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Filed Pursuant to Rule 424(b)(1)
File No. 333-94777
[eprise corporation logo]
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4,000,000 Shares
Common Stock
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This is the initial public offering of Eprise Corporation, and we are offering
4,000,000 shares of our common stock. The initial public offering price is
$15.00 per share.
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "EPRS."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND EPRISE
PUBLIC COMMISSIONS CORPORATION
<S> <C> <C> <C>
Per share $ 15.00 $ 1.05 $ 13.95
Total $60,000,000 $4,200,000 $55,800,000
</TABLE>
We have granted the underwriters the right to purchase up to 600,000 additional
shares to cover any over-allotments.
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
WIT SOUNDVIEW
THE DATE OF THIS PROSPECTUS IS MARCH 23, 2000.
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INSIDE FRONT COVER
The inside front cover of the prospectus depicts the following:
The upper left-hand corner displays the Eprise logo with the words "Eprise
Corporation" underneath.
The title bar at the top of the page states: "The Eprise Solution."
In the center of the page, there is a diagram with three sections. The
left-hand section contains four captions stating, in descending order,
"Corporate Info," "Product Info," "Sales Tools" and "Support Info." Each caption
is accompanied by a related illustration. The center section of the diagram
shows a transparent cylinder labeled "Web Server," which contains another
cylinder labeled "Eprise Participant Server(TM)" and displays a drawing of the
Eprise Participant Server product box. The internal cylinder also contains the
caption "Corporate Look and Feel." The right-hand section of the diagram
contains a drawing of two computer screens. The upper screen is labeled "Sales
Rep's View" and contains the illustrations from the left-hand section of the
diagram representing Corporate Info, Product Info and Sales Tools. The lower
screen is labeled "Customer's View" and contains the illustrations representing
Product Info, Corporate Info and Support Info.
Beneath the diagram, there is a caption that reads:
"EPRISE PARTICIPANT SERVER permits a business to manage its Web site content by:
- distributing responsibility for contribution and management of different
types of corporate content;
- maintaining a central repository where business managers can easily
organize, retrieve and re-use the business's Web site content; and
- delivering content to targeted Web site audiences."
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you should
consider before buying shares in this offering. You should read the entire
prospectus carefully.
EPRISE CORPORATION
Eprise provides software products and services that enable businesses to
manage the information contained on their Web sites. Eprise Participant Server,
our core product, provides a comprehensive, out-of-the-box Web content
management solution that enables an enterprise to distribute Web content
management and content approval rights broadly within the organization with
minimal involvement by technical personnel. Customers can quickly deploy Eprise
Participant Server and use it to keep their Web sites up to date without the
need for substantial technical assistance or customization. We believe that
these features make Eprise Participant Server the most cost-effective Web
content management solution currently available.
Creating dynamic, up-to-date Web site content has become an increasingly
complex and critically important business process. As businesses develop and
expand their use of the Internet for business communications and electronic
commerce, the number of Web sites and the amount of Web content continue to grow
worldwide at an unprecedented pace. This has created a strong demand for Web
content management software, resulting in increased capital expenditures on Web
content management solutions. IDC estimates that the market for Web development
life-cycle management software, which includes Web content management software,
will grow from $76.4 million in 1998 to $1.6 billion in 2003.
The Eprise Participant Server product line has been designed to meet all of
the important needs for Web content management software. It permits an
enterprise to delegate to appropriate individuals within the organization the
right to create and manage Web content. It also permits the enterprise to target
the content that is seen by each category of Web site user, such as employees,
customers and business partners. At the same time, business rules can be created
to ensure that the overall Web site content is carefully controlled and the Web
site design has a consistent look and feel.
Eprise Participant Server is based on widely accepted, non-proprietary
industry standards so that it can easily be integrated with other Internet
infrastructure software, such as databases, back office systems, and e-commerce
and application servers. It employs a technical architecture that is highly
scalable so that it can manage the Web site content of even the largest of
enterprises. Customers can also use readily available software development tools
to adapt and customize Eprise Participant Server to meet their specific business
needs.
Eprise also offers a variety of optional professional services to
complement Eprise Participant Server. Through our Eprise Advantage Program, an
Eprise professional evaluates and designs a Web content management plan for each
customer. During and after the implementation phase, our professional services
team and alliance partners are available to provide advice and technical
assistance, including building unique applications for the customer's business.
We also provide customer training, maintenance and support.
We principally market our products domestically through our direct sales
force, and we intend to increase our global presence. We target enterprise level
accounts and dot-com companies for which the use of the Internet is a
fundamental part of their strategy. To extend our market reach, we also have
business relationships with a number of systems integrators and Web developers.
In addition, we are making substantial investments in research and development
in order to continue to expand and enhance Eprise Participant Server and to
develop new products.
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To date, we have licensed Eprise Participant Server to more than 40
customers, including Bausch & Lomb, Eastman Chemical, EMC, Hartford Financial,
Hewlett-Packard, Lincoln Financial Group, Novell, Sharp Electronics and
SmartMoney.com.
We were incorporated in Delaware in September 1992. Our principal executive
offices are located at 1671 Worcester Road, Framingham, Massachusetts 01701, and
our telephone number is (508) 872-0200. Our World Wide Web address is
www.eprise.com. The information on our Web site is not part of this prospectus.
-------------------------
"Eprise" and "Eprise Participant Server" are registered trademarks of
Eprise Corporation. "E-business Experts," "Eprise Advantage Program," "Eprise
Web Catalyst," "Eprise Integration Agent," and the Eprise logo are trademarks of
Eprise Corporation. All other trademarks, service marks or trade names referred
to in this prospectus are the property of their respective owners.
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THE OFFERING
Common stock offered by Eprise..... 4,000,000 shares
Common stock to be outstanding
after the offering................. 22,943,440 shares
Use of proceeds.................... Working capital and general corporate
purposes, including expansion of sales,
distribution and marketing activities;
development of technology; capital
expenditures; funding of future operating
losses; and repayment of debt
Nasdaq National Market symbol...... EPRS
Common stock to be outstanding after this offering is based on shares
outstanding as of December 31, 1999. It excludes:
- 2,225,264 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $0.71 per share, all
of which options are exercisable, subject to repurchase restrictions on
the option shares, and
- 432,151 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $2.78 per share, all of which warrants
are exercisable.
Except as presented in the financial statements or as otherwise specified
in this prospectus, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- does not reflect the exercise by Deutsche Bank Securities Inc. of a
portion of its warrant for 28,713 shares of common stock effective upon
the closing of the offering;
- reflects a 1-for-2.55 reverse split of our common stock; and
- reflects the automatic conversion of all outstanding shares of preferred
stock into a total of 16,105,845 shares of common stock upon the closing
of this offering.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information below sets forth a summary of the results
of our operations and summary information about our assets, liabilities and
capital. In 1997, Eprise changed its fiscal year end from August 31 to December
31. The statement of operations data for the twelve months ended December 31,
1997 has been computed by summing the unaudited results of operations for the
four fiscal quarters in the period ended December 31, 1997. The data for pro
forma net loss per share treats our outstanding preferred stock as though it
were common stock from the date of original issuance. You should read this
information along with our discussion in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and notes to those statements included elsewhere in this prospectus. As
discussed in Note 10 to the Consolidated Financial Statements, the 1999
financial information has been restated.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
FOUR MONTHS OR YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
AUGUST 31, DECEMBER 31, ---------------------------------
1997 1997 1997 1998 1999
---------- ------------ ------- ------- -------------
(RESTATED)(1)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................ $1,420 $ 303 $ 1,222 $ 807 $ 3,659
Gross profit.............................. 902 18 643 347 2,534
Total operating expenses.................. 1,481 1,082 2,048 5,744 9,422
Operating loss............................ (579) (1,064) (1,405) (5,397) (6,888)
Net loss.................................. (733) (1,164) (1,615) (5,261) (6,600)
Loss to common shareholders............... $ (733) $(1,166) $(1,617) $(5,275) $(28,230)
====== ======= ======= ======= ========
Loss per share............................ $(0.35) $ (0.54) $ (0.76) $ (2.40) $ (11.42)
====== ======= ======= ======= ========
Weighted average common shares
outstanding............................. 2,073 2,156 2,118 2,200 2,473
====== ======= ======= ======= ========
Pro forma loss per share.................. $ (0.50)
========
Pro forma weighted average common shares
outstanding............................. 13,274
========
</TABLE>
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(1) See Note 10 to the Consolidated Financial Statements.
The following table presents a summary of our balance sheet at December 31,
1999:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of our preferred stock into a total of 16,105,845 shares of common stock,
which will occur upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale of 4,000,000 shares
of common stock in this offering at the initial public offering price of
$15.00 per share after deducting the underwriting discounts and
commissions and estimated offering expenses and the application of the
estimated net proceeds from this offering.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- --------- -----------
(RESTATED)(1)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 22,455 $22,455 $77,230
Working capital............................................. 22,977 22,977 77,752
Total assets................................................ 25,534 25,534 80,309
Total liabilities........................................... 1,977 1,977 1,812
Redeemable preferred stock.................................. 35,316 -- --
Total stockholders' equity (deficiency)..................... (11,758) 23,558 78,498
</TABLE>
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(1) See Note 10 to the Consolidated Financial Statements.
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below together with the other information about Eprise in
this prospectus before deciding to invest in shares of our common stock. If one
or more of the following risks actually occurs, our business, results of
operations and financial condition could be materially adversely affected, the
trading price of our common stock could decline, and you might lose all or part
of your investment. See "Special Note Regarding Forward-Looking Statements."
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, AND MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN
PROFITABILITY.
We incurred net losses of $5.3 million for the year ended December 31, 1998
and $6.6 million for the year ended December 31, 1999. As of December 31, 1999,
we had an accumulated deficit of $36.0 million. We have not yet achieved
profitability and we expect to incur net losses for the foreseeable future. To
date, we have funded our operations from the sale of equity securities and have
not generated cash from operations. We expect to continue to incur significant
research and development, selling and marketing, and general and administrative
expenses and, as a result, we will need to generate significant revenues to
achieve and maintain profitability. Although our revenues have grown
significantly in recent quarters, we cannot be certain that we can sustain these
growth rates or that we will achieve sufficient revenues for profitability. If
we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis in the future. See
"Summary Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the financial statements and
notes to those statements found elsewhere in this prospectus.
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
Eprise was founded in 1992 as a provider of online interactive games. We
made the transition to our current business in 1997 and, as a result, have a
limited operating history. We are still in the early stages of our development,
which makes the evaluation of our business operations and our prospects
difficult. We shipped our first commercial Web content management software
product in February 1998. Since that time, we have derived substantially all of
our revenues from licensing our Eprise Participant Server product and related
services. As a result of our limited operating history, we cannot forecast
operating expenses based on our historical results. Our ability to forecast
accurately our quarterly revenue is limited because our software products have a
long sales cycle, making it difficult to predict the quarter in which sales
revenue will be recognized. We would expect our business, operating results and
financial condition to be materially adversely affected if our revenues do not
meet our projections, and that net losses in a given quarter could be even
greater than expected.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND YOU SHOULD NOT
RELY ON THEM TO PREDICT OUR FUTURE PERFORMANCE.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
- demand for our products and services;
- the timing of sales of our products and services;
- the timing of customer orders and product implementation;
- unexpected delays in introducing new products and services;
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- increased expenses, whether related to selling and marketing, research
and development or general and administrative;
- changes in the rapidly evolving market for Web content management
solutions;
- the mix of product license and service revenue; and
- the timing and size of sales derived through our strategic partners.
Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful. Investors should not rely on
the results of one quarter as an indication of our future performance.
We plan to increase our operating expenditures to expand our sales and
marketing operations, develop new distribution channels, fund greater levels of
research and development, broaden professional services and support and improve
operational and financial systems. If our revenues do not increase along with
these expenses, our business, operating results or financial condition could be
materially adversely affected and net losses in a given quarter could be greater
than expected. Although we have limited historical financial data, we believe
that our quarterly operating results may experience seasonal fluctuations due to
clients' fiscal year budgeting cycles and purchasing patterns.
ONLY A LIMITED NUMBER OF CUSTOMERS HAVE LICENSED OUR PRODUCT, AND OUR WEB
CONTENT MANAGEMENT SOLUTION MAY NEVER ACHIEVE BROAD MARKET ACCEPTANCE.
We first introduced Eprise Participant Server in February 1998 and
delivered a second major release in April 1999. To date, only a limited number
of customers have licensed Eprise Participant Server, and an even smaller number
are operating Web sites using the most recent version. Therefore, we have not
demonstrated broad market acceptance of Eprise Participant Server. If our
product does not gain broad market acceptance, or if it fails to meet customer
expectations, our business would be harmed.
A LARGE PORTION OF OUR REVENUES ARE CURRENTLY DERIVED FROM A LIMITED NUMBER OF
CUSTOMERS.
Although we believe that our customer concentration will decrease as we
continue to build our client base, we expect that a small number of customers
will continue to account for a substantial portion of revenues in the near term.
As a result, our inability to secure major customers during a given period or
the loss of existing customers could have a material adverse effect on our
business, financial condition or results of operations. Our largest customer in
1998, American Express, accounted for 58% of our revenues for the year ended
December 31, 1998. Two of our customers accounted for an aggregate of 23% of our
revenues for the year ended December 31, 1999.
IF WE DO NOT SUCCESSFULLY EXPAND OUR DIRECT SALES AND SERVICES ORGANIZATIONS, WE
MAY NOT BE ABLE TO INCREASE OUR SALES OR SUPPORT OUR CUSTOMERS.
In the fiscal year ended December 31, 1998, we licensed substantially all
of our products through our direct sales organization. As of February 25, 2000,
we had 20 direct sales representatives. Our future success depends on
substantially increasing the size and scope of our direct sales force, both
domestically and internationally. There is intense competition for personnel,
and we cannot guarantee that we will be able to attract, assimilate or retain
additional qualified sales personnel on a timely basis. Moreover, we believe
that as our sales increase, and given the large-scale deployment required by our
customers, we will need to hire and retain a number of highly trained customer
service and support personnel. As of February 25, 2000, our customer service and
support organization included 18 individuals. We cannot guarantee that we will
be able to increase the size of our customer service and support
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organization on a timely basis to provide the high quality of support required
by our customers. Failure to add additional sales and customer service
representatives would have a material adverse effect on our business, operating
results and financial condition.
IF WE DO NOT SUCCESSFULLY MAINTAIN AND EXPAND OUR RELATIONSHIPS WITH INDIRECT
SALES CHANNELS, OUR SALES COULD DECLINE OR GROW MORE SLOWLY THAN EXPECTED.
To offer products and services to a larger customer base, our direct sales
force must establish and expand relationships with alliance partners, including
systems integrators, consulting firms, Web developers and application service
providers who build customer solutions based on Eprise Participant Server. We
must also build relationships, which we refer to as original equipment
manufacturer or OEM relationships, with companies offering complementary
products that can package our software along with their products. We are
currently investing, and we intend to continue to invest, significant resources
to develop these relationships. If our efforts are unsuccessful, our sales
growth would be adversely affected. We cannot guarantee that we will be able to
market our products effectively through our established partners. Further, these
third parties are under no obligation to recommend or support our products.
These companies could recommend or give higher priority to the products of other
companies or to their own products. A significant shift by these companies
toward favoring competing products could negatively affect our license and
service revenues. We cannot guarantee that we will be able to attract additional
distribution partners for desired distribution arrangements. The loss of
distribution partners or failure to establish new relationships could materially
adversely affect our business, operating results and financial condition.
WE NEED TO MANAGE OUR GROWTH EFFECTIVELY TO REMAIN COMPETITIVE AND CONTINUE TO
EXPAND OUR OPERATIONS.
We have expanded our operations rapidly since inception. We intend to
expand in the foreseeable future to pursue existing and potential opportunities.
This rapid growth places a significant demand on management, administrative and
operations resources. Our ability to compete effectively and to manage our
anticipated future growth requires us to continue to improve our financial and
management controls, reporting systems and procedures on a timely basis. We
recently hired a significant number of employees, and must continue to add
personnel to maintain our ability to grow in the future. We cannot guarantee
that we will be able to do so successfully. Failure to manage our growth
effectively could have a material adverse effect upon our business, operating
results and financial condition.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET.
Qualified personnel are in great demand throughout the computer software,
hardware and networking industries. The demand for qualified personnel is
particularly acute in the New England area because of the large number of
software and other high technology companies and the low unemployment rate in
the region. Our success depends in large part upon our ability to attract,
train, motivate and retain highly-skilled employees, particularly sales and
marketing personnel, software engineers, and technical support personnel. We
have had difficulty hiring these highly-skilled employees in the past. If we are
unable to attract and retain the highly-skilled technical personnel that are
integral to our sales, marketing, product development and customer support
teams, the rate at which we can generate sales and develop new products or
product enhancements may be limited. This inability could have a material
adverse effect on our business, operating results and financial condition.
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COMPETITION COULD REDUCE OUR REVENUES AND MARKET SHARE, AND PREVENT US FROM
EXPANDING IN THE FUTURE.
The market for Web content management software and services is rapidly
evolving and highly competitive and there are a number of products that compete
directly with our software solutions. Our clients' requirements and the
technology available to satisfy those requirements continually change. Some of
our current and potential competitors have significantly greater financial,
marketing, technical and other competitive resources than we do. This may enable
them to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products. In addition, other companies could develop
new products or incorporate additional functionality into their existing
products that could directly compete with our products. Barriers to entering the
software market are relatively low. Furthermore, cooperative relationships among
our competitors could increase their ability to address the Web site content
management needs of our prospective customers, and they could rapidly acquire
significant market share. We cannot guarantee that we will compete successfully
against existing or new competitors. Further, competitive pressures may require
us to lower the prices of our software and services. Failure to compete
successfully would have a material adverse effect on our business, operating
results and financial condition.
IF WE ARE UNABLE TO ENHANCE AND EXPAND OUR PRODUCT LINE TO MEET THE RAPID
CHANGES IN THE MARKET FOR WEB CONTENT MANAGEMENT TECHNOLOGY, OUR BUSINESS WILL
BE UNABLE TO GROW.
To succeed, we will need to enhance our current Eprise Participant Server
product and develop new products on a timely basis to keep pace with
developments related to Internet technology and to satisfy the increasingly
sophisticated requirements of our customers. The market for our products is
marked by rapid technological change, frequent new product introductions and
Internet-related technology enhancements, uncertain product life cycles, changes
in client demands and evolving industry standards. We cannot be certain that we
will successfully develop and market new products or new product enhancements
compliant with present or emerging Internet technology standards. New products
based on new technologies or new industry standards can rapidly render existing
products obsolete and unmarketable. Internet commerce technology is complex and
new products and product enhancements can require long development and testing
periods. Any delays in developing, testing and releasing enhanced or new
products could harm our business. New products or upgrades may not be released
according to schedule or may contain defects when released. Either situation
could result in adverse publicity, loss of sales, delay in market acceptance of
our products or customer claims against us, any of which could harm our
business. If we do not develop, license or acquire new software products, or
deliver enhancements to existing products on a timely and cost-effective basis,
our business will be harmed.
WE HAVE RELIED ON AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR EPRISE
PARTICIPANT SERVER LINE FOR OUR REVENUES.
Since 1998, we have derived substantially all of our revenues from licenses
of, and services related to, Eprise Participant Server. We expect that revenues
from this product will continue to account for a significant portion of our
revenues for the foreseeable future. A decline in the price of Eprise
Participant Server or our inability to increase license sales of Eprise
Participant Server would seriously harm our business and operating results. In
addition, our future financial performance will depend upon the successful
development, introduction and customer acceptance of enhanced versions of Eprise
Participant Server and future products. Failure to deliver the enhancements or
products that customers want could have a material adverse effect on our
business, operating results and financial condition.
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OUR LENGTHY SALES CYCLES REQUIRE EXPENDITURE OF RESOURCES THAT WILL NOT
NECESSARILY RESULT IN A SALE.
We typically experience long sales cycles. These sales cycles generally
vary by customer from three to six months. Because the licensing of our products
generally involves a significant capital expenditure by the customer, our sales
process is subject to lengthy approval processes and delays. We often devote
significant time and resources to a prospective customer, including costs
associated with multiple site visits, product demonstrations and feasibility
studies, without any assurance that the prospective customer will decide to
license our products.
YEAR 2000 PROBLEMS MAY CAUSE PRODUCT ERRORS OR FAILURES THAT COULD DIVERT
PERSONNEL AND FINANCIAL RESOURCES.
We have designed Eprise Participant Server and its add-on modules to be
Year 2000 compliant and have not been advised of any Year 2000 issues related to
those products. One prototype product (a precursor of Eprise Participant
Server), which was licensed to one customer and may currently be in use, may not
be Year 2000 compliant and may need to be upgraded or its use discontinued. We
have not been advised of any Year 2000 problems by this customer to date.
Further, although we have not been made aware of any Year 2000 problem relating
to the hardware and software used by our customers in connection with our
products to date, these problems may exist. Should any of these problems
develop, they may have a material adverse effect on our business, operating
results and financial condition.
In addition, we utilize software, computer technology and other services
internally developed and provided by third party vendors that may have Year 2000
issues. Although we have not experienced any of these problems to date, the
failure of our internal computing systems or of systems provided by third party
vendors to be Year 2000 compliant could materially adversely affect our
business.
IF OUR PRODUCTS FAIL TO REMAIN COMPATIBLE WITH MAJOR COMMERCIAL OPERATING
PLATFORMS, OUR SALES WOULD DECREASE.
Our products currently operate on the Microsoft Windows NT and Sun Solaris
operating systems. In addition, our products are required to interoperate with
Web servers, browsers and database servers. We must, therefore, continually
modify and enhance our products to keep pace with changes in these operating
systems and servers. If our products are not compatible with new operating
systems, Web servers, browsers or database servers that achieve sufficient
market penetration, our business will be harmed. In addition, uncertainties
related to the timing and nature of new product announcements, or introductions
or modifications by vendors of operating systems or browsers, could also harm
our business.
POTENTIAL DEFECTS IN OUR PRODUCTS COULD CAUSE SALES TO DECREASE AND COULD
SUBJECT US TO FUTURE WARRANTY CLAIMS.
Our products are complex and might contain undetected software errors or
failures when new versions are released. We cannot guarantee that, despite
testing by us and by current and prospective customers, we will not find errors
in existing products, new products or product enhancements after commercial
release. These errors may result in loss or delay of market acceptance, which
could have a material adverse effect upon our business, operating results and
financial condition.
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IF WE LOSE ANY KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY BE UNABLE TO CONTINUE EXPANDING OUR BUSINESS AND PRODUCT LINE.
The loss of the services of one or more of our key personnel could have a
material adverse effect on our business, operating results and financial
condition. We do not maintain key person life insurance on any executive
officers other than our Chief Executive Officer and Chief Technology Officer. We
cannot guarantee that we will be able to retain our key personnel. Our future
success also depends on our continuing ability to attract, assimilate and retain
highly qualified sales, technical and managerial personnel. Competition for
these individuals is intense, and there can be no assurance that we can attract,
assimilate or retain them in the future.
WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND
OTHERS COULD INFRINGE ON OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS AND
INFORMATION.
Our software is proprietary and is protected by trade secret, copyright and
trademark laws, license agreements, confidentiality agreements with employees
and nondisclosure and other contractual requirements imposed on our customers,
consulting partners and others. We cannot guarantee that these protections will
adequately protect our proprietary rights or that our competitors will not
independently develop products that are substantially equivalent or superior to
our products. In addition, the laws of countries in which our products may be
licensed in the future may not protect our products and intellectual property
rights to the same extent as the laws of the United States. Although we believe
that our products, trademarks and other proprietary rights do not infringe upon
the proprietary rights of third parties, we cannot guarantee that third parties
will not assert infringement claims against us. The cost of pursuing, enforcing
or defending infringement claims can be substantial and can also require
significant management attention.
RISKS RELATED TO THE INTERNET INDUSTRY
IF THE USE OF THE INTERNET DOES NOT EXPAND, THE DEMAND FOR OUR PRODUCTS MAY
STAGNATE OR DECLINE.
Our future success depends heavily on the Internet being accepted and
widely used. If Internet use does not continue to grow or grows more slowly than
expected, our business, operating results and financial condition would be
materially adversely affected. Consumers and businesses may reject the Internet
as a viable communications medium for a number of reasons, including potentially
inadequate network infrastructure, security concerns, slow development of
enabling technologies or insufficient commercial support. The Internet
infrastructure may not be able to support the demands placed on it by increased
Internet usage and bandwidth requirements. In addition, delays in the
development or adoption of new standards and protocols required to handle an
increased level of Internet activity or increased government regulation could
cause the Internet to lose its viability as a commercial medium. Even if the
required infrastructure, standards, protocols or complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.
WE CANNOT BE SURE THAT A SUSTAINABLE MARKET FOR OUR PRODUCTS WILL DEVELOP.
The market for Web content management software and services is new and
rapidly evolving, and the size and potential growth of this new market and the
direction of its development are uncertain. We have licensed our products to a
small number of customers. We expect that we will continue to need intensive
marketing and sales efforts to educate prospective clients about the uses and
benefits of our products and services. Enterprises that have invested
substantial resources in other methods of conducting business over the Internet
may be reluctant to adopt a new approach that may replace, limit or compete with
their existing systems. Any of these factors could inhibit the growth and market
acceptance of our products
10
<PAGE> 13
and services. Accordingly, we cannot be certain that a viable market for our
products will emerge, or if it does emerge, that it will be sustainable.
