<PAGE>
As filed with the Securities and Exchange Commission on March 24, 2000
Registration No. 333-
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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NEXGENIX, INC.
(Exact name of registrant as specified in its charter)
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Delaware 7379 33-0421282
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
30 Corporate Park, Suite 410, Irvine, CA 92606
(949) 476-4097
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------
A. Rick Dutta, Chairman and Co-Chief Executive Officer
S. Don Ganguly, Co-Chairman and Co-Chief Executive Officer
30 Corporate Park, Suite 410, Irvine, CA 92606
(949) 476-4097
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------
Copies to:
Nick E. Yocca, Esq. William J. Whelan, III, Esq.
Daniel P. Murphy, Esq. Cravath, Swaine & Moore
Thong (Tom) D. Le, Esq. Worldwide Plaza
Stradling Yocca Carlson & Rauth, P.C. 825 Eighth Avenue
660 Newport Center Drive, Suite 1600 New York, New York 10019-7475
Newport Beach, California 92660-6441 (212) 474-1000
(949) 725-4000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_] _____________
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CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price(1)(2) Registration Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Common stock, $.001 par value.............. $57,500,000 $15,180
</TABLE>
================================================================================
(1) Includes shares of common stock which may be purchased by the underwriters
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 24, 2000
Shares
[LOGO OF NEXGENIX(TM) APPEARS HERE]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$ and $ per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "NXGN."
The underwriters have an option to purchase a maximum of additional
shares from the selling stockholders to cover over-allotments of shares, if
any. We will not receive any of the proceeds from shares of our common stock
sold by the selling stockholders.
Investing in our common stock involves risks. See "Risk Factors" on page 4.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price Discounts and Proceeds to Selling
to Public Commissions Nexgenix Stockholders
--------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total....................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Lehman Brothers
Robertson Stephens
The date of this prospectus is , 2000.
<PAGE>
[Inside Front Cover of Prospectus/Artwork]
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Cautionary Note Regarding Forward-Looking Statements..................... 12
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 25
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 35
Certain Transactions....................................................... 42
Principal and Selling Stockholders......................................... 43
Description of Capital Stock............................................... 44
Shares Eligible for Future Sale............................................ 47
U.S. Federal Tax Considerations for Non-U.S. Holders....................... 49
Underwriting............................................................... 52
Notice to Canadian Residents............................................... 55
Legal Matters.............................................................. 56
Experts.................................................................... 56
Where You Can Find More Information........................................ 56
Index to Financial Statements.............................................. F-1
</TABLE>
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You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may be accurate only
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when acting as an underwriter and with respect to unsold allotments
or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and does
not contain all of the information that may be important to you. You should
read the entire prospectus, including the section entitled "Risk Factors" and
our consolidated financial statements and related notes, before deciding to
invest in our common stock. In this prospectus, unless the context otherwise
requires, the terms "we," "us," "our," "our company" and "Nexgenix" refer to
Nexgenix, Inc. and its predecessor, NexGen SI, Inc. and to its majority-owned
subsidiary. The term "fiscal" refers to our fiscal year, which is comprised of
a twelve-month period ending on June 30 of each year.
Nexgenix
We provide a new category of Internet professional services that we call e-
Relationship services. e-Relationship services are an integrated offering of
business strategy, branding, marketing, creative design and technology
services. We utilize our extensive technology expertise to implement reliable
and scalable web sites, and use our advanced information gathering and analytic
customer profiling capabilities to create more effective branding and marketing
campaigns consistent with our client's overall marketing strategy. Furthermore,
our loyalty building programs and customer service solutions allow our clients
to create more personalized e-businesses. As a result, our services add
significant value to our clients by helping them build next generation e-
businesses that efficiently acquire and retain customers and improve
profitability. We target startup and emerging e-businesses as well as
traditional brick-and-mortar companies that are developing and implementing e-
business solutions. Our clients include business-to-business and business-to-
consumer companies, such as Alcatel Internetworking Division, CBS SportsLine,
Ecolab, iMotors, Military.com and Sage Software.
Companies are increasingly building e-businesses in response to the rapid
growth in the commercial use of the Internet and are seeking the expertise of
outside Internet professional service providers to implement these e-
businesses. International Data Corporation, an independent research firm,
estimates that the worldwide market for Internet services will grow from $16.5
billion in 1999 to $102.7 billion in 2004.
We believe the marketplace is entering the next generation of e-businesses.
The first generation focused primarily on creating transactive web sites and
not on helping clients build stronger customer relationships. We believe that
next generation e-businesses must invest more efficiently to acquire customers
and increase customer retention rates in order to improve profitability. e-
businesses can achieve these objectives by more effectively managing
relationships with their online customers as well as investing in brand
differentiation. Relationship management helps identify the right customers
through segmentation analysis, creates loyalty by employing targeted marketing
and incentive campaigns and increases revenues per customer through
personalized marketing.
We believe next generation e-businesses are seeking Internet professional
services firms that can provide all the services that enable clients to build
profitable and longer-lasting e-relationships. We believe we are well
positioned to benefit from this market opportunity because of our ability to
help clients establish long term, stronger and more profitable customer
relationships, instead of simply acquiring customers on an individual
transaction basis. We believe the following elements of our solution
distinguish us as a leading provider of Internet professional services:
. our development and use of proprietary measurement tools, which we refer
to as eRMetrics, to help evaluate the effectiveness of an e-business;
. our ability to offer specific e-Relationship service offerings following
our eRMetrics evaluation;
. our use of reusable frameworks and tools and geographically dispersed
delivery centers to increase speed of execution and quality of the
solution;
. our use of integrated, multi-disciplinary client teams organized on a
regional basis; and
. our extensive technology expertise, which stems from our 10 year history
of implementing complex technology solutions.
1
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Our objective is to become the leading provider of e-relationships services.
Our strategy to achieve this goal is to:
. use our performance centers to develop new service offerings;
. enhance and capitalize on eRMetrics;
. target new industries;
. continue to build our brand;
. attract and retain highly qualified professionals; and
. continue to develop industry relationships.
We were incorporated in 1990 in Delaware under the name NexGen SI, Inc. and
changed our name to Nexgenix, Inc. on October 27, 1999. As of December 31,
1999, we had 260 billable employees. We have 22 offices located across the
United States in California, Florida, Georgia, Illinois, New Jersey, New York,
North Carolina, Pennsylvania and Texas, and one international office located in
India. Our principal executive office is located at 30 Corporate Park Plaza,
Suite 410, Irvine, California 92606 and our telephone number is (949) 476-4097.
Our web site is located at www.nexgenix.com. The information on our web site is
not part of this prospectus.
The Offering
Common stock offered by us.......... shares
Common stock to be outstanding
after this offering................ shares, or shares if
the underwriters exercise their over-
allotment option in full. We will not
receive any of the proceeds from the
sale of the shares by the selling
stockholders.
Over-allotment option by selling
stockholders....................... shares
Use of proceeds..................... For general corporate purposes,
including repayment of debt, working
capital and capital improvements.
Nasdaq National Market symbol....... NXGN
Risk Factors........................ See "Risk Factors" beginning on page
4 for a discussion of factors you
should carefully consider before
deciding to buy our common stock.
------------
The number of shares of our common stock that will be outstanding after this
offering is based on the number of shares of common stock outstanding on
December 31, 1999. This number excludes 9,200,000 shares of common stock
reserved for issuance under our stock option plans, of which options to
purchase 6,405,614 shares were outstanding on December 31, 1999 at a weighted
average exercise price of $0.52 per share.
Unless otherwise indicated, all information in this prospectus (other than
information in the consolidated financial statements):
. reflects the automatic conversion of all outstanding shares of our
preferred stock into a total of 8,313,728 shares of our common stock
upon the closing of this offering; and
. assumes no exercise of the underwriters' over-allotment option.
"Nexgenix" and the Nexgenix logo are our trademarks or service marks. Other
trademarks appearing in this prospectus are the property of their respective
owners, including us.
2
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following presents our summary consolidated financial data and has been
derived from our audited consolidated financial statements for the three-year
period ended June 30, 1999, and from our unaudited interim consolidated
financial statements for the six-month periods ended December 31, 1998 and
1999, all of which are included elsewhere in this prospectus. The pro forma as
adjusted column in the consolidated balance sheet data below gives effect to
the automatic conversion of all outstanding shares of our preferred stock upon
the closing of this offering, the issuance and sale of shares of our
common stock in this offering and our receipt of the net proceeds from the sale
of these shares after deducting underwriting discounts and commissions and
estimated offering expenses payable by us. You should read the following
summary financial information along with "Selected Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes,
each of which is included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six-month
period ended
Year ended June 30, December 31,
------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.......................... $16,790 $23,421 $32,376 $16,562 $20,715
------- ------- ------- ------- -------
Operating expenses:
Professional services (exclusive
of $16 reported below as stock-
based compensation)............ 9,568 15,155 17,771 9,569 11,369
Selling, general and
administrative (exclusive of
$1,768 reported below as stock-
based compensation)............ 6,542 7,972 14,663 6,473 12,405
Stock based compensation........ -- -- -- -- 1,784
------- ------- ------- ------- -------
Total operating expenses...... 16,110 23,127 32,434 16,042 25,558
------- ------- ------- ------- -------
Income (loss) from operations..... 680 294 (58) 520 (4,843)
Other income (expenses)........... (49) (64) (146) (77) (28)
Income tax (provision) benefit.... (219) (122) 54 (117) 1,169
------- ------- ------- ------- -------
Income (loss) before minority
interest......................... $ 412 $ 108 $ (150) $ 326 $(3,702)
======= ======= ======= ======= =======
Net income (loss)................. $ 362 $ 106 $ (171) $ 334 $(3,652)
Accretion of preferred stock
discount and dividends........... -- -- -- -- (350)
------- ------- ------- ------- -------
Net income (loss) available to
common stockholders.............. $ 362 $ 106 $ (171) $ 334 $(4,002)
======= ======= ======= ======= =======
Net income (loss) per common
share:
Basic........................... $ 0.01 $ 0.00 $ (0.01) $ 0.01 $ (0.15)
======= ======= ======= ======= =======
Diluted......................... $ 0.01 $ 0.00 $ (0.01) $ 0.01 $ (0.15)
======= ======= ======= ======= =======
Shares used in computation:
Basic........................... 28,000 28,000 28,000 28,000 27,386
======= ======= ======= ======= =======
Diluted......................... 29,344 29,344 28,000 29,344 27,386
======= ======= ======= ======= =======
Pro forma basic and diluted net
loss per common share............ $ (0.12)
=======
Shares used in pro forma basic and
diluted net loss per common
share............................ 30,003
=======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999
------------------------
Pro forma
Actual as adjusted
------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $11,758 $
Working capital.................................. 13,914
Total assets..................................... 23,172
Mandatorily redeemable preferred stock........... 20,663
Long-term debt, net of current portion........... 557
Total stockholders' equity (deficit)............. (4,902)
</TABLE>
3
<PAGE>
RISK FACTORS
Your investment in our common stock involves a high degree of risk. You
should consider the risks described below and the other information in this
prospectus carefully before you purchase any shares of our common stock. If we
do not successfully address any of the risks described below, there could be a
material adverse effect on our business, financial condition and results of
operations. Additional risks and uncertainties not presently known to us may
also impair our operations and business.
Risks Relating to Our Business
We expect to report losses for the forseeable future and may not achieve or
sustain future profitability.
Although we were incorporated in 1990, we have been focused on the Internet
services market only since 1998. We incurred a net loss of $3.7 million for the
six-month period ended December 31, 1999 and a net loss of $0.2 million for
fiscal 1999. We are investing in the expansion of our Internet services
offerings and may not recover that investment. We also expect to incur net
losses for the foreseeable future. As we strive to grow our business, we expect
to spend significant funds for general corporate purposes, including working
capital, marketing, hiring additional personnel, upgrading our infrastructure,
including internal information systems, and expanding into new geographical
markets. We expect that our plans for increases in expenses and capital
expenditures over the next 12 to 18 months will result in losses. We cannot
predict when, if ever, we will achieve sufficient revenues to enable us to
become profitable.
The loss of executive management or regional directors may harm our ability to
obtain and retain client engagements, maintain a cohesive culture and compete
effectively.
We believe that our success depends on the continued employment of our
executive management and regional directors, because personal relationships
between such individuals and our clients are critical to obtaining and
retaining client engagements and maintaining a cohesive culture. If one or more
members of our executive management or any of our regional directors should
discontinue working in their present positions for any reason, these persons
would be very difficult to replace. In addition, if any of these key employees
joined a competitor or formed a competing company, some of our clients might
choose to use the services of that competitor or new company instead of our
own. Furthermore, clients or other companies seeking management talent may hire
away some of our executive management or regional directors. This would not
only result in the loss of key employees, but could also result in the loss of
client relationships or new business opportunities and impede our ability to
implement our business strategy.
The loss of our professionals, or our inability to hire new qualified
professionals, could hinder our ability to grow and serve our clients.
The Internet services market is labor intensive. Currently, companies in our
industry and similar industries face a shortage of personnel with management
experience, Internet expertise and creative and technical skills, and we do not
anticipate any improvement in this situation in the foreseeable future. We
compete intensely with other companies to hire and retain qualified labor from
the pool of available talent. We may not be successful in hiring and retaining
qualified personnel. We may need to incur higher compensation expenses than we
currently incur in order to attract and retain qualified personnel. If we
cannot hire, train and retain qualified personnel or if a significant number of
our current employees depart, we may be unable to complete or retain existing
engagements or bid for new engagements of similar scope and revenues.
We have relied and expect to continue to rely on a limited number of clients
for a significant portion of our revenues.
For the six-month period ended December 31, 1999, our 10 largest clients
accounted for approximately 57% of our revenues, and for fiscal 1999, our 10
largest clients accounted for approximately 76% of our revenues. The volume of
work that we perform for a specific client is likely to vary from period to
period, and
4
<PAGE>
a significant client in one period may significantly decrease or discontinue
use of our services in a subsequent period. For example, although our largest
customer in fiscal 1999 accounted for approximately 25% of our revenues in
fiscal 1999, we do not expect it to continue to be one of our 10 largest
clients after the second quarter of fiscal 2000. To the extent that any
significant client uses less of our services or terminates its relationship
with us, during or following the completion of an engagement, our revenues
could decline substantially and our operating results could be adversely
affected to the extent we are unable to quickly redeploy our professionals to
other client engagements.
Our business may be harmed if we fail to estimate the cost, scope or duration
of an engagement accurately.
Approximately 67% of our revenues was derived from fixed price engagements
during the six-month period ended December 31, 1999. Because of the complexity
of many of our fixed price client engagements, accurately estimating the cost,
scope and duration of a particular engagement is often a difficult task. If we
fail to estimate the cost, scope or duration of one or more of our fixed price
engagements accurately, we could be forced to devote additional resources to
these engagements for which we will not receive additional compensation. To the
extent that we need to spend additional resources on a fixed price engagement,
we could realize reduced profits, or a loss, on that engagement.
We derive our revenues from project-based client engagements, which make our
revenues difficult to predict.
We derive our revenues from client engagements undertaken on a project-by-
project basis which vary in size, scope and duration. As a result, our revenues
are difficult to predict, because any client that accounts for a significant
portion of our revenues in a given period may not generate a similar amount of
revenues, if any, in subsequent periods. After completion of an engagement, a
client may not retain us in the future. Furthermore, our existing clients can
generally terminate their engagement with us with little notice and without
penalty. If clients terminate existing engagements or if we are unable to enter
into new engagements, our revenues could decline substantially.
Our quarterly financial results are subject to significant fluctuations due to
many factors, any of which could adversely affect our stock price.
Our revenues and operating results may vary significantly from period to
period. Any decline in revenues or earnings or a greater than expected loss for
any quarter could cause the market price of our common stock to decline. The
factors which may cause our financial results to vary from period to period
include:
. unanticipated delays, deferrals or cancellations of major client
engagements;
. unanticipated changes in the scope of major client engagements;
. the extent to which we use subcontractors or hire new billable
professionals whom we may not be able to immediately utilize on client
engagements;
. variations in market demand for Internet and marketing services; and
. our ability to complete fixed price engagements on budget.
In addition, because a substantial percentage of our expenses, particularly
labor costs, are fixed in amount, the factors listed above may cause our
operating income and operating margins to vary significantly from quarter to
quarter. Due to these factors, we believe that period-to-period comparisons of
our operating results may not be meaningful. Therefore, you should not rely on
period-to-period comparisons of our operating results as an indication of our
future performance.
