------------- -----
Outstanding, October 31, 1998.................... 4,888,577 3.95 3.95
Granted........................................ 3,717,189 3.95 - 7.22 4.41
Exercised...................................... (35,169) 3.95 3.95
Canceled....................................... (915,476) 3.95 - 4.46 3.98
--------- ------------- -----
Outstanding, October 31, 1999.................... 7,655,121 $3.95 - $7.22 $4.17
========= ============= =====
Exercisable, October 31, 1999.................... 2,547,069 $3.95 - $7.22 $4.02
========= ============= =====
Exercisable, October 31, 1998.................... 804,119 $ 3.95 $3.95
========= ============= =====
Exercisable, October 31, 1997.................... 286,845 $ 3.95 $3.95
========= ============= =====
</TABLE>
During November 1999, the Company has granted options to employees and
non-employees to purchase 1,763,206 shares of common stock at a weighted-average
exercise price of $9.87 per share. The options granted to employees are subject
to vesting over a four-year period and were granted at exercise prices equal to
the fair value of common stock.
The following table summarizes information relating to currently
outstanding and exercisable options as of October 31, 1999.
F-22
<PAGE> 84
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- --------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$3.95 5,158,526 8.0 $3.95 2,195,464 $3.95
4.46 2,326,749 9.7 4.46 348,272 4.46
7.22 169,846 10.0 7.22 3,333 7.22
--------- ---- ----- --------- -----
7,655,121 8.6 $4.17 2,547,069 $4.02
========= ==== ===== ========= =====
</TABLE>
In connection with their May 1997 investment in the Company, the investment
funds affiliated with GAP purchased 1,538,460 shares of common stock directly
from certain common stockholders. In addition, these investment funds also
received options to purchase 634,793 shares of common stock at an exercise price
of $5.91 per share from existing stockholders. GAP exercised options to purchase
507,834 shares of common stock from these stockholders. The remaining options to
purchase 126,959 shares of common stock expired in May 1999.
(f) Pro Forma Stock-Based Compensation
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the pro forma effects on net income (loss) and
net income (loss) per share as if the Company had elected to use the fair value
approach to account for all of its employee stock-based compensation plans
beginning in fiscal 1997.
The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted during fiscal 1997, fiscal 1998 and fiscal 1999 using
the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted
average assumptions used were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate..................... 5.8%-6.0% 4.2%-5.8% 4.5%-5.8%
Expected dividend yield..................... -- -- --
Expected lives.............................. 5 years 5 years 5 years
Expected volatility......................... 80% 80% 80%
Weighted average grant date fair value...... $2.70 $2.67 $4.75
Weighted average remaining contractual life
of options outstanding.................... 8.6 years 7.6 years 8.6 years
</TABLE>
Had compensation cost for the Company's plan been determined consistent
with the fair value approach enumerated in SFAS No. 123, the Company's pro forma
net income (loss) and net income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss, as reported................................. $(28,789) $ (8,064) $(28,678)
Net loss, pro forma................................... (29,998) (12,237) (37,182)
Diluted net loss per share, as reported............... $ (2.79) $ (0.81) $ (2.86)
Diluted net loss per share, pro forma................. (2.91) (1.23) (3.71)
</TABLE>
F-23
<PAGE> 85
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
(g) Stock-Based Compensation Charge
The Company has aggregated all of its stock-based compensation charges and
has presented them as a single caption in the accompanying consolidated
statements of operations for all periods presented.
The following summarizes the departmental allocation of the stock-based
compensation charge included in the accompanying consolidated statements of
operations:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
------ ------ --------
(In thousands)
<S> <C> <C> <C>
Cost of revenues....................................... $ -- $ -- $ 40
Operating expenses:
Sales and marketing.................................. -- -- 1,327
Research and development............................. -- -- 913
General and administrative........................... 450 672 317
---- ---- ------
Total stock-based compensation......................... $450 $672 $2,597
==== ==== ======
</TABLE>
(h) Warrants
In connection with the Series A Preferred Stock financing in May 1997, the
Company issued warrants to the investment funds affiliated with GAP to purchase
190,438 shares of Series B Preferred Stock at an exercise price of $19.69 per
share, exercisable in full, through May 2002. The price paid for this warrant
was $1,000. Upon an initial public offering, these warrants will automatically
be converted into warrants to purchase 634,794 shares of common stock at an
exercise price of $5.91 per share.