IF THE INTERNET OR E-COMMERCE BECOMES SUBJECT TO GOVERNMENTAL REGULATION OR
OTHER FUTURE LAWS, USE OF AND DEMAND FOR OUR PRODUCTS COULD DECLINE.
We are not currently required to comply with direct regulation by any
domestic or foreign governmental agency, other than regulations applicable to
businesses generally and any laws or regulations directly applicable to the
Internet. However, due to the increasing popularity of the Internet, it is
possible that laws may be adopted regarding the Internet, any of which could
materially harm our business. For example, because our products can be used for
the solicitation of personal data from individual consumers, our business could
be limited by laws regulating the solicitation, collection or processing of this
data. The Telecommunications Act of 1996 prohibits the transmission of some
types of information and content over the Internet. Legislation imposing
potential liability for information collected or disseminated through our
products could adversely affect our business. In addition, the increased
attention focused upon liability issues as a result of the Telecommunications
Act could limit the growth of Internet commerce, which could decrease demand for
our products.
Export regulations, either in their current form or as may be subsequently
enacted, may limit our ability to distribute our software outside the United
States. The unlawful export of our software could also harm our business.
Although we take precautions against unlawful export of our software, the global
nature of the Internet makes if difficult to effectively control the
distribution of software.
Furthermore, the growth and development of the Internet may lead to more
stringent consumer protection laws that may impose additional burdens on
companies conducting business online. The adoption of any additional laws may
decrease Internet use or impede the growth of Internet use, which may lead to a
decrease in the demand for our products and services or an increase in the cost
of doing business. Further, the imposition of new sales or other taxes could
limit the growth of Internet commerce generally and, as a result, the demand for
our products. Although recent federal legislation limits the imposition of state
and local taxes on Internet-related sales, there is a possibility that Congress
may not renew this legislation, in which case state and local governments would
be free to impose taxes on goods and services purchased on the Internet.
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY.
The market for securities of most high technology companies has been highly
volatile. It is likely that the market price of our common stock will fluctuate
widely in the future. Factors affecting the trading price of our common stock
are likely to include:
- responses to quarter-to-quarter variations in our results of operations;
- the announcement of new products or product enhancements by us or our
competitors;
- technological innovation by us or our competitors;
- general market conditions or market conditions specific to particular
industries; and
- changes in earnings estimates by analysts.
11
<PAGE> 14
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD AFFECT THE MARKET PRICE OF
OUR COMMON STOCK OR OUR ABILITY TO SELL OUR BUSINESS.
Our amended and restated certificate of incorporation and by-laws contain
provisions that could make it more difficult for a third party to acquire us or
effect a change of control in our management, even if doing so would be
beneficial to our stockholders. In addition, the provisions of Delaware law and
our stock incentive plans relating to an acquisition or change in control of
Eprise may also have the effect of discouraging, delaying or preventing a sale.
See "Description of Capital Stock."
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE, OR ANY, RETURN.
The net proceeds of this offering are allocated generally for working
capital and general corporate purposes. Thus, our management has broad
discretion over how these proceeds are used and could spend the proceeds in ways
with which you may not agree. We cannot assure you that the proceeds will be
invested in a way that yields a favorable, or any, return for us.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR SALE AFTER THIS OFFERING MAY ADVERSELY
AFFECT OUR STOCK PRICE.
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their stock for the first time.
More than 11,600,000 shares, or almost three times the number of shares sold in
this offering, assuming no exercise of the underwriters' over-allotment option,
will become eligible for sale in the public market at various dates beginning
180 days after the date of this prospectus. Sales of a substantial number of
shares of common stock in the public market, or the threat that substantial
sales might occur, could cause the market price of our stock to decrease
significantly. These factors could also make it difficult for us to raise
additional capital by selling stock. See "Shares Eligible for Future Sale."
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The offering price of our common stock is substantially higher than the
book value per share. As a result, investors purchasing our common stock in the
offering will incur immediate and substantial dilution. In addition, we have
issued options and warrants to acquire common stock at prices significantly
below the offering price. To the extent these outstanding options and warrants
are exercised, there will be further dilution. See "Dilution."
12
<PAGE> 15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance and are identified by terminology such as "may,"
"will," "could," "should," "expects," "plans," "intends," "seeks,"
"anticipates," "believes," "estimates," "potential," or "continue" or the
negative of such terms or other comparable terminology. These statements are
only predictions. You should not place undue reliance on these forward-looking
statements. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various important factors,
including the risks outlined under "Risk Factors." These factors may cause our
actual results to differ materially from any forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform such
statement to actual results.
USE OF PROCEEDS
We anticipate that our net proceeds from the sale of 4,000,000 shares of
common stock in this offering will be approximately $54.9 million, at the
initial public offering price of $15.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be approximately $63.3 million.
The principal purposes of this offering are to obtain additional capital,
create a public market for our common stock and facilitate our future access to
the public capital markets.
We anticipate that we will use substantially all of the net proceeds for
working capital and other general corporate purposes, including:
- expansion of sales, distribution and marketing activities;
- development of technology;
- capital expenditures;
- funding of future operating losses; and
- repayment of a term note outstanding to Silicon Valley Bank in the amount
of approximately $165,000.
We have not allocated any specific portion of the net proceeds to any
particular purposes, and our management will have the ability to allocate the
proceeds at its discretion. A portion of the net proceeds may be used for the
acquisition of businesses, products and technologies that are complementary to
our own, although we have no current plans, agreements or commitments with
respect to any such transaction and are not in any negotiations with respect to
any such transaction. Pending these uses, the net proceeds will be invested in
government securities and other short-term, investment-grade, interest-bearing
instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. Future dividends, if any, will be determined by the board of
directors. Our current loan agreement prohibits the payment of any dividends on
our capital stock.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on an actual, pro forma and pro forma as adjusted basis. The "actual" column
reflects our capitalization as of December 31, 1999 on a historical basis,
without any adjustments to reflect subsequent events or anticipated events. As
discussed in Note 10 to the Consolidated Financial Statements, the 1999
financial information has been restated. The "pro forma" column reflects our
capitalization as of December 31, 1999 with adjustments for the following:
- the filing prior to the closing of this offering of an Amended and
Restated Certificate of Incorporation authorizing 90,000,000 shares of
common stock and 10,000,000 shares of undesignated preferred stock.
- the automatic conversion of all of the shares of Series A, Series B and
Series C preferred stock into an aggregate of 16,105,845 shares of common
stock upon the closing of this offering.
The "pro forma as adjusted" column reflects our capitalization as of
December 31, 1999 with the preceding "pro forma" adjustments plus:
- the receipt of the net proceeds and the anticipated use of such proceeds
from our sale of 4,000,000 shares of common stock at the initial public
offering price of $15.00 per share.
None of the columns set forth below reflects as of December 31, 1999:
- the potential issuance of 600,000 shares of common stock issuable under
the overallotment option granted to the underwriters of this offering.
- outstanding warrants to purchase 432,151 shares of common stock at a
weighted average exercise price of $2.78 per share (assuming conversion
of the Series A Preferred Stock warrants to common stock warrants).
- outstanding options to purchase 2,225,264 shares of common stock at a
weighted average exercise price of $0.71 per share.
The information shown in the table below is qualified by, and should be
read in conjunction with, our more detailed financial statements and the related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------
ACTUAL PRO FORMA
(RESTATED)(1) PRO FORMA AS ADJUSTED
------------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of equipment line of credit................. $ 86 $ 86 $ --
======== ======== ========
Long-term equipment line of credit, less current portion.... 79 79 --
======== ======== ========
Redeemable preferred stock:
Series A redeemable convertible preferred stock, $0.01 par
value, 10,842,920 shares authorized, 10,515,925 shares
issued and outstanding, actual; no shares authorized,
issued and outstanding, pro forma and pro forma as
adjusted............................................... 5,192 -- --
Series B redeemable convertible preferred stock, $0.01 par
value, 14,320,446 shares authorized, issued and
outstanding, actual; no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted....... 8,569 -- --
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------
ACTUAL PRO FORMA
(RESTATED)(1) PRO FORMA AS ADJUSTED
------------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Series C redeemable convertible preferred stock, $0.01 par
value, 16,500,000 shares authorized, 16,233,766 issued
and outstanding, actual; no shares authorized, issued
and outstanding, pro forma and pro forma as adjusted... 21,555 -- --
-------- -------- --------
Total redeemable preferred stock............................ 35,316 -- --
-------- -------- --------
Stockholders equity (deficit):
Preferred stock, $0.01 par value; 41,663,366 shares
authorized, 41,070,137 shares issued and outstanding,
actual; 10,000,000 shares authorized, no shares issued
and outstanding, pro forma and pro forma as adjusted... -- -- --
Common Stock, $0.001 par value; 58,500,000 shares
authorized, 2,837,595 shares issued and outstanding,
actual; 58,500,000 shares authorized, 18,943,440 shares
issued and outstanding, pro forma; 90,000,000 shares
authorized, 22,943,440 shares issued and outstanding,
pro forma as adjusted.................................. 3 19 23
Additional paid-in capital................................ 24,333 59,633 114,569
Accumulated deficit....................................... (36,025) (36,025) (36,025)
Notes receivable from officers............................ (69) (69) (69)
-------- -------- --------
Total stockholders' equity (deficit)................... (11,758) 23,558 78,498
-------- -------- --------
Total capitalization.............................. $ 23,723 $ 23,723 $ 78,498
======== ======== ========
</TABLE>
- ---------------
(1) See Note 10 to the Consolidated Financial Statements.
15
<PAGE> 18
DILUTION
The pro forma net tangible book value of Eprise as of December 31, 1999 was
approximately $23.6 million, or $1.24 per share of common stock. Pro forma net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the pro forma shares of common stock
outstanding as of December 31, 1999. Pro forma net tangible book value gives
effect to the conversion to common, as of December 31, 1999, of all outstanding
shares of preferred stock. After giving effect to the issuance and sale of the
4,000,000 shares of common stock offered by this prospectus at the initial
public offering price of $15.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses, the pro forma net
tangible book value of Eprise as of December 31, 1999 would have been $78.5
million, or $3.42 per share. This represents an immediate increase in pro forma
net tangible book value of $2.18 per share to existing stockholders and an
immediate dilution of $11.58 per share to new investors. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $15.00
Pro forma net tangible book value per share at December
31, 1999............................................... $ 1.24
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.18
-------
Pro forma net tangible book value per share after
offering.................................................. 3.42
------
Dilution per share to new investors......................... $11.58
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1999, the differences between the number of shares of common stock purchased
from Eprise, the aggregate cash consideration paid and the average price per
share paid by existing stockholders and new investors purchasing shares of
common stock in this offering before deducting estimated underwriting discounts
and commission and offering expenses payable by Eprise:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNTS PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 18,943,440 82.6% $38,998,840 39.4% $ 2.06
New investors................. 4,000,000 17.4 60,000,000 60.6 15.00
---------- ----- ----------- ----- ------
Total....................... 22,943,440 100.0% $98,998,840 100.0% $ 4.31
========== ===== =========== ===== ======
</TABLE>
The discussion and tables above assume no exercise of any stock options or
warrants outstanding as of December 31, 1999. As of December 31, 1999, there
were options outstanding to purchase a total of 2,225,264 shares of common stock
with a weighted average exercise price of $0.71 per share and warrants
outstanding to purchase 303,918 shares of common stock at a weighted average
exercise price of $3.42 per share and 326,995 shares of Series A preferred stock
(convertible into 128,233 shares of common stock) at an exercise price of
$0.49695 per share. To the extent that any of these options or warrants are
exercised, there will be further dilution to new investors.
16
<PAGE> 19
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1997, 1998
and 1999 and for the year ended August 31, 1997, the four months ended December
31, 1997 and the years ended December 31, 1998 and 1999 have been derived from
our audited financial statements, included elsewhere in this prospectus. As
discussed in Note 10 to the Consolidated Financial Statements, the 1999
financial data has been restated. Selected financial data as of August 31, 1997
have been derived from our audited financial statements, which are not included
in this prospectus. The selected financial data as of August 31,1995 and 1996
and for the years ended August 31, 1995 and 1996 have been derived from our
unaudited financial statements, which in the opinion of management include all
adjustments necessary for a fair presentation of such information in accordance
with generally accepted accounting principles. In 1997, Eprise changed its
fiscal year end from August 31 to December 31. The statement of operations data
for the 12 months ended December 31, 1997 has been derived by summing the
unaudited results of operations for the four fiscal quarters in the period ended
December 31, 1997. The data for proforma loss per share treats our outstanding
preferred stock as though it were common stock from the date of original
issuance. The information set forth below should be read along with our
"Management's Discussions and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes to those statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOUR TWELVE
MONTHS MONTHS YEARS ENDED
YEARS ENDED AUGUST 31, ENDED ENDED DECEMBER 31,
------------------------ DEC. 31, DEC. 31, ------------------------
1995 1996 1997 1997 1997 1998 1999
------ ------ ------ -------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (RESTATED)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses.................................. $ -- $ -- $ 33 $ 65 $ 65 $ 345 $ 2,355
Services........................................... 1,104 1,192 1,387 238 1,157 462 1,304
------ ------ ------ ------- ------- ------- --------
Total revenues................................... 1,104 1,192 1,420 303 1,222 807 3,659
Cost of revenues..................................... 458 567 518 285 579 460 1,125
------ ------ ------ ------- ------- ------- --------
Gross profit......................................... 646 625 902 18 643 347 2,534
Operating expenses:
Research and development........................... -- 131 180 327 459 2,149 2,360
Selling and marketing.............................. -- 291 800 392 879 2,349 5,056
General and administrative......................... 1,014 332 501 363 710 1,246 2,006
------ ------ ------ ------- ------- ------- --------
Total operating expenses......................... 1,014 754 1,481 1,082 2,048 5,744 9,422
------ ------ ------ ------- ------- ------- --------
Operating loss....................................... (368) (129) (579) (1,064) (1,405) (5,397) (6,888)
Other income (expense), net.......................... (18) (26) (154) (100) (210) 136 288
------ ------ ------ ------- ------- ------- --------
Net loss............................................. (386) (155) (733) (1,164) (1,615) (5,261) (6,600)
Accretion of redeemable convertible preferred
stock.............................................. -- -- -- (2) (2) (15) (21,630)
------ ------ ------ ------- ------- ------- --------
Loss to common shareholders.......................... $ (386) $ (155) $ (733) $(1,166) $(1,617) $(5,276) $(28,230)
====== ====== ====== ======= ======= ======= ========
Loss per share....................................... $(0.20) $(0.08) $(0.35) $ (0.54) $ (0.76) $ (2.40) $ (11.42)
====== ====== ====== ======= ======= ======= ========
Weighted average common shares outstanding........... 1,822 2,064 2,073 2,156 2,118 2,200 2,473
====== ====== ====== ======= ======= ======= ========
Pro forma loss per share............................. $ (0.50)
========
Pro forma weighted average common shares
outstanding........................................ 13,274
========
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997 1998 1999
---------- ---------- ---------- ------------ ------------ -------------
(IN THOUSANDS) (RESTATED)(1)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 26 $ -- $ 105 $ 3,136 $ 6,357 $ 22,455
Working capital (deficit).................... (341) (508) (1,358) 2,389 5,829 22,977
Total assets................................. 320 408 335 3,647 7,075 25,534
Long-term debt............................... 202 144 -- -- 158 79
Redeemable preferred stock................... -- -- -- 5,004 13,740 35,316
Total stockholders' deficiency............... (370) (521) (1,220) (2,327) (7,583) (11,758)
</TABLE>
- ---------------
(1) See Note 10 to the Consolidated Financial Statements.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and related notes which appear elsewhere in this prospectus.
GENERAL
Eprise, originally named Inner Circle Technologies and then NovaLink, was
founded in 1992 as a provider of online interactive games. Between 1994 and
1997, our principal business shifted to creating and hosting Web sites for
corporate clients. During this period, we encountered recurring problems arising
out of the inadequacy of software tools that were commercially available to
build and maintain Web sites. Realizing that there was an opportunity to
streamline and automate these processes, we began to develop a software product
called Eprise Participant Server to facilitate the construction and updating of
Web sites. We shipped our first commercial product in early 1998. Eprise now
markets and sells version 2.5 of Eprise Participant Server.
We have completed three rounds of venture capital financing since December
1997, for over $38.0 million in gross proceeds, from investors including Prism
Venture Partners, Alliance Technology Ventures and Brookside Capital Partners.
OVERVIEW
We changed our fiscal year end from August 31 to December 31 in 1997. Our
financial information for the last eight months of the fiscal year ended August
31, 1997 and the four months ended December 31, 1997 contained in this
prospectus has been combined in order to present a comparable accounting period
for 1997 to the audited year ended December 31, 1998. Future references to the
year 1997 or 1998 mean the twelve months ended December 31 unless otherwise
indicated.
We generate revenues from two principal sources: (1) license fees for our
software products and (2) professional services and technical support revenues
derived from consulting, implementation, training and maintenance services
related to our software products. In the year ended December 31, 1999, two
customers accounted for 23% of our total revenues. In the year ended December
31, 1998, one customer accounted for 58% of our total revenues.
As our revenue generated from license sales has increased, our gross profit
margins have improved. License revenue represented 73% of total revenue in the
fourth quarter of 1999. License sales produce significantly higher margins than
service sales due to nominal costs associated with licenses and their delivery.
Software licenses. Customers typically pay an up-front, one-time fee for a
perpetual non-exclusive license of our software. Generally, the amount of the
fee is based on the number of licensed servers. To date, software license
revenues have principally come from direct sales to customers. The sales cycle
for our products is typically three to six months. Although we have limited
historical financial data, we believe that our quarterly operating results may
experience seasonal fluctuations due to clients' fiscal year budgeting cycles
and purchasing patterns. Because of our server-based licensing, we experience
significant variation in the size of our licensing transactions.
We generally recognize license fee revenues upon delivery of the product.
If the product is subject to acceptance and/or return and refund, we defer
revenues until acceptance has occurred or the refund period has expired.
18
<PAGE> 21
Services. Services revenues consist principally of revenues derived from
professional services associated with the implementation and integration of our
software products, training of customers' employees and ongoing customer
support, which primarily includes customer technical support services and
product enhancements. We deliver professional services on either a fixed price
basis or a time and materials basis. We generally complete implementation and
training services within three to six months following license contract signing.
We recognize revenues from professional services as such services are
performed. We recognize maintenance revenues, which are invoiced annually in
advance, ratably over the term of the maintenance agreement, which is generally
12 months. Our maintenance revenues currently account for less than 10% of total
revenues. As part of these agreements, we provide product enhancements and
technical support services to customers for an annual fee, which typically
amounts to 20% of the license fee. While a 60-day warranty is included in the
software license, maintenance agreements typically are entered into as of the
date of the software license. Maintenance agreements are renewable at the
discretion of the customer. As of December 31, 1999, there have been 31
customers who have entered into maintenance agreements with Eprise. Of the 31
contracts, to date two have expired, and have not currently been renewed. The
remaining contracts have not yet come up for renewal.
Backlog. Delivery lead times for our products are very short and,
consequently, substantially all of our license fee revenues in each quarter
result from orders received in that quarter. Accordingly, we generally only
maintain a backlog for our professional services and maintenance activities, and
we believe that our backlog at any point in time is not a reliable indicator of
future revenues and earnings.
Cost of revenues. The costs associated with software licenses, including
CDs and packaging, arise primarily from the production of software products, and
have not been significant in any period presented, nor are they expected to be
significant in the foreseeable future. Cost of services revenues consists
primarily of salaries and related personnel costs and other allocated expenses
of our consulting, support and training organizations, as well as costs related
to servicing our legacy products.
Research and development. We maintain a product development staff to
enhance our existing products and to develop new products. Software costs are
expensed as incurred until technological feasibility of the software is
determined, after which any additional costs are capitalized. To date, we have
expensed all software development costs because development costs incurred
subsequent to the establishment of technological feasibility have been minimal.
Selling and marketing. We license our products primarily through our
direct sales force. Selling and marketing expenses consist primarily of costs
associated with personnel, sales commissions, office facilities, travel and
promotional events such as trade shows, seminars and technical conferences,
advertising and public relations programs.
General and administrative. General and administrative expenses include
salaries and related personnel expenses and other costs of the finance, human
resources, information technology and administrative functions at Eprise.
Restatement. As discussed in Note 10 to the Consolidated Financial
Statements, the 1999 Consolidated Financial Statements have been restated.
Subsequent to the issuance of the Company's 1999 consolidated financial
statements, management determined that the Company had incorrectly accounted for
the issuance of the Series C preferred stock in 1999. Because of the proximity
of the issuance of the Series C to the commencement of the Company's proposed
stock offering, the Company has concluded that a beneficial conversion feature
was present in the preferred stock on the date of issuance. For purposes of
evaluating this beneficial conversion feature, the Company considers that the
19
<PAGE> 22
mid-point value implied in the preliminary range of prices for the proposed
stock offering ($9.00) represents the fair value of the common stock on the date
the Series C was issued.
In accordance with Emerging Issues Task Force Abstract No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," the proceeds from the Series C
financing were allocated between the conversion feature and the preferred stock;
because the fair value of the common stock ($9.00) was significantly in excess
of the conversion price implicit in the Series C stock ($3.93), the entire
amount of net proceeds ($21,555,501) were allocated to the conversion feature.
Because the preferred stock is immediately convertible into common stock, an
immediate dividend or accretion of $21,555,501 was recorded from common
stockholders' equity to the carrying value of the Series C preferred stock.
In addition, the Company had originally estimated that for grants of stock
options in September and October 1999, the fair value of the underlying common
stock was $3.93 per share. The Company has concluded that this estimate does not
fully reflect the fair value of the common stock at such times. The Company has
concluded that $9.00 more accurately represents the fair value of common stock
during the period these grants were made and has adjusted its estimates of
compensation cost related to those option grants accordingly.
See Note 10 to Notes to the Consolidated Financial Statements.
20
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth our operating results for the periods
indicated as a percentage of revenues.
<TABLE>
<CAPTION>
FOUR TWELVE
YEARS ENDED MONTHS MONTHS YEARS ENDED
AUGUST 31, ENDED ENDED DEC. 31,
------------ DEC. 31, DEC. 31, ----------------
1996 1997 1997 1997 1998 1999
---- ---- -------- -------- -------- ----
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses............................ --% 2% 21% 5% 43% 64%
Services..................................... 100 98 79 95 57 36
--- --- ---- ---- ---- ----
Total revenues........................ 100 100 100 100 100 100
--- --- ---- ---- ---- ----
Cost of revenues............................... 48 37 94 47 57 31
--- --- ---- ---- ---- ----
Gross profit................................... 52 63 68 53 43 69
Operating expenses:
Research and development..................... 11 13 108 38 266 65
Selling and marketing........................ 24 56 129 72 291 138
General and administrative................... 28 35 120 58 154 55
--- --- ---- ---- ---- ----
Total operating expenses.............. 63 104 357 168 711 258
--- --- ---- ---- ---- ----
Operating loss................................. (11) (41) (351) (115) (668) (188)
Other income (expense), net.................... (2) (11) (33) (17) 17 8
--- --- ---- ---- ---- ----
Net loss....................................... (13)% (52)% (384)% (132)% (651)% (180)%
=== === ==== ==== ==== ====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Software licenses. Revenues from software licenses increased by 582.6% to
approximately $2.4 million for the year ended December 31, 1999 compared to
$345,000 for the year ended December 31, 1998. The increase in revenues from
software licenses was primarily due to the release of version 2.0 of Eprise
Participant Server in April 1999 and the resulting increases in license
deliveries during 1999. All license revenues for the year ended December 31,
1999 were attributable to new customers compared to 30% attributable to new
customers for the year ended December 31, 1998.
Services. Revenues from services increased by 182.3% to approximately $1.3
million for the year ended December 31, 1999 compared to $462,000 for the year
ended December 31, 1998. Approximately 88% of the increase in revenues from
services is attributable to consulting, 9% to training, and 3% to implementation
revenue generated by new software license sales. Approximately 58% of services
revenues for the year ended December 31, 1999 were attributable to new customers
compared to 51% for the year ended December 31, 1998.
Cost of revenues. Cost of revenues, which primarily relate to services
because costs of licenses are insignificant, increased by 144.6% to
approximately $1.1 million for the year ended December 31, 1999 compared to
$460,000 for the year ended December 31, 1998. However, as a percentage of total
revenues, cost of revenues decreased to 31% for the year ended December 31, 1999
from 57% for the year December 31, 1998. This was primarily due to a larger
percentage of total revenues being derived from software license fees (which
have significantly higher gross profit margins) in the year ended December 31,
1999 compared to the year ended December 31, 1998, more efficient implementation
of our products and better utilization of service personnel.
Research and development. Research and development expenses increased by
9.8% to approximately $2.4 million for the year ended December 31, 1999 compared
to approximately $2.1 million for the year ended December 31, 1998. The increase
was primarily attributable to
21
<PAGE> 24
employee-related expenses incurred in the year ended December 31, 1999 for the
continued development of Version 2.0 of Eprise Participant Server and future
product releases.