5
<PAGE>
If we are unable to manage our growth, it will adversely affect our business,
the quality of our solutions and our ability to retain key personnel.
We may not be able to manage our growth if we continue to grow at a pace
similar to that in recent years. Our growth has placed significant demands on
our management and other resources and will continue to do so in the future.
Our revenues increased 38% for fiscal 1999 compared to fiscal 1998, and 25% for
the six-month period ended December 31, 1999 compared to the same period in
1998. The number of our employees increased from 278 on December 31, 1998 to
441 on December 31, 1999. Our ability to manage our growth will depend on our:
. estimating accurately the time and resources needed for engagements;
. improving our business development capabilities;
. continuing to retain, motivate and manage our existing employees and
attract and integrate new employees;
. building a base of intellectual capital that can be utilized for client
development and service delivery;
. opening and staffing new offices; and
. improving our operational, financial, accounting and other internal
systems and controls on a timely basis.
If we are unable to manage our growth effectively, it could have a material
adverse effect on our ability to achieve or maintain profitability, the quality
of our solutions and our ability to retain key personnel.
Intense competition in the Internet services market could impair our ability to
grow and achieve profitability.
We may not be able to compete effectively with current or future
competitors. The Internet services market is relatively new and highly
fragmented. We expect competition to intensify further as this market rapidly
evolves and consolidates. Some of our competitors have longer operating
histories, larger client bases, stronger relationships with their clients,
greater brand or name recognition and significantly greater financial,
technical and marketing resources than we do. As a result, our competitors may
be in a better position to respond more quickly to new or emerging technologies
and changes in client requirements and to devote greater resources than we can
to the development, promotion and sale of their services. We face competition
from the following types of companies:
. Internet services firms, including eLoyalty, Proxicom, Razorfish,
Sapient, Scient, Viant and Whittman-Hart;
. technology consulting firms and integrators, including Andersen
Consulting, EDS, IBM Global Services and the major accounting firms;
. strategy consulting firms, including Bain & Company, Booz Allen &
Hamilton, The Boston Consulting Group and McKinsey & Company; and
. in-house information technology, marketing and design service
departments of our current and potential clients.
In addition, there are relatively low barriers to entry into the Internet
services market. We do not own any patented technology that would stop
competitors from entering this market and providing services similar to ours.
As a result, the emergence of new competitors may pose a threat to our
business. Existing or future competitors may develop and offer services that
are superior to, or have greater market acceptance than, ours which could
significantly decrease our revenues and the value of your investment.
6
<PAGE>
We may need additional capital in the future, which may not be available to us
and if raised may dilute your ownership interest in us.
During fiscal 1999, we used $1.3 million net cash in operating activities
and in the six-month period ended December 31, 1999, we used $3.4 million net
cash in operating activities. We expect to continue to require cash for our
operating activities for the foreseeable future. We cannot predict when, if
ever, we will have positive cash flows from operations. In the future, we may
need to raise additional funds, either through public or private debt or equity
financing, to fund our operations, as well as to take advantage of expansion or
acquisition opportunities, develop new solutions or compete effectively. Any
additional capital raised through the sale of equity or equity-linked
securities would dilute your percentage ownership in us. These new securities
also could have rights, preferences or privileges senior to those of the common
stock issued in this offering. Furthermore, we may not be able to obtain
additional financing when needed or on terms favorable to us or our
stockholders. If additional financing is not available on favorable terms or at
all, this may adversely affect our ability to develop or enhance our services,
take advantage of business opportunities or respond to competitive pressures.
The market for Internet professional services is new and developing and may not
gain acceptance.
Our future growth is dependent upon our ability to provide Internet
professional services that are accepted by our existing and prospective
clients. The level of demand for and acceptance of Internet professional
services is uncertain and dependent upon a number of factors, including:
. the growth in consumer access to the Internet and acceptance of other
interactive technologies;
. the adoption of Internet-based business models by companies; and
. the development of technologies that facilitate two-way communication
between companies and targeted audiences.
Significant issues concerning the commercial use of Internet technologies
include security, reliability, cost, ease of use and quality of service. These
issues may inhibit the growth of the Internet business solutions that utilize
these technologies.
Industry analysts and others have made many predictions concerning the
growth of the Internet as a business medium. You should form your own views as
to the reliability of these predictions. If the market for Internet
professional services fails to develop, or develops more slowly than predicted,
or if our services do not achieve market acceptance, our business will not
succeed and the value of your investment in our common stock will decline.
Other parties may assert that we infringe on their intellectual property rights
or that our employees have misappropriated their proprietary information, which
could result in substantial costs and diversion of management's attention.
It is possible that other parties may assert infringement claims against us
in the future or claim that we have violated their intellectual property
rights. While we know of no basis for any intellectual property infringement
claims, authorship of intellectual property rights can be difficult to verify.
We currently are defending a claim brought by one of our competitors alleging
that its former employees who we hired misappropriated its proprietary
information for our benefit. Regardless of the merits of such claims,
infringement or misappropriation claims by third parties could be time
consuming and costly to defend, divert our management's attention or require us
to make changes to our technologies.
Our business may suffer if we have disputes over our right to reuse
intellectual property we develop in connection with a client engagement.
Part of our business involves the development of software applications for
specific client engagements. Clients generally retain ownership of client-
specific software, although we typically retain the right to reuse our
methodology, tools, processes and other intellectual property that we develop
without the joint participation of
7
<PAGE>
our client. Issues relating to the ownership of and rights to use intellectual
property can be complicated, and disputes may arise that could adversely affect
our ability to reuse these methodologies, tools, processes and other
intellectual property. These disputes could damage our relationships with our
clients and our business reputation, divert our management's attention and have
a material adverse effect on our ability to grow our business.
Our current services may become obsolete if we are unable to keep pace with the
latest technological changes and client preferences.
The Internet services market is characterized by rapid technological change.
We must respond successfully to changes in technology, industry standards and
client preferences on a timely and cost-effective basis to remain competitive
and serve our clients effectively. We may experience technical or other
difficulties that prevent or delay our development or introduction of solutions
that address changes in technology, industry standards and client preferences.
These difficulties could cause our current services to become obsolete.
If we are unable to maintain our reputation and expand our name recognition, we
may have difficulty attracting new business and retaining current clients and
employees, and our business may suffer.
Given our recent entry into the Internet professional services market, we
believe that establishing and maintaining a good reputation and name
recognition are critical for attracting and retaining clients and employees. We
also believe that in our market, which is relatively new and lacks any
dominating participant, the importance of reputation and name recognition will
play an important role in determining the competitive position of each market
participant. We believe that companies seeking to develop their e-businesses on
a rapid timetable are most likely to engage Internet services providers that
are well known and can provide strong references. If our reputation is damaged
or if potential clients are not familiar with us or the solutions we provide,
we may be unable to attract new, or retain existing, clients and employees.
Promotion and enhancement of our name will depend largely on our success in
continuing to provide effective solutions. If clients do not perceive our
solutions to be effective or of high quality, our brand name and reputation
will suffer and we could become subject to economic liability.
Increasing government regulation of the Internet could adversely affect our
business.
Due to the increasing popularity of the Internet, various laws or
regulations relating to the Internet may be adopted. For example, recent well
publicized concerns regarding consumer privacy in online marketing has raised
the possibility that the federal, state or foreign governments may enact
legislation or propose regulations that restrict the ability of marketers to
collect data on their customers or regulate the manner in which companies may
use such data. If governments implement such restrictions or regulations,
companies may be less inclined to seek our marketing solutions. An increase in
federal, state or foreign legislation or regulation of the Internet could
decrease its usage. If this decline occurs, existing and prospective clients
may decide not to use our solutions. In addition, a number of legislative
proposals have been made at the federal, state and local levels and by foreign
governments that could impose taxes on e-commerce. The three-year moratorium
preventing state and local governments from taxing Internet access, taxing
electronic commerce in multiple states and discriminating against electronic
commerce is scheduled to expire on October 21, 2001. If this moratorium ends,
state and local governments could impose taxes on or discriminate against e-
commerce. These regulations, and other attempts to regulate commerce over the
Internet, could impair the viability of e-commerce and the growth of our
business.
Potential acquisitions may result in increased expenses, difficulties in
integrating target companies and diversion of management's attention.
Although we currently do not have any agreements, commitments or
understandings to do so, we may attempt to expand our solutions and service
offerings and gain access to new markets through strategic acquisitions and
investments. We may encounter the following risks in implementing this
strategy:
. diversion of management's attention during the acquisition and
integration process;
8
<PAGE>
. costs, delays and difficulties of integrating the acquired company's
operations, technologies and personnel into our existing operations,
organization and culture;
. adverse impact on earnings of amortizing the acquired company's
intangible assets, which could be significant in light of the high
valuations of many Internet and other information technology services
companies;
. issuances of equity securities to pay for acquisitions which may be
dilutive to existing stockholders;
. negative impact on our financial condition due to the timing of the
acquisition or our failure to meet operating expectations for acquired
businesses; and
. expenses of any undisclosed or potential legal liabilities of the
acquired company, including intellectual property, employment and
warranty and product liability-related problems.
The occurrence of any of these events could have a material adverse effect
on our business, financial condition and results of operations.
We may encounter problems with international operations.
We have limited experience in promoting and selling our solutions within
foreign countries or in integrating international operations into our company.
As we begin pursuing international opportunities, including acquisitions, we
will face a number of potential difficulties, including cultural differences,
currency exchange risks, the underdevelopment of an Internet infrastructure in
some international markets and different regulatory schemes. Additionally, we
will need to devote significant managerial and financial resources to locate
and retain qualified personnel for international operations, as well as to
obtain the necessary technical and strategic support for international
expansion. As a result, we may not be able to promote our services or perform
client engagements in international markets successfully. If we fail to expand
our international operations successfully, it may hinder our growth and ability
to compete effectively and could harm our business reputation.
We rely on our subsidiary located in India for certain important aspects of
our operations, including developing our technologies, recruiting of personnel
and providing 24-hour project coverage to our clients. The operation of this
subsidiary may be disrupted by many events related to India and international
operations, which may disrupt our operations as a whole. These events include:
. political instability, civil interest and hostilities, and changes in
the local economy;
. economic sanctions imposed by the United States and other countries
against India;
. unexpected changes in local laws and regulations;
. the failure of India law to adequately protect our intellectual property
rights;
. natural disasters;
. our inability to manage this subsidiary from overseas.
The occurrence of any of these events could materially and adversely affect
our business and results of operations.
Risks Relating to this Offering
You may be unable to resell shares of common stock you purchase in this
offering at or above the initial public offering price.
There was no public market for our common stock prior to this offering. The
initial public offering price of the common stock will be determined through
our negotiations with the underwriters and does not
9
<PAGE>
necessarily reflect to our book value, assets, past operating results,
financial condition or other established criteria of value. Since the market
price after the offering may be less than the initial public offering price,
you may be unable to resell those shares at or above the initial public
offering price.
In addition to errors in the initial valuation of our publicly offered
common stock, the market price of our common stock may fluctuate significantly
in response to the following factors, some of which are beyond our control:
. announcements by us or by our competitors regarding significant
technological innovations, contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
. the introduction of new technology, products or services, or changes in
pricing policies by us or our competitors;
. changes in stock market analyst recommendations regarding our common
stock, the stock of comparable companies, or the technology industry
generally;
. comments regarding us and the Internet professional services market made
on Internet bulletin boards;
. changes in accounting policies; and
. regulatory actions.
In addition, stock markets have experienced extreme price and volume
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities of many smaller public companies for reasons
unrelated or disproportionate to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market
price of our common stock.
Our quarterly financial results may fall below public expectations due to many
factors, any of which could adversely affect our stock price.
We believe that the market price of our common stock, like that of other
Internet services providers, will be subject to wide fluctuations based on
variances between public expectations of our quarterly operating results and
our actual results. It is possible that in some future periods our operating
results may fall below the expectations of public market analysts and
investors. Any decline in revenues or earnings or a greater than expected loss
for any quarter could cause the market price of our common stock to decline
sharply.
The sale or availability for sale of substantial amounts of our shares of
common stock could cause our stock price to decline.
If our existing stockholders sell a substantial number of their shares of
our common stock after this offering, or the public market perceives that these
sales may occur, the market price of our common stock could decline. The
38,286,100 shares of common stock outstanding prior to this offering are
"restricted securities" as defined in Rule 144 under the Securities Act. These
shares may be sold in the future pursuant to a registration statement or
without registration pursuant to Rule 144 or Rule 701 under the Securities Act
or another exemption from registration.
In connection with this offering, we, the selling stockholders, our
executive officers and directors and all of our existing stockholders have
agreed, with limited exceptions, not to sell any shares of common stock for 180
days after this offering without the consent of Credit Suisse First Boston
Corporation. However, these shares may be released from these restrictions by
Credit Suisse First Boston Corporation at any time in its sole discretion. The
effect that sales in the public market of shares held by principal stockholders
or other stockholders or the potential availability for future sale of these
shares will have on the market price of our common stock is unpredictable. See
"Shares Eligible for Future Sale" for a more complete description of the number
of shares of our common stock that will be eligible for sale after this
offering and the restrictions imposed on those shares.
10
<PAGE>
We have entered into an agreement with a number of our stockholders that
provide these stockholders with the right to compel us to register their shares
for sale either by requiring us to include, or piggyback, their shares in a
registration statement relating to other shares of our common stock or by
demanding that we file a registration statement on their behalf. Piggyback
registration rights apply to approximately 35,863,436 shares and demand
registration rights apply to approximately 8,313,728 shares of our common
stock. Registration of these shares generally would allow these holders to sell
their shares without restriction.
The net proceeds of this offering may be allocated in ways with which our
stockholders may disagree.
Our management will have significant flexibility in applying the majority of
the net proceeds of this offering. We have not yet identified any particular
investment or transaction for these proceeds. You will have to rely on our
judgment and may disagree with our decisions as to the application of these
proceeds. See "Use of Proceeds" for a description of our intention regarding
our use of proceeds from this offering.
You will experience immediate and substantial dilution of the value of the
common stock you purchase in this offering.
If you purchase common stock in this offering, you will pay more for your
shares than existing stockholders paid for their shares. Accordingly, you will
experience immediate and substantial dilution of approximately $ per share,
representing the difference between our book value per share after giving
effect to this offering and the initial public offering price. All of the
shares issuable upon the exercise of currently outstanding stock options will
be issued at a purchase price lower than the initial public offering price per
share. We also expect to offer stock options to employees, officers and
directors in the future. These issuances could further dilute the value of your
investment in our common stock.
Provisions in our charter documents may make takeover attempts difficult or
impossible.
Our board of directors has the authority, without any approval by the
stockholders, to issue up to 10,000,000 shares of preferred stock and to fix
the rights and preferences of such shares. In addition, our amended and
restated certificate of incorporation and bylaws contain provisions that
require stockholders to give advance notice if they wish to nominate directors
or submit proposals for stockholder approval. These provisions may have the
effect of delaying, deferring or preventing a change in control, may discourage
bids for our common stock at a premium over its market price and may adversely
affect the market price, and the voting and other rights of the holders of our
common stock. See "Description of Capital Stock" for a more detailed discussion
of the anti-takeover effects of our charter and bylaws.
Our officers and directors, along with their affiliated entities, can control
matters requiring stockholder approval because they own a majority of our
common stock, and they may vote this common stock in a way with which you do
not agree.
After this offering, our officers and directors, along with their affiliated
entities, will beneficially own, in the aggregate, approximately % of the
outstanding shares of our common stock. As a result, if these persons choose to
act together, they will have the ability to exercise substantial control over
our affairs and corporate actions requiring stockholder approval, including the
election of directors, a sale of substantially all our assets, a merger with
another entity or an amendment to our certificate of incorporation. This
ability of these stockholders to control stockholder votes could delay, deter
or prevent a change in control and could adversely affect the price that
investors might be willing to pay in the future for shares of our common stock.
11
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements that reflect our current
expectations and projections about our future results, performance, prospects
and opportunities. We have tried to identify these forward-looking statements
by using words such as "may," "will," "expect," "anticipate," "believe,"
"intend," "estimate," "continue" and similar expressions. These forward-looking
statements are based on information currently available to us and are subject
to a number of risks, uncertainties and other factors that could cause our
actual results, performance, prospects or opportunities to differ materially
from those expressed in, or implied by, these forward-looking statements. You
should not place undue reliance on any forward-looking statements. Except as
otherwise required by federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events, changed circumstances or any other reason
after the date of this prospectus to conform these statements to actual
results.