In July 1997, the Company issued a warrant to purchase 200,000 shares of
common stock to a vendor at $3.95 per share, exercisable in full, through 2007.
The warrant was issued in consideration for services to be received from the
vendor. The estimated value of the warrant totaled $450,000 and has been
recorded in stock-based compensation expense in the accompanying statement of
operations for fiscal 1997. In addition, in July 1997, that vendor purchased
190,114 shares of Series C Preferred Stock for $500,000.
In connection with the Series F Preferred Stock financing in February 1999,
the Company sold warrants to purchase 673,401 shares of Series F Preferred Stock
at an exercise price of $3.56 per share. The price paid for this warrant was
$1,000. Upon an initial public offering, these warrants will automatically be
exercised through the voluntary payment of the exercise price by the warrant
holder or through a cashless exercise.
In October 1999, the Company approved the future issuance of warrants to
purchase 500,000 shares of common stock to customers and strategic partners. In
connection with a license arrangement with a customer, the Company issued
fully-vested warrants to purchase an aggregate of 13,333 shares of common stock
under this program at an exercise price of $7.22 per share, exercisable within
12 months. The estimated value of the warrants totaled $106,000 and has been
recorded as a reduction in the amount of future revenue to be recognized
associated with this customer. The Company also issued warrants to a strategic
partner to purchase 83,334 shares of common stock at an exercise price of $7.22
per share, and vest over three years. The
F-24
<PAGE> 86
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated value of these warrants totaled $463,000 at the time of grant. In
accordance with EITF 96-18, the fair value of these warrants will be marked to
market over the vesting period.
All of the above-mentioned warrants were outstanding as of October 31,
1999.
(i) Stock Purchase Agreement
The Company had an agreement with a stockholder to repurchase 431,833
shares of common stock for $0.86 per share. The agreement provided for equal
monthly purchases over 60 months beginning in July 1993. Under the agreement,
the Company repurchased and retired approximately 86,667 shares of common stock
at a cost of approximately $74,000 in each of fiscal 1994, fiscal 1995 and
fiscal 1996. In fiscal 1997, the Company repurchased and retired the remaining
172,663 shares available under this agreement for approximately $148,000.
(j) Other Common Stock Issuances and Repurchases
During fiscal 1998, the Company sold 86,061 shares of its common stock at
$3.95 per share to a third party and also repurchased 7,600 shares of its
outstanding common stock from a stockholder for $3.95 per share.
In September 1999, the Company sold 33,334 shares of its common stock at
$4.46 per share to an officer of the Company. The Company recorded stock-based
compensation expense of $130,000 to reflect the below fair market value purchase
price.
10. PROFIT-SHARING PLAN
The Company sponsors a defined contribution profit-sharing plan which
conforms to Internal Revenue Service provisions for 401(k) plans. Employees must
be at least 21 years of age to be eligible to participate in the plan.
Participants may contribute up to 15% of their earnings. The Company matches 50%
of the first 2% and 25% of the next 4% of employee contributions and may make
additional contributions as determined by the Board of Directors. Operations
have been charged for contributions to the plan of approximately $321,000,
$324,000 and $551,000 for fiscal 1997, fiscal 1998 and fiscal 1999,
respectively.
11. RELATED-PARTY TRANSACTIONS
(a) Transactions with Scopus Technology, Inc.
In June 1997, the Company entered into a $650,000 software license and
implementation services agreement with Scopus Technology, Inc. (Scopus), under
which it licensed Scopus' software product. In July 1997, the Company entered
into an agreement with Scopus, under which Scopus licensed the Company's
Signature Plus product for $350,000. Scopus was a related party through GAP. GAP
owned approximately 6% of Scopus and had Board of Director representation at
Scopus at that time. In addition, in October 1997, the Company entered into an
OEM arrangement with Scopus. The Company also entered into a development license
and obtained a prepaid license fee from Scopus valued at $250,000 in exchange
for outstanding liabilities owed to Scopus. In fiscal 1998, the Company made the
determination that it would not pursue its arrangements with Scopus and wrote
off the remaining book value of the software license purchased totaling
$469,000, net of deferred revenue related to the prepaid license fee totaling
$250,000, for a loss of $219,000.
(b) Transactions with Intelligroup, Inc.
In October 1997 and November 1997, the Company entered into a master
consulting agreement and an implementation partner agreement, with Intelligroup,
Inc. The CEO of the Company is a member of the Board of Directors of
Intelligroup, Inc.