Selling and marketing. Selling and marketing expenses increased by 115.2%
to approximately $5.1 million for the year ended December 31, 1999 compared to
approximately $2.3 million for the year ended December 31, 1998. Approximately
72% of the increase in selling and marketing expenses was attributable to an
increase in the number of sales and sales support personnel as we expanded our
direct sales force. In addition, approximately 19% of the increase was
attributable to significant cost increases in marketing programs and public
relations activities as we expanded our presence in the market and further
developed our brand.
General and administrative. General and administrative expenses increased
by 61.0% to approximately $2.0 million for the year ended December 31, 1999
compared to $1.2 million for the year ended December 31, 1998. The increase in
general and administrative expenses primarily reflects personnel increases and
the related costs associated with supporting our recent and anticipated revenue
growth.
Compensation cost for stock options. Options were granted during 1999 at
exercise prices which were the best estimate of our board of directors as to the
fair value of the underlying common stock on the date of grant. However,
subsequent to the grant date, management concluded that for grants after the
release of the new version of Eprise Participant Server, these estimates may not
have fully reflected the impact of this release. Management has determined that
for grants made from May to August 1999, $3.93 is a more reliable estimate of
the fair value of the common stock during this period. For grants subsequent to
August 1999, management determined that the mid-point of the preliminary price
range for our anticipated public offering represented the best estimate of the
fair value of the common stock during this period. For grants during 1999,
compensation cost aggregated approximately $6.8 million, which will be amortized
to expense over the four year vesting period of the option grants. For the year
ended December 31, 1999, compensation expense recorded related to these grants
aggregated $524,000.
Other income (expense). Other income and expense consisted primarily of
interest income on invested cash balances and interest expense on borrowings.
The increase in other income between the two periods was the result of higher
cash balances generated from our second round of venture capital financing in
August 1998 and our private placement financing in November 1999.
Income taxes. During the years ended December 31, 1999 and 1998, we
reported losses for both financial and income tax purposes. No provision or
benefit for income taxes was recorded in either period. At December 31, 1999, we
had net operating loss carry forwards for federal and state income tax purposes
aggregating $13.5 million available to offset future taxable income. These loss
carry forwards expire in varying amounts through 2014. At December 31, 1999, we
had federal and state tax credits aggregating $319,000 available to reduce
future taxes payable, expiring through 2014. Because of changes in ownership
that have occurred, including the proposed offering, our ability to fully
utilize these carry forwards is likely to be limited.
SUPPLEMENTAL DISCUSSION OF YEAR ENDED DECEMBER 31, 1998 AND TWELVE MONTHS ENDED
DECEMBER 31, 1997
Software licenses. Revenues from software licenses increased by 430.8% to
$345,000 for the year ended December 31, 1998 compared to $65,000 for the twelve
months ended December 31, 1997. The increase in revenues from software licenses
was primarily due to the first commercial release of Eprise Participant Server
in February 1998 and an increase in the number of licenses delivered. Revenues
from software license fees for the twelve months ended
22
<PAGE> 25
December 31, 1997 resulted from a limited number of license sales of a
preliminary version of the product.
Approximately 30% of license revenues for the year ended December 31, 1998
were attributable to new customers compared to 100% for the year ended December
31, 1997.
Services. Revenues from services decreased by 60.1% to $462,000 for the
year ended December 31, 1998 compared to approximately $1.2 million for the
twelve months ended December 31, 1997. The decrease in revenues from services
was attributable to the fact that prior to the first commercial release of
Eprise Participant Server in February 1998, we derived the majority of our
revenues from Web site development; supporting and operating, or hosting,
customer Web sites; and online interactive games. During these periods, these
revenues decreased as we focused on development and marketing of Eprise
Participant Server.
Cost of revenues. Cost of revenues, which primarily relate to services
because costs of licenses are not significant, decreased by 20.6% to $460,000
for the year ended December 31, 1998 compared to $579,000 for the twelve months
ended December 31, 1997. Cost of services revenues for the twelve months ended
December 31, 1997 included data communication costs associated with our hosting
of customers' Web sites. The decrease in services revenues between the two
periods was due to a decrease in services revenues associated with Web site
hosting and development.
Research and development. Research and development expenses increased by
368.2% to approximately $2.1 million for the year ended December 31, 1998
compared to $459,000 for the twelve months ended December 31, 1997.
Approximately 80% of the increase was due to increased payroll and related
expenses associated with the expansion of our product development staff, which
was required for the continued development of Eprise Participant Server. In
addition, approximately 19% of the increase was due to consulting and contract
programmer expenses incurred in the year ended December 31, 1998 to supplement
our product development staff in the development of version 2.0 of Eprise
Participant Server.
Selling and marketing. Selling and marketing expenses increased by 167.2%
to approximately $2.3 million for the year ended December 31, 1998 compared to
$879,000 for the twelve months ended December 31, 1997. Approximately 75% of the
increase in selling and marketing expenses was due to an increase in the number
of sales and sales support personnel as we developed and expanded our direct
sales force in 1998. Additionally, with the first commercial release of Eprise
Participant Server in February 1998, approximately 25% of the increase was due
to marketing expenses incurred for market awareness programs associated with the
product launch.
General and administrative. General and administrative expenses increased
by 75.5% to approximately $1.2 million for the year ended December 31, 1998
compared to $710,000 for the twelve months ended December 31, 1997.
Approximately 60% of the increase in general and administrative expenses was due
to costs associated with the recruitment and hiring of our Chief Executive
Officer and other executive management staff in 1998 following the first round
of venture financing and approximately 40% of the increase was due to costs
associated with the move to our new facilities in October 1997.
Other income (expense). Other income, consisting of interest income,
increased to $164,000 for the year ended December 31, 1998 compared to $6,000
for the twelve months ended December 31, 1997. The increase in interest income
resulted from interest earned on invested cash balances generated from our first
round of venture capital financing in December 1997. Other expense, consisting
of interest expense, decreased to $28,000 for the year ended December 31, 1998
compared to $216,000 for the year ended December 31, 1997. The majority of
interest expense incurred in 1997 was associated with borrowings from a
financial institution under an accounts receivable factoring arrangement.
23
<PAGE> 26
Income taxes. During the year ended December 31, 1998 and the twelve
months ended 1997, we reported losses for both financial and income tax
purposes. No provision or benefit for income taxes was recorded in either year.
FOUR MONTHS ENDED DECEMBER 31, 1997
Software licenses. Revenues from software licenses for the four months
ended December 31, 1997 were $65,000. The increase in software license revenues
compared to the full year ended August 31, 1997, was primarily attributable to
the release of the preliminary version of Eprise Participant Server and the
initial deliveries of the product to customers.
Services. Revenues from services totaled $238,000 for the four months
ended December 31, 1997. These revenues primarily related to consulting services
provided for initial installations of Eprise Participant Server and, on a
monthly basis, were reduced from levels realized in the year ended August 31,
1997. This decrease in revenues was attributable to the fact that prior to the
release of Eprise Participant Server, we derived a majority of our revenues from
Web site development, Web site hosting and online interactive games.
Cost of revenues. Costs of revenues, which primarily relate to services
because costs of licenses are not significant, totaled $285,000 for the four
months ended December 31, 1997. As a percentage of revenues, cost of services
revenues was 94.1%, compared to 36.5% in the year ended August 31, 1997. The
increase in cost of services and other revenues as a percentage of revenues is
attributable to the decrease in revenues discussed above, as we began to exit
our original lines of business.
Research and development. Research and development expenses totaled
$327,000 for the four months ended December 31, 1997. As a percentage of
revenues, research and development expenses were 107.9%, compared to 12.7% for
the year ended August 31, 1997. This increase in research and development
expenses as a percentage of revenues is attributable primarily to increased
salaries, benefits, and recruiting expenses associated with an increase in
product development personnel during the four months ended December 31, 1997.
Selling and marketing. Selling and marketing expenses totaled $392,000 for
the four months ended December 31, 1997. Spending in this category, on a monthly
basis compared to monthly spending during the year ended August 31, 1997, rose
due to an increase in the number of sales and sales support personnel during the
period.
General and administrative. General and administrative expenses totaled
$363,000 for the four months ended December 31, 1997. Spending in this category,
on a monthly basis compared to monthly spending during the year ended August 31,
1997, rose due to an increase in the number of personnel during the period to
support our anticipated growth.
Other income (expense). Other expense for the four months ended December
31, 1997 totalled $99,000 and consisted principally of interest expense related
to outstanding borrowings during the period under an accounts receivable
factoring arrangement.
Income taxes. During the four months ended December 31, 1997, we reported
a loss for both financial and income tax purposes. No provision or benefit for
income taxes was recorded during the period.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED AUGUST 31, 1997
Software licenses. Revenues from software licenses were $345,000 for the
year ended December 31, 1998 compared to $33,000 for the year ended August 31,
1997. The increased revenues from software licenses were the result of the first
commercial release of Eprise Participant Server in February 1998. In the year
ended August 31, 1997, revenues from software licenses were derived from the
sale of a preliminary version of Eprise Participant
24
<PAGE> 27
Server. Eprise derived the majority of its revenues during the year ended August
31, 1997 from Web site development, Web site hosting and online interactive
games.
Services. Revenues from services decreased by 66.7% to $462,000 for the
year ended December 31, 1998 compared to approximately $1.4 million for the year
ended August 31, 1997. The decrease in revenues from services was attributable
to the fact that for the year ended August 31, 1997, prior to the release of
Eprise Participant Server, Eprise derived the majority of its revenues from Web
site development, Web site hosting and online interactive games.
Cost of revenues. Cost of revenues, which primarily relate to services as
costs of licenses are not significant, decreased by 11.2% to $460,000 for the
year ended December 31, 1998 compared to $518,000 for the year ended August 31,
1997. The decrease in cost of revenues was primarily due to the significant
reduction of data communications expenses associated with the operation of
online interactive games and Web site hosting.
Research and development. Research and development expenses increased by
1,093.9% to approximately $2.1 million for the year ended December 31, 1998
compared to $180,000 for the year ended August 31, 1997. Approximately 73% of
the increase was due to increased salaries, benefits and recruiting expenses
associated with an increase in the number of research and development personnel.
In addition, approximately 16% of the increase was due to consulting and
contract programmer expenses incurred in the year ended December 31, 1998 to
supplement our research and development staff in the development of version 2.0
of Eprise Participant Server.
Selling and marketing. Selling and marketing expenses increased by 193.6%
to approximately $2.3 million for the year ended December 31, 1998 compared to
$800,000 for the year ended August 31, 1997. Approximately 40% of the increase
in selling and marketing expenses was due to the hiring of sales and sales
support personnel as Eprise developed and expanded its direct sales force in
1998. Additionally, with the first commercial release of Eprise Participant
Server in February 1998, approximately 60% of the increase was due to increased
marketing expenses for market awareness programs associated with the product
launch.
General and administrative. General and administrative expenses increased
by 148.7% to approximately $1.2 million for the year ended December 31, 1998
compared to $501,000 for the year ended August 31, 1997. Approximately 88% of
the increase in general and administrative expenses was due to costs associated
with the recruitment and hiring of our Chief Executive Officer and other
executive management staff in 1998 following the first round of venture
financing and approximately 12% of the increase was due to costs associated with
our move to new facilities in October 1997.
Other income (expense). Interest income increased to $164,000 for the year
ended December 31, 1998 compared to $3,000 for the year ended August 31, 1997.
The increase in interest income resulted from interest earned on invested cash
balances generated from our two rounds of venture capital financing in December
1997 and August 1998. Interest expense decreased to $28,000 for the year ended
December 31, 1998 compared to $157,000 for the year ended August 31, 1997. The
majority of interest expense incurred in 1997 was associated with borrowings
from a financial institution under an accounts receivable factoring arrangement.
Income taxes. During the years ended December 31, 1998 and August 31,
1997, we reported losses for both financial and income tax purposes. No
provision for or benefit from income taxes was recorded in either year.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited results of operations for each
of our last eight quarters up to and including the quarter ended December 31,
1999, and also presents such
25
<PAGE> 28
information as a percentage of our total revenue for the periods indicated. The
unaudited results of operations have been prepared on substantially the same
basis as the audited statements of operations contained in this prospectus and
include all adjustments, consisting of normal recurring accruals, that we
consider necessary to present this information fairly when read in conjunction
with our financial statements and accompanying notes appearing elsewhere in this
prospectus. The operating results in any quarter are not necessarily indicative
of the results that may be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses.. $ 76 $ 101 $ -- $ 168 $ 108 $ 223 $ 524 $ 1,500
Services........... 95 148 104 115 53 305 399 547
------- ------- ------- ------- ------- ------- ------- -------
Total
revenues..... 171 249 104 283 161 528 923 2,047
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues..... 149 94 101 116 126 161 415 423
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 22 155 3 167 35 367 508 1,624
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development...... 421 473 624 631 568 545 558 689
Selling and
marketing........ 571 605 550 623 765 1,099 1,203 1,989
General and
administrative... 249 301 344 352 364 410 444 788
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses..... 1,241 1,379 1,518 1,606 1,697 2,054 2,205 3,466
------- ------- ------- ------- ------- ------- ------- -------
Operating loss....... (1,219) (1,224) (1,515) (1,439) (1,662) (1,687) (1,697) (1,842)
Other income
(expense), net..... 19 7 28 82 55 33 18 182
------- ------- ------- ------- ------- ------- ------- -------
Net loss............. $(1,200) $(1,217) $(1,487) $(1,357) $(1,607) $(1,654) $(1,679) $(1,660)
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENT OF TOTAL
REVENUES:
Revenues:
Software licenses.. 44% 41% --% 59% 67% 42% 57% 73%
Services........... 56 59 100 41 33 58 43 27
------- ------- ------- ------- ------- ------- ------- -------
Total
revenues..... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues..... 87 38 97 41 78 30 45 21
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 13 62 3 59 22 70 55 79
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development...... 247 190 600 223 353 103 60 34
Selling and
marketing........ 333 243 529 220 475 208 130 97
General and
administrative... 146 121 331 124 226 79 48 38
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses..... 726 554 1,460 567 1,054 390 238 169
------- ------- ------- ------- ------- ------- ------- -------
Operating loss....... (713) (492) (1,457) (508) (1,032) (320) (183) (90)
Other income
(expense), net..... 11 3 27 29 34 6 2 8
------- ------- ------- ------- ------- ------- ------- -------
Net loss............. (702)% (489)% (1,430)% (479)% (998)% (314)% (181)% (82)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our quarterly operating results have varied in the past and may vary
significantly in the future depending on many factors including, among others:
- demand for our products and services;
26
<PAGE> 29
- the timing of sales of our products and services;
- the timing of customer orders and product implementation;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to selling and marketing, product
development or general administration;
- changes in the rapidly evolving market for Web content management
solutions;
- the mix of product license and service revenue; and
- the timing and size of sales derived through our strategic partners.
Furthermore, we believe that the purchase of our products is relatively
discretionary and generally involves a significant commitment of capital. As a
result, purchases of our products may be deferred or canceled in the event of a
downturn in any potential customer's business or the economy in general.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through 1997, we primarily financed our operations and
met our capital expenditure requirements through funds generated from
operations, funds borrowed from several stockholders and a director, and funds
borrowed from Silicon Valley Bank. Since December 1997, we have raised over
$38.0 million in venture capital and private placement funding in order to
expand the product development and sales and marketing efforts of the business.
At December 31, 1999, our primary source of liquidity consisted of cash
totaling approximately $22.5 million as well as accounts receivable of
approximately $2.0 million. Accounts receivable increased by approximately $1.9
million in 1999, primarily as a result of our increase in revenues during the
fourth quarter of 1999. We expect that as we continue to expand our revenue
base, our accounts receivable will increase proportionally. On November 8, 1999,
we raised cash proceeds of approximately $23.4 million, after expenses, from the
sale of an aggregate of 16,233,766 shares of Series C preferred stock. In
addition, we have a borrowing agreement with Silicon Valley Bank that provides
us with a working capital revolving line of credit and a capital equipment line
of credit. The working capital line of credit, which expires on March 26, 2000,
provides for borrowings up to a maximum amount equal to the lesser of $1.0
million or a percentage of eligible accounts receivable. Borrowings under the
line are subject to financial performance covenants, bear interest at a rate per
annum equal to the bank's prime rate plus 1%, and are collateralized by all of
our tangible assets. There have been no borrowings to date under the working
capital line of credit and as of December 31, 1999 there was $1.0 million
available under the line. As of December 31, 1999, the equipment line of credit
had expired and is subject to renewal, and there were no borrowings outstanding
under the equipment line of credit. At December 31, 1999, there was a term note
outstanding relating to a previous equipment line of credit with Silicon Valley
Bank totaling $164,675. At December 31, 1998, we were not in compliance with
maximum net loss covenants contained in the line of credit agreements. The bank
waived the events of noncompliance, and the covenants were amended. At December
31, 1999, we were in compliance with all of the terms of our line of credit
agreements.
Our operating activities have used cash in the current fiscal year and each
of the last two fiscal years. During the calendar years 1999, 1998 and 1997,
cash used in operating activities of approximately $6.9 million, $5.3 million
and $1.4 million, respectively, resulted from net losses of approximately $6.4
million, $5.3 million and $1.6 million, respectively. For the year ended
December 31, 1999, the cash operating loss was primarily a result of payroll and
related expenditures, as well as marketing programs representing approximately
15% of revenues, and research and development representing approximately 10% of
revenues (excluding payroll and
27
<PAGE> 30
related expenditures). For the year ended December 31, 1998, the cash operating
loss was primarily a result of payroll and related expenditures, as well as
marketing programs representing approximately 8% of revenues, and research and
development representing approximately 10% of revenues (excluding payroll and
related expenditures). We expect the trend in cash operating losses to continue
at a rate equal to or greater than the current rate as we increase and expand
our distribution capability and continue our product development.
Cash used in investing activities was approximately $366,000, $350,000 and
$212,000 in the calendar years 1999, 1998 and 1997, respectively. The cash used
in investing activities was primarily used for purchases of computer systems and
software for internal development used to support our growth, as well as
furniture and equipment to accommodate the increased number of personnel.
Cash provided by financing activities amounted to approximately $23.4
million, $8.8 million and $4.7 million in the calendar years 1999, 1998 and
1997, respectively. In November 1999, approximately $23.4 million was provided
from the sale of Series C preferred stock to approximately 200 venture capital
investors and other qualified investors who were existing stockholders of Eprise
or clients of our private placement agent. In 1998, approximately $8.5 million
was provided from the sale of Series B Preferred Stock to seven institutional
venture capital investors and their affiliates and one accredited individual. In
calendar year 1997, approximately $4.9 million was provided from the sale of,
and conversion of a note payable into, Series A preferred stock issued to three
institutional venture capital investors and one accredited individual.
We currently anticipate that the net proceeds from the issuance of Series C
preferred stock on November 8, 1999, and the net proceeds from this offering,
together with our current cash and equivalents and line of credit, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. However, we may need to raise
additional funds in future periods through public or private financings, or
other arrangements. Any additional financings, if needed, might not be available
on reasonable terms or at all. Failure to raise capital when needed could harm
our business, financial condition and results of operations. If additional funds
are raised through the issuance of equity securities, additional dilution could
result. In addition, any equity securities issued might have rights, preferences
or privileges senior to our common stock.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants
released Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to provide guidance related to determination of the allocation
of revenues in multiple element contracts under certain circumstances. SOP 98-9
will be effective for transactions entered into in our fiscal year beginning
January 1, 2000. Eprise does not expect that adoption of SOP 98-9 will have a
material impact on financial position or the results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 2000. The new standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for based on the use of the derivative and
whether it qualifies for hedge accounting. Management is currently assessing the
impact of SFAS No. 133 on our financial statements. Eprise will adopt this
accounting standard on January 1, 2001, as required.
28
<PAGE> 31
YEAR 2000 ISSUES
We have designed Eprise Participant Server and its add-on modules to be
Year 2000 compliant, and, as a result, to date we have not experienced Year 2000
problems related to these products. We licensed a precursor of Eprise
Participant Server that may not be Year 2000 compliant to one customer, but have
not been advised of any Year 2000 problems by such customer to date.
The majority of the computer programs and hardware we currently use in our
own internal operations did not require replacement or modification as a result
of the Year 2000 issue.
We believe that our significant vendors and service providers are Year 2000
compliant and have not, to date, been made aware that any of our significant
vendors or service providers have suffered Year 2000 disruptions in their
systems.
Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result of any Year 2000
problems.
29
<PAGE> 32
BUSINESS
Eprise provides software products and services that enable businesses to
maintain, update, expand and otherwise manage the information contained on their
Web sites. Our core product, Eprise Participant Server, enables a business
organization to distribute this Web content management function among the
appropriate individuals within the enterprise who are charged with particular
aspects of the Web business. These individuals need no knowledge of programming
languages or other technical skills to use Eprise Participant Server, thereby
minimizing a customer's reliance on information technology professionals and
consultants. Eprise Participant Server ensures, however, that changes to Web
content are carefully managed through rules contained in the software which
govern Web content access and approval rights. Eprise Participant Server permits
an enterprise to have Web site content which is dynamic, up to the minute and
responsive to the needs of customers, business partners, employees and others
who visit the enterprise's Web site. Our product can be easily integrated with a
customer's existing Web site infrastructure and it can be extended to provide
enhanced, customized functionality. We believe that Eprise Participant Server's
comprehensive, out-of-the-box functionality makes it the most cost-effective Web
content management solution currently available.
INDUSTRY BACKGROUND
The Internet has evolved into a critical sales, service and communications
channel for businesses. This development has permanently altered the way
organizations manage relationships, not just with customers, but also with
suppliers, business partners, employees and others interested in the business
enterprise. Business organizations worldwide have realized that an effective Web
site can help the organization to achieve higher revenues as well as to build
and strengthen relationships with its many constituencies. IDC estimates that
the number of business Web pages will increase from 2.2 billion in 1999 to 16.5
billion in 2003.
Effective Web sites must communicate business information to one or more
target audiences. In order to do this, many enterprises maintain:
- an intranet site, which is used for internal communications with and
among employees and which may contain information about corporate
policies and employee benefits, other non-public announcements, and
internal product and sales support.
- an extranet site, which is used for restricted external communications
with business partners and which may contain information about products
and pricing, distribution channels, contract terms and conditions and
promotional material.
- an Internet site, which is used for communications with customers and the
general public and which often contains information about products,
customer service and support, company contacts, and investor and
financial information.
Because Web sites provide critical business information, they must be
carefully managed and kept up to date. Given the large amount of information
that can be made available on an organization's Web sites, and the number of
people who may be responsible for delivering and maintaining that information, a
business must determine who will contribute and manage what content, and how and
to whom that content will be presented. This means that software which manages
Web site content must:
- distribute Web site content contribution, editing and approval functions
to the most appropriate individuals in the organization to enable them to
modify content quickly and easily without the assistance of technical
personnel;
- organize and store content so that it is presented consistently
throughout the Web site, and so that it can be easily formatted,
retrieved, re-used and revised over time;
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- target content to the intended audience that is consistent with the
organization's business strategy and marketing messages; and
- permit integration with existing Web site content and software, without
the need for complex conversions or extensive programming.
Businesses have found it difficult and expensive to build in-house systems
or to customize commercially available software to manage their Web site
content. Businesses first attempted to manage the content of their Web sites
through in-house software development efforts. These efforts often failed
because the organization did not have sufficient resources and internal
technical personnel. These difficulties led to the development of commercially
available software that businesses could use to manage their Web site content
without substantial commitment of internal technical personnel. Many of these
solutions required a high degree of costly and time-consuming customization in
connection with both implementation and ongoing Web site management and
enhancement. Customized software solutions have also made businesses dependent
upon proprietary technology, which is difficult to integrate with other existing
and future business applications.
Because of these difficulties, business organizations require a new
approach to Web content management. This new approach requires software that is
as fully functional as possible upon installation, without requiring extensive
customization or consulting services. The software should be easy for
non-technical personnel to use, should be easy to integrate with the user's
existing databases, information systems and other technology and it should
permit a business to manage the content of its Web site on a decentralized basis
so that the appropriate individuals within the organization are responsible for
managing the content. Finally, the software should permit the business
organization to deliver timely, targeted information to its various audiences.
OUR SOLUTION
Eprise Participant Server provides a solution that addresses all of the
requirements for effective Web content management software.
Comprehensive, Out-of-the-Box Functionality. We believe that Eprise
Participant Server is the most complete out-of-the-box content management
software solution available today, with built-in functionality that results in
low implementation and customization costs.
Rapid Deployment. Typically, a customer can quickly install Eprise
Participant Server and begin using it commercially within a week. Because our
software is intuitive and easy to use, there is no need for technical scripting
or programming. This means that business people can begin contributing to and
modifying content on the Web site immediately after deployment, dramatically
reducing the time to market of the enterprise's Web initiatives.
Easy Integration with Existing Web Site Infrastructure and
Technology. Eprise Participant Server uses widely accepted, non-proprietary
industry standards to communicate with other Internet infrastructure software.