12
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from this offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, will be approximately $ million based upon an assumed initial public
offering price of $ per share. We will not receive any proceeds from the
sale of our common stock by the selling stockholders.
We expect to apply the net proceeds from this offering as follows:
. $ for the purchase of the 40% minority interest in our
subsidiary from our two principal stockholders, A. Rick Dutta and S. Don
Ganguly;
. $ to repay amounts outstanding under our line of credit; and
. $ to repay amounts under promissory notes we issued to A. Rick
Dutta and S. Don Ganguly.
We expect to use the remaining net proceeds from this offering for general
corporate purposes, including working capital and capital improvements. We may
also use a portion of the net proceeds for the acquisition of businesses that
are complementary to ours. However, we have no agreements or commitments and
currently are not engaged in any negotiations with respect to any acquisitions.
Pending these uses, we will invest the net proceeds from this offering in
investment grade interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We plan
to retain all future earnings to finance the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
on our common stock in the foreseeable future. Any future determination as to
the payment of dividends will be at the discretion of our board of directors.
13
<PAGE>
CAPITALIZATION
The table below sets forth our capitalization as of December 31, 1999 on an
actual basis and on a pro forma as adjusted basis to reflect:
. the sale of shares of common stock offered by us at an assumed
initial public offering price of $ per share, after deducting
underwriting discounts and commissions and estimated offering expenses
payable by us; and
. the automatic conversion of all outstanding shares of preferred stock
into 8,313,728 shares of common stock effective upon the closing of this
offering.
The table excludes 6,405,614 shares of common stock issuable upon exercise
of options outstanding as of December 31, 1999, at a weighted average exercise
price of $0.52 per share.
You should read this table together with the sections entitled "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31,
1999
--------------------
Pro forma
Actual as adjusted
------- -----------
(dollars in
thousands)
<S> <C> <C>
Cash and cash equivalents................................ $11,758 $
======= ====
Current maturities of long-term debt..................... $ 941 $
------- ----
Long-term debt, less current maturities.................. 557
Mandatorily redeemable preferred stock, $.001 par value
per share, 4,093,801 shares authorized, 3,761,871 shares
issued and outstanding, 331,930 shares subject to issued
and outstanding warrants, actual; no shares authorized,
issued and outstanding, pro forma as adjusted........... 20,663
Stockholders' equity:
Preferred stock, $.001 par value per share, 10,000,000
shares authorized, no shares issued and outstanding,
actual and pro forma as adjusted...................... --
Common stock, $.001 par value per share, 80,000,000
shares authorized, 26,917,874 shares issued and
outstanding, actual; 160,000,000 shares authorized,
shares issued and outstanding, pro forma as
adjusted.............................................. 27
Additional paid-in-capital............................. --
Notes receivable from stockholders..................... (627)
Deferred compensation.................................. (1,251)
Retained earnings (deficit)............................ (3,051)
Total stockholders' equity (deficit)................. (4,902)
------- ----
Total capitalization................................. $16,318 $
======= ====
</TABLE>
14
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $ million, or $ per share. Pro forma net tangible book
value per share, after giving effect to the automatic conversion of all
outstanding shares of our preferred stock into shares of our common stock upon
the closing of this offering, is equal to our total tangible assets less total
liabilities, divided by the pro forma as adjusted number of shares of common
stock outstanding, in each case as of December 31, 1999. Our pro forma as
adjusted net tangible book value as of December 31, 1999 would have been $
million, or $ per share of common stock, assuming the sale by us of
shares of common stock at an assumed initial public offering price
of $ per share and after deducting underwriting discounts and commissions
and estimated offering expenses payable by us. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$ per share to new investors purchasing shares of our common stock in this
offering, as illustrated in the following table:
<TABLE>
<CAPTION>
Per
Share
-------
<S> <C> <C>
Assumed initial public offering price.................................. $
Pro forma net tangible book value as of December 31, 1999............ $
Increase in pro forma net tangible book value attributable to new
investors...........................................................
---
Pro forma as adjusted net tangible book value after this offering......
---
Dilution to new investors.............................................. $
===
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
December 31, 1999, the total number of shares of common stock purchased from
us, the total consideration paid to us and the average price per share paid, in
each case by (1) existing stockholders, including those stockholders receiving
shares of our common stock upon the automatic conversion of all outstanding
shares of our preferred stock upon the closing of this offering, and (2) new
investors purchasing shares in this offering.
<TABLE>
<CAPTION>
Shares of
Common Stock Total Average
Purchased(1) Consideration Price
-------------- -------------- Per
Number Percent Amount Percent Share
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. % $ % $
New investors..........................
---- --- ----- ---
Total................................ 100% $ 100%
==== === ===== ===
</TABLE>
- ---------------------
(1) If the underwriters exercise their over-allotment option in full, such
sales by the selling stockholders in this offering will reduce the number
of shares held by existing stockholders to shares, or % of
the total number of shares of common stock to be outstanding after this
offering, and will increase the number of shares held by new investors to
shares, or % of the total number of shares of common
stock outstanding after this offering. See "Principal and Selling
Stockholders."
The foregoing tables assume no exercise of any outstanding stock options to
purchase common stock. As of December 31, 1999, there were outstanding options
and warrants to purchase an aggregate of 7,069,474 shares of common stock at a
weighted average exercise price of $ per share. If all of these options and
warrants had been exercised on December 31, 1999, our pro forma net tangible
book value would have been approximately $ million, or $ per share.
Upon the issuance of common stock in this offering, our pro forma as adjusted
net tangible book value on December 31, 1999 would have been approximately
$ million, or $ per share, the increase in pro forma as adjusted net
tangible book value attributable to new investors would have been $ per
share and the dilution in pro forma as adjusted net tangible book value to new
investors would have been $ per share.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
You should read the following selected consolidated financial data along
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and the related notes,
each of which is included in this prospectus. We derived the statement of
operations data for the three-year period ended June 30, 1999 and the balance
sheet data as of June 30, 1998 and 1999 from our consolidated financial
statements, which have been audited by PricewaterhouseCoopers LLP, independent
accountants, and are included in this prospectus. We derived the statement of
operations data for the year ended June 30, 1996 and the balance sheet data as
of June 30, 1996 and 1997 from our audited consolidated financial statements,
which are not included in this prospectus. We derived the statement of
operations data for the six-month periods ended December 31, 1998 and 1999 and
the balance sheet data as of December 31, 1999 from our unaudited consolidated
financial statements, which are included in this prospectus. We derived the
statement of operations data for the year ended June 30, 1995 and the balance
sheet data as of June 30, 1995 from our unaudited consolidated financial
statements, which are not included in this prospectus. In the opinion of our
management, the unaudited financial information includes all adjustments,
consisting of only normal recurring adjustments, considered necessary for a
fair presentation of such information. Our results of operations for the
six-month period ended December 31, 1999 are not necessarily indicative of the
results that we may achieve for the full fiscal year.
<TABLE>
<CAPTION>
Six-month
period ended
Year ended June 30, December 31,
------------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $11,509 $15,799 $16,790 $23,421 $32,376 $16,562 $20,715
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Professional services
(exclusive of $16
reported below as
stock-based
compensation)........ 7,652 8,747 9,568 15,155 17,771 9,569 11,369
Selling, general and
administrative
(exclusive of $1,768
reported below as
stock-based
compensation)........ 3,401 5,706 6,542 7,972 14,663 6,473 12,405
Stock-based
compensation......... -- -- -- -- -- -- 1,784
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 11,053 14,453 16,110 23,127 32,434 16,042 25,558
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 456 1,346 680 294 (58) 520 (4,843)
Other income (expenses):
Interest income....... 1 19 21 72 52 19 106
Interest expense...... (24) (35) (64) (157) (198) (96) (134)
Other................. (1) 14 (6) 21 -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes and minority
interest............... 432 1,344 631 230 (204) 443 (4,871)
Income tax (provision)
benefit................ (210) (514) (219) (122) 54 (117) 1,169
------- ------- ------- ------- ------- ------- -------
Income (loss) before
minority interest...... 222 830 412 108 (150) 326 (3,702)
Minority interest....... 32 (56) (50) (2) (21) 8 50
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 254 774 362 106 (171) 334 (3,652)
Accretion of preferred
stock discount and
dividends.............. -- -- -- -- -- -- (350)
------- ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders........... $ 254 $ 774 $ 362 $ 106 $ (171) $ 334 $(4,002)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
common share:
Basic................. $ 0.01 $ 0.03 $ 0.01 $ 0.00 $ (0.01) $ 0.01 $ (0.15)
======= ======= ======= ======= ======= ======= =======
Diluted............... $ 0.01 $ 0.03 $ 0.01 $ 0.00 $ (0.01) $ 0.01 $ (0.15)
======= ======= ======= ======= ======= ======= =======
Shares used in
computation:
Basic................. 28,000 28,000 28,000 28,000 28,000 28,000 27,386
======= ======= ======= ======= ======= ======= =======
Diluted............... 29,344 29,344 29,344 29,344 28,000 29,344 27,386
======= ======= ======= ======= ======= ======= =======
Pro forma basic and
diluted net loss per
common share........... $ (0.12)
=======
Shares used in pro forma
basic and diluted net
loss per common share.. 30,003
=======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
As of June 30, As of
---------------------------------- December 31,
1995 1996 1997 1998 1999 1999
------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 30 $ 694 $ 773 $1,016 $ 728 $11,758
Working capital............... 219 873 1,753 1,902 1,491 13,914
Total assets.................. 2,764 4,257 5,188 7,566 9,700 23,172
Long-term debt, net of current
portion...................... 122 57 662 763 736 557
Mandatorily redeemable
preferred stock.............. -- -- -- -- -- 20,663
Total stockholders' equity
(deficit).................... 612 1,386 1,748 1,854 1,683 (4,902)
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion along with our consolidated
financial statements and the related notes included elsewhere in this
prospectus. The following discussion contains forward-looking statements that
involve potential risks and uncertainties, including those discussed under
"Risk Factors." Actual results could differ materially from results discussed
in, or implied by, these forward-looking statements.
Overview
We provide a new category of Internet professional services that we call e-
Relationship services. e-Relationship services are an integrated offering of
business strategy, branding, marketing, creative design and technology
services. Our services add significant value to our clients by helping them
build next generation e-businesses that efficiently acquire and retain
customers and improve profitability. We target startup and emerging e-
businesses as well as traditional brick-and-mortar companies that are
developing and implementing e-business solutions.
We were incorporated in 1990. Prior to entering into the Internet
professional services market in 1998, we provided client-server systems
integration services. Since we began providing e-business services, our
revenues have been derived increasingly from providing Internet related
services. Our e-business revenues accounted for approximately 52% of our total
revenues in fiscal 1999, and approximately 75% of our total revenues for the
six-month period ended December 31, 1999. We expect revenues from e-business
services to represent substantially all of our revenues in the future.
Recently, we have spent considerable resources and have taken several steps
to facilitate our continuing growth, including:
. enhancing our already experienced executive management staff by adding a
chief financial officer, vice president, relationship management
services, vice president, financial services and vice president, people
and organization strategy;
. hiring 142 additional highly qualified professionals since January 1999,
more than half of which were senior project managers and experienced
consultants;
. entering into industry relationships with hardware and software vendors
such as E.piphany, Hewlett-Packard, Silknet and Vignette over the last
12 months; and
. opening 14 new offices over the last 12 months and more than doubling
the size of our delivery centers in New York, New Jersey and California.
Our revenues consist of fees generated from professional services. We
provide services on a fixed price basis as well as on a time-and-materials
basis. For the six-month period ended December 31, 1999, we derived
approximately 67% of our revenues from fixed price engagements, compared to 25%
for the six-month period ended December 31, 1998. We expect to continue to
derive a majority of our revenues from fixed price engagements in the future.
Generally, at the inception of an engagement, we bill clients for a limited
engagement to assess a project. Once we have completed this initial assessment,
we typically negotiate a fixed price contract based upon a defined scope of
work. To determine the proposed fixed price for an engagement, we use our
proprietary estimation process that takes into account the complexity of the
engagement, the anticipated number and experience of billable professionals
needed, associated billing rates and the estimated duration of the engagement.
Our Quality Assurance Center must approve every fixed price proposal over a
specified threshold, which is currently $150,000.
For fixed price engagements, we generally recognize revenues as services are
rendered. We use the percentage-of-completion method of accounting primarily
based on our evaluation of actual labor hours
18
<PAGE>
incurred to date compared to total labor hours estimated at contract
completion. In the event cash received or billings exceed revenues recognized,
we record deferred revenues as a liability. Conversely, if revenues recognized
exceed billings, we record an unbilled receivable as an asset. Where
appropriate, we make provisions for estimated losses on uncompleted contracts
on a contract-by-contract basis and recognize these provisions in the period in
which the losses are determined. For time-and-materials engagements, we
generally recognize revenues as we provide services.
Revenues from a few large clients historically have constituted a large
portion of our total revenues in a particular quarter or year. For example, in
fiscal 1999, our five largest clients represented approximately 53% of our
revenues. For the six-month period ended December 31, 1999, our five largest
clients represented approximately 41% of our revenues. The following table
identifies these clients and the percent of revenues derived from each.
<TABLE>
<CAPTION>
Six-month period ended December 31,
Year ended June 30, 1999 1999
------------------------ -----------------------------------
Percent of Percent of
Client revenues Client revenues
------ ---------- ------ ----------
<S> <C> <C> <C>
Ceridian Employer Services 25% Ceridian Employer Services 13%
CSX Technology 8 Nicholson NY 10
Merrill Lynch Credit Corp. 7 Block Financial Corporation 9
Financial Services Corp. 7 Merrill Lynch Credit Corp. 5
Republic Mortgage Insurance Corp. 6 Financial Services Corp. 4
</TABLE>
We expect a relatively high level of client concentration to continue,
although not necessarily with the same clients from period to period. For
example, we do not expect to continue to derive a significant portion of our
revenues from Ceridian Employer Services due to the completion of our
engagement with it. To the extent that any one of our significant clients uses
less of our services or terminates its relationship with us, our revenues could
decline substantially and our operating results could be affected adversely. We
attempt to mitigate our revenue concentration risk by contractual advanced
termination provisions and by rapid redeployment of our professionals to other
client engagements.
Costs of professional services primarily consist of compensation, benefits
and training for our professionals engaged in the delivery of our services,
costs of subcontractors, unreimbursed travel and, where applicable, software
purchases. We expect that salaries for our professionals will increase over
time due to the intense competition in our industry for qualified individuals.
We use the term "professional services margin" to mean revenues less costs of
professional services, stated as a percentage of revenues. Our ability to
utilize our professionals, to incorporate any wage increases of our
professionals into our billing rates, and to price and execute our fixed price
engagements effectively will affect our professional services margins. We
expect that our professional services margins will vary from quarter to quarter
to the extent that we change our use of subcontractors, hire new professionals
who we may not be able to utilize immediately, or are unable to utilize our
existing base of professionals fully due to a decline in engagements.
Selling, general and administrative expenses consist primarily of
compensation and benefits for personnel engaged in sales and marketing,
compensation and related expenses for executive and technical recruiting, human
resources, development information technology, finance and administrative
personnel, advertising, office facility expenses, professional fees and other
corporate general expenses. We expect selling, general and administrative
expenses to increase in absolute dollars as we expand our direct sales force,
continue to increase expenditures on information technology, open new offices
and expand current offices, increase recruiting efforts and incur additional
costs related to the growth of our business and operations as a public company.
Stock-based compensation is composed of two elements. Concurrently with the
sale of our preferred stock in October 1999, our two founding stockholders sold
1,770,292 shares of common stock to the purchasers of our preferred stock. The
holders of our preferred stock immediately exchanged with us the shares of
common stock acquired from our two founding stockholders for 885,146 shares of
our preferred stock. The difference in
19
<PAGE>
the fair market value of our preferred stock and our shares of common stock
resulted in a compensation charge of $1.7 million, which was recorded in the
six-month period ended December 31, 1999. In addition, we recorded an expense
for the amortization of deferred compensation for stock options that were
granted to employees, officers and board members at exercise prices below fair
market value. All fair market value calculations are based on independent third
party valuations.
Our number of employees increased from 278 on December 31, 1998, to 441 on
December 31, 1999. We actively recruit professionals and support staff and
expect our total number of employees to increase significantly in 2000.