F-25
<PAGE> 87
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Contract Software Development
The Company contracts with a third party, Soft OS, to provide software
development and implementation services on an outsourced basis. Soft OS
subcontracts to have these services provided to us by Effective Programming, a
development organization located in Minsk, Belarus, and EPAM Systems, a related
development organization located in New Jersey. Under this arrangement,
Effective Programming and EPAM Systems provide software developers dedicated to
the Company's projects to develop products and application functionality
pursuant to specifications provided by the Company and to provide implementation
services to the Company's customer's. The agreement with Soft OS expires in
February 2002. As of October 31, 1999, approximately 85 employees and
contractors of Effective Programming and EPAM Systems were performing services
for the Company. Effective Programming and EPAM Systems are majority owned by
one of the Company's employees.
For the fiscal year ended October 31, 1999, the Company incurred a total of
$1,920,000 of software development costs under this contract which has been
charged to research and development expenses in the accompanying consolidated
statements of operations. The Company believes that the terms of this agreement
were negotiated on an arms-length basis.
12. VALUATION AND QUALIFYING ACCOUNTS
A summary of the allowance for doubtful accounts and reserve for loss
contracts is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
------ ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance, beginning of period......................... $ 221 $ 100 $ 290
Provision for doubtful accounts................. 76 318 120
Write-offs...................................... (197) (128) --
------ ------- ------
Balance, end of period............................. $ 100 $ 290 $ 410
====== ======= ======
Reserve for loss contracts:
Balance, beginning of period....................... $ -- $ 5,005 $1,600
Provision (reduction) for loss contracts
reserve....................................... 5,005 (1,546) --
Payments and/or costs incurred.................. -- (1,859) (500)
------ ------- ------
Balance, end of period............................. $5,005 $ 1,600 $1,100
====== ======= ======
</TABLE>
In fiscal 1998, the Company revised its estimated loss reserve requirements
due to the resolution of contingencies identified in fiscal 1997. As a result,
the Company recorded a reduction of $2,026,000 in the cost of custom development
services in the accompanying consolidated statement of operations in fiscal
1998. In fiscal 1998, the Company also recorded a provision of $480,000 for
estimated losses on other contracts.
13. SEGMENT REPORTING
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in the period ended July 31, 1999. SFAS No.
131 establishes standards for reporting information regarding operating segments
in annual financial statements and requires selected information for those
segments to be presented in interim financial reports issued to stockholders.
SFAS No. 131 also establishes standards for related disclosures about products
and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate, discrete financial information
is available for
F-26
<PAGE> 88
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
evaluation by the chief operating decision maker, or decision-making group, in
making decisions how to allocate resources and assess performance. The Company's
chief operating decision maker, as defined under SFAS No. 131, is its Chief
Executive Officer.
The Company views its operations and manages its business as two segments,
product-related licenses and services and custom development services. The
Company's reportable segments are strategic business units that provide distinct
services to the end customer. They are managed separately because each business
requires different marketing and management strategies. The Company's approach
is based on the way that management organizes the segments within the Company
for making operating decisions and assessing performance.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company does not allocate
operating expenses between its two reportable segments. Accordingly, the
Company's measure of performance for each reportable segment is based on total
net revenues and direct costs of services, which are reported separately in the
accompanying consolidated statements of operations. Accordingly, no additional
disclosure is required. The Company does not identify assets and liabilities by
segment. Accordingly, identifiable assets, capital expenditures and depreciation
and amortization are not reported by segment.
The Company's revenues by geographic destination to any single foreign
country did not exceed 10% of total revenues during any period presented.
14. SUBSEQUENT EVENTS (UNAUDITED)
On November 8, 1999, the Board of Directors and on the stockholders
approved (1) the adoption of the 1999 Stock Option and Grant Plan pursuant to
which 3,000,000 shares of the Company's common stock have been reserved for
future issuance, (2) the adoption of the 1999 Director Stock Option Plan
pursuant to which 500,000 additional shares of the Company's common stock have
been reserved for future issuance and (3) an increase in the number of shares of
the Company's common stock reserved for issuance under the 1997 Stock Option
Plan from 7,896,815 shares to 9,396,815 shares.