This permits a customer to easily integrate Eprise Participant Server with its
back-office systems, databases, e-commerce and application servers and existing
Web content. In addition, customers can use readily available software
development tools to adapt and customize Eprise Participant Server to address
their specific needs. Our architecture also permits a software developer to
enhance the functionality of our product to address a customer's specific
requirements.
Distribution of Content Management Responsibility. Eprise Participant
Server distributes Web site content creation, editing and approval
responsibilities throughout an organization, enabling the appropriate
individuals to implement and manage the Web site, in most cases without
assistance from a Webmaster or other technical personnel. At the same time,
Eprise Participant Server enables an organization to establish rules to control
those aspects of the Web site which
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are most appropriately managed by the Webmaster, such as rules to provide a
consistent look and feel. As a result of this distribution of responsibility, a
customer using our solution can successfully provide more timely and targeted
information that is consistent with the organization's business objectives.
Delivery of Information Targeted to Particular Audiences. Through the
creation of unique business rules and individually assigned roles, Eprise
Participant Server makes it easy for the appropriate people within an enterprise
to create targeted, up-to-date content for the specific audiences that the
enterprise is trying to reach. Similarly, by assigning roles to Web site users
within and outside the enterprise, such as "employee," "manager" or "business
partner," and allowing those persons to select user preferences relevant to
their role or the available content, an enterprise can ensure that each member
of its audience is receiving the most relevant content.
Because Eprise Participant Server has all of this functionality, we believe
that it is the most cost-effective Web content management solution currently
available. Using Eprise Participant Server, a customer can create and maintain a
dynamic Web site that can be seamlessly integrated with other aspects of its
business with minimal reliance on internal or external information technology
professionals.
OUR STRATEGY
Our objective is to become the leading provider of Web content management
solutions. To achieve this goal we are pursuing the following strategies:
Expand Product Offerings. Using customer feedback and market research, we
intend to expand our research and development in order to provide new releases
of Eprise Participant Server and to add new products that respond to our
customers' requirements. We intend through future releases of Eprise Participant
Server and new products to provide for further integration with our customers'
other software products, and to extend the content management capabilities of
our products.
Expand Direct Sales. Our direct sales force consists of teams of account
executives and systems engineers. Each of these teams is assigned to a territory
where it calls on enterprise accounts and dot-com companies that need content
management software to support their Internet infrastructure requirements. We
intend to substantially increase the number of our sales personnel in order to
achieve greater geographical coverage and increased market penetration.
Expand Alliances. We will continue to form and develop alliances with
large systems integrators, Web developers, interactive agencies, application
service providers and original equipment manufacturers. These alliances enable
us to expand our sales and marketing activities, giving us greater marketing
presence and sales coverage. In addition, we intend to continue forming
alliances with other Internet software companies with complementary products and
technologies so that together we may deliver to our respective customers more
comprehensive and better integrated solutions.
Expand Sales Rapidly in Global Markets. We intend to rapidly expand our
international sales presence to take advantage of the growing global demand for
Web content management solutions. We will support this effort with a combination
of direct sales and support personnel, indirect sales channels and alliance
partnerships. We have formed a key alliance with a Japanese integrator to
co-develop and distribute a Japanese language version of Eprise Participant
Server. Additionally, we are establishing a direct sales presence and forming
alliances in the European market.
Leverage Existing and New Customer Relationships. We are targeting
potential customers with multiple Web sites. We intend to develop and strengthen
our relationships with these customers with the expectation that we can generate
substantial additional revenues beyond
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the initial license and service fees, as well as shorten the sales cycle on
future licenses for the same account. In addition, we expect to build on our
relationships with existing and future "marquee" customers to expand the
market's awareness of our product.
PRODUCTS
The Eprise product line consists of Eprise Participant Server, which is our
Web content management software, and a series of add-on products for Eprise
Participant Server. The following table highlights the key functionality and
features of Eprise Participant Server.
Eprise Participant Server Functionality and Features
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRODUCT FUNCTIONALITY FEATURES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Content Management - Enterprise-wide distributed content contribution and
editing
- Categorization and organization of content
- Ability to store and retrieve previous versions of
content
- Ability to track access and editing history
- Re-useable page components (i.e., headers, footnotes) and
templates
- ------------------------------------------------------------------------------------------------------
User Management - Ability to assign roles to view and manage content
- Authentication of user identity using a variety of
industry standards
- Ability of Web site visitors to select content
preferences
- ------------------------------------------------------------------------------------------------------
Business Rule Management - Ability to provide for multiple levels of content
approval
- Ability to create rules governing an individual's rights
to view, modify or manage content
- Ability to target content to appropriate audiences
- ------------------------------------------------------------------------------------------------------
</TABLE>
Eprise Participant Server provides all of the functionality shown in the
above chart directly to non-technical business people within an enterprise, in
most cases without intervention by information technology personnel.
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Eprise also offers a variety of add-on products to maximize the effective
use of Eprise Participant Server by the broadest range of users. The current
add-on products offered by Eprise are shown in the following table.
Eprise Add-On Products
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRODUCT FEATURES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Integration Agents - Facilitates communication and exchange of information and
services between Eprise Participant Server and e-commerce
and applications servers
for ASP - Supports products based on Microsoft Active Server Pages
including Site Server Commerce
for Cold Fusion - Supports Allaire Cold Fusion Application Servers
for Java technologies - Supports Java Server Pages applications and other
applications servers that utilize Java technologies
- ------------------------------------------------------------------------------------------------------
Full Text Options - Allows a searchable full-text index to be created for
content managed in Eprise Participant Server
- Provides permission system for search requests and
displaying search results
for Windows NT - Uses Microsoft Index Server that ships with Windows NT
4.0
for Solaris - Uses technology from Verity, a leading full-text search
provider for the Unix platform
- ------------------------------------------------------------------------------------------------------
Web Catalyst - Automatically incorporates existing Web site content into
Eprise Participant Server
- ------------------------------------------------------------------------------------------------------
</TABLE>
We typically charge for Eprise Participant Server and add-on product
licenses based on the number of servers the customer will need to support its
Web sites, but occasionally we will provide our customers with the option to
license our products on an enterprise, divisional, or site license basis. As a
result, as the customer's Web sites prosper and site visits and transaction
volume grow, the client will need to purchase more licenses for the additional
servers deployed.
TECHNOLOGY
Eprise Participant Server incorporates a number of important technological
and design features. Its open architecture is based on the programming language
XML and supports other programming standards such as COM and Java through our
optional add-ons. The user interface for Eprise products is delivered through a
Web browser and is based upon standard Web programming languages such as HTML,
DHTML, Java and JavaScript. Eprise Participant Server is also portable, allowing
customers to use different database products for their information repository,
such as Microsoft SQL Server or Oracle, as well as different operating systems
and Web servers such as Windows NT and Solaris.
Eprise Participant Server's architecture is highly scalable because it uses
technology that allows dynamically rendered content to be stored in memory to
improve transactional performance and speed, as well as a two-tier architecture
that permits multiple Eprise servers to be "clustered" to share a database
server.
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Eprise Participant Server is also extensible, allowing a business to create
customized Web pages for specialized business process automation. Eprise
Participant Server's business rule management can incorporate information
provided by other corporate systems, such as directories. Using widely available
Web software development tools, a customer can easily integrate Eprise
Participant Server with other systems, such as application and e-commerce
servers, sales and service systems and back-office systems.
SERVICES
While the effective use of Eprise Participant Server requires little or no
customization, we do offer a variety of optional services to our customers.
Eprise Advantage Program. Through our Eprise Advantage Program, available
for a standard fee, an Eprise professional will evaluate a customer's Internet
initiatives in conjunction with its overall business strategy. Based on this
evaluation, we will deliver a discovery and design analysis providing
recommendations on how Eprise Participant Server can best be used to implement
the customer's business goals, either through the customer's own technology
department, Eprise professional services or third party service providers.
Professional Services. If a customer wishes to work with Eprise in the
implementation phase of a project, including projects arising out of Eprise
Advantage Program recommendations, our professional services team will provide
development services ranging from graphics design to building applications using
complex database and development tools, either on a fixed fee or a time and
materials basis.
Customer Training. Our professional services team provides customer
training, either as a component of our Eprise Advantage Program or as a
stand-alone service offering for a fixed fee.
Maintenance and Support. We provide technical support and maintenance
services through annual maintenance agreements with our customers. These
services include delivery of software product bug fixes, enhancements and new
versions of Eprise Participant Server. We deliver support and maintenance
services primarily through telephone and e-mail communications. We also address
customer questions involving product operation, installation and application
development.
CUSTOMERS
We target enterprise-level accounts and dot-com companies who
- understand the critical importance of communicating with their
distribution channels and customers through their Web sites,
- have a significant amount of information to impart which requires
frequent updating,
- must address the informational needs of a number of different audiences
from their sites, and
- require rapid design of, and updates to, their sites.
To date, we have licensed Eprise Participant Server to over 40 clients in a
broad spectrum of industries, including the financial services, technology and
manufacturing industries. For the year ended December 31, 1999, American Express
accounted for 13% of revenues and Teijin Systems Technology Ltd. accounted for
10% of revenues for such period.
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The following is a partial list of clients that have licensed our products
and that we believe are representative of our overall client base.
Allstate Insurance
American Express
Asset International
Bausch & Lomb
BP Amoco
Briggs & Stratton
CAP Ventures
ChemPoint.com
Eastman Chemical
EMC Corp.
Financial Executives Institute
The Hartford
Hewlett-Packard
Homeruns.com
Laidlaw
Lincoln Financial Group
Martin Professional A/S
(Denmark)
MicroTouch Systems Inc.
Novell
Racing Rhino.com
Republican National Committee
Sabre
Sharp Electronics
SmartMoney.com
SPX Corporation
Teijin Systems Technology
(Japan)
VIS Corporation
CASE STUDIES
Our customers have a wide variety of business objectives and Web site
strategies that we believe our product can address.
EMC CORPORATION, a supplier of intelligent enterprise storage and retrieval
technology, was seeking to reduce the time and cost associated with maintaining
its "build-it-yourself" Web site, while preserving its existing Web content.
EMC's Web site provides a critically important internal communications vehicle
for its geographically dispersed personnel. Using Eprise Participant Server, the
company has developed an intranet that provides employees with a wealth of
competitive data. The information is organized in three secure levels, and is
made available to employees depending upon their role in the organization. This
intranet is helping to maximize the productivity of marketing, corporate
executives, field operations, and other departments throughout EMC.
SHARP ELECTRONICS CORPORATION is the U.S. sales and marketing subsidiary of
Sharp Corporation, a Japanese manufacturer of consumer electronics, business
products and electronic components. Sharp has traditionally sold products to end
users through existing distribution networks. However, it recently established a
new division, the Document and Network Systems Group, that focuses on selling
Network Laser Systems to businesses through value-added resellers, or VARs, and
equipment dealers.
Because the Document and Network Systems Group required a more
sophisticated sales channel than that used by other Sharp product groups, Sharp
believed that new and more sophisticated communications tools would be
necessary. Sharp elected to develop a complete e-business system to support its
VAR and equipment dealer relationships, including a Web site that would be the
focal point for product marketing, sales and support and communication between
Sharp and its VARs and equipment dealers. In consultation with Andersen
Consulting, Sharp elected to deploy a Microsoft-centric environment that uses
Windows NT, SQL Server, IIS, and Site Server Commerce. To round out the
solution, Sharp and Andersen Consulting chose Eprise Participant Server to
provide dynamic Web content management.
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With Eprise Participant Server, the content on Sharp's new Web site is
targeted to various tiers of resellers and provides timely, up-to-date
information which is easily added to the site by Sharp's business professionals.
Sharp has realized the following competitive advantages by using our product to
develop its sales channels:
- real-time delivery of product information, such as price lists, technical
notes, bulletins, frequently asked questions, or FAQs, and service
documentation, to resellers and equipment dealers;
- effective, targeted communications with business partners and consumers;
- ability of non-technical business professionals to quickly add and update
content on the Web site to improve customer service and satisfaction; and
- enhanced ability to attract sales channel partners.
SALES, MARKETING AND BUSINESS DEVELOPMENT
We license our product through both our direct sales force and indirect
sales channels. As of February 25, 2000, our sales, marketing and business
development organization consisted of 54 individuals, 52 of whom were based in
North America, including 22 direct sales representatives, who are supported by
11 sales support personnel, and 10 marketing personnel.
Direct Sales. To date, we have sold our products primarily through our
direct sales force. We currently have nationwide sales coverage, organized
principally by geographic regions. We intend to increase our direct sales force
in the U.S. and overseas. We are focusing our sales efforts on well-defined
market segments where the need for our solution is greatest and where technology
innovation is the norm, such as the financial services, technology and
manufacturing industries. We target enterprise-level accounts and dot-com
companies for whom the Internet is a fundamental part of their corporate
strategy.
Marketing. We support our sales efforts through various marketing efforts
to generate brand awareness and to qualify leads for the sales organization. We
intend to significantly increase both expenditures and personnel to support our
marketing efforts.
Business Development. It is the goal of our business development staff to
extend our market reach and increase our sales opportunities through the
establishment of relationships with systems integrators, Web developers and
application service providers who build customer solutions based on Eprise
Participant Server. In many cases, these business partners will recommend a Web
content management solution to their customers as part of the e-business
application that they deliver. We anticipate that these business partners will
reduce our current three- to six-month sales cycle while adding value to the
planning and deployment phase of projects that require an Eprise solution. Our
current business partner arrangements include lead sharing, product training,
joint marketing and access to engineering resources. These relationships are
important to our strategy because of our business partners' technical knowledge
and extensive customer relationships across many industries. We intend to devote
significant resources to developing these relationships further.
We also have formal contractual relationships under our "E-business
Experts" program with a number of systems integrators and Web developers. Under
this program, we provide our E-business Experts with a license to use Eprise
Participant Server along with in-depth professional training in order to enable
the E-business Experts, in turn, to design and build for their customers content
management solutions based on the use of Eprise Participant Server.
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The following is a partial list of our current E-business Experts
alliances:
<TABLE>
<S> <C>
Agency.com PixelDance Communications
Lante Corporation Power 2000
Mitchell Systems Corporation Primix Solutions
MultiMedia Management AS Telesoft Corporation
(Sweden) The New Media Group
Northwoods Software TUSC Computer Systems
Development, Inc. Pty. Ltd. (Australia)
OPN Systems Wing.net
</TABLE>
Additionally, we are working with key large systems companies such as
Microsoft to coordinate product and marketing activities. We are a Microsoft
Certified Solutions Provider and a member of the Hewlett-Packard Covision
Program, the Sun Developer Connection Program and the Allaire Alliance Program.
These relationships afford us greater worldwide marketing and sales reach.
Global Expansion. We currently sell our products primarily in the United
States, but are taking steps to rapidly expand our global sales efforts to
domestically based global companies and companies based outside the United
States. We intend to do this with a combination of direct sales and support
personnel, indirect sales channels and partnerships. We have formed an alliance
with a Japanese integrator, Teijin Systems Technology Ltd., to co-develop and
distribute Japanese-language versions of our products. Additionally, we are in
the process of establishing a presence and forming partnerships in the European
market.
RESEARCH AND DEVELOPMENT
We have invested significantly in research and development to enhance our
current products and develop new products. Our research and development expenses
were $459,000 for the twelve months ended December 31, 1997, approximately $2.1
million for the year ended December 31, 1998 and approximately $2.4 million for
the year ended December 31, 1999. We expect that we will increase the dollar
amount of our research and development expenditures substantially in the future.
As of February 25, 2000, 26 employees were engaged in research and development
activities and we plan to continue to hire additional engineers to further our
research and development activities.
Our research team, led by the Chief Technology Officer, identifies market
opportunities and develops prototypes for new product features, product updates,
add-ons and new products. This team is responsible for defining and guiding our
product strategy and vision, and maintaining our reputation as an innovator in
content management solutions. Our development team, led by the Vice President of
Software Development, designs, develops and enhances new and existing products.
This team is responsible for product development, quality and assurance testing,
product documentation, product release and maintenance, and overall execution of
our product development strategy. We intend to continue to expand and enhance
the capabilities of Eprise Participant Server, as well as develop and extend our
content management product offerings, to provide our customers with complete
flexibility in choosing the most desirable environment for creating and managing
content.
COMPETITION
The market for Web content management solutions is intensely competitive,
subject to rapid technological changes and significantly affected by new product
introductions and other
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market activities of industry participants. Many of our competitors currently
have a greater market share than Eprise. We have four primary sources of
competition:
- in-house development efforts by potential clients and partners;
- specialized application servers such as Vignette;
- legacy document management systems such as Documentum; and
- file-based content management systems such as Interwoven.
In addition, we currently partner with a number of companies that provide
complementary products such as Web tools and application servers. Any of these
companies might introduce competitive product offerings in the future.
We believe that the primary factors upon which we compete favorably are the
out-of-the-box functionality and rapid deployment capability of Eprise
Participant Server and Eprise Participant Server's ease of integration with our
customers' existing and future application server products. Other areas in which
we compete favorably include the ability to distribute content management
responsibilities within an organization, the ability to deliver information
targeted to specific audiences, and the cost-effectiveness of our product.
Despite these competitive advantages, we also face competitive
disadvantages because many of our competitors have longer operating histories
and significantly greater financial, technical, marketing and other resources
than we. As a result, they may be able to undertake more extensive promotional
efforts, adopt more aggressive pricing strategies, and offer more attractive
terms to purchasers than we.
We expect competition to persist and intensify in the future. Competition
could materially and adversely affect our ability to obtain revenues from
license fees from new or existing customers and service fees from existing
customers. Further, competitive pressure may force us to reduce the price of our
products. In either case, our operating results and financial condition would be
materially and adversely affected.
PROPRIETARY RIGHTS AND LICENSING
Our success depends upon our ability to maintain the proprietary aspects of
our technology and operate without infringing the proprietary rights of others.
We rely on a combination of trademark, trade secret and copyright law, and
contractual restrictions, to protect the proprietary aspects of our technology.
We seek to protect the source code for our software, documentation and other
written materials under trade secret and copyright laws. These legal protections
provide limited protection for our technology. Our license agreements prohibit
our customers from using our software other than for internal business purposes.
We also seek to protect our intellectual property by requiring employees and
consultants with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source code.
Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments and
enhancements to existing products are at least as important to establishing and
maintaining a technology leadership position. Eprise also licenses third party
software from RogueWave and Verity that is incorporated into Eprise Participant
Server and an add-on product, respectively. We believe these licenses are not
material to our business and the technology could be replaced, if necessary or
appropriate, by commercially available third party software or internally
developed technology without material disruption to our business or operations.
See "Risk Factors -- We have a limited ability to protect our intellectual
property rights, and others could infringe on or misappropriate our proprietary
rights and information."
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EMPLOYEES
As of February 25, 2000, we had a total of 118 employees, including 54 in
sales and marketing, 26 in research and development, 25 in professional services
and support and 13 in information technology, administration and finance. None
of our employees is represented by a collective bargaining agreement, nor have
we experienced any work stoppage. We consider our relations with our employees
to be good.
FACILITIES
Our principal office occupies approximately 12,400 square feet in
Framingham, Massachusetts, under a lease that expires in September 2000. Annual
lease payments on the Framingham facility are approximately $198,600. We have
entered into a lease agreement for approximately 78,000 square feet of new
office space in Framingham, Massachusetts commencing on October 1, 2000. Initial
annual lease payments on the new Framingham facility will be approximately $2.1
million, with periodic increases over the ten-year term of the lease. In
addition, we lease sales and service offices in Oakbrook, Illinois; Dallas,
Texas; San Jose, California; Denver, Colorado; and Reading, U.K., as well as
additional office space in Framingham, Massachusetts. Eprise does not own any
real property.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph A. Forgione(1).................. 45 President, Chief Executive Officer and Director
Jonathan B. Radoff..................... 27 Founder, Chief Technology Officer and Director
Milton A. Alpern....................... 48 Vice President, Finance and Chief Financial Officer
Henry Barnes........................... 36 Vice President, Marketing
Thomas Feldman......................... 41 Vice President, Business Development
Joseph Fiorentino...................... 43 Vice President, Sales
Robert Strong.......................... 56 Vice President, Software Development
Edson D. de Castro(2).................. 61 Director and Chairman
Deborah M. Besemer(2).................. 45 Director
Robert C. Fleming(1)................... 43 Director
Alain J. Hanover(1)(2)................. 51 Director
Nicholas A. Papantonis................. 65 Director
Joseph J. Tischler..................... 51 Director
</TABLE>
- -------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Joseph A. Forgione has been President and Chief Executive Officer, and a
Director of Eprise since November 1997. Prior to joining Eprise, Mr. Forgione
held several senior positions at Lotus Corporation from 1993 to 1997, including
most recently Vice President of Business Development and Planning for the
Internet Applications Division. Mr. Forgione also co-founded and served as a
Senior Vice President of HyperDesk, an object-oriented development tools
company, from 1990 to 1993. Prior to founding HyperDesk, Mr. Forgione held
senior management positions at Data General Corporation. Mr. Forgione holds a
B.S.E.E. degree from the Massachusetts Institute of Technology (MIT) and a
Master of Science in Management from the Sloan School of Management at MIT.
Jonathan B. Radoff is the founder of Eprise, and served as its Chairman,
President and Chief Executive Officer from 1992 until 1997. In November 1997,
Mr. Radoff assumed the position of Chief Technology Officer. Prior to founding
Eprise, Mr. Radoff was the President of Inner Circle Software, a developer of
online interactive software products for Atari and Amiga computers. Mr. Radoff
is a member of the Association of Computer Machinery (ACM) and a trustee of the
Massachusetts Software Council.
Milton A. Alpern joined Eprise in April 1998 as Chief Financial Officer.
Prior to joining Eprise, Mr. Alpern served as Vice President of Finance at
National Transaction Network, Inc. from 1992 to 1998, where he helped establish
that company as a leading publicly-held provider of software solutions to the
electronic payments industry. He also has served as Vice President of Finance at
Henco Software, Inc., a venture-funded producer of information management
software products, from 1987 to 1992. He received his B.S. degree in Accounting
from Montclair State University.
Henry Barnes joined Eprise as Director of Marketing in 1997 and became Vice
President, Marketing in March 1998. Prior to joining Eprise, Mr. Barnes served
as director of product marketing from 1995 to 1997 at ESS Software. He also has
held managerial positions at Edify
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Corporation, a self-service tools and applications company. He holds a B.S.
degree in Computer Science from Tulane University and is a member of the
American Marketing Association.
Thomas Feldman joined Eprise in November 1999 as Vice President, Business
Development. Prior to joining Eprise, Mr. Feldman served from September 1998 to
October 1999 as Vice President, Marketing and Business Development for Prodigy
Communications Corporation, an Internet service provider. Prior to that, Mr.
Feldman worked at Simon & Schuster from 1994 to 1997 as Vice President and
General Manager of RedRocket.com, an online retailer of educational toys and
games. He has also held management positions with Staples and PepsiCo. Mr.
Feldman holds a B.A. degree from Ohio Wesleyan University and a Masters of
Management degree from the Kellogg School of Management at Northwestern
University.
Joseph Fiorentino joined Eprise in April 1999 as Vice President, Sales.
Prior to joining Eprise, Mr. Fiorentino served as Vice President of Sales for
American Internet Corporation, a developer of Internet Protocol address
management software, from December 1997 to December 1998. Mr. Fiorentino also
served as Vice President of Sales for OrderTrust, an e-commerce start-up
company, from March 1996 to November 1997 and as Director of North American
Sales at FTP Software Inc., from April 1994 to March 1996. Mr. Fiorentino holds
a B.A. degree from Merrimack College.
Robert Strong joined Eprise in December 1998 as Vice President, Software
Development. Prior to joining Eprise, Mr. Strong served as Director of Software
Development for FTP Software Inc. from 1996 to 1998. Before that, he served from
1993 to 1996 as Vice President of Research and Development for HyperDesk (which
was acquired by FTP Software in 1996). Mr. Strong also has held senior
management positions at the technology firms Ontologic, Inc., Softbridge
Microsystems and Xyvision. He holds a B.E.E. degree from Villanova University
and a Ph.D. in Communications from MIT, and is a member of the ACM, the IEEE,
the IEEE Computer Society and the Scientific Research Society of North America.
Edson D. de Castro joined our board of directors in May 1998 and was
elected as chairman in October 1999. He served as Chief Executive Officer of
Xenometrix Inc., a biotechnology company, from July 1995 until January 1997. Mr.
de Castro served as Chief Executive Officer of Data General Corporation from
September 1968 to December 1990, and has worked as a consultant in the
technology industry since January 1991. Mr. de Castro currently sits on the
boards of seven other companies, including Healthgate Data Corporation.
Deborah M. Besemer joined our board of directors in October 1999. Ms.
Besemer has been President and Chief Executive Officer of HireSystems, Inc., a
software and services company for hiring management personnel, since June 1999.
Prior to that, Ms. Besemer was President and Chief Operating Officer at
SystemSoft from November 1997 to August 1998. Ms. Besemer worked from 1986 to
1997 at Lotus Corporation, most recently as Executive Vice President of
Worldwide Field Operations. She is a trustee of the Massachusetts Software
Council.
Robert C. Fleming joined our board of directors in December 1997. Mr.