We had positive income from operations and net income from inception to
fiscal 1998. In fiscal 1999, we reported an operating loss as we increased
expenses related to our expansion and increased investment in our Internet
related services. We expect to report an operating loss in fiscal 2000 and
fiscal 2001. In particular, we expect that our plans for increases in expenses
and capital expenditures through at least fiscal 2001 to support our expected
growth will adversely affect our operating results. As we strive to grow our
business, we expect to spend significant funds for marketing and advertising,
recruiting and hiring additional personnel, upgrading our infrastructure,
expanding our internal information systems, and moving into new geographical
markets. We cannot predict when, if ever, we will achieve sufficient revenues
to enable us to become profitable.
Results of operations
The following table presents, for the periods indicated, our selected
statement of operations data as a percentage of our revenues. We derived these
percentages from our audited financial statements included elsewhere in this
prospectus for all periods presented, except for the six-month periods ended
December 31, 1998 and 1999, for which we derived the percentages from our
unaudited financial statements included elsewhere in this prospectus. In our
opinion, the unaudited financial statements have been prepared on substantially
the same basis as the audited financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. The
operating results for any interim period are not necessarily indicative of the
results that we may achieve for the full fiscal year.
<TABLE>
<CAPTION>
Six-month period
Year ended ended
June 30, December 31,
--------------------- -------------------
1997 1998 1999 1998 1999
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues..................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Professional services...... 57.0 64.7 54.9 57.8 54.9
Selling, general, and
administrative............ 39.0 34.0 45.3 39.1 59.9
Stock-based compensation... -- -- -- -- 8.6
----- ----- ----- -------- --------
Total operating expenses..... 96.0 98.7 100.2 96.9 123.4
----- ----- ----- -------- --------
Income (loss) from
operations.................. 4.0 1.3 (0.2) 3.1 (23.4)
Other income (expense) and
income taxes................ (1.6) (0.8) (0.3) (1.2) 5.5
Minority interest in
subsidiary.................. (0.3) -- -- -- 0.2
----- ----- ----- -------- --------
Net income (loss)............ 2.1 % 0.5 % (0.5)% 1.9 % (17.7)%
===== ===== ===== ======== ========
</TABLE>
Comparison of six-month periods ended December 31, 1999 and 1998
Revenues. Revenues increased $4.1 million, or 25%, to $20.7 million for the
six-month period ended December 31, 1999, from $16.6 million for the same
period in 1998. This increase in revenues reflects expanding Internet
professional services revenues, partially offset by a decline in our
non-Internet services revenues. Internet professional services revenues
accounted for 75% of total revenues for the six-month period
20
<PAGE>
ended December 31, 1999, compared to 43% for the same period in 1998. We also
experienced an increase in the average size and number of client engagements
and average realized billing rates.
Professional services. Costs of professional services increased $1.8
million, or 19%, to $11.4 million for the six-month period ended December 31,
1999, from $9.6 million for the same period in 1998. This increase was
primarily the result of an increase in the number of professional service
personnel to support increases in revenues and to prepare for anticipated rapid
growth. This increase also reflects an overall increase in salary and benefit
costs.
Our professional services margin increased to 45% for the six-month period
ended December 31, 1999, from 42% for the same period in 1998. This increase
was the result primarily of an increase in the average realized billing rate,
higher utilization of our professionals and the decreased use of contractors.
Selling, general and administrative. Our selling, general and administrative
expenses increased $5.9 million, or 92%, to $12.4 million for the six-month
period ended December 31, 1999, from $6.5 million for the same period in 1998.
The increase in selling, general and administrative expenses was primarily the
result of the expansion of our business to continue to facilitate our rapid
growth. During the six-month period ended December 31, 1999 we significantly
increased our sales force and marketing efforts, established new office space,
enhanced internal systems and communications infrastructure, and added internal
systems, marketing, finance and recruiting personnel.
Stock-based compensation. In October 1999, we issued 2,876,725 shares of
preferred stock and two warrants to purchase an aggregate of 331,930 shares of
preferred stock exercisable until the earlier of October 28, 2000 or the
closing of this offering at an exercise price of $5.55 per share, for total
gross proceeds of $15,966,000. Concurrently with this issuance, our
stockholders sold 1,770,292 shares of their common stock to our preferred stock
investors in exchange for $4,913,000. The 1,770,292 shares of common stock were
then canceled and transferred to us in exchange for 885,146 shares of preferred
stock. This transaction resulted in compensation to the stockholders calculated
as the difference between the fair market value of the preferred stock issued
in exchange for shares of common stock and the fair market value of these
shares of common stock prior to the transaction. Both values were determined by
reference to independent valuations which were engaged by us in June and
December, 1999. We recorded non-cash compensation expense of $1.7 million in
connection with this transaction in the six-month period ended December 31,
1999.
Additional stock-based compensation of $0.1 million reflects amortization of
deferred compensation relating to employee stock options which were deemed in
the money on their grant dates based on independent valuations. Unamortized
deferred compensation was $1.3 million at December 31, 1999 and will be
amortized over periods of up to four years.
Minority interest. Minority interest in loss of subsidiary for the six-month
period ended December 31, 1999 was fifty thousand dollars, compared to a
minority interest in loss of eight thousand dollars for the six-month period
ended December 31, 1998.
Income taxes. The effective income tax benefit rate was 24% for the six-
month period ended December 31, 1999, compared to 26% for the same period in
1998. The rate in both periods reflects the effects of permanent nondeductible
expenses.
Net income (loss). Net loss for the six-month period ended December 31, 1999
was $3.7 million, compared to net income of $0.3 million for the same period in
1998, primarily as a result of the above factors.
21
<PAGE>
Comparison of fiscal 1999 and fiscal 1998
Revenues. Revenues increased $9.0 million, or 38%, to $32.4 million in
fiscal 1999, from $23.4 million in fiscal 1998. This increase in revenues was
primarily the result of expanding Internet professional services revenues
attributable to our entry into the Internet professional services market in
1998. This increase was partially offset by a decline in our non-Internet
services. This shift in our source of revenues has contributed to an increase
in the average size and number of client engagements and average realized
billing rates.
Professional services. Costs of professional services increased $2.6
million, or 17%, to $17.8 million in fiscal 1999, from $15.2 million in fiscal
1998. This increase was primarily the result of an increase in the number of
professionals and increases in wage rates.
Our professional services margin increased to 45% in fiscal 1999, from 35%
in fiscal 1998. This increase was primarily the result of an increase in our
average realized billing rate, higher utilization of our professionals and the
decreased use of contractors in fiscal 1999.
Selling, general and administrative. Selling, general and administrative
expenses increased $6.7 million, or 84%, to $14.7 million in fiscal 1999, from
$8.0 million in fiscal 1998. This increase was primarily the result of
additional non-billable personnel being hired in fiscal 1999, including
technology, sales, human resource, finance and management personnel. This
increase also reflects higher facility costs related to the expansion of our
operations.
Minority interest. Minority interest in earnings of subsidiary was twenty-
one thousand dollars in fiscal 1999, compared to minority interest in earnings
of subsidiary of two thousand dollars in fiscal 1998.
Net income (loss). Net loss was $0.2 million in fiscal 1999, compared to net
income of $0.1 million in fiscal 1998, primarily as a result of the above
factors.
Comparison of fiscal 1998 and fiscal 1997
Revenues. Revenues increased $6.6 million, or 39%, to $23.4 million in
fiscal 1998, from $16.8 million in fiscal 1997. This increase in revenues was
attributable primarily to our entrance into the Internet professional services
market in 1998. We also experienced an increase in the average size and number
of client engagements and average realized billing rates.
Professional services. Costs of professional services increased $5.6
million, or 58%, to $15.2 million in fiscal 1998, from $9.6 million in fiscal
1997. This increase was due primarily to an increase in the number of
professionals. Our professional services margin decreased to 35% in fiscal
1998, from 43% in fiscal 1997. This increase in costs of professional services
was the result of the integration of a significant number of new professionals,
as well as the training required to transition from client server to Internet
professional services.
Selling, general and administrative. Selling, general and administrative
expenses increased $1.4 million, or 22%, to $8.0 million in fiscal 1998, from
$6.5 million in fiscal 1997. This increase was the result of higher facility
costs related to the expansion of our business, and training and recruiting
costs related to the hiring of new employees.
Minority interest. Minority interest in earnings of subsidiary was two
thousand dollars in fiscal 1998, compared to minority interest in earnings of
subsidiary of fifty thousand dollars in fiscal 1997.
Net income. Net income decreased to $0.1 million in fiscal 1998, from $0.4
million in fiscal 1997, primarily as a result of the above factors.
22
<PAGE>
Liquidity and capital resources
Prior to June 1999, we financed our operations and investments in property
and equipment primarily through cash generated from operations, proceeds from
our line of credit and loans from stockholders.
During the six-month period ended December 31, 1999, we used $3.4 million
net cash in operating activities. This use of cash was due primarily to the
hiring of additional professionals, as well as investments in infrastructure.
Cash flows used in investing activities principally relate to capital
expenditures. Cash flows used in investing activities increased during the six-
month period ended December 31, 1999 as a result of investments in our
facilities and information systems.
We financed our operations and investments in property and equipment through
gross proceeds of $16.0 million from the sale of 2,876,725 shares of our
preferred stock during October 1999. In connection with this sale of our
preferred stock, we also issued two warrants to acquire an aggregate of an
additional 331,930 shares of our preferred stock at $5.55 per share. These
outstanding shares of preferred stock, including the shares of preferred stock
issuable upon exercise of the warrants, automatically will convert into an
aggregate of 6,417,310 shares of our common stock upon consummation of this
offering.
On October 1, 1999, each of Mr. Qureshey and Mr. Dukes purchased 330,000
shares of our common stock in exchange for a promissory note in the amount of
$313,335. Each note is secured by the shares purchased and bears interest at
the rate of 5.96% per annum, payable annually on September 30. Principal and
unpaid interest on both notes are due September 30, 2004.
During fiscal 1999, we used $1.3 million net cash in operating activities.
We used cash primarily to fund the increase in accounts receivable. Cash flows
used in investing activities principally relate to capital expenditures. We
financed our operations and investments in property and equipment through net
borrowings under our line of credit and increases in accounts payable and
accrued expenses.
Cash and cash equivalents increased to $11.8 million at December 31, 1999,
from $0.7 million at June 30, 1999. This increase was due primarily to gross
proceeds of $16.0 million from the sale of 2,876,725 shares of our preferred
stock during October 1999. We invest available cash in short-term, investment-
grade, interest-bearing securities.
We have a commitment for a $7.0 million line of credit that is secured by
our accounts receivable and other general assets. The annual interest rate on
amounts borrowed under the line of credit is calculated using the lender's
index rate, which was 9.0% as of March 22, 2000. The line of credit expires on
October 31, 2000. The financial covenants of the line of credit require that
our actual loss per month not exceed our projected monthly loss by more than
25%. Subsequent to this offering, the financial covenants also require that our
maximum quarterly loss not exceed our projected quarterly loss by more than
25%. In addition, the covenants require us to maintain minimum working capital
of $10.0 million, measured quarterly subsequent to this offering. At December
31, 1999, we had $1.2 million outstanding borrowings under the line of credit.
We are obligated under various non-cancelable operating leases for our
office space. Future annual minimum rental commitments under these leases as of
December 31, 1999, range in the aggregate from $1.1 million to $1.7 million
over the next five years. Total future minimum rental commitments are
approximately $6.6 million.
We anticipate that we will invest capital to develop the infrastructure
needed to support our future growth. Specifically, we expect capital
expenditures through December 31, 2000 will be approximately $3.5 million. We
may attempt to expand our solutions and service offerings and gain access to
new markets through acquisitions. We do not, however, have any agreements,
commitments or understandings with respect to any material acquisitions.
We believe cash on hand, availability under our existing and replacement
lines of credit and the net proceeds from this offering will be sufficient to
finance our operations and capital expenditures through June 30, 2001.
23
<PAGE>
We cannot predict whether we will have positive cash flow from operations at
such time. If we do not, we likely will have to raise additional capital.
However, we may seek to raise additional capital prior to such date to finance
acquisitions or to fund accelerated growth.
Recent equity transactions
In February 2000, each of Mr. Qureshey and Mr. Dukes purchased 330,000
shares of our common stock in exchange for a promissory note in the amount of
$816,585. Each note was secured by the shares purchased and bore interest at
the rate of 5.96% per annum, payable annually on January 31. Both notes were
paid in March 2000.
In February and March 2000, we issued an aggregate of 63,063 shares of our
preferred stock for aggregate proceeds of $350,000. These shares automatically
will convert into 126,126 shares of our common stock upon consummation of this
offering. In February and March 2000, we also issued an aggregate of
109,000 shares of our common stock for aggregate proceeds of $302,350.
Recently issued accounting standard
In June 1998, the Financial Accounting Standards Boards ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
new standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not expect SFAS No. 133 to have a material effect on its
financial position or results of operations.
24
<PAGE>
BUSINESS
Overview
We provide a new category of Internet professional services that we call e-
Relationship services. e-Relationship services are an integrated offering of
business strategy, branding, marketing, creative design and technology
services. We utilize our extensive technology expertise to implement reliable
and scalable web sites, and use our advanced information gathering and analytic
customer profiling solutions to create more effective branding and marketing
campaigns, consistent with our client's overall marketing strategy. Further,
our loyalty building programs and customer service solutions allow our clients
to offer more personalized e-businesses. As a result, our services add
significant value to our clients by helping them build next generation
e-businesses that efficiently acquire and retain customers and improve
profitability. We target startup and emerging e-businesses as well as
traditional brick-and-mortar companies that are developing and implementing e-
business solutions. Our clients include business-to-business and business-to-
consumer companies.
As of December 31, 1999, we had 260 billable employees. We have 22 offices
located across the United States in California, Florida, Georgia, Illinois, New
Jersey, New York, North Carolina, Pennsylvania and Texas, and 1 international
office located in India.
We were incorporated in 1990 under the name NexGen SI, Inc. We changed our
name to Nexgenix, Inc. on October 27, 1999. Prior to entering into the Internet
professional services market in 1998, we provided application development and
integration services.
Industry Background
The rapid growth in the commercial use of the Internet fundamentally is
transforming the way businesses interact with their customers. International
Data Corporation, or IDC, an independent research firm, forecasts the number of
World Wide Web users to grow from 239.6 million in 1999 to 602 million in 2003
and projects worldwide e-commerce revenues to increase from approximately $60
billion to more than $1.6 trillion over the same period. In response to the
increasing number of consumers and businesses using the Internet, companies are
implementing e-business solutions. Many of these companies seek the expertise
of outside Internet professional services providers. IDC estimates that the
worldwide market for Internet services will grow from $16.5 billion in 1999 to
$102.7 billion in 2004.
We believe the marketplace is entering the next generation of e-businesses.
The first generation focused primarily on acquiring and engaging new customers
on a transaction-by-transaction basis. This business model primarily uses a
mass marketing approach and requires e-businesses to expend significant
resources on advertising. However, these expenditures do not necessarily result
in improved customer acquisition and retention rates or increased
profitability.
We believe that next generation e-businesses must invest more efficiently to
acquire customers and increase customer retention rates in order to improve
profitability. e-businesses can achieve these objectives by more effectively
managing relationships with their online customers as well as investing in
brand differentiation. Relationship management helps identify the right
customers through segmentation analysis, creates loyalty by employing targeted
marketing and incentive campaigns, and increases revenue per customer through
personalized marketing.
By having loyal customers, companies can more successfully market
complementary and higher end products. Because initial customer acquisition
costs can far exceed a typical customer's spending in the first year, there is
a significant financial impact associated with losing high value customers. As
part of an overall strategy to increase customer loyalty, companies
increasingly look to expand customer relationship management initiatives into
their overall e-business solutions. Electronic customer relationship
management, or eCRM, refers to this expansion that includes communicating with
the customer via the Internet, e-mail, web-chat, personal digital assistants,
and cellular and digital phones.
25
<PAGE>
We believe next generation e-businesses are seeking Internet professional
services firms that can provide all the services that enable clients to build
profitable and longer-lasting e-relationships. Many Internet professional
services firms focus on business strategy, creative design and technology, but
do not have the branding and marketing skills to develop strong e-
relationships. Strategic consulting firms generally do not undertake the
implementation of business recommendations they provide. Marketing agencies
typically have to partner with outside technology vendors to deliver complete
solutions.