F-27
<PAGE> 89
(inside back cover)
DESCRIPTION OF ARTWORK
At the top of the page is the name "FirePond" with the company's
logo above it. The following caption is beneath the name of the company and its
logo: "Our customers and partners include:"
At the center of the page is a large shaded circle labeled "Customers" in large
print extending slightly beyond the boundary of the circle on the right on the
top half of the circle. Within the large circle in smaller print is a list of
customers: "KLA-Tencor, Savings Bank Life Insurance, Empire Blue Cross and Blue
Shield, IBM, Scania, Freightliner, General Motors, Sikorsky Aircraft Company,
Cummins Power Generation Group, John Deere, Blue Cross and Blue Shield of
Minnesota, Sprint PCS, Ford Motor Company-Europe, Automatic Data Processing,
Subaru of America, Packard Bell NEC, Ricoh Europe, Renault V.I., Hitachi."
Overlapping on top of the large shaded circle on its bottom-right quadrant is a
smaller circle labeled "Partners" in large print extending slightly beyond the
boundary of the smaller circle on the right on the lower half of the circle.
Within the smaller circle is a list of partners: "EDS, Silverstream E.piphany,
Talus Solutions, Sun Microsystems, Oberon Software, Intelligroup, GTE, Ernst &
Young LLP, debis Systemhaus, Viant, WM Data."
<PAGE> 90
[FIREPOND LOGO]
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- ----------
<S> <C>
SEC Registration Fee........................................ $ 20,850
NASD Filing Fee............................................. 8,000
Nasdaq National Market Listing Fee.......................... 90,000
Accounting Fees and Expenses................................ 450,000
Legal Fees and Expenses..................................... 550,000
Printing Expenses........................................... 250,000
Blue Sky Qualification Fees and Expenses.................... 15,000
Transfer Agent's Fee........................................ 10,000
Miscellaneous............................................... 156,150
----------
Total....................................................... 1,550,000
==========
</TABLE>
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VII of our amended and restated certificate of incorporation provides
that no director of FirePond be personally liable to FirePond, its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to FirePond or
its stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) in respect of unlawful
dividend payments or stock redemptions or repurchases, or (4) for any
transaction from which the director derived an improper personal benefit. In
addition, the first amended and restated certificate of incorporation provides
that if the Delaware General Corporation Law is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Article V of our amended and restated by-laws provides for indemnification
by FirePond of its officers and certain non-officer employees under certain
circumstances against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of the registrant if such person acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of FirePond, and, with respect to criminal actions or proceedings, if
such person had no reasonable cause to believe his or her conduct was unlawful.
Under Section 7 of the underwriting agreement to be filed as Exhibit 1.1
hereto, the underwriters have agreed to indemnify, under certain conditions,
FirePond, its directors, certain officers and persons who control FirePond
within the meaning of the Securities Act against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by the Registrant during the past three years.
Further included is the consideration, if any, received by
II-1
<PAGE> 92
the Registrant for such shares, and information relating to the section of the
Securities Act or rule of the Securities and Exchange Commission under which
exemption from registration was claimed.
1. An aggregate of 837,776 shares of Series A preferred stock was issued
in a private placement in May 1997 to investment funds associated with
General Atlantic. In July 1997, an aggregate of 3,351,104 additional
shares of Series A preferred stock were issued to investment funds
associated with General Atlantic to account for a 5-for-1 stock split.
The Series A preferred stock is convertible into 2,792,587 shares of
common stock. The consideration received for such shares was
$11,000,000.
2. Warrants to purchase an aggregate of 190,438 shares of Series B
preferred stock (which are convertible into 634,794 shares of common
stock) were issued in a private placement in May 1997 to investment
funds associated with General Atlantic. The consideration received for
such warrants was $1,000.
3. An aggregate of 570,342 shares of Series C preferred stock (which are
convertible into 380,228 shares of common stock) was issued in a
private placement in July 1997 to Ramsey/Bierne Associates Incorporated
and Ori Sasson, pursuant to a Stock Purchase Agreement. The
consideration received for such shares was $1,500,000.
4. An aggregate of 100,000 shares of Series D preferred stock was issued
in a private placement in October 1997 to investment funds associated
with General Atlantic pursuant to a Stock Purchase Agreement. The
consideration received for such shares was $10,000,000. The shares of
Series D preferred stock were exchanged for 3,802,281 shares of Series
E preferred stock in April 1998.
5. An aggregate of 86,061 shares of common stock was issued in a private
placement in September 1998 to Loek van den Boog, a private investor.
The consideration received for such shares was $339,509.