Fleming is general partner of Prism Venture Partners. Prior to co-founding Prism
in November 1995, Mr. Fleming was a general partner at Norwest Venture Capital
from July 1993 to May 1995. Mr. Fleming currently serves on the boards of
directors of a number of venture-backed companies.
Alain J. Hanover joined our board of directors in March 1998. Mr. Hanover
is a co-founder, and has been President and Chief Executive Officer, of InCert
Software Corp., a company that develops program failure detection and prevention
software, since October 1997. Mr. Hanover was co-founder, President, Chief
Executive Officer and Chairman of Viewlogic Systems, Inc. from 1984 to 1997. He
sits on the boards of directors of three other companies, including Applix, Inc.
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<PAGE> 45
Nicholas A. Papantonis joined our board of directors in August 1998. Mr.
Papantonis has been a venture partner with Alliance Technology Ventures of
Atlanta since 1995 and heads that firm's Boston office. He has been a general
partner of Aspen Venture Partners, a Boston-based venture capital partnership,
since 1989, where he has focused on telecommunications investments. In 1970, Mr.
Papantonis joined Infinet Inc., a venture-backed start-up telecommunications
company in Boston, and served as its Chief Executive Officer from 1984 until
1988.
Joseph J. Tischler joined our board of directors in December 1997. Since
January 1995, Mr. Tischler has been an investment manager of The Still River
Management Company and a general partner and founder of The Still River Fund, a
venture capital fund. Mr. Tischler has more than 20 years experience in
marketing and retail store management, including strategic planning and senior
operating positions with divisions of Federated Department Stores and the Batus
Retail Group. Mr. Tischler currently sits on the boards of three other
companies.
ELECTION OF OFFICERS AND DIRECTORS
Our executive officers are elected by the board of directors and serve
until their successors are duly elected and qualified. There are no family
relationships among any of our executive officers or directors.
Our board of directors consists of eight members. Currently, each director
is elected pursuant to our Second Amended and Restated Stockholders Agreement
among Eprise, our preferred stockholders, Messrs. Forgione and Radoff and Angela
Bull. This agreement will automatically terminate upon the closing of this
offering. Our Fourth Amended and Restated Certificate of Incorporation, to be
filed prior to the effectiveness of the registration statement of which this
prospectus forms a part, will provide for classification of our board into three
classes, with the members of the respective classes serving for staggered
three-year terms. The first class consists of Mr. Fleming, Mr. Papantonis and
Mr. Tischler, the second of Ms. Besemer, Mr. de Castro and Mr. Hanover and the
third of Mr. Forgione and Mr. Radoff, with the initial terms of the directors
comprising each class expiring upon the election and qualification of directors
at the annual meetings of stockholders held following the fiscal years ending
December 31, 2000, 2001 and 2002, respectively. At each annual meeting of
stockholders, the number of directors will be fixed and directors will be
re-elected or elected for full three-year terms.
BOARD COMMITTEES
Our audit committee reviews our external and internal auditing procedures,
reviews with our independent auditors the scope and results of their audit for
the year, and also reviews with our management the plan, scope and results of
Eprise's operations. After the closing of this offering, it will also review all
quarterly and year-end financial statements before such financial information is
included in our quarterly and annual filings with the Commission. The members of
our audit committee are Mr. de Castro, Ms. Besemer and Mr. Hanover.
Our compensation committee's functions are to determine the salaries and
other forms of compensation of officers of Eprise and to review general policy
matters relating to compensation and benefits of Eprise's employees. The
compensation committee is also charged with granting stock options and
restricted stock to officers, key employees and consultants, and addressing
stock option and restricted stock matters generally. The members of our
compensation committee are Mr. Forgione, Mr. Fleming and Mr. Hanover. Mr.
Forgione does not participate in any decisions with respect to his own
compensation or, to the extent mandated by applicable securities laws and
Internal Revenue Code regulations, in any compensation decisions relating to
other executive officers.
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<PAGE> 46
No member of the audit committee or the compensation committee is a past or
current officer or employee of Eprise, except as noted with respect to Mr.
Forgione's service on the compensation committee.
DIRECTOR COMPENSATION
The directors of Eprise are not compensated in cash for their service as
directors. Directors who are not employees of Eprise are eligible to participate
in our 2000 Non-Employee Director Stock Option Plan, described below under
"Stock Option Plans." To date, Messrs. de Castro and Hanover each have received
options to purchase 39,215 shares of common stock upon joining the board, and
Ms. Besemer has received options to purchase 15,686 shares of common stock upon
joining the board and 3,921 shares of common stock in January 2000. In addition,
Mr. de Castro received an option to purchase 19,607 shares of common stock in
connection with his election as chairman of the board. All of these grants were
made under the Company's 1997 Stock Option Plan. Directors who are employees of
Eprise are not paid any fees or additional compensation for service as members
of the board of directors or any committee of the board. We maintain directors'
and officers' liability insurance and our by-laws provide for mandatory
indemnification of directors and officers to the fullest extent permitted by
Delaware law. In addition, our charter limits the liability of directors to
Eprise or its stockholders for breaches of the directors' fiduciary duties to
the fullest extent permitted by Delaware law.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In December 1997, the board of directors established a compensation
committee with sole responsibility for determining the compensation of officers
of Eprise, the members of which were Messrs. Fleming, Forgione and Hanover.
Prior to that, all compensation decisions were made by the full board. Mr.
Forgione does not participate in board or compensation committee deliberations
with respect to his compensation. No interlocking relationship exists between
our board or compensation committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past. Mr. Forgione and an affiliate of Mr. Fleming have engaged
in transactions with Eprise as described in "Certain Transactions -- Board
Member Participation in Financings" and "-- Officer Loans," respectively.
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<PAGE> 47
EXECUTIVE COMPENSATION
The following table provides information regarding all compensation
received by our Chief Executive Officer and the other four most highly
compensated executive officers of Eprise whose total salary and bonus for the
fiscal year ended December 31, 1999 exceeded $100,000 for services rendered in
all capacities during 1999. We will use the term "named executive officers" to
refer collectively to these individuals later in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#)
--------------------------- ---- --------- ----------- ------------
<S> <C> <C> <C> <C>
Joseph A. Forgione............................. 1999 $225,869 $48,021 90,584
President and Chief Executive Officer
Joseph Fiorentino.............................. 1999 86,539 80,833(3) 329,411
Vice President, Sales(2)
Jonathan B. Radoff............................. 1999 141,509 25,567 --
Chief Technology Officer
Robert Strong.................................. 1999 141,509 23,126 188,234
Vice President, Software Development
Milton A. Alpern............................... 1999 122,376 32,156 39,215
Vice President, Finance and Chief Financial
Officer
</TABLE>
- -------------------------
(1) The bonus figures listed above represent bonuses paid in July 1999 and
January 2000 for services performed in 1999.
(2) Mr. Fiorentino commenced employment with Eprise in April 1999.
(3) Represents amounts paid to Mr. Fiorentino as sales commissions.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Mr. Forgione has entered into an employment agreement with Eprise dated
November 4, 1997, which provides, among other things, for salary and bonus
payments and stock option grants in specified amounts. The agreement also
provides that Mr. Forgione will receive up to 12 months' severance if his
employment is terminated without "cause" (defined as having engaged in gross
negligence relative to Eprise's affairs or having been convicted of a felony)
and that Mr. Forgione's stock options will become fully vested upon a change of
control of Eprise. In addition, Mr. Forgione has agreed not to solicit Eprise's
employees or customers, or to compete with its business, for a period of one
year following the termination of his employment. Either party can terminate the
agreement at any time, with or without cause. As a condition of his employment
agreement, Mr. Forgione also has signed Eprise's standard form of non-disclosure
and assignment of inventions agreement.
Mr. Radoff has entered into an employment agreement with Eprise dated
December 17, 1997, which provides, among other things, for salary payments of a
specified minimum amount and 12 months' severance if Mr. Radoff's employment is
terminated without "cause" (defined as having engaged in gross negligence
relative to Eprise's affairs or having been convicted of a felony). Mr. Radoff
has agreed not to solicit Eprise's employees or customers, or to compete with
its business, for a period of one year following the termination of his
employment, and has agreed that all works created by him during the term of his
employment shall be deemed works made for hire. The agreement provides that Mr.
Radoff can be terminated only upon the vote of at least five-sevenths of the
board of directors.
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<PAGE> 48
All employee stock option grants, including those granted to the named
executive officers, provide for partial acceleration of vesting (and partial
termination of Eprise's right to repurchase the underlying shares) upon a change
of control of Eprise. Grants to the named executive officers also provide for
additional vesting (and additional lapsing of Eprise's right to repurchase the
underlying shares) upon material, adverse changes in the employee's
responsibilities, compensation and/or job location occurring within one year of
the change of control.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to each of the named executive officers in fiscal 1999.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERMS(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL 1999(1) PRICE($/SH)(2) DATE 5%($) 10%($)
---- ---------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Forgione(4).. 90,584 6.7% $ 0.64 9/17/09 $1,825,347 $2,900,398
Jonathan B. Radoff..... -- -- -- -- -- --
Joseph Fiorentino...... 250,980 18.7 0.46 5/12/09 5,130,490 8,152,129
78,431 5.8 0.64 9/15/09 1,580,453 2,511,272
Robert Strong.......... 141,176 10.5 0.31 1/14/09 2,921,104 4,641,508
47,058 3.5 0.64 9/15/09 948,260 1,506,744
Milton A. Alpern....... 39,215 2.9 0.64 9/15/09 790,217 1,255,620
</TABLE>
- -------------------------
(1) Based on an aggregate of 1,345,682 options granted by us during the fiscal
year ended December 31, 1999 to our employees, including the named executive
officers.
(2) The options in this table were granted under our 1997 stock plan, have
10-year terms and are exercisable in full as of the date of this prospectus.
We have the right to repurchase the shares issued upon exercise of these
options at the original exercise price paid for such shares upon termination
of the optionee's employment. Except as indicated in footnote (4) below,
this right lapses over a four-year period in equal annual installments
beginning on the first anniversary of the date of grant, except that upon a
change of control this right will lapse as to the next regularly scheduled
installment, and will further lapse as to 50% (100% in the case of Mr.
Fiorentino) of any remaining unvested shares upon termination of the
optionee's employment or materially adverse changes in the optionee's
employment responsibilities, compensation and/or job location within one
year after the change of control. All options are incentive stock options,
except for 29,134 options held by Mr. Forgione, and all were granted at the
fair market value of our common stock on the date of grant.
(3) In accordance with SEC rules, we have based our calculation of the potential
realizable value on the term of the option at its time of grant, and we have
assumed that:
- The estimated fair market value on the date of grant, based on an assumed
initial public offering price of $13.00 per share, appreciates at the
indicated annual rate compounded annually for the entire term of the
option; and
- The option is exercised and sold on the last day of its term for the
appreciated stock price.
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<PAGE> 49
These amounts are based on 5% and 10% assumed rates of appreciation and do
not represent our estimate of future stock prices. Actual gains, if any, on
stock option exercises will be dependent on the future performance of the
common stock.
(4) Any shares purchased by Mr. Forgione pursuant to exercise of his option vest
ratably over a 48-month period from the date of grant, and vest in full upon
a change of control.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information regarding the exercise of stock
options by the named executive officers during fiscal 1999 and the value of
unexercised options at 1999 fiscal year-end.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS HELD AT VALUE OF UNEXERCISED
DECEMBER 31, IN-THE-MONEY OPTIONS AT
SHARES 1999(#)(2) DECEMBER 31, 1999($)(3)
ACQUIRED VALUE ----------------------- -----------------------
NAME ON EXERCISE(#) REALIZED($)(1) VESTED UNVESTED VESTED UNVESTED
---- -------------- -------------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Forgione... 285,385 $135,940 18,220 498,746 $ 230,465 $6,318,530
Joseph Fiorentino.... -- -- -- 329,411 -- 4,117,143
Jonathan B. Radoff... -- -- 98,039 98,039 1,247,007 1,247,007
Robert Strong........ 35,294 127,800 -- 152,940 -- 1,925,821
Milton A. Alpern..... 12,254 4,688 12,253 112,744 155,540 1,420,048
</TABLE>
- -------------------------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) All such options are currently exercisable; however, a portion of the shares
underlying the exercisable options of each of the named executive officers
are subject to our repurchase as of December 31, 1999. The heading "Vested"
refers to shares no longer subject to repurchase and the heading "Unvested"
refers to shares subject to repurchase as of December 31, 1999, in each case
assuming exercise of the underlying option.
(3) Based on the assumed initial public offering price of $13.00 per share,
minus the per share exercise price, multiplied by the number of shares
issuable upon exercise of the option.
STOCK OPTION PLANS
Eprise's 1994 and 1997 stock plans provide for the granting of either
incentive stock options or non-qualified options to purchase shares of our
common stock in order to provide incentives to our employees, consultants and
directors. In addition, the 1994 plan provides for the issuance of purchase
authorizations and stock awards. The stock plans authorize the grant of up to
4,144,281 shares in the aggregate, which number will increase automatically on
each of January 1, 2001 and January 1, 2002 by a number of shares equal to the
lesser of (i) 5% of the number of shares of Eprise common stock issued and
outstanding, including treasury shares, as of the close of business on December
31 of the prior year or (ii) 1,372,549 shares. As of January 1, 2000, there were
697,053 shares outstanding pursuant to option exercises, 2,225,264 options
outstanding and 1,221,964 options available for grant under both plans.
The 1994 and 1997 stock plans are administered by our board of directors
and the compensation committee, each of which has the authority to select the
persons to whom options are granted and determine the terms of each option,
including the number of shares of common stock underlying each option. Our plans
allow participants to purchase common stock of Eprise at prices set by the board
of directors, but in the case of incentive stock options and
47
<PAGE> 50
options granted under the 2000 Non-Employee Director Stock Option Plan described
below, not less than fair market value on the date the option is granted.
The maximum term for options granted under the 1994 and 1997 stock plans is
ten years. Options generally expire three months after termination of the
optionee's service to Eprise. Unless otherwise specified, outstanding options
are exercisable immediately upon grant, but we have the right to repurchase the
shares issued upon exercise of the option at the option exercise price if the
employee's employment is terminated for any reason. Generally, the repurchase
right lapses over a four-year period in equal annual installments beginning on
the first anniversary of the date of grant. In the event of a "change in
control" transaction, our board of directors is authorized to take one or more
of the following actions:
- provide that outstanding options be assumed or substituted for by the
acquiror;
- provide that all unexercised options terminate immediately prior to the
event unless exercised within a time period specified in a written notice
to the option holder;
- in the event of a merger in which the holders of common stock would
receive a cash payment for each share surrendered, provide for a cash
payment to each option holder equal to the amount by which the amount
paid to common stockholders exceeds the option's exercise price,
multiplied by the total number of shares for which the option is then
exercisable; in exchange for this payment, the options would be
terminated; or
- provide that any or all outstanding options become fully exercisable and
Eprise's repurchase right with respect to the shares issuable upon
exercise of these options terminate.
In any event, the shares underlying outstanding options that would have become
vested on the next scheduled vesting date will become vested upon the change in
control.
Our board and stockholders have approved the 2000 Non-Employee Director
Stock Option Plan, to take effect upon the effectiveness of this offering. The
director plan provides for the grant of options to purchase a maximum of 274,510
shares of our common stock to non-employee directors of Eprise. The director
plan will be administered by a committee appointed by the board of directors. In
the event the board does not appoint such a committee, the board shall have all
power and authority to administer the director plan. Under the director plan,
each director who is not also an employee or officer of Eprise and who is not a
director at the time of this offering shall automatically be granted, on the
date such person is first elected to the board of directors, an option to
purchase 15,686 shares of common stock. In addition, each continuing
non-employee director will automatically receive an option to purchase 7,843
shares of common stock upon the effectiveness of the registration statement of
which this prospectus forms a part and thereafter immediately following each
annual meeting of our stockholders commencing in 2001. Each option is
immediately exercisable, subject to our right to repurchase the option shares if
the director ceases to be a member of the board (other than due to death or
disability). The repurchase right lapses over a three-year period in the case of
option grants to new directors and on the first anniversary of the date of grant
in the case of annual option grants. Upon a change in control, our repurchase
rights will lapse as to all shares subject to director options. All options
granted under the director plan will have an exercise price equal to the fair
market value of the common stock on the date of grant. The term of each option
will be ten years from the date of grant. No options have been granted to date
under the director plan.
Payment of the exercise price of an option granted under any of our stock
plans may be made in cash or by check or, if permitted by the applicable grant
(as determined by the compensation committee or board of directors), in shares
of common stock or by recourse promissory note, or by a combination of any of
the above methods, consistent with Section 422 of the Internal Revenue Code and
Rule 16b-3 under the Exchange Act. Unless otherwise specified in a nonqualified
stock option grant, options are not transferable (although, once the option is
exercised, the underlying stock may be) except by will or the laws of
48
<PAGE> 51
descent and distribution. Each of the board of directors and the compensation
committee may, in its sole discretion, amend, modify or terminate our stock
plans, so long as such amendment, modification or termination would not
materially and adversely affect any participant. Amendment, modification or
termination of individual grants requires the consent of the participant
affected. Each of the board of directors and the compensation committee may
also, in its sole discretion, accelerate the date or dates on which all or any
particular option or options granted under our stock plans may be exercised.
STOCK LOAN PROGRAM
On July 14, 1999, the board of directors approved a stock loan program, as
subsequently amended, whereby our executive officers may borrow from Eprise an
amount equal to the purchase price of common stock purchased pursuant to stock
options, solely for the purpose of acquiring such stock. All shares purchased
with such loans are pledged to Eprise as collateral for repayment of the loans.
The loans are recourse to the borrower, bear interest at a variable rate which
is one-half of one percent above Eprise's cost of funds, payable quarterly in
arrears, and are payable as to principal no later than five years after the date
of the loan. As of the date of this prospectus, Eprise has loans outstanding to
the named executive officers in the following aggregate principal amounts,
secured by the number of shares listed: Mr. Forgione, $151,301, secured by
564,900 shares; Mr. Alpern, $52,500, secured by 137,254 shares; Mr. Fiorentino,
$165,200, secured by 329,411 shares; and Mr. Strong, $10,800, secured by 35,294
shares.
2000 EMPLOYEE STOCK PURCHASE PLAN
The board and stockholders have approved the Eprise Corporation 2000
Employee Stock Purchase Plan, and have authorized the reservation of a total of
588,235 shares of common stock for issuance under this plan. On each January 1
commencing January 1, 2001, the aggregate number of shares reserved for issuance
under our 2000 Employee Stock Purchase Plan will be increased automatically by a
number of shares equal to the lesser of (i) 1% of our outstanding shares on the
preceding December 31 or (ii) 294,118 shares. Our compensation committee will
administer the plan, which will become effective on the first day on which price
quotations are available for our common stock on the Nasdaq National Market.
Employees generally will be eligible to participate in the plan if they are
employed at least three months before the beginning of the applicable offering
period and they are customarily employed by Eprise, or any of our subsidiaries
that we designate, for more than 20 hours per week and more than five months in
a calendar year. Employees are not eligible to participate in the plan if they
hold 5% or more of our outstanding stock, or would become 5% stockholders as a
result of their participation in this plan.
Under the plan, eligible employees will be able to acquire shares of our
common stock through payroll deductions. Eligible employees may select payroll
deductions between $150 and 10% of their cash compensation and are subject to
maximum purchase limitations under the Internal Revenue Code. Participation in
this plan will end automatically upon termination of employment for any reason.
Each offering period under the plan will be for six months. The first offering
period is expected to begin on the first business day on which price quotations
for our common stock are available on the Nasdaq National Market. The first
offering period may be more or less than six months long. Offering periods
thereafter will begin on September 1 and March 1. The purchase price for common
stock purchased under the plan will be 85% of the lesser of fair market value of
our common stock on the first day of the applicable offering period or the last
day of such offering period. In the case of the first offering period, the
purchase price for common stock purchased under the plan will be 85% of the
price offered to the public in the offering. The compensation committee will
have the power to change the duration of offering periods.
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<PAGE> 52
The plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. The plan will terminate in 2010,
unless it is terminated earlier pursuant to its terms.
401(k) PLAN
Eprise has established a 401(k) plan for the benefit of eligible employees
and their beneficiaries. Almost all employees are eligible to participate in the
plan and are fully vested as to their own contributions. Eprise matches 50% of
employee contributions, up to 5% of each employee's annual salary. Our
contributions are subject to a six-year vesting schedule.
LIMITATIONS ON LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS.
As permitted by the Delaware General Corporation Law, as amended, Eprise's
Amended and Restated Certificate of Incorporation provides that Eprise's
directors shall not be liable to Eprise or its stockholders for monetary damages
for breach of fiduciary duty as a director to the fullest extent permitted by
the Delaware corporation law as it now exists or as it may be amended. As of the
date of this prospectus, the Delaware corporation law permits limitations on
liability for a director's breach of fiduciary duty other than liability
- for any breach of the director's duty of loyalty to Eprise or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation law;
- under Section 174 of the Delaware corporation law; or
- for any transaction from which the director derived an improper personal
benefit.
In addition, Eprise's bylaws provide that Eprise shall indemnify all directors,
officers, employees and agents of Eprise for acts performed on behalf of Eprise
in such capacity to the fullest extent permitted by law.
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<PAGE> 53
CERTAIN TRANSACTIONS
OFFICER LOANS
On August 1, 1999, Eprise loaned Mr. Forgione an amount required to fund
his partial exercise of options granted under Eprise's 1997 Stock Option Plan.
The loan matures on July 31, 2004. On October 29, 1999, Mr. Forgione borrowed
$41,146 from Eprise to fund his partial exercise of options granted under
Eprise's 1997 Stock Option Plan. This loan matures on October 28, 2004. On
January 3, 2000, the following officers borrowed the following amounts from
Eprise to fund their exercise of options granted under our 1997 Stock Option
Plan: Mr. Forgione, $80,155; Mr. Fiorentino, $165,200; and Mr. Feldman,
$152,075. As collateral for the loans and pursuant to pledge agreements dated as
of the respective dates of the loans, each such officer has pledged the shares
of common stock purchased with the loans to Eprise. The loans bear interest at a
variable rate which is 0.5% above Eprise's cost of funds, payable monthly in
arrears. As of January 31, 2000, total loan amounts outstanding to Messrs.
Feldman, Fiorentino and Forgione were $153,183, $166,404 and $149,283,
respectively.
EMPLOYMENT OF FAMILY MEMBER
One member of Mr. Radoff's family is employed by Eprise in a managerial,
non-executive position. Eprise believes that the compensation paid by Eprise to
this family member is on terms no less favorable to Eprise than could be
obtained from unrelated third parties.
BOARD MEMBER PARTICIPATION IN FINANCINGS
On October 9, 1997, as part of a bridge financing, we issued a warrant to
purchase 326,995 shares of Series A preferred stock at an exercise price of
$0.49695 per share to Prism Venture Partners, of which Mr. Fleming is a general
partner. This warrant has a five-year term and will convert automatically to a
right to purchase 128,233 shares of common stock at an exercise price of $1.27
per share upon the closing of this offering. No part of the warrant has been
exercised to date.
On December 18, 1997, we sold a total of 10,515,925 shares of our Series A
preferred stock in a private financing at a price of $0.49695 per share. The
purchasers included Prism Venture Partners (6,036,825 shares), of which Mr.
Fleming is a general partner, The Still River Fund (1,006,138 shares), of which
Mr. Tischler is a general partner, and Alain Hanover (201,228 shares). As part
of the terms of the financing, the purchasers received registration rights with
respect to the purchased shares.
On August 18, 1998, we sold a total of 14,320,446 shares of our Series B
preferred stock in a private financing at a price of $0.60 per share. The
purchasers included Alliance Technology Ventures and an affiliate (5,100,000
shares), of which Mr. Papantonis is a venture partner, Prism Venture Partners
(1,666,667 shares), of which Mr. Fleming is a general partner, The Still River
Fund (833,333 shares), of which Mr. Tischler is a general partner, and Alain
Hanover (100,000 shares).
On November 8, 1999, we sold a total of 16,233,766 shares of our Series C
preferred stock in a private placement at a price of $1.54 per share. The
purchasers included Alliance Technology Ventures and an affiliate (662,338
shares), of which Mr. Papantonis is a venture partner, Prism Venture Partners
(324,675 shares), of which Mr. Fleming is a general partner, The Still River
Fund (649,351 shares), of which Mr. Tischler is a general partner, Edson de
Castro (64,935 shares) and Alain Hanover (65,000 shares).
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<PAGE> 54
The following table provides information with respect to the Series A,
Series B and Series C preferred stock financings on an as-converted to common
stock basis, reflecting the 1-for-2.55 reverse stock split:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
----------------------------------
STOCKHOLDER SERIES A SERIES B SERIES C
----------- -------- -------- --------
<S> <C> <C> <C>
Prism Venture Partners............................ 2,367,382 653,594 127,323
The Still River Fund.............................. 394,563 326,797 254,647
Alain Hanover..................................... 78,912 39,215 25,490
Alliance Technology Ventures...................... -- 1,960,784 254,647
Edson de Castro................................... -- -- 25,464
</TABLE>
We believe that all transactions set forth above were made on terms no less
favorable to us than would have been or were obtained from unaffiliated third
parties. We have adopted a policy providing that all future transactions between
Eprise and any of our officers, directors and affiliates will be on terms no
less favorable to us than could be obtained from unaffiliated third parties and
will be approved by a majority of the disinterested members of our board of
directors.