Our Solution
Our vision is to help our clients build next generation e-businesses. We
combine our extensive expertise in technology with our experience in business
strategy, branding, marketing, creative design and technology to deliver an
integrated solution that enables clients to build strong e-relationships with
their customers. Key elements of our solution are:
360(degrees) e-Relationships--A New Approach to e-Business Customer
Relationships. We combine our extensive expertise in technology with our
experience in business strategy, branding, marketing, and creative design to
deliver an integrated solution that enables clients to manage all aspects of
their relationships with their customers. We believe this ability helps clients
establish long term, stronger and more profitable customer relationships,
instead of simply acquiring customers on an individual transaction basis. We
refer to these relationships as 360(degrees) e-Relationships. We do this by:
. identifying the right customers through the collection and segmentation
of customer data and the application of customized marketing techniques;
. fostering customer loyalty by using reward management solutions to
generate incentives targeted towards group or individual preferences;
and
. improving the quality of customer service by providing support and
communications across various communication channels.
Create and Measure Value Through Proprietary Metrics. We developed our
solution offerings specifically to help our clients maximize the value of their
e-Relationships. In order for our clients to measure and manage the value of
their e-Relationships, we have developed and implemented a framework and
proprietary toolset of metrics we call eRMetrics. eRMetrics consists of
ValueMap and eRQ.
. ValueMap. ValueMap is a process tool that ensures that the implemented
e-business is aligned with the business and financial objectives
initially identified by our clients. In addition, ValueMap serves as a
framework for future enhancements to the e-business and helps our
clients maintain a long term competitive advantage.
. eRQ. eRQ is our proprietary measurement tool that helps existing and
prospective clients evaluate their ability to build e-relationships
relative to their competition and industry. We have developed a visual
representation of eRQ, which we call ValueGraph, that we use to
demonstrate eRQ results to our clients.
eRQ evaluates an e-business based on the following four capabilities:
. Transactive Capabilities. Transactive capabilities include information
presentation, customer interaction, transaction processing and
completeness of product or service offering.
. Knowledgment Management. Knowledge management includes data management,
customer and web site activity tracking, customer, market and product
segmentation, and marketing campaigns.
. Reward Management. Reward management includes reward generation, real-
time recommendations, customized incentives and personalized offers.
. Touchpoint Management. Touchpoint management includes managing customer
interactions across all communication channels, including the Internet,
e-mail, web-chat, personal digital assistants and phones.
26
<PAGE>
Advanced e-Relationship Offerings. We provide specific e-Relationship
service offerings to build new e-businesses and improve existing e-businesses
based on the results obtained from our eRMetrics evaluation. These e-
Relationship service offerings are:
. e-Transact. Our e-Transact offering builds a reliable and scalable
transactive web site that we integrate with existing back-end systems.
e-Transact encompasses both the creative design and the technical
implementation of the web site;
. e-Knowledge. Our e-Knowledge offering provides advanced information
gathering and analytic profiling solutions that allow our clients to
gain a thorough understanding of their customers. This allows them to
offer more personalized product or service offerings;
. e-Reward. Our e-Reward offering provides customer loyalty-building
programs to our clients, including frequent visitor rewards, online
discounting and personalized promotions. This allows our clients to
retain and expand their customer base; and
. e-Assist. Our e-Assist offering delivers personalized, proactive online
assistance to enable our clients to offer superior customer service and
a compelling online experience.
Speed of Execution and Quality of the Solution. Our delivery model,
NexFrame, focuses on speed of execution and quality of the solution. NexFrame
consists of reusable frameworks and tools that can be re-deployed rapidly to
new engagements, increasing the speed and quality of our execution. Another way
we achieve speed and quality is to distribute work among our geographically
dispersed delivery centers rather than executing projects exclusively at client
locations. Our delivery centers give us 24-hour project coverage and access to
qualified personnel in local areas, each of which increases our delivery
capacity.
Multi-Disciplinary Capability on a Regional Basis. We deliver our e-
Relationship services by deploying multi-disciplinary, regional client services
teams. Each team consists of professionals with expertise in business strategy,
branding, marketing, creative design and technology. This approach allows us to
deliver high quality solutions rapidly and cost effectively in comparison to
the approach of engaging multiple service providers.
Technology Expertise. Our professionals possess the skills and experience
required to design and develop next generation e-businesses successfully. We
have been implementing complex technology solutions for 10 years, including
customer relationship management, or CRM, services since 1995 and e-business
services since 1998. Our professionals have extensive expertise in application
development and integration, technology architectures and scalable solutions
that can handle high volumes of data and transactions.
Strategy
Our objective is to be the leading provider of e-relationship services. The
key elements of our strategy are to:
Use Performance Centers to Develop New Service Offerings. We have four
performance centers to ensure innovation in our organization by creating,
developing, testing, training and introducing new service offerings and
frameworks. We will continue to make significant investments in our performance
centers to introduce new service offerings. For example, we plan to offer
solutions that integrate electronic exchanges, web sites and Internet portals.
Enhance and Capitalize on eRMetrics. We intend to use our proprietary
eRMetrics measurement tools to help our clients continuously evaluate and
improve their e-businesses. We anticipate this will result in the demand for
additional services and extended client engagements. We continue to develop our
eRMetrics tools. For example, we are developing industry-specific versions of
eRQ.
27
<PAGE>
Target New Industries. We have extensive knowledge and experience in the
retail, financial services and technology industries. We believe having
personnel with knowledge and experience in these industries helps us rapidly
create tailored solutions to meet the particular requirements of businesses in
such industries, as well as generate additional business. We plan to hire
experienced industry professionals to help us enter new industries such as
telecommunications, utilities and entertainment. We are focusing our efforts on
these industries because we believe that businesses in these industries are
implementing next generation e-business solutions.
Continue to Build Our Brand. A well-recognized and accepted brand will
better enable us to attract new customers and employees as well as strengthen
our overall competitive market position. We will continue to invest in
strengthening and building awareness of the Nexgenix brand by:
. advertising in key business, industry and trade publications;
. establishing additional strategic alliances with leading software,
hardware and service providers;
. conducting public relations campaigns;
. developing local event marketing programs;
. communicating with industry analysts;
. participating in partner and industry trade shows; and
. developing customer success and reference programs.
Attract and Retain the Most Qualified Professionals. We believe our
professionals are our most valuable assets. To grow our business and continue
to deliver high quality solutions to our clients, we will continue to devote
substantial resources to attracting and retaining qualified professionals. We
have a full time recruiting team of nine people dedicated to identifying
qualified candidates with strategy, marketing, branding, creative design and
technology expertise. We recruit a significant number of our higher-level
positions through our employee referral program, which provides incentives to
the referring individual.
Our hiring and retention program provides professionals with the following
benefits:
. an opportunity to learn and utilize the latest competencies to deliver
e-Relationship solutions;
. decreased travel as a result of our business model that uses
geographically dispersed delivery centers;
. a compensation structure for senior management based on employee
development and retention;
. a chief morale officer responsible for promoting our corporate culture
and planning company events;
. a culture of collaboration that facilitates and rewards initiative and
achievement;
. learning and development programs that focus on professional and
personal development including a career advancement and mentoring
program; and
. competitive compensation and benefits packages, including stock options.
Continue to develop industry relationships. We have entered into
arrangements with hardware and software vendors such as E.piphany, Hewlett-
Packard, Silknet and Vignette, pursuant to which we expect to obtain benefits
such as access to the latest versions of technology, co-marketing opportunities
and access to new clients. For example, we were able to obtain three
significant client engagements through a joint marketing effort involving sales
and delivery personnel from both us and Hewlett-Packard. We believe these types
of relationships are mutually beneficial, in that these industry vendors gain
from us a new channel for distribution of their products and we obtain
incremental business and credibility by being associated with these vendors. We
intend to continue to establish additional relationships with industry
participants in order to maintain access to leading technologies and valuable
marketing opportunities.
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<PAGE>
Service and Delivery Model
We base our client engagement and delivery model on a proprietary
methodology that we call NexFrame. This methodology allows us to rapidly
deliver fully integrated high quality e-Relationship solutions. NexFrame
combines our extensive expertise in technology with our experience in business
strategy, branding, marketing and creative design.
NexFrame provides a number of common benefits to us and our clients,
including:
. Fixed price. Our fixed price model provides a clear understanding of the
scope and price of the solution. This allows our clients to prioritize
the components and phasing of the initiative and allows us to forecast
revenues more accurately and allocate resources more efficiently.
. Flexibility. Our flexible methodology allows our clients to engage us at
any phase of their e-business development.
. Consistency. Our methodology ensures consistent delivery of our
services. All of our delivery professionals must attend an intensive
workshop to learn NexFrame.
NexFrame consists of four phases that we refer to as e.Opportunity,
e.Strategy, e.Build and e.Measure.
e.Opportunity. In the e.Opportunity phase, we work in conjunction with our
clients to study the key aspects of our clients' businesses, including
existing e-business strategies, initiatives and solutions, perform market and
competitive analyses, and assess relationships with customers, employees,
suppliers and partners. Once we complete our initial analysis, we develop and
recommend an appropriate business model.
e.Strategy. In the e.Strategy phase, we perform a marketing assessment,
define marketing and brand objectives and strategies, explore creative design
options and examine the information technology and organizational structure
necessary to achieve our clients' goals. In addition, we conduct brand
valuation, identify the client's most profitable customers and develop a
marketing plan.
e.Build. In the e.Build phase, we combine our creative design, marketing
and technology expertise to design, develop and deploy the e-business
solution. We perform systems integration and capacity testing and support
clients during accepting and testing of our solution. In the final step of
this phase, we load the content and deliver the production-ready e-business
solution.
e.Measure. In the e.Measure phase, we track, measure and analyze the
performance of our e-business solution against objectives agreed upon by our
clients. We use our eRMetrics to continuously identify opportunities to
improve our client's e-business.
Performance Centers
We have four performance centers that help us to develop and implement more
scalable and reliable solutions in a seamless and rapid manner. Our four
performance centers are:
. Relationship Management Performance Center. Our Relationship Management
Performance Center develops online customized marketing concepts and
creates methodologies for delivering marketing, branding and creative
design strategies.
. Technology Enabled Application Management (TEAM) Performance Center. Our
TEAM Performance Center develops new service offerings by evaluating and
integrating eCRM, e-commerce and e-marketing applications.
. Technology Performance Center. Our Technology Performance Center
prototypes solutions using new technologies to ensure scalability and
reliability. This center also evaluates the design, architecture and
scalability of application packages in conjunction with our TEAM
Performance Center.
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<PAGE>
. Quality Assurance Performance Center. Our Quality Assurance Performance
Center is responsible for maintaining and ensuring adherence to our
methodology and reviewing all fixed price proposals.
Competencies
Our NexFrame methodology integrates our expertise in the following areas:
Business Strategy. Our business strategists have management, information
technology and Internet consulting experience as well as experience in our
targeted industries. Our business strategists are proficient in mission
formulation, market and customer needs assessment, environment and competitive
analysis, operations assessment, and business and financial modeling.
Branding. Our branding professionals have experience in strategic marketing,
brand development and positioning, name generation and brand identity
development. Our branding professionals help e-businesses establish brands and
help more traditional companies update and invigorate their existing brands.
Marketing. Our marketing professionals have experience in market research,
competitive analysis, customer segmentation and retention strategies, and
campaign management. Our marketing professionals develop campaigns that can
lower customer acquisition and retention costs and increase the number of
profitable customers.
Creative Design. Our creative design professionals have expertise in visual,
structural and information design, navigational design, user behavior, website
architecture, search methodology and customer support services. Our creative
design professionals have experience in a broad range of graphical design and
programming languages and technologies such as DHTML, JAVA, ActiveX, Flash,
Shockwave and XML.
Technology. We have been implementing technology solutions prior to the
widespread commercialization of the Internet and e-business. Our technical
professionals consist of technical architects, programmers, integration
specialists, security experts and planning and testing experts, and have
expertise in the latest Internet technologies and programming languages. They
also have significant experience in integrating Internet applications with
existing computing architectures.
Case Studies
Military.com
A web community designed for United States military personnel, the reserve
corps, family members, veterans and military enthusiasts.
Challenge: To design, develop and launch the web community and to promote
its content to a targeted user base.
Solution: We are building a comprehensive e-Relationship-enabled web
community. As part of the engagement, we are implementing personalization,
customer service and loyalty reward sharing programs to ensure that the site
provides long-term value for its members. Some of the personalized services
include real-time news, sports coverage, weather reports, a military personnel
and unit locator, bulletin boards, online chat, discussion groups, personalized
home page design and free e-mail services.
Financial Services Corp., a Sun America subsidiary
A leading retail distributor of financial products and services.
Challenge: To create a business-to-business exchange to allow FSC's network
of approximately 2,500 independent financial consultants to access financial
management tools and services, such as account management, fund management and
security trading.
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Solution: We created an Internet- and virtual private network-based dealer
and broker exchange application to which independent brokers can subscribe. Our
solution features online order entry capability allowing brokers to access
client information, process mutual fund trades and manage client accounts. Our
solution also provides subscribing brokers with enhanced analytical tools that
lead to increased productivity, better revenue management and improved client
service. Capitalizing on our financial services and technical expertise, we
designed a database and developed processes to aggregate orders and make
services provided by large financial institutions available to individual
brokers who otherwise could not receive these services directly. We designed
our solution to meet SEC compliance requirements and track broker license
validity for each transaction. Based on our success in delivering this
solution, FSC continues to engage us to enhance this exchange application and
other engagements.
CBS SportsLine
An Internet-based sports media and e-commerce company that provides branded,
interactive information and programming and sports merchandise.
Challenge: To double membership through rapid customer acquisition and to
strengthen customer relationships to achieve a higher retention rate.
Solution: We are implementing a comprehensive e-Relationship solution in
three phases. In the first phase, we designed a data warehouse that allows CBS
SportsLine to store data acquired from internal and external sources. This data
warehouse generates customer demographics, enabling CBS SportsLine to target
new customers more accurately. CBS SportsLine also uses the customer
demographic information to create personalized marketing campaigns for
registered web site users. We are now integrating an Internet-based customer
relationship management solution to improve a user's online experience. In the
third phase of this engagement, we will design and implement a reward
management infrastructure to offer personalized online incentives with the goal
of increasing customer retention.
Alcatel Internetworking Division
Manufacturer and distributor of internetworking products.
Challenge: To formulate a business strategy enhancing Alcatel IND's e-
Relationships with independent sales personnel, employees, channel partners,
customers and visitors.
Solution: We were engaged in an e.Strategy assessment to develop Alcatel
IND's e-business strategy and a blueprint to assist them in enhancing their
ability to build e.Relationships. We evaluated the competitive environment
using our proprietary eRQ measurement tool. By using a structured interview
approach, evaluating existing tool sets and confirming our client's
capabilities, we facilitated an e-business mission statement and helped
establish priorities for Alcatel IND's e-business initiatives. At the end of
our e.Strategy assessment, we provided Alcatel IND with a recommendation to
implement an intranet to assist its sales force and other employees, enhance
their web site to include e-business capabilities and develop an extranet to
provide an exchange forum for its suppliers and partners. In addition, we
conducted a review of Alcatel IND's brand.
Sage Software
A developer and marketer of business software with approximately 7,000
channel partners worldwide.
Challenge: To build a self-service web site allowing business-to-business
customers to execute transactions without the need to interact with online
service agents.
Solution: We built a complete Internet based business-to-business solution
that enables Sage's partners and customers to perform direct order entry, order
tracking and resolution management, and to allow customers to renew agreements.
As part of this solution, we provided the creative design, built necessary
infrastructure and transaction capability and are integrating the solution with
a call center that is under development to provide customer support.
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Clients
The following is a partial list of clients for whom we have performed
significant e-Relationship assignments during the past 18 months:
<TABLE>
<S> <C>
Alcatel Internetworking Division Mercury Interactive
Block Financial Corporation Military.com
Broadband Sports Merrill Lynch Credit Corp.
CBS SportsLine MyOnlyCatalog.com
Centis Corporation Nissan Motors
Cirrus Logic Republic Mortgage Insurance Corp.