6. An aggregate of 7,604,563 shares of Series E preferred stock was issued
in a private placement in April 1998 to investment funds associated
with General Atlantic pursuant to a Stock Purchase Agreement. The
consideration received for such shares was $10,000,000 and the exchange
of all of the outstanding shares of Series D preferred stock. These
shares of Series E preferred stock were exchanged for an equivalent
number of shares of Series G preferred stock in February 1999.
7. An aggregate of 6,734,008 shares of Series F preferred stock (which are
convertible into shares of common stock) was issued in a
private placement in February 1999 to investment funds associated with
Technology Crossover Ventures, General Atlantic and Lehman Brothers,
pursuant to a Stock Purchase Agreement. The consideration received for
such shares was $20,000,000.
8. Warrants to purchase an aggregate of 673,401 shares of Series F
preferred stock (which are convertible into 249,158 shares of common
stock) were issued in a private placement in February 1999 to
investment funds associated with Technology Crossover Ventures, General
Atlantic and Lehman Brothers. The consideration received for such
warrants was $1,000.
9. An aggregate of 7,604,563 shares of Series G preferred stock (which are
convertible into 5,069,709 shares of common stock) was issued in
exchange for the outstanding shares of Series E preferred stock in
February 1999 to investment funds associated with General Atlantic
pursuant to a Stock Exchange Agreement.
10. An aggregate of 33,334 shares of common stock was issued in a private
placement in September 1999 to Edwin B. Lange, our Senior Vice
President of North American Sales. The consideration received for such
shares was $148,500.
11. From May 20, 1997 to November 30, 1999, FirePond granted stock options
to purchase an aggregate of 10,732,598 shares of common stock to
directors, employees and consultants with exercise prices ranging from
$3.95 to $9.90 per share pursuant to FirePond's 1997 Stock Option Plan.
As of November 30, 1999, 58,871 shares of common stock have been issued
upon exercise of options pursuant to Firepond's 1997 Stock Option Plan.
II-2
<PAGE> 93
12. From September 9, 1999 to November 30, 1999, FirePond granted stock
options to purchase an aggregate of 183,333 shares of common stock to
non-employee directors with exercise prices ranging from $4.46 to $9.90
per share pursuant to FirePond's 1999 Director Plan.
13. Warrants to purchase an aggregate of 96,667 shares of common stock were
issued in private placement transactions in October 1999 to a customer
and strategic partner with an exercise price of $7.22 per share.
14. Warrants to purchase an aggregate of 360,000 shares of common stock
were issued in a private placement transaction in November 1999 to
lenders, including investment funds affiliated with General Atlantic
Partners and Technology Crossover Ventures, with an exercise price of
$5.25 per share.
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act pursuant to Rule 701 promulgated thereunder on the basis that
these securities were offered and sold either pursuant to a written compensatory
benefit plan or pursuant to written contracts relating to compensation, as
provided by Rule 701, or pursuant to Section 4(2) of the Securities Act on the
basis that the transactions did not involve a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 Form of First Amended and Restated Certificate of
Incorporation of the Registrant (to be filed prior to the
effectiveness of the offering).
*3.3 Form of Second Amended and Restated Certificate of
Incorporation of the Registrant (to be filed following the
consummation of this offering).
*3.4 By-laws of the Registrant.
*3.5 Form of First Amended and Restated By-laws of the Registrant
(to be effective upon consummation of the offering).
*4.1 Specimen certificate for shares of common stock, $.01 par
value, of the Registrant.
*5.1 Opinion of McDermott, Will & Emery as to the validity of the
securities being offered.
**10.1 Amended and Restated Registration Rights Agreement, dated
February 23, 1999, between the Registrant and the
Stockholders named therein.
*10.2 Amended and Restated 1997 Stock Option Plan of the
Registrant.
*10.3 1999 Stock Option and Grant Plan of the Registrant.
*10.4 1999 Director Plan of the Registrant.
**10.5 Lease Agreement between Petrie Development Corp. and the
Registrant, dated as of August 11, 1998.
**10.6 Lease of 890 Winter Street, Waltham, Massachusetts between
FirePond, Inc., as Tenant, and 890 Winter Street, L.L.C., as
Landlord dated as of March 25, 1999.
**10.7 Consulting Agreement between the Registrant and Soft OS,
Inc. dated January 23, 1999.
+**10.8 Software License Agreement between the Registrant and
Silverstream Software Inc. dated as of March 18, 1999.