52
<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table provides information concerning the beneficial
ownership of Eprise's common stock as of December 31, 1999, and as adjusted to
reflect the sale of common stock offered by this prospectus. The information is
provided for
- each person known to Eprise to beneficially own at least five percent of
the common stock of Eprise (on an as-converted basis),
- each named executive officer of Eprise,
- each director of Eprise and
- all executive officers and directors as a group.
Unless otherwise noted, each person or group identified possesses sole voting
and investment power with respect to such shares, subject to community property
laws where applicable. Shares not outstanding but deemed beneficially owned
because a person or member of a group has a right to acquire them within 60 days
after the date of this prospectus are treated as outstanding only when
determining the amount and percent owned by such person or group.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
BENEFICIALLY OWNED(1)
NUMBER OF SHARES -----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER: BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING(2)
- ------------------------------------- ------------------ --------------- -----------------
<S> <C> <C> <C>
Prism Venture Partners I, L.P.(3)......... 3,276,532 17.2% 14.2%
100 Lowder Brook Drive, Suite 2500
Westwood, MA 02090
Alliance Technology Ventures II,
L.P.(4)................................. 2,259,738 11.9 9.8
3343 Peachtree Road NE, Suite 1140
East Tower, Atlanta, GA 30326
Angela Bull(5)............................ 2,135,390 11.3 9.2
c/o Eprise Corporation
1671 Worcester Road,
Framingham, MA 01701
TGI Fund I, LC(6)......................... 1,899,249 10.0 8.3
c/o Tredegar Investments, Inc.
6501 Columbia Center, 701 Fifth Avenue
Seattle, WA 98104
Brookside Capital Partners Fund,
L.P.(7)................................. 1,273,236 6.7 5.5
Two Copley Place
Boston, MA 02116
Van Wagoner Funds(8)...................... 1,018,589 5.4 4.4
345 California Street, Suite 2450
San Francisco, CA 94104
Axiom Venture Partners II, L.P.(9)........ 995,245 5.3 4.3
City Place II, 17th Floor
185 Asylum Street
Hartford, CT 06103
The Still River Fund(10).................. 976,007 5.2 4.3
100 Federal Street, 29th Floor
Boston, MA 02109
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS:
- ---------------------------------
<S> <C> <C> <C>
Joseph A. Forgione(11).................... 802,352 4.1% 3.4%
Jonathan B. Radoff(12).................... 2,135,390 11.3 9.2
Joseph Fiorentino(13)..................... 329,411 1.7 1.4
Robert Strong(14)......................... 188,235 1.0 *
Milton A. Alpern(15)...................... 137,254 * *
Deborah M. Besemer(16).................... 15,686 * *
Edson D. de Castro........................ 84,287 * *
Robert C. Fleming(17)..................... 3,276,532 17.2 14.2
Alain J. Hanover.......................... 182,832 1.0 *
Nicholas A. Papantonis(18)................ 2,259,738 11.9 9.8
Joseph J. Tischler(19).................... 976,007 5.2 4.3
---------- ---- ----
All executive officers and directors as a
group (13 persons)...................... 10,679,879 51.6% 43.2%
========== ==== ====
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1%.
(1) Percentages are based on a total of 18,943,440 shares of common stock
(including shares of preferred stock convertible into common stock)
outstanding as of December 31, 1999. For holders of options or warrants
exercisable within 60 days after the date of this prospectus, the number of
shares so exercisable by each such holder has been added to the denominator
for purposes of calculating such holder's percentage ownership.
(2) Assumes the underwriters' over-allotment option is not exercised.
(3) Includes 128,233 shares of common stock issuable within 60 days upon
exercise of a warrant. The general partner of Prism Venture Partners I,
L.P. is Prism Investment Partners, L.P. Prism Venture Partners, LLC, of
which Mr. Fleming is a managing member, is the general partner of Prism
Investment Partners, L.P. and exercises sole voting and investment power
with respect to all shares held of record by Prism Venture Partners I, L.P.
No member or manager of Prism Venture Partners, LLC is deemed individually
to have or to share such voting or investment power.
(4) Includes 2,215,431 shares held by Alliance Technology Ventures II, L.P. and
44,307 shares held by ATV II Affiliates Fund, L.P. Alliance Associates II,
LLC is the sole general partner of both Alliance Technology Ventures II,
L.P. and ATV II Affiliates Fund, L.P., and exercises sole voting and
investment control with respect to all shares held of record by Alliance
Technology Ventures II, L.P. and ATV II Affiliates Fund, L.P. Michael A.
Henos, Stephen R. Fleming and Michael R. Slawson are the managing members
of Alliance Associates II, LLC. No member of Alliance Associates II, LLC is
deemed individually to have or to share voting or investment control with
respect to any shares held of record by Alliance Technology Ventures II,
L.P. and ATV II Affiliates Fund, L.P. Nicholas A. Papantonis, a member of
our board of directors, has an ownership interest in Alliance Associates
II, LLC; Mr. Papantonis disclaims beneficial ownership of the shares held
by Alliance Technology Ventures II, L.P. and ATV II Affiliates Fund, L.P.
(5) Includes 969,901 shares of common stock held by, and 196,078 shares
issuable within 60 days upon exercise of outstanding options to, Ms. Bull's
spouse, Jonathan Radoff. Ms. Bull disclaims beneficial ownership of such
shares.
(6) Tredegar Investments, Inc. is the sole manager of TGI Fund I, LC. Tredegar
Corporation owns 100% of Tredegar Investments, Inc. and exercises sole
voting and investment control with respect to all shares held of record by
TGI Fund I, LC. No stockholder,
54
<PAGE> 57
director or officer of Tredegar Corporation is deemed individually to have
or to share such voting or investment control.
(7) Brookside Capital Investors, L.P. is the sole general partner of Brookside
Capital Partners Fund, L.P. Brookside Capital Investors, Inc. is the sole
general partner of Brookside Capital Investors, L.P. W. Mitt Romney is the
sole stockholder of Brookside Capital Investors, Inc., and Mr. Romney is
thus the controlling person of Brookside Capital Partners Fund, L.P.
(8) Includes 483,207 shares held by Van Wagoner Funds and 26,087 shares held by
Van Wagoner Capital Partners. Van Wagoner Capital Management, Inc. is the
sole investment advisor to Van Wagoner Funds. Van Wagoner Capital
Management, Inc. is the general partner of Van Wagoner Capital Partners.
Garrett R. Van Wagoner is the sole shareholder of Van Wagoner Capital
Management, Inc., and he exercises sole voting and investment control with
respect to all shares held of record by Van Wagoner Funds and by Van
Wagoner Capital Partners.
(9) The general partner of Axiom Venture Partners II Limited Partnership is
Axiom Venture Associates II Limited Liability Company. The managers of
Axiom Venture Associates are Alan M. Mendelson, Samuel McKay, Linda Sonntag
and Barry R. Bronfin, all of whom make investment and voting decisions on a
unanimous basis. No manager is deemed individually to have or to share
voting or investment power.
(10) Still River Management Company, Inc. is the sole manager of The Still River
Fund. James A. Saalfield and Joseph J. Tischler are each 50% stockholders
of Still River Management Company, Inc., and each has 50% voting and
investment control with respect to all shares held of record by The Still
River Fund.
(11) Includes 516,967 shares issuable within 60 days upon exercise of
outstanding stock options; 22,549 shares held by Maria-Elena Kadala, Mr.
Forgione's spouse, as trustee under three trusts, the beneficiaries of
which are Michael A. Forgione, Angela Forgione and Joseph A. Forgione; and
250,568 shares pledged to Eprise pursuant to stock pledge agreements dated
August 1, 1999 and October 29,1999 as collateral for promissory notes held
by Eprise of the same dates in the aggregate amount of $71,146.
(12) Includes 196,078 shares issuable within 60 days upon exercise of
outstanding options and 969,411 shares held by Mr. Radoff's spouse, Angela
Bull, as to which Mr. Radoff disclaims beneficial ownership.
(13) Represents shares issuable within 60 days upon exercise of outstanding
options.
(14) Includes 152,941 shares issuable within 60 days upon exercise of
outstanding options.
(15) Includes 125,000 shares issuable within 60 days upon exercise of
outstanding options and 12,254 shares pledged to Eprise under a pledge
agreement dated October 29, 1999.
(16) Represents shares issuable within 60 days upon exercise of outstanding
options.
(17) Represents shares beneficially owned by Prism Venture Partners I, L.P. (See
note 3.) Mr. Fleming disclaims beneficial ownership of all such shares,
except to the extent of his direct pecuniary interest therein.
(18) Represents shares beneficially owned by Alliance Technology Ventures and an
affiliate, of which Mr. Papantonis is a venture partner. Mr. Papantonis
disclaims beneficial ownership of all such shares.
(19) Represents shares beneficially owned by The Still River Fund. (See note
10.) Mr. Tischler disclaims beneficial ownership of all such shares, except
to the extent of his direct pecuniary interest therein.
55
<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
GENERAL
Effective upon the closing of this offering and the filing of a Certificate
of Amendment to our Fourth Amended and Restated Certificate of Incorporation,
our authorized capital stock will consist of 90,000,000 shares of common stock,
par value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.01 per share. Prior to the effectiveness of the registration statement of
which this prospectus is a part, and in accordance with our Fifth Amended and
Restated Certificate of Incorporation, as amended, the authorized and
outstanding capital stock was as follows:
<TABLE>
<CAPTION>
OUTSTANDING AS OF
AUTHORIZED DECEMBER 31, 1999
----------- -----------------
<S> <C> <C>
Common Stock, par value $0.001 per share................. 58,500,000 2,837,595
Preferred Stock, par value $0.01 per share............... 41,663,366 41,070,137
----------- ----------
Total Capital Stock...................................... 100,163,366 43,907,732
=========== ==========
</TABLE>
Upon the closing of this offering there will be 22,943,440 shares of our
common stock outstanding, including all outstanding shares of preferred stock
which will have automatically converted into 16,105,845 shares of common stock.
The following summary of the terms and provisions of Eprise's capital stock
does not purport to be complete and is qualified by reference to the actual
terms and provisions of the capital stock contained in our amended and restated
certificate of incorporation, the various documents and agreements referred to
below, which are included as exhibits to the registration statement of which
this prospectus forms a part, and the provisions of applicable Delaware law.
COMMON STOCK
As of December 31, 1999, there were 2,837,595 shares of common stock
outstanding held by 62 stockholders of record. Based upon the number of shares
outstanding as of that date and giving effect to the issuance of the 4,000,000
shares of common stock offered by Eprise in this offering and the conversion of
the outstanding shares of preferred stock, there will be 22,943,440 shares of
common stock outstanding upon the closing of this offering. In addition, as of
December 31, 1999, there were outstanding stock options for the purchase of
2,225,264 shares of common stock and outstanding warrants for the purchase of
303,918 shares of common stock and 326,995 shares of Series A preferred stock.
The 326,955 shares of Series A preferred stock will be automatically convertible
into 128,233 shares of our common stock upon the closing of this offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in this election. The
holders of common stock are entitled to receive, at the same rate, cash
dividends when and as declared by the board of directors out of legally
available funds, subject to the rights and preferences of the holders of
preferred stock. In the event of any liquidation, dissolution, or winding up of
Eprise, the holders of common stock are entitled to receive, at the same rate,
the net assets of Eprise available after the payment of all our debts and other
liabilities, and after the satisfaction of the rights of any outstanding
preferred stock. Holders of the common stock have no preemptive, subscription,
redemption or conversion rights, nor are they entitled to the benefit of any
sinking fund. The outstanding shares of
56
<PAGE> 59
common stock are, and the shares offered by Eprise in this offering will be,
when issued and paid for, validly issued, fully paid and non-assessable. The
rights, powers, preferences and privileges of holders of common stock are
subordinate to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in the
future.
PREFERRED STOCK
The board of directors will be authorized, subject to any limitations
prescribed by Delaware law, without further stockholder approval, to issue from
time to time up to an aggregate of 10,000,000 shares of preferred stock, in one
or more series. The board of directors is also authorized, subject to the
limitations prescribed by Delaware law, to establish the number of shares to be
included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges of each series. The
board of directors is authorized to issue preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of common stock.
Eprise has no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding common stock of Eprise.
WARRANTS
Upon the closing of this offering and giving effect to the exercise of
outstanding warrants to purchase 28,713 shares of our common stock at an
exercise price of $3.93 per share by Deutsche Bank Securities Inc., we will have
outstanding warrants as follows:
<TABLE>
<CAPTION>
HOLDERS GRANT DATE NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
------- ---------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Silicon Valley Bank July 18, 1997 19,728 $ 0.03 July 17, 2002
Prism Venture
Partners I, L.P. October 9, 1997 128,233 1.27 October 9, 2002
Silicon Valley Bank December 5, 1997 29,592 1.27 December 5, 2002
Deutsche Bank
Securities Inc. September 8, 1999 225,885 15.00 September 8, 2004
</TABLE>
The number of shares for which the December 5, 1997 Silicon Valley Bank
warrant is exercisable will be subject to adjustment for future issuances of
common stock at a price per share that is less than the warrant price, other
than issuances pursuant to outstanding options or options granted in the future
under plans approved by the board of directors.
REGISTRATION RIGHTS
We have granted registration rights to the holders of preferred stock under
a registration rights agreement dated November 8, 1999 with respect to any
common stock acquired by such holders, whether by conversion of preferred stock
or otherwise. Under that agreement, we have agreed to register the registrable
securities upon request of at least 40% in interest of the holders of the
registrable securities, at the earlier of (i) six months following our initial
public offering or (ii) December 18, 2000. The holders are entitled to two
demand registrations as described in the preceding sentence, as well as
unlimited registrations on Form S-3 (when and if we are eligible to register
shares on such form). The holders of at least 20% of the registrable securities
must request registrations on Form S-3 and the minimum aggregate price to the
public must be expected to be at least $1.0 million. Further, if we elect to
register any of our shares of common stock for an offering to the public, our
holders are entitled to include
57
<PAGE> 60
their registrable securities in such offering, subject to the terms of our
underwriting agreement and underwriter cutbacks. Registration expenses for
demand registrations and the first two registrations on Form S-3 shall be borne
by us. The holders of at least 50% of the preferred stock must approve any
further registration rights granted by us to third parties. In addition, we
shall not engage in a merger or consolidation in which Eprise is not the
surviving company unless the surviving company agrees to assume the registration
rights described in this paragraph. Such registration rights shall terminate on
the fifth anniversary of our initial public offering.
We also have granted registration rights to the holders of warrants to
purchase our common stock. Under Registration Rights Agreements between the
Company and Silicon Valley Bank dated July 18, 1997 and December 5, 1997, if we
elect to register any of our shares of common stock under the Securities Act
(with exceptions related to underwritten offerings and registrations in
connection with acquisitions or employee stock plans), we have agreed to include
the warrant shares in such offering, subject to the terms of our underwriting
agreement and underwriter cutbacks, if any. The Company must pay all
registration expenses incurred in connection with any such registration.
Under the terms of the warrant issued to Deutsche Bank Securities Inc. as
of September 8, 1999, if we elect to register any of our shares of common stock
for an underwritten offering to the public on a form that would permit
registration of the warrant shares, we have agreed to include the warrant shares
in such offering, subject to the terms of our underwriting agreement and
underwriter cutbacks, if any. Eprise will pay all registration expenses incurred
in connection with such registration. These registration rights will terminate
on the fifth anniversary of our initial public offering.
We also have granted registration rights to one holder of shares of our
common stock. Under the terms of a debenture purchase agreement between Eprise
and Leigh Leeper dated April 1, 1993, if we elect to register any of our
securities under the Securities Act (other than registrations relating to
employee stock plans), we have agreed to use our best efforts to include in such
registration such number of Mr. Leeper's shares as he may request.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS AND ANTI-TAKEOVER EFFECTS
Upon completion of this offering, the provisions of Section 203 of the
General Corporation Law of Delaware will prohibit Eprise from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is defined as a person who, at the time of determination whether a
person is an interested stockholder,
- beneficially owns 15% or more of Eprise's common stock; or
- is an affiliate or associate of Eprise and beneficially owned 15% or more
of Eprise's common stock at any time within three years of the date of
determination.
Eprise's Fourth Amended and Restated Certificate of Incorporation provides
for the division of the board of directors into three classes as nearly equal in
size as possible with staggered three-year terms. See "Management -- Election of
Officers and Directors". In addition, our Fourth Amended and Restated
Certificate of Incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of 75% of the shares of capital
stock of Eprise entitled to vote. Under our Fourth Amended and Restated
Certificate of Incorporation, any vacancy on the board of directors, however
occurring, including a vacancy resulting from an enlargement of the board, may
only be filled by vote of a majority of the
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<PAGE> 61
directors then in office. The likely effect of the classification of the board
of directors and the limitations on the removal of directors and filling of
vacancies is an increase in the time required for the stockholders to change the
composition of the board of directors. For example, because only two to three
directors may be replaced by stockholder vote at each annual meeting of
stockholders, stockholders seeking to replace a majority of the members of the
board of directors will need at least two annual meetings of stockholders to
effect this change.
Eprise's Fourth Amended and Restated Certificate of Incorporation also
provides that, after the effective date of the registration statement of which
this prospectus is a part, any action required or permitted to be taken by the
stockholders of Eprise at an annual meeting 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. Eprise's Amended and Restated
By-laws provide that special meetings of the stockholders may only be called by
the board of directors, the chairman of the board of directors, the Chief
Executive Officer or the president of Eprise. Eprise's Amended and Restated
By-laws further provide that in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with requirements regarding
advance notice to Eprise. The foregoing provisions could have the effect of
delaying until the next stockholders meeting stockholder actions which are
favored by the holders of a majority of the outstanding voting securities of
Eprise. These provisions may also discourage another person or entity from
making a tender offer for Eprise's common stock, because such person or entity,
even if it acquired a majority of the outstanding voting securities of Eprise,
would be able to take action as a stockholder, such as electing new directors or
approving a merger, only at a duly called stockholders meeting, and not by
written consent.
The General Corporation Law of Delaware provides that the affirmative vote
of a majority of the shares entitled to vote on any matter is required to amend
a corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Eprise's Fourth Amended and Restated Certificate of Incorporation
requires the affirmative vote of the holders of at least 75% of the shares of
capital stock of Eprise issued and outstanding and entitled to vote to amend or
repeal any of the foregoing provisions of the Fourth Amended and Restated
Certificate of Incorporation. Eprise's Amended and Restated By-laws may be
amended or repealed by a majority vote of the board of directors. The Amended
and Restated By-laws may also be amended or repealed by the affirmative vote of
the holders of at least 75% of the shares of capital stock of Eprise issued and
outstanding and entitled to vote. The 75% stockholder vote would be in addition
to any separate class vote that might in the future be required in accordance
with the terms of any series of preferred stock that might be outstanding at the
time any such amendments are submitted to stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is EquiServe Trust
Company.
LISTING
Our common stock will be listed on the Nasdaq National Market under the
symbol "EPRS."
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<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices of our common stock. Since
substantially all of our shares currently outstanding will not be available for
sale immediately following this offering because of the contractual and legal
restrictions on resale described below, sales of substantial amounts of common
stock in the public market after these restrictions lapse could adversely affect
the prevailing market price and our ability to raise equity capital in the
future.
Upon completion of this offering and based on shares outstanding as of
December 31, 1999, we will have outstanding an aggregate of 22,943,440 shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, all of the
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, unless such shares are purchased
by "affiliates" as that term is defined in Rule 144 under the Securities Act. In
general, affiliates include officers, directors or 10% stockholders. The
remaining 18,943,440 shares outstanding are "restricted securities" within the
meaning of Rule 144. Restricted securities may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which are summarized
below. Sales of the restricted securities in the public market, or the
availability of such shares for sale, could adversely affect the market price of
the common stock.
LOCK UP AGREEMENTS
All of our directors and officers and substantially all of our security
holders have entered into lock-up agreements in connection with this offering
generally providing that they will not offer, sell, contract to sell or grant
any option to purchase or otherwise dispose of our common stock or any
securities exercisable for or convertible into our common stock for a period of
180 days after the effectiveness of this offering without the prior written
consent of Deutsche Bank Securities Inc. Holders of an aggregate of 67,647
shares of our common stock that were issued upon exercise of stock options are
subject to a 120-day lock-up period, rather than a 180-day period, under the
terms of our stock option plans. The holder of warrants to purchase an aggregate
of 49,320 shares of our common stock is not subject to a lock-up agreement.
Taking into account the lock-up agreements, and assuming Deutsche Bank
Securities Inc. does not release security holders from these agreements, the
number of shares that will be available for sale in the public market under the
provisions of Rule 144, 144(k) and 701 will be as follows:
- Beginning on the effective date of this prospectus, only the shares sold
in this offering and 49,320 shares of common stock issuable upon exercise
of two warrants will be immediately available for sale in the public
market.
- Beginning 120 days after the effective date, 67,647 shares will be
eligible for sale.
- Beginning 180 days after the effective date, approximately 11,491,071
shares will be eligible for sale, including approximately 653,577 shares
subject to outstanding warrants and vested options.
- At various times thereafter upon the expiration of applicable holding
periods, 10,060,616 shares will become eligible for sale, including
1,858,195 shares subject to outstanding warrants and unvested options.
STOCK OPTIONS
Immediately after this offering, we intend to file a registration statement
on Form S-8 under the Securities Act covering the shares of common stock
reserved for issuance
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<PAGE> 63
under our stock incentive and employee stock purchase plans as well as the
resale of the shares issued upon the exercise of options prior to filing the
registration statement on Form S-8. As of December 31, 1999, options to purchase
2,225,264 shares of common stock were issued and outstanding. Shares registered
under the registration statement on Form S-8 will, subject to vesting provisions
and Rule 144 volume limitations applicable to shares held by our affiliates and
to options exercised before the registration statement is filed, be available
for sale in the open market immediately after the 180-day lock-up period expires
or terminates pursuant to the lock-up agreement.
RULE 144
In general, under Rule 144, after the expiration of the lock-up agreements,
a person who has beneficially owned restricted securities 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:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately 229,434 shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us.
RULE 144(k)
Under Rule 144(k), a person holding restricted securities who is not deemed
to have been our affiliate at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
RULE 701
Rule 701 permits our employees, officers, directors or consultants who
purchased shares pursuant to a written compensatory plan or contract to resell
such shares in reliance upon Rule 144 but without compliance with specific
restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares
under Rule 144 without complying with the holding period requirement and that
non-affiliates may sell such shares in reliance on Rule 144 without complying
with the holding period, public information, volume limitation or notice
provisions of Rule 144.
WARRANTS
Upon the closing of this offering, there will be warrants outstanding to
purchase 403,438 shares of common stock at a weighted average exercise price of
$8.90 per share.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 16,105,845 shares of our
common stock, or their transferees, will be entitled to registration of such
shares under the Securities Act as described above in "Description of Capital
Stock -- Registration Rights." Upon the effectiveness of such a registration,
these shares would become freely tradable without restriction under the
Securities Act.
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<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Dain Rauscher Incorporated, and SoundView Technology Group, Inc., have
severally agreed to purchase from Eprise the following respective number of
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Deutsche Bank Securities Inc................................ 1,490,000
Dain Rauscher Incorporated.................................. 745,000
Soundview Technology Group, Inc............................. 745,000
Banc of America Securities LLC.............................. 80,000
Bear, Stearns & Co. Inc..................................... 80,000
Chase H&Q................................................... 80,000
FleetBoston Robertson Stephens Inc.......................... 80,000
Prudential Securities Incorporated.......................... 80,000
SG Cowen Securities Corporation............................. 80,000
Chatsworth Securities LLC................................... 60,000
Josephthal & Co. Inc........................................ 60,000
Legg Mason Wood Walker, Incorporated........................ 60,000
McDonald Investments Inc., a KeyCorp Company................ 60,000
Edgar M. Norris & Co. Inc................................... 60,000
Raymond James & Associates, Inc............................. 60,000
Suntrust Equitable Securities Corporation................... 60,000
Tucker Anthony Cleary Gull.................................. 60,000
C.E. Unterberg, Towbin...................................... 60,000
Total............................................. 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares of common stock offered by this prospectus
are subject to the prior satisfaction of various conditions, including the
absence of any material adverse change in our business and the receipt of
certificates, opinions and letters from us, and that the underwriters will be
obligated to purchase all shares of the common stock offered by this prospectus,
other than those covered by the over-allotment option described below, if any
are purchased. The underwriting agreement provides that, in the event of a
default by an underwriter who is obligated to purchase not more than 10% of the
common stock offered by this prospectus or not more than 10% of the shares
covered by the over-allotment option, as the case may be, the purchase
commitments of the non-defaulting underwriters may be increased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $0.63 per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than $0.10 per share to other dealers.
After the initial public offering, the representatives of the underwriters may
change the offering price and other selling terms.