CSX Technology Rooms To Go.com
Discount Auto Parts Sage Software
Ecolab Style365.com
Financial Services Corp. Seagate Technology
iMotors Southern California Gas Company
Integrated Partnership Sendmail
Interpath Communications ShopNow.com
Kawama.com Vistacon (Johnson & Johnson)
LendingTree
</TABLE>
Sales and Marketing
We market and sell our e-Relationship services to start-up and emerging e-
businesses as well as traditional brick-and-mortar companies that are
implementing e-business solutions. We have sales and marketing professionals
located in 22 offices across the United States. We currently generate most of
our business through our direct sales force and alliance managers. We also
generate new business from strategic alliances, client referrals and venture
capital firms, and through business relationships of our executive team. It is
our practice to have delivery and performance center professionals collaborate
with our sales force personnel in qualifying and pursuing sales leads.
Our marketing strategy is to strengthen the Nexgenix brand, differentiate us
in the Internet services market, generate business leads and recruit talented
professionals. Our marketing strategies include:
. sponsoring and speaking at targeted industry conferences and trade
shows;
. promoting our brand through media and analyst relations, event
marketing, direct response, telemarketing and advertising; and
. creating co-marketing programs with our strategic alliance partners.
Competition
We compete in the emerging Internet professional services market. This
market is highly fragmented, and we believe competition will become more
intense as the market evolves due to the relatively low barriers to entry. Our
competitors include:
. Internet services firms, including Proxicom, Razorfish, Sapient, Scient,
Viant and Whittman-Hart;
. technology consulting firms and integrators, including Andersen
Consulting, EDS, IBM Global Services and the major accounting firms;
. strategy consulting firms, including Bain & Company, Booz Allen &
Hamilton, The Boston Consulting Group and McKinsey & Company; and
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. in-house information technology, marketing and design service
departments of our current and potential clients.
We believe that the principal competitive factors in this market are:
. integrated business strategy, branding, marketing, creative design and
technology expertise;
. company reputation and brand recognition;
. an ability to provide high quality services in a timely and cost-
effective manner; and
. an ability to attract and retain qualified professionals.
We believe we compete favorably overall with respect to these factors.
Intellectual Property
We have developed processes, skill sets, technologies, software frameworks
and methodologies, including our NexFrame delivery model and our eRQ tool, that
we consider to be proprietary. We seek to protect our intellectual property
through a combination of license agreements and trademark, service mark,
copyright and trade secret laws. We also attempt to protect the brand names of
our proprietary technologies and processes by registering domain names that we
believe may be important to our business. Since 1995, we have required all
employees to sign a proprietary information and inventions agreement upon
initiation of employment with us. Our proprietary information and inventions
agreements with our employees provide that they must maintain the
confidentiality of our intellectual property and that any intellectual property
they create that relates to our current or future business while employed by us
belongs to us. In addition, these agreements provide that the employees will
not solicit any of our employees or business for the purpose of competing with
us for one year after termination of their employment.
We have pending registrations with the United States Patent and Trademark
Office for trademarks and service marks we use in our business, including
"Nexgenix," "NexFrame," "e-Relationship Quotient" and "360(degrees) e-
Relationship." We will continue to make filings or take other actions that we
consider necessary or appropriate in order to protect our intellectual property
rights.
Although we seek to protect our intellectual property, our efforts could be
inadequate to deter misappropriation of proprietary information. For example,
the steps we have taken or will take to protect our intellectual property
rights may be inadequate to deter misappropriation of our intellectual
property, and we may not be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property. We have no patented
technology that would preclude or inhibit competitors from entering our market.
Finally, our intellectual property cannot protect us from new and emerging
technologies and changes in customer requirements.
Employees
As of December 31, 1999, we had 441 employees, including 260 billable
employees. We are not a party to any collective bargaining agreement or other
similar agreement, and our employees generally serve on an at-will basis. We
believe that our relationship with our employees is satisfactory.
Facilities
Our principal executive offices are located in an 14,264 square foot leased
facility in Irvine, California. Our lease on this facility expires in May 15,
2000. We currently are in the process of consolidating operations located in
various facilities in the Irvine area into our new principal executive offices.
We also lease an
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<PAGE>
aggregate of 39,206 square feet of office space in locations across California,
Florida, Georgia, Illinois, New Jersey, New York, North Carolina, Pennsylvania,
Texas and Mumbai (Bombay), India. We believe our facilities are satisfactory
for our current needs.
Legal Proceedings
We are involved in legal proceedings from time to time in the ordinary
course of business. However, there currently are no material legal proceedings
pending or, to our knowledge, threatened against us except as described below.
On February 18, 2000, Questra Corporation filed a complaint against us and
certain of the employees in our North Carolina office in the Superior Court of
the County of Wake, North Carolina. The complaint alleges that these employees,
all former employees of Questra, have used and continue to use proprietary and
confidential information and trade secrets of Questra and have solicited
clients and employees of Questra while employed by us. The complaint alleges
that these employees breached their contractual obligations to Questra, as well
as violation of statutory and tort law by such employees and us. The complaint
seeks to enjoin these employees from engaging in these activities and to obtain
compensatory, punitive and treble damages from us and the employees. On March
2, 2000 the court issued an order temporarily restraining our employees from
continuing these activities. We are not subject to the temporary restraining
order. This action is still pending. We believe that the allegations against us
are without merit and we intend to vigorously defend this lawsuit.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information as of March 23, 2000 with
respect to each person who is an executive officer and director of Nexgenix:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
A. Rick Dutta........... 44 Chairman of the
Board of
Directors and
Co-Chief
Executive
Officer
S. Don Ganguly.......... 43 Co-Chairman of
the Board of
Directors and
Co-Chief
Executive
Officer
Mark S. St.Clare........ 53 Vice President,
Chief Financial
Officer and
Secretary
David R. Andrade........ 41 Vice President,
Sales
Scott D. Raskin......... 38 Vice President,
Corporate
Development
Ravi Renduchintala...... 45 Vice President,
Alliance
Marketing
Dean A. Reynolds........ 49 Vice President,
People and
Organization
Strategy
Keith A. Yagnik......... 50 Vice President,
Relationship
Management
Services
David R. Dukes(1)(2).... 56 Director
Safi U. Qureshey(1)(2).. 49 Director
John L. Walecka(1)(2)... 40 Director
</TABLE>
- ---------------------
(1) Member of the audit committee
(2) Member of the compensation committee
A. Rick Dutta is one of our founders and has served as our chairman of the
board of directors and co-chief executive officer since October 1999. Mr. Dutta
served as our chairman of the board of directors, chief executive officer and
president since our inception in 1990 until October 1999. Prior to founding
Nexgenix, Mr. Dutta served in various management positions at Hewlett Packard
and Unisys. Mr. Dutta earned B.S. and M.S. degrees in engineering, and an
M.B.A. from the Anderson Graduate School of Management at the University of
California, Los Angeles.
S. Don Ganguly is one of our founders and has served as our co-chairman of
the board of directors and co-chief executive officer since October 1999. Mr.
Ganguly served as our executive vice president and secretary from 1992 until
October 1999. Prior to founding Nexgenix, Mr. Ganguly served as vice president
and general manager of Bluebird Systems, an applications software company, from
1989 to 1992. Mr. Ganguly earned a B.S. degree in engineering, and an M.B.A. in
marketing and finance from the Wharton School of Business at the University of
Pennsylvania.
Mark S. St.Clare joined us in February 2000 as our vice president, chief
financial officer and secretary. From January 1985 to February 2000, Mr.
St.Clare was the vice president and chief financial officer of FileNET
Corporation, a public company that develops and markets document management and
web content management software. Mr. St.Clare has a B.S.B.A. degree in
accounting, and is a Certified Public Accountant.
David R. Andrade joined us in December 1998 as our vice president, sales.
Prior to joining us, Mr. Andrade served as vice president, southwest area of
Parametric Technology Corporation, a software company, from June 1998 to
December 1998, and in various positions, including regional director, with Sun
Microsystems Computer Corporation from 1991 to 1998. Mr. Andrade has a B.S.
degree in business administration.
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<PAGE>
Scott D. Raskin joined us in 1993, and currently serves as our vice
president, corporate development. Mr. Raskin is responsible for our planning
and implementation of our recruiting efforts. Mr. Raskin was our vice
president, sales and business development from 1993 until 1999. Prior to
joining us, Mr. Raskin held various sales management positions with other
technology companies.
Ravi Renduchintala joined us in 1994 and currently serves as vice president,
alliance marketing. From 1992 to 1994, Mr. Renduchintala served as a consultant
to us and helped us establish our Indian subsidiary operations. Prior to
joining us, Mr. Renduchintala worked for over 10 years at TATA Unisys in
managing, consulting, and business development functions in Europe, Asia, and
the United States. Mr. Renduchintala has a masters degree in engineering.
Dean A. Reynolds joined us in February 2000 as our vice president, people
and organization strategy. Mr. Reynolds served as director of human resources
from 1994 to January 2000, and as director of risk management from 1989 to
1994, at Nissan North America. Mr. Reynolds earned a B.A. degree in English
literature and an M.B.A. from the Anderson Graduate School of Management at the
University of California, Los Angeles.
Keith A. Yagnik joined us in November 1999 as our vice president,
relationship management services. Prior to joining us, Mr. Yagnik served as
president and chief executive officer of Burell Yagnik Relationship Marketing,
a direct response advertising agency, from January 1999 to June 1999. From
December 1995 to December 1998, Mr. Yagnik served as senior vice president and
director of strategic services at McCann Relationship Marketing, a direct
response advertising agency. Mr. Yagnik has a B.A. degree in economics and an
M.B.A.
David R. Dukes has served as a member of our board of directors since
October 1999. Mr. Dukes was employed by Ingram Micro, the world's largest
distributor of technology products and services, from September 1989 until his
retirement in May 1998. Mr. Dukes served in various executive capacities with
Ingram Micro, including co-chairman, vice chairman, president and chief
operating officer. Mr. Dukes also was a co-founder and chief executive officer
of Ingram Alliance from January 1994 until his retirement in 1998, and was
chairman of the Global Technology Distribution Council from January 1998 until
December 1999. Mr. Dukes is an active investor, and serves on the Boards of
Viking Components, Inc., CUShopper, Inc. and Tempest Financial Services, Inc.
Safi U. Qureshey has served as a member of our board of directors since
October 1999. Mr. Qureshey was the founder of AST Research, a personal computer
manufacturer, and served as its chairman of the board of directors and chief
executive officer from 1980 to 1997. Mr. Qureshey is an active investor and
serves on the board of directors of Nextcard, Inc., and PowerWave Technologies,
Inc., each a public company, and of several private companies.
John L. Walecka has served as a member of our board of directors since
October 1999. Mr. Walecka is a managing director of Redpoint Ventures I, LLC,
an investment firm he founded in 1999. Prior to founding Redpoint Ventures, Mr.
Walecka was a general partner with Brentwood Venture Capital since joining them
in 1984. Mr. Walecka serves on the board of directors of Netro Corporation,
Rhythms NetConnection, Inc. and Vitria Technology, Inc., each of which is a
public company, and of several private companies. Mr. Walecka earned B.S. and
Master degrees in engineering from Stanford University and an M.B.A. from the
Stanford Graduate School of Business.
Executive Officers
Each executive officer serves at the discretion of our board of directors
and holds office until his successor is elected and qualified or until his
earlier resignation or removal. There are no family relationships among any of
our directors or executive officers.
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<PAGE>
Board of Directors
Our board of directors consists of five members. Each director serves a term
of one year. Each director serves the term for which he is elected until the
election and qualification of his successor or until his resignation or
removal, whichever comes earlier.
Compensation of Directors
We do not have a policy of compensating our non-employee directors. However,
directors are eligible to receive options and rights to purchase restricted
stock under our 1997 stock incentive plan.
In October 1999, we granted to each of Mr. Qureshey and Mr. Dukes the right
to purchase 330,000 shares of common stock at a price of $0.95 per share, which
each director purchased with a promissory note. We have the right to repurchase
each director's restricted shares of common stock granted in October 1999 at
the original purchase price upon termination of his service for any reason. Our
repurchase right lapses and the director's shares vest ratably each month over
four years following the date of grant. In February 2000, we granted to each of
Mr. Qureshey and Mr. Dukes the right to purchase 330,000 shares of common stock
at a price of $2.48 per share, which each director purchased with a promissory
note. The promissory notes issued in February 2000 have been paid in full by
the directors.
Committees of the Board of Directors
Our board of directors currently has two committees, a compensation
committee and an audit committee. The compensation committee consists of
Messrs. Dukes, Qureshey and Walecka. The compensation committee reviews and
recommends the salaries and bonuses of our officers, establishes compensation
and incentive plans, and determines other fringe benefits.
The audit committee consists of Messrs. Dukes, Qureshey and Walecka. The
audit committee recommends engagement of our independent public accountants,
reviews the results and scope of the audit and other services provided by our
independent public accountants, and reviews and evaluates our accounting
principles and our system of internal controls.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Our board of directors established the compensation committee in March 2000.
Prior to establishing the compensation committee, our board of directors as a
whole performed the functions delegated to the compensation committee. No
executive officer serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on our
board of directors.
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<PAGE>
Executive Compensation
The following table summarizes all compensation earned by each of our co-
chief executive officers and our three other most highly compensated executive
officers whose total salary and bonus exceeded $100,000 for services rendered
in all capacities to us during fiscal 1999. We refer to these people as our
named executive officers in other parts of this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long term
compensation
awards
------------
Annual Securities
compensation underlying
Name and ---------------- stock
Principal Position Salary Bonus options
------------------ -------- ------- ------------
<S> <C> <C> <C>
A. Rick Dutta............................... $204,988 $ -- --
Chairman of the Board of Directors and Co-
Chief Executive Officer
S. Don Ganguly.............................. 204,988 -- --
Co-Chairman of the Board of Directors and
Co-Chief Executive Officer
David Andrade............................... 134,160 59,166 --
Vice President, Sales
Scott D. Raskin............................. 160,000 53,509 --
Vice President, Corporate Development
Ravi Renduchintala,......................... 140,000 -- --
Vice President, Alliance Marketing
</TABLE>
Mr. Dutta and Mr. Ganguly's current annual base salary is 250,000. Mr.
Andrade's current annual base salary is $250,000, and Mr. Renduchintala's
current annual base salary is $170,000. Mr. St.Clare, our vice-president, chief
financial officer and secretary joined us in February 2000, and Mr. Yagnik, our
vice president, relationship management services, joined us in November 1999.
Mr. St.Clare and Mr. Yagnik each earn an annual base salary of $250,000. Mr.
St.Clare also received a signing bonus of $50,000 upon joining us.
Option Grants in Fiscal 1999
The following table contains information concerning our grant of stock
options during fiscal 1999 to our named executive officers. Potential
realizable value is presented net of the option exercise price, but before any
federal or state income taxes associated with exercise, and is calculated
assuming that the fair market value on the date of the grant appreciates at the
indicated annual rates, compounded annually, for the term of the option. The 5%
and 10% assumed rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of future increases in the price of our common stock. Actual gains
will be dependent on the future performance of our common stock and the option
holder's continued employment throughout the vesting period. The amounts
reflected in the following table may not be achieved.
<TABLE>
<CAPTION>
Potential realizable
value at assumed
annual rates
of stock price
Percent of total appreciation
Number of shares options granted Exercise or for option term
underlying to employees in base price Expiration --------------------
Name options granted fiscal year per share date 5% 10%
- ---- ---------------- ---------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
A. Rick Dutta........... -- -- % $ -- -- $ -- $ --
S. Don Ganguly.......... -- -- -- -- -- --
David R. Andrade........ 200,000 100 0.53 3/31/09 66,034 167,343
Scott D. Raskin......... -- -- -- -- -- --
Ravi Renduchintala...... -- -- -- -- -- --
</TABLE>
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<PAGE>
Aggregated Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values
None of our named executive officers exercised any options in fiscal 1999.
Employment Agreements
We have employment agreements with Mr. Dutta, chairman of our board of
directors and co-chief executive officer, and with Mr. Ganguly, co-chairman of
our board of directors and co-chief executive officer, which provides each of
them with an annual base salary of $250,000. Mr. Dutta and Mr. Ganguly may
terminate their employment on 30 days prior written notice and we may terminate
their employment on 30 days' prior written notice, with or without cause. In
the event we terminate either executive for cause, or such executive terminates
his employment for any reason, we may elect to require that such executive
observe the non-competition and nonsolicitation restrictions in the agreement
if we pay to such executive an immediate cash severance equal to one year of
his annual salary. In the event that we terminate either executive without
cause, we are required to pay such officer's annual salary as severance for the
remainder of the term or until the executive obtains comparable employment and
the executive will be required to observe the non-competition and
nonsolicitation restrictions so long as we continue to pay such severance. The
non-competition and nonsolicitation agreements expire on the first anniversary
of the closing of this offering. The agreements define cause to mean the
executive's willful malfeasance or gross negligence in performing his duties,
willful failure or refusal to perform his duties, or material breach of such
agreement.