**10.9 Loan and Security Agreement between Registrant and Greyrock
Business Credit Company dated as of July 31, 1998.
**10.9.1 First Amendment to Loan and Security Agreement between
Registrant and Greyrock Business Credit Company dated June
24, 1999.
**10.9.2 Second Amendment to Loan and Security Agreement between
Registrant and Greyrock Business Credit Company dated as of
July 8, 1999.
**10.9.3 Third Amendment to Loan and Security Agreement between
Registrant and Greyrock Business Credit Company dated as of
September 28, 1999.
**10.10 Employment Agreement dated April 2, 1998 between Registrant
and Klaus P. Besier.
**10.11 Offer Letter dated May 11, 1998 between Registrant and
Graham S. Williams.
</TABLE>
II-3
<PAGE> 94
<TABLE>
<S> <C>
**10.12 Offer Letter dated October 21, 1998 between Registrant and Ilya G. Gorelik.
**10.13 Offer Letter dated September 5, 1998 between Registrant and Steven J. Waters.
**10.14 Offer Letter dated December 11, 1998 between Registrant and Paul K. McDermott.
**10.15 Product Use and General Services Agreement between the Registrant and General Motors dated as of
August 1, 1994.
+**10.15.1 Amendment to Product Use and General Services Agreement between Registrant and General Motors
Corporation dated as of June 26, 1998.
+**10.15.2 Purchase Order between Registrant and General Motors Corporation dated as of February 3, 1999.
+**10.15.3 Amendment to Product Use and General Services Agreement between Registrant and General Motors
Corporation dated as of February 24, 1999.
+**10.16 Signature Plus Software License Agreement between the Registrant and BCBSM, Inc. dated as of December
18, 1998.
**10.17 Sublease between Registrant and Dataworks Corporation dated as of November 2, 1998.
**10.17.1 Addendum to Sublease Agreement between Registrant and Dataworks Corporation dated November 2, 1998.
**10.18 Sublease Agreement between Registrant and International Poison Center Consortium, Inc. dated as of
December 8, 1998.
**21.1 Subsidiaries
*23.1 Consent of McDermott, Will & Emery (included in Exhibit 5.1 hereto).
23.2 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (included on page II-6).
27.1 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment to this Registration Statement.
** Previously Filed.
+ Confidential treatment has been requested for certain portions of this
Exhibit. The confidential redacted information has been filed separately with
the Securities and Exchange Commission.
(b) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the Consolidated Financial Statements or
Notes to those statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
II-4
<PAGE> 95
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Waltham, Commonwealth of Massachusetts, on December 21, 1999.
FIREPOND, INC.
By: /s/ PAUL K. MCDERMOTT
------------------------------------
Paul K. McDermott
Chief Financial Officer and
Vice President of Finance and
Administration
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints each of Klaus P. Besier, Paul K. McDermott and
Thomas F. Carretta such person's true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
(or to any other registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act), and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that any said attorney-in-fact
and agent, or any substitute or substitutes of any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, President, Chief December 21, 1999
- --------------------------------------------------- Executive Officer and
Klaus P. Besier Director (Principal Executive
Officer)
/s/ PAUL K. MCDERMOTT Chief Financial Officer and December 21, 1999
- --------------------------------------------------- Vice President of Finance and
Paul K. McDermott Administration (Principal
Financial Officer and
Principal Accounting Officer)
* Director December 21, 1999
- ---------------------------------------------------
Paul R. Butare
* Director December 21, 1999
- ---------------------------------------------------
J. Michael Cline
* Director December 21, 1999
- ---------------------------------------------------
William O. Grabe
</TABLE>
II-6
<PAGE> 97
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERHARD SCHULMEYER Director December 21, 1999
- ---------------------------------------------------
Gerhard Schulmeyer
*By: /s/ PAUL K. MCDERMOTT
---------------------------------------------
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 Form of First Amended and Restated Certificate of
Incorporation of the Registrant (to be filed prior to the
effectiveness of the offering).
*3.3 Form of Second Amended and Restated Certificate of
Incorporation of the Registrant (to be filed following the
consummation of this offering).
*3.4 By-laws of the Registrant.
*3.5 Form of First Amended and Restated By-laws of the Registrant
(to be effective upon consummation of the offering).
*4.1 Specimen certificate for shares of common stock, $.01 par
value, of the Registrant.