At our request, the underwriters have reserved up to 280,000 shares of
common stock to be sold in the offering and offered for sale, at the public
offering price, to our directors, employees, business associates and persons
related to, or affiliated with, the foregoing persons. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these individuals purchase the reserved shares. Any reserved shares
62
<PAGE> 65
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered by this prospectus.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 600,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered by this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of additional shares of common stock as the number of shares of
common stock to be purchased by it in the above table bears to the total number
of shares of common stock offered by this prospectus.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is 7.0% of the initial public offering price. We
have agreed to pay the underwriters the following fees, assuming either no
exercise or full exercise by the underwriters of the underwriters' over-
allotment option:
<TABLE>
<CAPTION>
TOTAL FEES
--------------------------------------
WITHOUT EXERCISE WITH FULL EXERCISE
FEE PER OF OVER-ALLOTMENT OF OVER-ALLOTMENT
SHARE OPTION OPTION
------- ----------------- ------------------
<S> <C> <C> <C>
Fees paid by Eprise............................... $1.05 $4,200,000.00 $4,830,000.00
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $850,000.
We have agreed to indemnify the underwriters against specified types of
liabilities, including liabilities under the Securities Act and to contribute to
payments the underwriters may be required to make in respect of any of these
liabilities.
Each of our officers and directors and substantially all of our
stockholders and holders of options and warrants to purchase our common stock,
have agreed not to offer, sell, contract to sell or otherwise dispose of or
transfer, or enter into any transaction that is designed to, or could be
expected to, result in the disposition of any portion of our common stock or
common stock issuable upon exercise or conversion of options, warrants or
convertible securities held by these persons for a period of 180 days after the
date of this prospectus without the prior written consent of Deutsche Bank
Securities Inc. This consent may be given at any time without public notice. We
have entered into a similar agreement with the representatives of the
underwriters.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority in excess of 5% of the shares of common stock
being offered by this prospectus.
A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit SoundView's affiliate, Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on Web sites
maintained by each of these dealers. Other than the prospectus in electronic
format, the information on Wit Capital's Web site and any information contained
on any other Web site maintained by Wit Capital is not part of the prospectus or
the registration statement of which this prospectus forms a part, has not been
approved or endorsed by Eprise or any underwriter in its capacity as underwriter
and should not be relied upon by investors.
63
<PAGE> 66
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
In June 1999, we sold shares of our Series C preferred stock in a private
placement at a price of $1.54 per share. Each of the shares of Series C
preferred stock is convertible at the option of the holder into one share of our
common stock. In this private placement, Deutsche Bank Securities Inc. received
a warrant to purchase 254,598 shares of common stock at an exercise price of
$3.93 per share, ABS Employees' Venture Fund, L.P., an affiliate of Deutsche
Bank Securities Inc., purchased 246,443 shares of Series C preferred stock and
Timothy Dolan, an employee of Deutsche Bank Securities Inc., purchased 6,494
shares of Series C preferred stock, each at the purchase price of $1.54 per
share. ABS Employees' Venture Fund, L.P. and Mr. Dolan purchased the Series C
preferred stock on the same terms as the other investors in the private
placement, and the exercise price per share under the warrant issued to Deutsche
Bank Securities Inc. is the same price per share paid by the investors in the
private placement, assuming the reverse stock split immediately prior to, and
the automatic conversion of the Series C preferred stock upon, the closing of
this offering.
Pursuant to the terms of letter agreements with Eprise each dated March 14,
2000, Deutsche Bank and Mr. Dolan agreed not to sell, transfer, assign, pledge
or hypothecate its or his respective securities referenced above for a period of
one year following the date of this prospectus, and ABS Employees' Venture Fund,
L.P. agreed not to sell, transfer, assign, pledge or hypothecate its respective
securities referenced above for a period of three years following the date of
this prospectus.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation among us and the representatives of the
underwriters. Among the primary factors considered in determining the public
offering price were:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business; and
- estimates of our business potential.
There can be no assurance that an active trading market will develop for
our common stock or that the common stock will trade in the market subsequent to
the offering at or above the initial public offering price.
64
<PAGE> 67
LEGAL MATTERS
Hill & Barlow, a Professional Corporation, will pass upon the validity of
the shares of common stock offered by this prospectus for us. A purchase trust,
the beneficiaries of which are members of Hill & Barlow, purchased 16,233 shares
of our Series C preferred stock in the private placement that closed on November
8, 1999. Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts, will pass upon
legal matters in connection with this offering for the underwriters.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for the four months ended December 31, 1997 and for the years ended December 31,
1998 and 1999 included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report (which includes an
explanatory paragraph relating to a restatement of the 1999 consolidated
financial statements) appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The financial statements for the year ended August 31, 1997 included in
this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
in reliance upon the authority of said firm as experts in giving said reports.
CHANGE IN ACCOUNTANTS
Effective in May 1998, Deloitte & Touche LLP was engaged as our independent
auditors and replaced Arthur Andersen LLP whose position as our independent
auditors was terminated. The decision to change independent auditors was
approved by our board of directors. In the period from October 1995 to May 1998,
Arthur Andersen LLP issued no audit report which was qualified or modified as to
uncertainty, audit scope or accounting principles. During the same period,
Arthur Andersen LLP issued no adverse opinions or disclaimers of opinion on any
of our financial statements, and there were no disagreements with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures. Arthur Andersen LLP has
reported on the financial statements for the year ended August 31, 1997 included
in this prospectus. Prior to May 1998 we had not consulted with Deloitte &
Touche LLP on items which involved our accounting principles or the form of
audit opinion to be issued on our financial statements.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock offered by
this prospectus. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedule filed
therewith. For further information with respect to Eprise Corporation and the
common stock offered by this prospectus, reference is made to the registration
statement and the exhibits and schedule filed therewith. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. A copy of the registration statement and the
exhibits and schedule filed therewith may be inspected without charge at the
public reference facilities maintained by the Commission in Room 1025, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located in Northwestern
65
<PAGE> 68
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048 and copies of all
or any part of the registration statement may be obtained from such offices upon
the payment of the fees prescribed by the Commission. Copies of these materials
may also be obtained from the Public Reference Room of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain
information regarding the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the site is www.sec.gov.
66
<PAGE> 69
EPRISE CORPORATION
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999
(Restated)................................................ F-4
Consolidated Statements of Operations for the Year Ended
August 31, 1997, the Four Months Ended December 31, 1997,
and the Years Ended December 31, 1998 and 1999
(Restated)................................................ F-5
Consolidated Statements of Changes in Stockholders'
Deficiency for the Year Ended August 31, 1997, the Four
Months Ended December 31, 1997, and the Years Ended
December 31, 1998 and 1999 (Restated)..................... F-6
Consolidated Statements of Cash Flows for the Year Ended
August 31, 1997, the Four Months Ended December 31, 1997,
and the Years Ended December 31, 1998 and 1999
(Restated)................................................ F-7
Notes to the Consolidated Financial Statements.............. F-8
</TABLE>
F-1
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Eprise Corporation:
We have audited the accompanying consolidated balance sheets of Eprise
Corporation (the "Company") as of December 31, 1998 and 1999, and the related
consolidated statements of operations, changes in stockholders' deficiency and
cash flows for the four months ended December 31, 1997, and for the years ended
December 31, 1998 and 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1999, and the results of its operations and its cash flows for the
four-month period ended December 31, 1997 and for the years ended December 31,
1998 and 1999, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 10, the 1999 financial statements have been restated.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 21, 2000 (March 21, 2000, as to the effects of the stock split described
in Note 2 and the restatement described in Note 10)
F-2
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Eprise Corporation:
We have audited the accompanying statements of operations, stockholders'
deficit and cash flows of Eprise Corporation (the "Company") for the year ended
August 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Company's operations and its cash
flows for the year ended August 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
- --------------------------------
Boston, Massachusetts
December 18, 1997
(except with respect to the disclosure of the issuance of
Series A Redeemable Preferred Stock (Note 5) as to which
the date is January 28, 1998)
F-3
<PAGE> 72
EPRISE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------------------- DECEMBER 31,
1998 1999 1999
----------- -------------- -------------
(RESTATED, SEE
NOTE 10) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,356,665 $ 22,455,448
Accounts receivable (less allowance for doubtful accounts
of approximately $48,000 and $189,000 at December 31,
1998 and 1999, respectively)............................ 103,060 2,045,076
Due from related parties.................................. -- 58,145
Prepaid expenses and other current assets................. 129,657 316,945
----------- ------------
Total current assets.................................... 6,589,382 24,875,614
----------- ------------
Property and equipment:
Computers and equipment................................... 672,296 987,443
Furniture and fixtures.................................... 92,758 134,933
Leasehold improvements.................................... 29,897 29,897
----------- ------------
Total................................................... 794,951 1,152,273
Less accumulated depreciation and amortization............ (345,103) (538,886)
----------- ------------
Property and equipment, net............................. 449,848 613,387
----------- ------------
Other assets, net........................................... 36,054 45,377
----------- ------------
Total assets................................................ $ 7,075,284 $ 25,534,378
=========== ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Current portion of equipment line of credit............... $ 85,920 $ 85,917
Accounts payable.......................................... 264,273 148,484
Accrued compensation and benefits......................... 220,492 597,380
Other accrued expenses.................................... 100,125 495,050
Deferred revenue.......................................... 89,873 571,724
----------- ------------
Total current liabilities............................... 760,683 1,898,555
----------- ------------
Long-term equipment line of credit, less current portion.... 157,510 78,756
----------- ------------
Commitments (Note 9)
Redeemable convertible preferred stock (Aggregate
liquidation preference of $13,818,157 and $38,818,157 in
1998 and 1999)............................................ 13,740,189 35,315,984
----------- ------------
Stockholders' (deficiency) equity:
Common stock, $.001 par value; 58,500,000 shares
authorized; 2,237,331 and 2,837,595 shares issued and
outstanding at December 31, 1998 and 1999, respectively
(18,943,440 shares pro forma)........................... 2,238 2,838 $ 18,944
Additional paid-in capital................................ 209,535 24,332,606 59,632,484
Accumulated deficit....................................... (7,794,871) (36,025,090) (36,025,090)
Notes receivable from officers............................ (69,271) (69,271)
----------- ------------ ------------
Total stockholders' (deficiency) equity................. (7,583,098) (11,758,917) $ 23,557,067
----------- ------------ ============
Total liabilities and stockholders' (deficiency) equity..... $ 7,075,284 $ 25,534,378
=========== ============
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 73
EPRISE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ ---------------
(RESTATED, SEE
NOTE 10)
<S> <C> <C> <C> <C>
Revenues:
Software licenses............................ 33,000 $ 65,000 $ 345,000 $ 2,354,908
Services..................................... 1,387,223 237,541 462,321 1,303,907
---------- ----------- ----------- ---------------
Total revenues............................. 1,420,223 302,541 807,321 3,658,815
Cost of revenues (includes compensation cost of
$14,521 for stock options in 1999.).......... 518,456 285,037 459,730 1,125,050
---------- ----------- ----------- ---------------
Gross profit................................... 901,767 17,504 347,591 2,533,765
Operating expenses:
Research and development (includes
compensation cost of $72,946 for stock
options in 1999.).......................... 179,929 326,718 2,149,289 2,360,201
Selling and marketing (includes compensation
cost of $381,446 for stock options in
1999.)..................................... 800,399 392,537 2,348,835 5,056,254
General and administrative (includes
compensation cost of $54,813 for stock
options in 1999.).......................... 500,715 362,708 1,245,951 2,004,988
---------- ----------- ----------- ---------------
Total operating expenses................... 1,481,043 1,081,963 5,744,075 9,421,443
---------- ----------- ----------- ---------------
Operating loss................................. (579,276) (1,064,459) (5,396,484) (6,887,678)
---------- ----------- ----------- ---------------
Other income (expense):
Interest income.............................. 2,232 4,146 164,105 314,441
Interest expense and other................... (156,364) (103,392) (28,129) (26,759)
---------- ----------- ----------- ---------------
Other income (expense), net................ (154,132) (99,246) 135,976 287,682
---------- ----------- ----------- ---------------
Net loss....................................... (733,408) (1,163,705) (5,260,508) (6,599,996)
Accretion of redeemable convertible preferred
stock...................................... -- (1,983) (14,920) (21,630,223)
---------- ----------- ----------- ---------------
Loss to common shareholders.................... $ (733,408) $(1,165,688) $(5,275,428) $ (28,230,219)
========== =========== =========== ===============
Loss per share................................. $ (0.35) $ (0.54) $ (2.40) $ (11.42)
========== =========== =========== ===============
Weighted-average common shares outstanding..... 2,072,575 2,156,252 2,199,732 2,472,745
========== =========== =========== ===============
Pro forma loss per share....................... $ (0.50)
===============
Pro forma weighted-average common shares
outstanding.................................. 13,273,529
===============
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE> 74
EPRISE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEAR ENDED AUGUST 31, 1997, THE FOUR MONTHS ENDED DECEMBER 31, 1997 AND THE
YEARS ENDED DECEMBER 31, 1998 AND 1999 (RESTATED, SEE NOTE 10)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTE
------------------ PAID-IN ACCUMULATED RECEIVABLE
SHARES AMOUNT CAPITAL DEFICIT FROM OFFICER TOTAL
--------- ------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 1, 1996................. 2,067,157 $2,067 $ 97,133 $ (620,347) $ -- $ (521,147)
Exercise of stock options................ 3,921 4 2,496 -- -- 2,500
Issuance of warrants..................... -- -- 12,212 -- -- 12,212
Issuance of stock in exchange for notes
payable................................ 79,292 79 19,921 -- -- 20,000
Net loss................................. -- -- -- (733,408) -- (733,408)
--------- ------ ----------- ------------ -------- ------------
Balance, August 31, 1997................... 2,150,370 2,150 131,762 (1,353,755) -- (1,219,843)
Exercise of stock options................ 11,765 11 7,489 -- -- 7,500
Issuance of warrants..................... -- -- 51,186 -- -- 51,186
Accretion of redeemable preferred stock
to redemption value.................... -- -- -- (1,983) -- (1,983)
Net loss................................. -- -- -- (1,163,705) -- (1,163,705)
--------- ------ ----------- ------------ -------- ------------
Balance, December 31, 1997................. 2,162,135 2,161 190,437 (2,519,443) -- (2,326,845)
Exercise of stock options................ 75,196 77 19,098 -- -- 19,175
Accretion of redeemable preferred stock
to redemption value.................... -- -- -- (14,920) -- (14,920)
Net loss................................. -- -- -- (5,260,508) -- (5,260,508)
--------- ------ ----------- ------------ -------- ------------
Balance, December 31, 1998................. 2,237,331 2,238 209,535 (7,794,871) -- (7,583,098)
Exercise of stock options.............. 600,264 600 180,085 -- -- 180,685
Issuance of Series C preferred stock... -- -- 21,555,501 -- -- 21,555,501
Accretion of redeemable preferred stock
to redemption value.................. -- -- (21,630,223) -- (21,630,223)
Compensation cost for stock options.... -- -- 523,726 -- -- 523,726
Issuance of warrant for services....... -- -- 1,863,759 -- -- 1,863,759
Notes receivable from officers......... (69,271) (69,271)
Net loss (as restated)................. -- -- -- (6,599,996) -- (6,599,996)
--------- ------ ----------- ------------ -------- ------------
Balance, December 31, 1999 (as restated)... 2,837,595 $2,838 $24,332,606 $(36,025,090) $(69,271) $(11,758,917)
========= ====== =========== ============ ======== ============
</TABLE>
See notes to the consolidated financial statements.
F-6
<PAGE> 75
EPRISE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ -------------
(RESTATED,
SEE NOTE 10)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(733,408) $(1,163,705) $(5,260,508) $ (6,599,996)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization......................... 51,312 27,680 146,225 198,034
Compensation cost for stock options................... -- -- -- 523,726
Loss on sale of property and
equipment........................................... -- 5,642 -- 4,108
Provision for doubtful accounts receivable............ -- 4,600 3,200 155,770
Interest accretion related to warrants................ 4,037 59,361 -- --
Conversion of interest to note payable................ -- 28,165 -- --
Exchange of preferred stock for
services............................................ -- 63,888 91,000 --
Increase (decrease) in cash from:
Accounts receivable................................... 203,110 (63,595) 26,575 (2,097,786)
Due from related parties.............................. -- -- -- (58,145)
Prepaid expenses and other current assets............. (18,407) (70,997) (40,253) (187,288)
Other assets.......................................... (10,399) (19,388) 5,965 (9,323)
Accounts payable...................................... (190) 3,622 44,867 (115,789)
Accrued expenses...................................... 116,317 (11,428) (19,821) 771,813
Deferred revenue...................................... 249,631 (81,985) (256,327) 481,851
--------- ----------- ----------- -------------
Net cash used for operating
activities........................................ (137,997) (1,218,140) (5,259,077) (6,933,025)
--------- ----------- ----------- -------------
Cash flows from investing activities:
Purchases of property and equipment..................... (47,941) (165,539) (349,534) (366,432)
Proceeds from sale of property and equipment............ -- 1,010 -- 750
--------- ----------- ----------- -------------
Net cash used for investing
activities........................................ (47,941) (164,529) (349,534) (365,682)
--------- ----------- ----------- -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of
issuance costs........................................ -- 3,712,581 8,629,928 23,364,830
Payments on notes payable............................... (202,914) (1,056,167) (77,470) (78,754)
Proceeds from issuance of note payable.................. 491,000 1,750,000 257,750 --
Proceeds from exercise of stock options................. 2,500 7,500 19,175 111,414
--------- ----------- ----------- -------------
Net cash provided by (used for) financing
activities........................................ 290,586 4,413,914 8,829,383 23,397,490
--------- ----------- ----------- -------------
Net increase (decrease) in cash........................... 104,648 3,031,245 3,220,772 16,098,783
Cash and cash equivalents, beginning of period............ -- 104,648 3,135,893 6,356,665
--------- ----------- ----------- -------------
Cash and cash equivalents, end of period.................. $ 104,648 $ 3,135,893 $ 6,356,665 $ 22,455,448
========= =========== =========== =============
Supplemental disclosures of cash flow information -- cash
paid for interest....................................... $ 55,642 $ 16,617 $ 46,987 $ --
========= =========== =========== =============
Summary of noncash investing and financing activities
-- Issuance of stock for notes payable.................. $ 20,000 $ 1,225,889 $ -- $ --
========= =========== =========== =============
-- Issuance of stock for note receivable................ $ -- $ -- $ -- $ 69,271
========= =========== =========== =============
-- Issuance of preferred stock for services at fair
value................................................ $ -- $ 63,888 $ 91,000 $ --
========= =========== =========== =============
-- Issuance of warrant for common stock for services.... $ -- -- -- $ 331,227
========= =========== =========== =============
</TABLE>
See notes to the consolidated financial statements.
F-7
<PAGE> 76
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Eprise Corporation and its subsidiary, together referred to as the
"Company," develop, market and implement web content management solutions that
help businesses shape and direct e-business communications effectively and
efficiently. The Company also provides design and other consultative services
designed to help organizations maximize the value they derive from the Company's
web content management solutions. Business is conducted primarily in the United
States.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma balance sheet as of December 31, 1999, reflects the
conversion of all outstanding shares of Series A, B and C preferred stock to
common stock, which will occur upon closing of an initial public offering.
STOCK SPLIT
The accompanying financial statements reflect a 1 for 2.55 reverse split of
the Company's common stock. All share and per share information herein has been
retroactively restated to reflect this split.
SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates that affect the reported amounts of assets, liabilities and reported
results of operations. Actual results could differ from those estimates.
REVENUE RECOGNITION
Software license fees are generally recognized when a signed contract has
been received, the product has been shipped, the fee is fixed or determinable
(based on vendor specific objective evidence), and collectibility is probable.
Vendor specific objective evidence is based on the prices at which products and
services are separately sold, as listed in our current price lists. Discounts
from established prices are infrequent and require management approval. Revenue
from maintenance agreements is deferred and recognized ratably over the term of
the agreement. Consulting revenue is recognized as services are performed.
COSTS OF REVENUE
Costs of revenue consist primarily of personnel costs related to the
provision of services. Costs of licenses, which are comprised of media and
documentation costs, are not material in any period presented.
COMPREHENSIVE INCOME (LOSS)
The Company does not have any items of comprehensive income (loss) other
than net loss.
F-8
<PAGE> 77
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of demand deposits and highly
liquid short-term instruments purchased with remaining maturities of three
months or less.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Repairs and maintenance are
expensed as incurred, while betterments are capitalized. Depreciation and
amortization are provided using the straight-line method over estimated useful
lives ranging from three years for computer equipment to seven years for
furniture and fixtures. Leasehold improvements are amortized over the life of
the asset or the lease, whichever is shorter.
LONG-LIVED ASSETS
Upon occurrence of certain events or changes in circumstances, the Company
reviews the carrying value of its long-lived assets to determine if impairment
has occurred and, if necessary, adjusts the carrying value accordingly. No
adjustments have been required to date.
STOCK-BASED COMPENSATION
Compensation expense associated with awards of stock or options to
employees is measured using the intrinsic-value method. Compensation expense
associated with awards to nonemployees is measured using the fair-value method.
(See Note 6)
INCOME TAXES
Deferred income taxes are provided for differences between the financial
statement carrying amounts and tax basis of the Company's assets and liabilities
and tax loss and credit carryforwards, using enacted tax rates in effect in the
years in which the differences are expected to reverse. Valuation allowances are
provided to the extent realization of deferred tax assets is not considered more
likely than not.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, other than software development costs, are
expensed as incurred. Software development costs are capitalized upon
achievement of technological feasibility. To date, no costs have been incurred
which qualify for capitalization.
NET LOSS PER SHARE
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during each period. In addition,
for purposes of pro forma net loss per share, all shares of Series A, B and C
preferred stock, which are convertible into common stock on a one-for-one basis
and are expected to be converted to common upon closing of this offering, have
been treated as though they were common stock in all periods in which such
shares were outstanding. In addition, no effect is given to accretion of the
preferred stock for purposes of this computation.
F-9
<PAGE> 78
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HISTORICAL NET LOSS PER SHARE
Historical net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during each period. Diluted amounts
per share would include the impact of the Company's outstanding potential common
shares, such as options and warrants (computed using the treasury stock method)
and convertible preferred stock. However, the effect of these items would be
antidilutive in all periods presented and they are excluded from the
computation. Had such shares been included in the computation, weighted average
shares would have been increased by 1,794,249 shares in 1999.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's revenues are derived from various customers who generally are
not required to provide collateral for amounts owed to the Company. The Company
operates in one segment. The Company's customers are dispersed over a wide
geographic area.
Major customers accounted for the following percentages of the Company's
revenues:
<TABLE>
<CAPTION>
YEAR FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Customer A........... -- 21% 58% 13%
Customer B........... -- 16 -- --
Customer C........... -- 15 -- --
Customer D........... -- 13 -- --
Customer E........... 22% -- -- --
Customer F........... -- -- -- 10%
</TABLE>
No other customers accounted for more than 10% of revenue in any of the
periods presented.
DUE FROM RELATED PARTIES
Amounts shown as due from related parties represent cash due from employees
at December 31, 1999 for exercise of stock options. This cash was received in
January 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS
On June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 2000. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for based on the use of the derivative and whether it qualifies for
hedge accounting. Management is currently assessing the impact of SFAS No. 133
on the financial statements of the Company. The Company will adopt this
accounting standard on January 1, 2001.
F-10
<PAGE> 79
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE REVENUE RECOGNITION
In December 1998, the American Institute of Certified Public Accountants
released Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to provide guidance related to determination of the allocation
of revenues in multiple element contracts under certain circumstances. SOP 98-9
will be effective for transactions entered into in the Company's fiscal year
beginning January 1, 2000. The Company does not expect that adoption of SOP 98-9
will have a material impact on financial position or the results of operations.
3. LINES OF CREDIT
The Company has lines of credit with a bank providing for borrowings of up
to $1,000,000 for working capital ($800,000 prior to March 26, 1999) and
borrowings of up to $500,000 for equipment purchases ($400,000 prior to March
26, 1999).
Borrowings under the working capital commitment are limited to the lesser
of $1,000,000 or 80% of eligible accounts receivable. The revolving line of
credit expires on March 26, 2000. Any borrowings outstanding under the working
capital line of credit bear interest at the bank's prime rate plus 1%. As of
December 31, 1998 and 1999, there were no borrowings under the working capital
line of credit. The equipment line of credit was available to purchase equipment
acquisitions through December 26, 1999. Borrowings under the equipment line of
credit bear interest at the bank's prime rate plus 1.5%. At December 31, 1998
and 1999, $243,430 and $78,756 were outstanding under the initial tranche of the
equipment line of credit, respectively. As of December 31, 1999, there were no
borrowings under the second tranche of the lease line of credit. Minimum lease
payments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- ----------------------
<S> <C>
2000................................................ $ 97,701
2001................................................ 82,444
--------
Total payments...................................... 180,145
Less portion representing interest.................. 15,472
--------
Net amount due...................................... 164,673
Current portion of note payable..................... 85,917
--------
Long-term note payable.............................. $ 78,756
========
</TABLE>
Both the revolving line of credit and the equipment line of credit are
collateralized by substantially all of the Company's assets. The lines of credit
contain covenants requiring minimum levels of liquidity and tangible net worth,
and prohibit the payment of cash dividends. At December 31, 1998, the Company
was not in compliance with maximum net loss covenants contained in the
agreements related to the lines of credit; the bank has waived the events of
non-compliance for 1998, and the agreements have been amended. At December 31,
1999, the Company was in compliance with the terms and covenants contained in
the amended lines of credit.