We entered into an employment agreement with Mr. St.Clare, our vice
president, chief financial officer and secretary, in connection with his
joining us in February 2000. Pursuant to the terms of the agreement, we pay Mr.
St.Clare an annual base salary of $250,000 and granted Mr. St.Clare options to
purchase 688,000 shares of our common stock at an exercise price of $0.95 per
share. Mr. St.Clare also received a signing bonus of $50,000 and the right to
purchase 50,000 shares of our common stock at $2.78 per share. Furthermore, we
agreed to provide him salary and benefits for a period of six months if we
terminate him for a reason other than cause.
We also entered into an employment agreement with Mr. Yagnik, our vice
president, relationship management services, in connection with his joining us
in November 1999. Pursuant to the terms of the agreement, we pay Mr. Yagnik an
annual base salary of $250,000 and granted Mr. Yagnik options to purchase
80,000 shares of our common stock at an exercise price of $0.95 per share.
Furthermore, we agreed to provide him salary and benefit continuation for a
period of one year if we terminate Mr. Yagnik for a reason other than cause.
Stock Option Plans
1993 Stock Option Plan. In 1993, we adopted, and our stockholders approved,
our 1993 stock option plan. The purpose for adopting the 1993 plan is to
promote our overall financial objectives by attracting employees who would be
instrumental to our long term growth. In October 1999, our board of directors
terminated the 1993 plan and as a result no further options may be granted
under the 1993 plan. As of December 31, 1999 there are 2,240,000 options
outstanding under the 1993 plan, which represents all options that have ever
been granted under the 1993 plan. All outstanding options are fully vested and
shall be exercisable at any time until expiration. 1,400,000 options expire in
2003 and 840,000 options expire in 2004.
1997 Stock Incentive Plan. In 1997 we adopted, and our stockholders
approved, our 1997 stock incentive plan. The purpose for adopting the 1997 plan
is to promote our overall financial objectives by attracting and motivating
board members, officers, employees, consultants and other service providers who
are instrumental to our long-term growth. Our board of directors, or a
committee of the board of directors, administers the 1997 plan, and has
discretion to fashion the terms of option grants and issuance of restricted
stock, including the type, size and exercise price, subject to the provisions
of the 1997 plan. The 1997 plan permits the issuance of stock options and
restricted stock totaling up to 6,960,000 shares of our common stock. As of
December 31, 1999, 2,766,220 shares of our common stock remained available for
option grants and restricted stock issuances under the 1997 plan.
Options to purchase common stock granted and restricted stock issued under
our 1997 plan generally vest in stages, whereby the vested portion of such
option shall become exercisable and the vested portion of such issuance of
restricted stock shall be released from our right to repurchase such restricted
stock at the original purchase price. Subject to the terms of the specific
option or stock issuance agreement, one-fourth of each option grant and each
issuance of restricted stock vest on the first anniversary of the participant's
commencement of services to with us, and the remaining portion of the grant or
issuance vests in
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<PAGE>
36 equal monthly installments thereafter at the end of each month of service to
us by the participant. A holder of an option does not have any rights as a
stockholder until such person exercises his or her options. An option may be
assigned only by will or by laws of intestacy. All restricted stock is subject
to our right of first refusal in the event of a proposed transfer by a
participant. Upon a merger involving a transfer of more than 50% of our
outstanding securities or the sale of all or substantially all of our assets,
all options and restricted stock shall vest in full, unless they are assumed or
replaced by the successor company. Our board of directors may, at its
discretion, provide for the acceleration of vesting of an option or issuance of
restricted stock in the event of an involuntary termination of the participant
within up to 18 months of an assumption or replacement by a successor company
and may also provide that vesting shall accelerate in full regardless of an
assumption or replacement by a successor company. All vested options at the
date of termination of employment of an optionee will be exercisable for a
maximum of 90 days following termination, subject to limited exceptions
contained in the plan.
In the case of options intended to qualify as performance-based compensation
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended, the committee will consist of two or more outside directors within the
meaning of Section 162(m) of the Internal Revenue Code. The administrator has
the power to determine the terms of the options or share purchase rights
granted, including the exercise price, the number of shares subject to each
option or share purchase right, the exercisability of the options and the form
of consideration payable upon exercise.
The exercise price of stock options, and the purchase price of restricted
stock, must be not less than the fair market value of a share of our common
stock on the date of grant, or 110% of the fair market value of a share of our
common stock on the date of grant with respect to incentive stock options
granted to optionees who own more than 10% of our outstanding common stock.
Options expire no later than ten years from the date of grant, or five years
with respect to incentive stock options granted to optionees who own more than
10% of our outstanding common stock. Options generally are nontransferable,
other than upon death by will and the laws of descent and distribution.
401(k) Plan
We maintain a 401(k) plan to provide eligible employees with a tax
preferential savings and investment program. Contributions by participants or
by us to the 401(k) plan, and income earned on plan contributions, generally
are not taxable to the participants until withdrawn, and we may deduct our
contributions when we make them. Employees that are 21 years or older become
eligible to participate in the 401(k) plan on the first of the month following
30 days of employment with us. Eligible participants may elect to reduce their
current compensation up to the lesser of 15% of eligible compensation or the
statutorily prescribed annual limit, currently $10,500, and have such reduction
contributed to the 401(k) plan. We will match 25% of the first 6% of our
employee's contribution to the 401(k) plan. Our matching contributions are
subject to a vesting schedule, whereby unvested portions of our matching
contributions are required to be refunded to us at the time the participant is
terminated. Twenty-five percent of our matching contributions vest on the
second anniversary of the participant's commencement of services to us and 25%
on each anniversary thereafter. The trustees of the 401(k) plan invest the
assets of the 401(k) plan in the various investment options available under the
plan as directed by the participants.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation eliminates the
personal liability of our directors to us or our stockholders for monetary
damages for breach of their fiduciary duty as a director to the fullest extent
permitted by the Delaware General Corporation Law. Under the Delaware General
Corporation Law, a director's liability to a company or its stockholders may
not be limited:
. for any breach of their duty of loyalty to us or our stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
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<PAGE>
. for any transaction from which the director derived an improper personal
benefit.
These provisions do not affect a director's responsibilities under any
other laws, including the federal securities laws or state or federal
environmental laws.
Our bylaws also contain provisions that require us to indemnify our
directors, and permit us to indemnify our officers and employees, to the
fullest extent permitted by the Delaware General Corporation Law. However, we
are not obligated to indemnify any such person:
. with respect to proceedings, claims or actions initiated or brought
voluntarily by any such person and not by way of defense; or
. for any amounts paid in settlement of an action indemnified against by
us if we do not give our prior written consent to the settlement.
We have entered into indemnity agreements with each of our directors and
executive officers that provide for the maximum indemnification permitted by
law. We believe that these limitations on liability are essential to attract
and retain qualified persons as directors and officers.
We intend to obtain directors' and officers' liability insurance prior to
the effectiveness of this offering.
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<PAGE>
CERTAIN TRANSACTIONS
On July 1, 1996, we issued a promissory note to Mr. Dutta providing for
repayment of a loan he made to us in the amount of $300,000. Interest on the
note accrues at the rate of 7.25% per annum compounded semi-annually, with
principal and interest due and payable on June 30, 1999. On September 29, 1997,
we issued a promissory note to Mr. Dutta providing for repayment of a loan he
made to us in the amount of $240,901. Interest on the note accrues at the rate
of 5.75% per annum compounded semi-annually, with principal and interest due
and payable on September 28, 2000. Mr. Dutta has represented to us in writing
that he does not intend to demand payment on either of these notes prior to
June 30, 2000. A portion of the net proceeds of this offering will be used to
repay both of these notes in their entirety.
On September 11, 1996, we issued a promissory note to Mr. Ganguly providing
for repayment of a loan he made to us in the amount of $285,000. Interest on
the note accrues at the rate of 6.5% per annum compounded semi-annually, with
principal and interest due and payable on September 10, 1999. On September 29,
1997, we issued a promissory note to Mr. Ganguly providing for repayment of a
loan he made to us in the amount of $240,000. Interest on the note accrues at
the rate of 5.75% per annum compounded semi-annually, with principal and
interest due and payable September 28, 2000. Mr. Ganguly has represented to us
in writing that he does not intend to demand payment on either of these notes
prior to June 30, 2000. A portion of the net proceeds of this offering will be
used to repay both of these notes in their entirety.
On November 2, 1998, Mr. Dutta and Mr. Ganguly each purchased shares
representing a 20% interest in NexGen Information Solutions, our 60% owned
subsidiary located in India, for $101,927 from an unaffiliated investor. We
plan to purchase all of Mr. Dutta's and Mr. Ganguly's shares in NexGen
Information Solutions following completion of this offering.
On October 1, 1999, each of Mr. Qureshey and Mr. Dukes purchased 330,000
shares of our common stock in exchange for a promissory note in the amount of
$313,335. Each note is secured by the shares purchased and bears interest at
the rate of 5.96% per annum, payable annually on September 30. Principal and
unpaid interest on both notes are due on September 30, 2004. We have the right
to repurchase each director's restricted shares of common stock granted in
October 1999 at the original purchase price upon termination of his service for
any reason. Our repurchase right lapses and the director's shares vest ratably
each month over four years following the date of grant.
On October 28, 1999, we sold an aggregate of 2,867,716 shares of our
preferred stock to Redpoint Ventures I, L.P., Redpoint Associates I, LLC and
CGSH Investments. We also issued to each of Redpoint Ventures I, L.P. and
Redpoint Associates I, LLC a warrant to purchase 331,930 shares of our
preferred stock at an exercise price of $5.55 per share. As part of this
transaction, we also exchanged 885,146 shares of our preferred stock for
885,146 shares of our common stock held by Redpoint Ventures I, L.P. and
Redpoint Associates I, LLC, which they had purchased from Mr. Dutta and Mr.
Ganguly immediately before the exchange for an aggregate of $4,912,560. Upon
the closing of this offering, all of the shares of our preferred stock held by
Redpoint Ventures I, L.P. and Redpoint Associates I, LLC automatically will
convert into 8,169,584 shares of our common stock. John Walecka, a member of
our board of directors, is a managing director of Redpoint Ventures LLC.
Redpoint Ventures LLC is the general partner of Redpoint Ventures I, L.P. and
Redpoint Associates I, LLC. On October 28, 1999, we entered into an investors'
rights agreement with Redpoint Ventures I, L.P., Redpoint Associates I, LLC and
four of our directors and stockholders, Messrs. Dutta, Ganguly, Qureshey and
Dukes, that provides them with demand and piggyback registration rights.
On February 1, 2000, each of Messrs. Qureshey and Dukes purchased 330,000
shares of our common stock in exchange for a promissory note in the amount of
$816,585. Each note is secured by the shares purchased and bears interest at a
rate of 5.96% per annum, payable annually on January 31. Principal and unpaid
interest on both notes are due on the earlier of 60 days from our written
demand or January 31, 2005. Both of the promissory notes were repaid in full in
March 2000.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table contains information regarding the beneficial ownership
of our common stock as of March 23, 2000, and as adjusted to reflect the sale
of our common stock in this offering, by:
. each person or group of affiliated persons known by us to beneficially own
more than 5% of the outstanding shares of our common stock;
. each of our directors;
. each of our executive officers; and
. all of our directors and executive officers as a group.
Unless otherwise indicated below the persons in this table have sole voting
and investment power with respect to all shares shown as beneficially owned by
them. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially owned by
a person and the percentage ownership of that person includes shares of our
common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of March 23, 2000, as disclosed in
the "Options to purchase shares included in beneficial ownership" column in the
table below.
The amounts shown in the table below assume no exercise by the underwriters
of their over-allotment option. A Rick Dutta and S. Don Ganguly have granted
the underwriters an option to purchase up to shares of our common stock
owned by them to cover over-allotments, if any. If the underwriters exercise
the over-allotment option, the additional shares will be sold pro rata by each
of Messrs. Dutta and Ganguly according to their relative ownership of our
common stock with respect to one another. If the underwriters exercise this
over-allotment option in full, Mr. Dutta will beneficially own % of our
common stock outstanding after this offering and Mr. Ganguly will beneficially
own % of our common stock outstanding after this offering. If the
underwriters do not exercise their over-allotment option, Messrs. Dutta and
Ganguly will not sell any shares of common stock in this offering.
Unless otherwise indicated, the address of each person who beneficially owns
5% or more of our common stock is c/o Nexgenix, Inc., 30 Corporate Park Plaza,
Suite 410, Irvine, California 92606.
<TABLE>
<CAPTION>
Number of shares of Percentage of
common stock shares owned
beneficially owned ----------------- Options to purchase
Name of Beneficial prior to and after Prior to After shares included in
Owners this offering offering offering beneficial ownership
- ------------------ ------------------- -------- -------- --------------------
<S> <C> <C> <C> <C>
A. Rick Dutta........... 13,120,269(1) 34.3% 5,415
S. Don Ganguly.......... 13,114,854(2) 34.3 --
Redpoint Ventures I,
LLC.................... 8,169,584(3) 21.3 --
John L. Walecka......... 8,169,584(3) 21.3 --
Scott R. Raskin......... 1,542,556 4.0 392,556
Ravi Renduchintala...... 925,534 2.4 175,534
David R. Dukes.......... 660,000 1.7 --
Safi U. Qureshey........ 632,000 1.7 --
David R. Andrade........ 54,166 * 54,166
Dean A. Reynolds........ 50,000 * --
Mark S. St. Clare....... 50,000 * --
Keith A. Yagnik......... -- -- --
All executive officers
and directors as a
group (11 people): 38,331,959 98.5 640,667
</TABLE>
- -----------------
* Less than 1%
(1) Includes 700,000 shares owned by A. Rick Dutta 2000 GRAT, dated March 7,
2000, 700,000 shares owned by Jayshree Dutta 2000 GRAT, dated March 7,
2000, and 11,714,854 shares owned by the R. and J. Dutta Revocable Trust
dated July 1, 1998. Manjira Datta is the Trustee of the A. Rick Dutta 2000
GRAT and the Jayshree Dutta 2000 GRAT. Mr. Dutta and Jayshree Dutta
are Co-Trustees of the R. and J. Dutta Revocable Trust. Includes 5,415
shares issuable upon exercise of an option held by Jayshree Dutta which is
exercisable within 60 days of March 23, 2000. Jayshree Dutta is the spouse
of Rick Dutta. GRAT is a Grantor Retained Annuity Trust.
(2) All shares are owned by the D. and D. Ganguly Revocable Trust, dated
November 22, 1999. Mr. Ganguly and Ms. Ganguly are the Co-Trustees of the
D. and D. Ganguly Revocable Trust.
(3) Includes 7,924,498 shares of common stock held by Redpoint Ventures I, L.P.
and 245,086 shares of common stock held by Redpoint Associates I, LLC.
Redpoint Ventures I, LLC is the sole general partner of Redpoint Ventures
I, L.P. and Redpoint Associates I, LLC and Mr. Walecka is a managing
director of Redpoint Ventures I, LLC. Mr. Walecka disclaims beneficial
ownership of all of the shares held by Redpoint except to the extent of his
individual partnership interest.
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DESCRIPTION OF CAPITAL STOCK
The following summary describes the material terms of our capital stock and
is subject to, and qualified by, applicable law and the provisions of our
amended and restated certificate of incorporation and bylaws, which have been
filed as exhibits to the registration statement of which this prospectus is a
part.
Upon the closing of this offering, our authorized capital stock will consist
of 160,000,000 shares of common stock, $.001 par value, and 10,000,000 shares
of preferred stock, no par value. We currently have outstanding
shares of common stock and shares of preferred stock.
Common Stock
All outstanding shares of common stock are, and the common stock to be
issued in this offering will be, fully paid and nonassessable.