*5.1 Opinion of McDermott, Will & Emery as to the validity of the
securities being offered.
**10.1 Amended and Restated Registration Rights Agreement, dated
February 23, 1999, between the Registrant and the
Stockholders named therein.
*10.2 Amended and Restated 1997 Stock Option Plan of the
Registrant.
*10.3 1999 Stock Option and Grant Plan of the Registrant.
*10.4 1999 Director Plan of the Registrant.
**10.5 Lease Agreement between Petrie Development Corp. and the
Registrant, dated as of August 11, 1998.
**10.6 Lease of 890 Winter Street, Waltham, Massachusetts between
FirePond, Inc., as Tenant, and 890 Winter Street, L.L.C., as
Landlord dated as of March 25, 1999.
**10.7 Consulting Agreement between the Registrant and Soft OS,
Inc. dated January 23, 1999.
+**10.8 Software License Agreement between the Registrant and
Silverstream Software, Inc. dated as of March 18, 1999.
**10.9 Loan and Security Agreement between Registrant and Greyrock
Business Credit Company dated as of July 31, 1998.
**10.9.1 First Amendment to the Loan and Security Agreement between
the Registrant and Greyrock Business Credit Company dated
June 24, 1999.
**10.9.2 Second Amendment to Loan and Security Agreement between
Registrant and Greyrock Business Credit Company dated as of
July 8, 1999.
**10.9.3 Third Amendment to Loan and Security Agreement between
Registrant and Greyrock Business Credit Company dated as of
September 28, 1999.
**10.10 Employment Agreement dated April 2, 1998 between Registrant
and Klaus P. Besier.
**10.11 Offer Letter dated May 11, 1998 between Registrant and
Graham S. Williams.
**10.12 Offer Letter dated October 21, 1998 between Registrant and
Ilya G. Gorelik.
**10.13 Offer Letter dated September 5, 1998 between Registrant and
Steven J. Waters.
**10.14 Offer Letter dated December 11, 1998 between Registrant and
Paul K. McDermott.
**10.15 Product Use and General Services Agreement between the
Registrant and General Motors dated as of August 1, 1994.
+**10.15.1 Amendment to Product Use and General Services Agreement
between Registrant and General Motors Corporation dated as
of June 26, 1998.
+**10.15.2 Purchase Order between Registrant and General Motors
Corporation dated as of February 3, 1999.
+**10.15.3 Amendment to Product Use and General Services Agreement
between Registrant and General Motors Corporation dated as
of February 24, 1999.
+**10.16 Signature Plus Software License Agreement between the
Registrant and BCBSM, Inc. dated as of December 18, 1998.
**10.17 Sublease between Registrant and Dataworks Corporation dated
as of November 2, 1998.
**10.17.1 Addendum to Sublease Agreement between Registrant and
Dataworks Corporation dated as of November 2, 1998.
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
**10.18 Sublease Agreement between Registrant and International
Poison Center Consortium, Inc. dated as of December 8, 1998.
**21.1 Subsidiaries.
*23.1 Consent of McDermott, Will & Emery (included in Exhibit 5.1
hereto).
23.2 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (included on page II-6).
27.1 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment to this Registration Statement.
** Previously Filed.
+ Confidential treatment has been requested for certain portions of this
Exhibit. The confidential redacted information has been filed separately with
the Securities and Exchange Commission.
<PAGE> 1
Exhibit 23.2
After the two-for-three stock split discussed in Note 9(b) to FirePond, Inc.'s
consolidated financial statements is effected, we expect to be in a position to
render the following report.
/s/ Arthur Andersen LLP
Boston, Massachusetts
December 21, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
December 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 2,120
<SECURITIES> 0
<RECEIVABLES> 10,320
<ALLOWANCES> 410
<INVENTORY> 0
<CURRENT-ASSETS> 14,486
<PP&E> 9,583
<DEPRECIATION> 3,535
<TOTAL-ASSETS> 21,660
<CURRENT-LIABILITIES> 26,466
<BONDS> 0
0
191
<COMMON> 101
<OTHER-SE> (6,246)
<TOTAL-LIABILITY-AND-EQUITY> 21,660
<SALES> 0
<TOTAL-REVENUES> 34,285
<CGS> 0
<TOTAL-COSTS> 62,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 850
<INCOME-PRETAX> (28,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,678)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,678)
<EPS-BASIC> (2.86)
<EPS-DILUTED> (2.86)
</TABLE>