F-11
<PAGE> 80
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE AND OTHER OBLIGATIONS
CONVERTIBLE DEMAND NOTES PAYABLE
In August 1997, the Company entered into a convertible demand note payable
with an investor in the amount of $200,000, bearing interest at a rate of 10%
per annum. Effective with the issuance of the Series A redeemable convertible
preferred stock in December 1997 ("Series A"), the investor elected to convert
the note and accrued interest into 415,983 shares of Series A (see Note 5).
On October 9, 1997, the Company issued a $1,000,000 convertible demand note
payable, bearing interest at 10% per annum. Effective with the issuance of
Series A, the investor elected to convert the note and accrued interest into
2,050,843 shares of Series A (see Note 5). In connection with the issuance of
this note, the Company issued the investor a warrant to purchase 326,995 shares
of Series A for $0.49695 per share (see Note 6).
ACCOUNTS RECEIVABLE FINANCING
The Company has an agreement with a bank to finance its accounts receivable
with recourse. There were no borrowings under the agreement during 1998 or 1999.
The outstanding balance due to the bank under this agreement at December 31,
1997 was $37,696, which was repaid in 1998. The agreement has no defined
termination date.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 1997, the Company issued 10,189,936 shares of Series A, $0.01
par value. The issuance involved the sale of 7,594,550 shares for approximately
$3,774,100, the conversion of a note payable carried at $1,163,329 into
2,340,938 shares and the issuance of 125,888 shares for services rendered valued
at $63,888. Issuance costs approximated $61,500 and are being accreted to the
carrying value of the Series A stock over the period to the stock's scheduled
redemption date.
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
In August 1998, the Company sold 14,272,113 shares of Series B and received
proceeds of approximately $8,530,000. Issuance costs approximated $33,000 and
are being accreted to the carrying value of the Series B stock over the period
to the stock's scheduled redemption date.
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK
In November 1999, the Company issued 16,233,766 shares of Series C, $0.01
par value, and received proceeds of $25,000,000. Issuance costs approximated
$3,445,000, which includes the value of a warrant granted to the placement agent
in connection therewith (Note 6), and will be accreted to the carrying value of
the Series C stock over the period to the stock's scheduled redemption date.
The rights and preferences of the different classes of preferred stock are
as follows:
Liquidation -- Upon liquidation, dissolution or winding up of the
Company, holders of the Series C will be entitled to receive, before any
distribution is made to any other class of currently outstanding capital
stock, an amount equal to $1.54 per share, plus all accrued and unpaid
dividends, if any. Following this distribution to the holders of the Series
C, the holders
F-12
<PAGE> 81
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Series A and B will be entitled to receive, on a pari passu basis,
before any distribution or payment is made on the common stock, an amount
equal to $0.49695 and $0.60 per share, respectively, plus all accrued and
unpaid dividends, if any. The remaining assets will be distributed among
the holders of Series A, B and C and the common stock on an "as if"
converted basis. If the assets of the Company are insufficient to permit
payment in full to the holders of Series A and B of all amounts
distributable to them, then the entire assets of the Company available for
distribution will be distributed ratably among the holders of Series A and
B in proportion to the full preferential amount each holder is otherwise
entitled to receive.
Conversion -- Each share of Series A, B or C is convertible at the
option of the holder into shares of common stock on a 2.55 for 1 basis,
subject to adjustment in the event of subsequent issuances of securities at
a price per share that is lower than the price paid by the preferred
stockholders. Conversion of all classes of currently outstanding preferred
stock into common becomes automatic upon the closing of an initial public
offering with gross proceeds of at least $15,000,000 and a per share price
of at least $0.98, as to the Series A and B, and $1.21 as to the Series C.
Conversion also becomes automatic if at least two-thirds of the preferred
shareholders, voting as a single class, so elect or if at least 90% of the
outstanding preferred shares have been converted to common.
Dividends -- The holders of Series A, B and C are entitled to receive
dividends, if and when declared on the shares of common stock, on an "as
if" converted basis.
Voting -- The holders of Series A, B and C vote together with all
other classes and series of stock of the corporation as one class. Each
share of Series A, B and C entitles the holder to a number of votes equal
to the number of shares of common stock into which the preferred shares
could be converted on that date.
Redemption -- Upon the election of a majority of the Series C holders
at any time on or after December 18, 2002, the Company will be required to
redeem all of the then outstanding shares of Series C in three equal
installments. The redemption price per share is equal to the greater of
$1.54 per share plus all accrued but unpaid dividends, if any, or the fair
market value of the Series C shares. These redemption rights of the Series
C holders are senior to the redemption rights described below for the
Series A and B shares. Should sufficient funds exist if redemption of the
Series C has occurred and upon the election of the majority of the Series A
and B holders at any time on or after December 18, 2002, the Company will
be required to redeem all of the then outstanding shares of the Series A
and B in three equal annual installments. The redemption price per share is
equal to the greater of $0.49695 for Series A and $0.60 for Series B, plus
all declared but unpaid dividends, if any, or the fair market value of the
stock.
Covenants -- The Company's fourth amended and restated certificate of
incorporation provides for separate, identical covenants for all classes of
redeemable preferred stock as follows: except with the approval of a
majority of each class of redeemable preferred stock outstanding, the
Company may not amend its Certificate of Incorporation or By-laws; increase
the number of shares of redeemable preferred stock, or reclassify any
common stock into shares having any preference or priority superior to or
in parity with the redeemable preferred stock; create, authorize or issue
any class or classes of stock senior to or in parity with the redeemable
preferred stock; pay or declare any dividend or distribution on any shares
of common stock; or effect any sale, lease, assignment, transfer or other
conveyance (other than the grant of a mortgage or security interest in
connection with indebtedness for borrowed money) of all or substantially
all the assets of the
F-13
<PAGE> 82
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, any liquidation, dissolution or winding up of, or any
consolidation or merger involving the Company, or recapitalization of the
Company.
Beneficial Conversion Feature -- Because of the proximity of the
issuance of the Series C to the commencement of the Company's proposed
stock offering, the Company has concluded that a beneficial conversion
feature was present in the preferred stock on the date of issuance. For
purposes of evaluating this beneficial conversion feature, the Company
considers that the mid-point value implied in the preliminary range of
prices for the proposed stock offering ($9.00) represents the fair value of
the common stock on the date the Series C was issued.
In accordance with Emerging Issues Task Force Abstract No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," the proceeds from the Series C
financing were allocated between the conversion feature and the preferred stock;
because the fair value of the common stock ($9.00) was significantly in excess
of the conversion price implicit in the Series C stock ($3.93), the entire
amount of net proceeds ($21,555,501) were allocated to the conversion feature.
Because the preferred stock is immediately convertible into common stock, an
immediate dividend or accretion of $21,555,501 was recorded from common
stockholders' equity to the carrying value of the Series C preferred stock.
In addition, except with the approval of 51% of the holders of Series C
preferred stock, the Company may not issue additional securities (other than
under an approved plan), adopt or amend its stock option plans, sell or lease
the assets of the Company or impair its ability to perform under the Series C
Purchase Agreement.
As of December 31, 1998 and 1999, the number of shares, and liquidation
value of each class of redeemable convertible preferred stock are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Number of shares:
Series A............................................ 10,515,925 10,515,925
Series B............................................ 14,320,446 14,320,446
Series C............................................ -- 16,233,766
Redemption and liquidation value:
Series A............................................ $ 5,225,889 $ 5,225,889
Series B............................................ 8,592,268 8,592,268
Series C............................................ -- 25,000,000
</TABLE>
6. STOCKHOLDERS' DEFICIENCY
In August 1998, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock from 25,000,000 to
40,000,000. In November 1999, the number of authorized shares of common stock
was further increased to 58,500,000.
WARRANTS
In connection with the issuance of a bridge note payable to a bank issued
and paid in 1997 (see Note 4), the Company issued a warrant to purchase 19,728
shares of the Company's common stock at an exercise price of $0.03 per share.
The warrant expires five years from the
F-14
<PAGE> 83
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issuance date. The estimated fair value of the warrant as of the grant date,
$12,205, was recorded as a discount on the bridge note. This discount was
amortized to interest expense over the period the bridge note payable was
outstanding.
In connection with the issuance of a convertible demand note payable,
issued and paid in 1997 (see Note 4), the Company issued a warrant to purchase
326,995 shares of the Company's Series A preferred stock at an exercise price of
$0.49695 per share. The warrant expires five years from the issuance date. The
estimated fair value of the warrant as of the date of the grant, $41,589, was
recorded as a discount on the convertible demand note payable and charged to
interest expense during the four months ended December 31, 1997.
In connection with the issuance of a promissory note payable, issued and
paid in 1997 (see Note 4), the Company issued a warrant to purchase 29,592
shares of the Company's common stock at an initial exercise price of $1.27 per
share, which may be adjusted upon issuance of securities at a price less than
the initial exercise price of the warrant. The warrant expires five years from
the issuance date. The estimated fair value of the warrant as of the date of the
grant, $9,597, was recorded as a discount on the promissory note and charged to
interest expense during the four months ended December 31, 1997.
In connection with the private placement of 16,233,776 shares of Series C
preferred stock, the Company issued to the placement agent a warrant to purchase
254,598 shares of common stock at an exercise price of $3.93 per share. The
warrant expires five years from the issuance date (September 1999). The
estimated fair value of the warrant as of the date of grant was $1,863,759. The
warrant has been recorded as an issuance cost and has been offset against the
initial carrying value of the Series C Preferred Stock.
All warrants were valued on the date of grant using the Black-Scholes
option pricing model. Among the assumptions used to value these warrants were as
follows:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1997 1999
----------- ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate................. 6.1% - 6.75% 6.0% 6.0%
Expected life of warrant................ 5 years 5 years 5 years
Expected dividend payment rate, as a
percentage of the stock price on the
date of grant......................... -- -- --
Assumed volatility...................... 45% 45% 51%
Fair value of underlying common stock... $0.64 $0.64 $9.00
</TABLE>
STOCK OPTIONS
In August 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan"), which provides for the issuance of common stock as either incentive
stock options ("ISOs") or nonqualified stock options ("NSOs"). Under the terms
of the 1997 Plan, ISOs are to be granted at the fair market value of the
Company's common stock on the date of grant and NSOs are to be granted at a
price determined by the Board of Directors. ISOs and NSOs generally vest over
four years and have contractual lives of up to ten years. In December 1999, the
Company amended the plans to allow the holder of options to exercise their
options immediately, with a requirement that the employees rights to the shares
vest over a period that is identical to the original vesting schedule. Should
the employee terminate prior to vesting, the
F-15
<PAGE> 84
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee is required to resell the shares to the Company at the original
purchase price. This amendment did not result in a new measurement date.
In December 1999, the 1997 Plan was amended to provide for automatic
increases in options available for grant on January 1 of each of 2000, 2001 and
2002. The increase in options available (and the related reserved shares of
common stock) in any given year is limited to the lesser of 5% of the total
outstanding shares of common stock as of December 31st of the previous year or
1,372,549 additional options.
As of the effective date of the 1997 Plan, any unvested or unexercised
options that were issued under the 1997 Plan's predecessor, the 1994 Plan, that
are forfeited will become available for issuance under the 1997 Plan thereby
increasing the options available for grant under the 1997 Plan to a maximum of
4,144,281 shares. Option activity under both the 1997 and 1994 plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR
SHARES PRICE VALUE
--------- --------- ---------
<S> <C> <C> <C>
Outstanding, September 1, 1996........... 227,452 $0.64
Granted................................ 423,529 0.64 $0.15
Exercised.............................. (3,922) 0.64
Canceled............................... (214,510) 0.64
---------
Outstanding, August 31, 1997............. 432,549 0.64
Granted................................ 844,082 0.64 0.15
Exercised.............................. (11,765) 0.64
Canceled............................... (111,373) 0.64
---------
Outstanding, December 31, 1997........... 1,153,493 0.64
Granted................................ 962,393 0.28 0.08
Exercised.............................. (75,196) 0.26
Canceled............................... (239,706) 0.26
---------
Outstanding, December 31, 1998........... 1,800,984 0.26
Granted................................ 1,380,940 0.99 2.37
Exercised.............................. (600,287) 0.30
Canceled............................... (356,373) 0.29
---------
Outstanding and exercisable, December 31,
1999................................... 2,225,264 0.71
=========
Vested, December 31, 1999................ 586,549 0.26
=========
Vested, December 31, 1998................ 337,902 0.26
=========
Vested, December 31, 1997................ 137,255 0.64
=========
Vested, August 31, 1997.................. 98,039 0.64
=========
</TABLE>
In October 1999, the Company granted options to acquire 133,725 shares of
common stock to employees at an exercise price of $0.64. In December 1999, the
Company granted options to acquire 200,196 shares of common stock to employees
at an exercise price of
F-16
<PAGE> 85
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$3.53. In January 2000, the Company granted options to acquire 259,118 shares of
common stock to employees at an exercise price of $6.89.
In July, 1999, the Board of Directors approved a stock loan program, which
allows specified employees to fund the purchase of common stock pursuant to the
exercise of stock options through loans from the Company. Borrowings are limited
to 50% of the employee's annual salary. Loans under this program bear interest
at a variable rate of 0.5% over the Company's cost of funds and are secured by
the underlying shares. All loans are due no later than five years from the date
of the loan. At December 31, 1999, $69,271 had been advanced to employees under
this program.
In January 2000, the Board of Directors of the Company approved the 2000
Employee Stock Purchase Plan, which allows employees of the Company to purchase
common stock of the Company through payroll deductions at 85% of the then fair
market value of the Company's stock. The Company reserved 588,235 shares for
issuance under the plan. The 2000 Employee Stock Purchase Plan provides for
automatic increases in shares available for purchase under the plan. In general,
the increase in shares available in any given year is limited to the lesser of
1% of the total outstanding shares of common stock as of December 31st of the
previous year or 294,118 additional shares.
The board of directors has approved the 2000 Non-Employee Director Stock
Plan, which will become effective upon the effectiveness of the Company's
proposed initial public offering. The 2000 Non-Employee Director Stock Plan
provides for the issuance of options covering up to 274,510 shares of common
stock to non-employee directors. Under the plan, non-employee directors will
receive a one-time grant of 15,686 options upon election to the Board of
Directors. In addition, each year all non-employee directors will automatically
receive an additional grant of 7,843 shares following the Company's annual
meeting. Options granted under the plan will be immediately exercisable, but
will be subject to repurchase restrictions which will lapse over a three year
period following the grant. Options granted under the plan will contain exercise
prices equal to the fair market value of the underlying common stock on the date
of grant.
At December 31, 1999, there were 1,221,964 options available for grant
under the 1997 Plan, including those shares forfeited under the 1994 Plan. In
February 1998, the Company's Board approved the repricing of all outstanding
options on that date, covering approximately 1,153,333 shares, to $0.26 per
share to reflect the Board's estimate of the fair value of the underlying common
stock on the date of the repricing.
Grants made during 1999 contained exercise prices which were the Company's
best estimate of fair value of the underlying common stock on the date of grant.
However, subsequent to the grant date, management concluded that for grants
after the release of the new version of the Company's principal product, these
estimates may not have fully reflected the impact of this event. Management has
concluded that for grants made between May and August 1999, $3.93 is a more
reliable estimate of the fair value of the common stock during this period. For
grants made in periods after August 1999, management concluded that the
mid-point value implied in the preliminary range of prices for a proposed
initial public offering ($9.00) is a more reliable estimate of the fair value of
the common stock during the period. For grants during this period, compensation
cost aggregated $6,796,000, which will be amortized to expense over the four
year vesting period of the option grants. For the year ended December 31, 1999,
compensation expense recorded related to these grants aggregated $523,726.
F-17
<PAGE> 86
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of the options on their grant date was measured using the
Black-Scholes option pricing model. Key assumptions used to apply this option
pricing model are as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Risk-free interest
rate................... 6.1% - 6.75% 6.0% 6.0% 6.0%
Expected life of option
grants................. 5 years 5 years 5 years 5 years
Expected dividend payment
rate, as a percentage
of the stock price on
the date of grant...... -- -- -- --
Assumed volatility....... 45% 45% 45% 51%
</TABLE>
The option-pricing model used was designed to value readily tradable stock
options with relatively short lives. However, management believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances.
The following table sets forth information regarding options outstanding
and vested at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
- ------------------------------------------------------------ ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
SHARES PRICE LIFE PRICE SHARES PRICE
------ ------------ ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
2,225,264............ $0.26 - 3.53 9.00 years $0.71 586,549 $0.26
</TABLE>
As described in Note 2, the Company uses the intrinsic value method to
measure compensation expense associated with grants of stock options to
employees. If the Company had used the fair value method to measure
compensation, reported net loss would have been as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
As reported....................... $(733,408) $(1,163,705) $(5,260,508) $(6,599,996)
========= =========== =========== ===========
Pro forma......................... $(743,799) $(1,179,636) $(5,337,568) $(8,276,951)
========= =========== =========== ===========
Pro forma loss per share.......... $ (0.36) $ (0.54) $ (2.42) $ (12.09)
========= =========== =========== ===========
</TABLE>
RESERVED SHARES
At December 31, 1999, 19,985,224 shares of common stock were reserved for
issuance under the Company's stock option plans and outstanding warrants and for
potential conversion of preferred stock.
F-18
<PAGE> 87
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of the provision (benefit) for income taxes consisted of the
following:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal -- deferred.................. $(226,000) $(358,000) $(1,619,000) $ (2,144,000)
State -- deferred.................... (70,000) (110,000) (500,000) (627,000)
Increase in valuation allowance...... 296,000 468,000 2,119,000 2,771,000
--------- --------- ----------- ------------
Provison (benefit) for income
taxes.............................. $ -- $ -- $ -- $ --
========= ========= =========== ============
</TABLE>
Taxes during interim periods are computed using the estimated rate
effective for the entire year. Changes to the estimated rate are reflected in
periods in which the change in estimate occurs.
A reconciliation of the statutory federal rate to the effective rate for
all periods is as follows:
<TABLE>
<S> <C>
Statutory Federal rate benefit............................ (34)%
State, net of Federal effect.............................. (6)
Valuation allowance provided.............................. 40
---
Effective rate............................................ --%
===
</TABLE>
Deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets (liabilities):
Property and equipment........................ $ (13,400) $ (30,500)
Accounts receivable -- allowance for doubtful
accounts................................... 19,100 75,600
Accrued liabilities........................... -- 182,800
Net operating loss carryforwards.............. 3,115,600 5,471,500
Research and development credits.............. 125,800 318,900
Valuation allowance........................... (3,247,100) (6,018,300)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards for
federal and state tax purposes aggregating approximately $13,500,000 available
to offset future taxable income. These net operating loss carryfowards expire in
varying amounts through 2013. At December 31, 1999, the Company had federal and
state tax credits aggregating $318,900 available to offset future taxable
income, expiring through 2013. Due to changes in ownership due to stock
issuances during 1997, 1998 and 1999, the Company's ability to utilize these
carryforwards and credits is likely to be limited.
The valuation allowance increased by $2,191,500 and $2,771,200 in 1998 and
1999, respectively, primarily due to the generation of net operating loss
carryforwards and credits for which realization is not reasonably assured.
F-19
<PAGE> 88
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) retirement plan (the "Plan") under which
eligible employees may contribute up to 20% of their annual compensation,
subject to limitations imposed by the Internal Revenue Code. The Company
provides matching contributions of 50% of the employee salary deferral, up to 5%
of eligible earnings. Employees vest immediately in their contributions and
earnings thereon and ratably over six years in the Company's contributions.
During the year ended August 31, 1997, the four months ended December 31, 1997,
the year ended December 31, 1998 and 1999, the Company made matching
contributions of approximately $13,900, $7,200, $55,800, and $81,882
respectively.
9. COMMITMENTS
LEASE COMMITMENTS
The Company has operating lease agreements for facilities and equipment.
The Company entered into a three-year, noncancelable operating sublease for its
office facilities commencing October 15, 1997. The lease provides that the
Company pay a base monthly rental of approximately $16,500, plus its
proportionate annual share of the facility's common area expenses and real
estate taxes. On November 30, 1997, the Company terminated its previous lease
for office space and paid a $34,000 termination fee.
Subsequent to December 31, 1999, the Company entered into a short-term
lease for an operating facility. This lease calls for rental payments of
$171,126 and expires at the end of September 2000. The Company also entered into
a ten year lease, commencing in October 2000, for a 78,260 sq. ft. operating
facility which calls for base lease payments of $27 per square foot in the first
three years of the lease, $28.75 in years four through six, and $30.75
thereafter.
Future minimum lease commitments for all noncancelable operating leases at
December 31, 1999, including leases entered into subsequent to December 31,
1999, approximated the following:
<TABLE>
<S> <C>
Years Ending December 31:
2000........................................... $ 792,000
2001........................................... 2,115,000
2002........................................... 2,115,000
2003........................................... 2,150,000
2004........................................... 2,252,000
Thereafter..................................... 13,567,000
</TABLE>
Rent expense under operating lease agreements approximated $148,000,
$113,900, (including the termination fee) $198,400 and $255,835 for the year
ended August 31, 1997, the four months ended December 31, 1997, and the years
ended December 31, 1998 and 1999, respectively.
10. RESTATEMENTS
The accompanying 1999 consolidated financial statements have been restated
to correct the accounting applied to the issuance of the Series C redeemable
preferred stock (the "Series C") and to correct the accounting applied to grants
of stock options during 1999.
F-20
<PAGE> 89
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to the issuance of the Company's 1999 consolidated financial
statements, management determined that the Company had incorrectly accounted for
the issuance of the Series C preferred stock in 1999. Because of the proximity
of the issuance of the Series C to the commencement of the Company's proposed
stock offering, the Company has concluded that a beneficial conversion feature
was present in the preferred stock on the date of issuance. For purposes of
evaluating this beneficial conversion feature, the Company considers that the
mid-point value implied in the preliminary range of prices for the proposed
stock offering ($9.00) represents the fair value of the common stock on the date
the Series C was issued.
In accordance with Emerging Issues Task Force Abstract No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," the proceeds from the Series C
financing were allocated between the conversion feature and the preferred stock;
because the fair value of the common stock ($9.00) was significantly in excess
of the conversion price implicit in the Series C stock ($3.93), the entire
amount of net proceeds ($21,555,501) were allocated to the conversion feature.
Because the preferred stock is immediately convertible into common stock, an
immediate dividend or accretion of $21,555,501 was recorded from common
stockholders' equity to the carrying value of the Series C preferred stock.
In addition, the Company had originally estimated that for grants of stock
options in September and October of 1999, the fair value of the underlying
common stock was $3.93 per share. The Company has concluded that this estimate
does not fully reflect the fair value of the common stock at such times. The
Company has concluded that $9.00 more accurately represents the fair value of
common stock during the period these grants were made and has adjusted its
estimates of compensation cost related to those option grants accordingly.
The effects of these restatements on the Company's consolidated financial
statements as of and for the year ended December 31, 1999, are as follows:
<TABLE>
<CAPTION>
AS
PREVIOUSLY
REPORTED AS RESTATED
------------ ------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET:
Redeemable convertible preferred stock................. $ 36,848,516 $ 35,315,984
Additional paid-in capital............................. 1,053,085 24,332,606
Accumulated deficit.................................... (14,278,101) (36,025,090)
Total stockholders' deficiency......................... (13,291,449) (11,758,917)
</TABLE>
F-21
<PAGE> 90
EPRISE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS
PREVIOUSLY
REPORTED AS RESTATED
------------ ------------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Cost of revenues....................................... $ 1,119,741 $ 1,125,050
Research and development expenses...................... 2,333,530 2,360,201
Selling and marketing expenses......................... 4,916,787 5,056,254
General and administrative expenses.................... 1,984,947 2,004,988
Operating loss......................................... (6,696,190) (6,887,676)
Net loss............................................... (6,408,508) (6,599,996)
Accretion of redeemable convertible preferred stock.... (74,722) (21,630,223)
Loss to common shareholders............................ $ (6,483,230) $(28,230,219)
============ ============
Loss per share......................................... $(2.62) $(11.42)
</TABLE>
F-22
<PAGE> 91
[INTENTIONALLY LEFT BLANK]
<PAGE> 92
[INTENTIONALLY LEFT BLANK]
<PAGE> 93
[EPRISE CORPORATION LOGO]
<PAGE> 94
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Special Note Regarding Forward-
Looking Statements and Industry
Data................................ 13
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 30
Management............................ 41
Certain Transactions.................. 51
Principal Stockholders................ 53
Description of Capital Stock.......... 56
Shares Eligible for Future Sale....... 60
Underwriting.......................... 62
Legal Matters......................... 65
Experts............................... 65
Change in Accountants................. 65
Where You Can Find Additional
Information......................... 65
Index to Financial Statements......... F-1
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATION: UNTIL APRIL 17, 2000 (25 DAYS AFTER THE
DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[EPRISE CORPORATION LOGO]
4,000,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
WIT SOUNDVIEW
PROSPECTUS
MARCH 23, 2000