The following summarizes the rights of holders of our common stock:
. each holder of common stock is entitled to one vote per share on all
matters to be voted upon by the stockholders, and may cumulate their
votes in the election of directors;
. subject to preferences that may apply to shares of preferred stock that
we may issue in the future, the holders of common stock are entitled to
receive such lawful dividends as may be declared by the board of
directors;
. upon our liquidation, dissolution or winding up, the holders of shares
of common stock are entitled to receive a pro rata portion of all of our
assets remaining for distribution after satisfaction of all our
liabilities and the payment of any liquidation preference of any
outstanding preferred stock;
. there are no redemption or sinking fund provisions applicable to our
common stock; and
. there are no preemptive or conversion rights applicable to our common
stock.
Preferred Stock
Our amended and restated articles of incorporation authorize our board of
directors, without stockholder approval, to issue our preferred stock in one or
more series and to fix the rights, preferences and privileges thereof. Among
other rights, the board of directors may determine, without further vote or
action by our stockholders:
. the number of shares and the designation of any series;
. the dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;
. whether the series will have voting rights in addition to the voting
rights provided by law and, if so, the terms of the voting rights;
. whether the series will have conversion privileges and if so, the terms
and conditions of conversion;
. whether or not the shares of the series will be redeemable or
exchangeable and if so, the dates, terms and conditions of redemption or
exchange, as the case may be;
. whether the series will have a sinking fund for the redemption or
purchase of shares of that series and if so, the terms and amount of the
sinking fund; and
. the rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.
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Although we presently do not have plans to issue any shares of preferred
stock, any future issuance of shares of preferred stock, or the issuance of
rights to purchase preferred shares, may delay, defer or prevent a change of
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of the common stock.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this section prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless:
. prior to the date at which the stockholder became an interested
stockholder the board of directors approved either the business
combination or the transaction in which the person became an interested
stockholder;
. the stockholder acquires more than 85% of the outstanding voting stock
of the corporation, excluding shares held by directors who are officers
or held in certain employee stock plans, upon consummation of the
transaction in which the stockholder becomes an interested stockholder;
or
. the business combination is approved by the board of directors and by
two-thirds of the outstanding voting stock of the corporation, excluding
shares held by the interested stockholder, at a meeting of the
stockholders, and not by written consent, held on or subsequent to the
date of the business combination.
An interested stockholder is a person who, together with affiliates and
associates, owns, or at any time within the prior three years did own, 15% or
more of the corporation's voting stock. A business combination includes,
without limitation, mergers, consolidations, stock sales and asset-based
transactions and other transactions resulting in a financial benefit to the
interested stockholder.
Anti-Takeover Effects of our Amended and Restated Certificate of Incorporation
and Bylaws
Some provisions of our amended and restated certificate of incorporation and
bylaws may have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by our stockholders. These provisions include:
. Authorized But Unissued Shares. Our board of directors has the authority
to issue up to 10,000,000 shares of preferred stock without stockholder
approval. Our board of directors also has the authority to issue
approximately million shares of common stock without
stockholder approval, subject to certain limitations imposed by The
Nasdaq National Market. These additional shares may be issued for a
variety of corporate purposes, including future public offerings to
raise additional capital, corporate acquisitions and employee benefit
plans. The existence of authorized but unissued and unreserved capital
stock could discourage or make more difficult an attempt to obtain
control of our company by means of a proxy contest, tender offer, merger
or otherwise.
. Limitation of Liability. Our amended and restated certificate of
incorporation eliminates the personal liability of our directors to us
and our stockholders to the fullest extent permitted by the Delaware
General Corporation Law. Our bylaws authorize us to provide
indemnification to our directors and officers if they are made party to
litigation by reason that such person was acting on our behalf and in
good faith. These provisions may reduce the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their
duty of care.
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. Advance Notice Provisions. Our bylaws contain advance notice provisions
for nominations for election to our board of directors and for proposals
to be acted on by our stockholders at stockholder meetings. Any
nomination or proposal that does not comply with these provisions will
not be allowed. This may make it more difficult to change the
composition of our board of directors or to propose a transaction which
could result in a change in control.
Delaware law provides generally 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 bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. Our
certificate of incorporation and bylaws require the vote of a majority of the
holders of the outstanding common stock to amend, revise or repeal anti-
takeover provisions.
Registration Rights
Demand Rights
The holders of our common stock issued pursuant to conversion of our
preferred stock have demand registration rights pursuant to an investors'
rights agreement dated October 28, 1999.
The holders of 30% of the stock held by this group may request up to two
long form registrations under the Securities Act for all or any of their
securities at any time, although we have the option of filing a short form
registration if it is available to us. Additionally, the holders of 20% of the
stock held by this group may request up to two additional short form
registrations in any 12 month period unless at such time a short form
registration is not available. We will pay all registration expenses for demand
registrations, including reasonable legal counsel fees for such holders up to
$35,000, other than underwriting commissions and discounts. We are not
obligated to effect any demand registration within 60 days of our good faith
estimate of the effectiveness of a registration under the Securities Act or
within 180 days following the effectiveness of a registration under the
Securities Act. We may postpone the filing of a registration statement in
connection with a demand registration for up to 90 days if our board of
directors determines that such demand registration is seriously detrimental to
us.
Piggyback Rights
Whenever we determine to register any of our securities under the Securities
Act, we must give written notice of the registration to the holders of our
common stock issued pursuant to conversion of our preferred stock, as well as
to Messrs. Dutta, Ganguly, Qureshey and Dukes, and must include in the
registration all common stock of this group which they request for inclusion in
the registration. We will pay the registration expenses, other than
underwriting commissions and discounts. If an underwriter in the offering
limits the number of securities which can be offered, the investors' rights
agreement specifies the priority for the inclusion of shares proposed to be
included in such registration. No person will be allowed to participate in any
offering which is underwritten unless the person agrees to sell on the same
basis as is provided in any applicable underwriting arrangements.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services L.L.C.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, shares of our common stock will be
outstanding, excluding shares issuable upon exercise of employee stock
options, of which were outstanding as of December 31, 1999. The
shares sold in this offering, shares if the over-allotment option is
exercised in full, will be freely tradable without restriction or further
registration under the Securities Act, unless held by one of our "affiliates"
as that term is defined in Rule 144 of the Securities Act.
All of the remaining shares of common stock currently outstanding
and shares subject to outstanding options are "restricted securities" as
such term is defined under the Securities Act. These shares are restricted
securities because they were issued in private transactions not involving a
public offering and may not be sold in the absence of registration other than
in accordance with Rule 144 or another exemption from registration under the
Securities Act. However, as discussed below, under Rule 144(k) and Rule 701 of
the Securities Act, restricted shares of our common stock will be eligible for
sale into the public market without restriction.
Lock-Up Agreements
Each of us, the selling stockholders, our directors and executive officers
and all of our existing stockholders, have agreed with the underwriters that,
for a period ending 180 days from the date of this prospectus, they will not,
subject to limited exceptions, offer, sell, transfer or dispose of, directly or
indirectly, any shares of our common stock, or any securities convertible into
or exercisable for shares our common stock, without the prior written consent
of Credit Suisse First Boston Corporation. We expect that shares of
common stock will be subject to our lock-up agreements.
These restrictions do not apply to grants of employee stock options pursuant
to the terms of our stock option plans, issuances of securities pursuant to the
exercise of such options, the exercise of any other stock options outstanding
on the date of this prospectus or the registration of shares of common stock on
a Form S-8 registration statement.
As a result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701 of the
Securities Act discussed below, shares subject to these lock-up agreements will
not be salable until the agreements expire or unless prior written consent is
received from Credit Suisse First Boston Corporation. Credit Suisse First
Boston Corporation has advised us that it has no present intention to, and has
not been advised of any circumstances that would lead it to, grant an early
release of this restriction. However, Credit Suisse First Boston Corporation
could grant an early release of this restriction at any time in its sole
discretion. Any early waiver of the lock-up agreements by the underwriters and
us, which, if granted, could permit sales of a substantial number of shares and
could adversely affect the trading price of our shares, may not be accompanied
by an advance public announcement by us.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted securities from the issuer or an
affiliate of an issuer for at least one year, including a person who may be
deemed our affiliate, 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 our common stock then outstanding;
or
. the average weekly trading volume of our common stock on The Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale on Form 144 is filed with the Commission.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not an affiliate and has not deemed to
have been our affiliate at any time during the 90 days preceding a sale, and
who has beneficially owned for at least two years the shares in the public
market
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proposed to be sold, would be entitled to sell those shares under Rule 144(k)
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, subject to the
restrictions of the lock-up agreements and compliance with Rule 144(k), "144(k)
shares" may be sold in the public market upon completion of this offering.
Rule 701
Beginning 90 days after the date of this prospectus, shares of
common stock issuable upon exercise of the options granted by us prior to
will be eligible for sale in the public market pursuant to Rule
701 under the Securities Act, subject to the lock-up agreements. In general,
Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts commencing 90 days after the issuer becomes subject
to the reporting requirements of the Securities Exchange Act of 1934 in
reliance upon Rule 144, but without having to comply with the public
information, holding period, volume limitation and notice provisions in Rule
144.
Sales of Restricted Securities
shares of restricted securities, or shares if the over-
allotment option is exercised in full, held by our existing stockholders may be
sold in the public market after this offering only if they are registered or if
they are exempt from registration under Rule 144, Rule 144(k) or Rule 701, as
follows:
. beginning 180 days after the date of this prospectus, shares will be
eligible for sale under Rules 144(k) and 701; and
. an additional shares will be eligible for sale under Rule 144 after
the expiration of the lock-up period, upon the expiration of various
one-year holding periods.
1997 Stock Option Plan and Registration Statements on Form S-8
We have authorized shares of common stock for grant under our 1997
stock option plans.
As of December 31, 1999:
. options to purchase shares have been exercised;
. options to purchase shares have vested but have not yet been
exercised; and
. options to purchase shares have been granted but have not yet
vested.
Following this offering, we intend to file under the Securities Act one or
more registration statements on Form S-8 to register all of the shares of our
common stock:
. issuable upon exercise of outstanding options granted pursuant to our
1997 stock option plans; and
. reserved for future option grants pursuant to individual option
agreements or our 1997 stock option plans.
We expect these registration statements to become effective upon filing with
the Securities and Exchange Commission. Shares covered by these registration
statements will be freely tradable, subject to vesting provisions and, in the
case of affiliates only, to the restrictions of Rule 144, other than the
holding period requirement. Resales of these shares will also be subject to
expiration of the lock-up agreements with the underwriters.
Registration Rights
The holders of our common stock issued pursuant to conversion of our
preferred stock have demand registration rights pursuant to an investors'
rights agreement dated October 28, 1999. The same holders, as well as Messrs.
Dutta, Ganguly, Qureshey and Dukes, have piggyback registration rights. See
"Description of Capital Stock--Registration Rights."
48
<PAGE>
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our common
stock by a Non-U.S. Holder. As used in this prospectus, the term "Non-U.S.
Holder" is a person that is not:
. a citizen or resident of the United States for U.S. federal income tax
purposes;
. a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the United States;
. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
. a trust the administration of which is subject to the primary
supervision of a court within the United States and which has one or
more U.S. persons with authority to control all substantial decisions.
. If a partnership is a holder of our common stock, the tax treatment of a
partner will generally depend upon the status of the partner and upon
the activities of the partnership. If you are a partner of a partnership
holding common stock, you should consult your tax advisor about the U.S.
tax consequences of holding and disposing of shares of our common stock.
An individual may, subject to certain exceptions, be treated as a resident
of the United States for U.S. federal income tax purposes, instead of a
nonresident, by, among other things, being present in the United States for at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year--counting for
these purposes all of the days present in the current year, one-third of the
days present in the immediately preceding year and one-sixth of the days
present in the second preceding year. Residents are subject to U.S. federal
taxes as if they were U.S. citizens.
This discussion does not consider:
. U.S. state and local or non-U.S. tax consequences;
. specific.facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position, including, if the Non-U.S. Holder is a
partnership, that the U.S. tax consequences of holding and disposing of
our common stock may be affected by certain determinations made at the
partner level;
. the tax consequences for the shareholders, partners or beneficiaries of
a Non-U.S. Holder;
. special tax rules that may apply to certain Non-U.S. Holders, including
without limitation, certain financial institutions, insurance companies,
dealers in securities and traders in securities; or
. special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."
The following discussion is based on provisions of the U.S. Internal Revenue
Code of 1986, as amended applicable Treasury regulations, and administrative
and judicial interpretations, all as of the date of this prospectus, and all of
which may change, retroactively or prospectively. The following summary is for
general information only. Accordingly:
. EACH NON-U.S. HOLDER SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
Dividends
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In the event, however, that dividends are paid on shares of
common stock, dividends paid to a Non-U.S. Holder of common
49
<PAGE>
stock generally will be subject to withholding of U.S. federal income tax at a
30% rate, or a lower rate as may be provided by an applicable income tax
treaty. Non-U.S. Holders should consult their tax advisors regarding their
entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment, or in the case of an individual, a
"fixed base," in the United States, as provided in that treaty ("U.S. trade or
business income"), are generally subject to U.S. federal income tax on a net
income basis at regular graduated rates, but are not generally subject to the
30% withholding tax if the Non-U.S. Holder files the appropriate U.S. Internal
Revenue Service form with the payor. Any U.S. trade or business income received
by a Non-U.S. Holder that is a corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate,
or a lower rate as specified by an applicable income tax treaty.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above and for purposes
of determining the applicability of a tax treaty rate. For dividends paid after
December 31, 2000:
. a Non-U.S. Holder of common stock who claims the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements;
. in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number; and
. look-through rules will apply for tiered partnerships.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit
of any excess amounts withheld by filing an appropriate claim for a refund with
the IRS.
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
. the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate Non-U.S.
Holder;
. the Non-U.S. Holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for more than 182 days in the
taxable year of the disposition and meets other requirements;
. the Non-U.S. Holder is subject to tax pursuant to the provisions of the
U.S. tax law applicable to some U.S. expatriates; or
. we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the five-
year period ending on the date of disposition or the period that the
Non-U.S. Holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property
interests plus its other assets used or held for use in a trade or business. We
believe that we have not been, are not currently, and do not anticipate
becoming, a "U.S. real property holding corporation." That the effects which
could arise if we were ever a "U.S. real property holding corporation" will
generally not apply to a Non-U.S. Holder whose holdings, direct and indirect,
at all times during the applicable period, constituted 5% or less of our common
stock, provided that our common stock was regularly traded on an established
securities market.
50
<PAGE>
Federal Estate Tax
Common stock owned or treated as owned by an individual who is not a citizen
or resident of the U.S. (as specially defined for U.S. federal estate tax
purposes) at the time of death will be included in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax or
other treaty provides otherwise and, therefore, may be subject to U.S. federal
estate tax.
Information Reporting and Backup Withholding Tax
We must report annually to the IRS and to each Non-U.S. Holder the amount of
dividends paid to that holder and the tax withheld with respect to those
dividends. Copies of the information returns reporting those dividends and
withholding may also be made available to the tax authorities in the country in
which the Non-U.S. Holder is a resident under the provisions of an applicable
income tax treaty or agreement.
Under some circumstances, U.S. Treasury Regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, Non-U.S. Holders of common stock
generally will be exempt from these information reporting requirements and from
backup withholding on dividends prior to 2001 to an address outside the United
States. For dividends paid after December 31, 2000, however, a Non-U.S. Holder
of common stock that fails to certify its Non-U.S. Holder status in accordance
with applicable U.S. Treasury Regulations may be subject to backup withholding
at a rate of 31% on payments of dividends.
The payment, through a non-U.S. branch of a U.S. broker, of the proceeds of
the disposition of common stock by a holder to or through the U.S. office of a
broker will be subject to information reporting and backup withholding at a
rate of 31% unless the holder either certifies its status as a Non-U.S. Holder
under penalties of perjury or otherwise establishes an exemption. The payment
of the proceeds of the disposition by a Non-U.S. Holder of common stock to or
through a non-U.S. office of non-U.S. broker will not be subject to backup
withholding or information reporting unless the non-U.S. broker is a "U.S.
related person." In the case of the payment of proceeds from the disposition of
common stock by or through a non-U.S. office of a broker that is a U.S. person
or a "U.S. related person," information reporting, but currently not backup
withholding, on the payment applies unless the broker receives a statement from
the owner, signed under penalty of perjury, certifying its non-U.S. status or
the broker has documentary evidence in its files that the holder is a Non-U.S.
Holder and the broker has no actual knowledge to the contrary. For this
purpose, a "U.S. related person" is:
. a "controlled foreign corporation" for U.S. federal income tax purposes;
. a foreign person, 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a U.S. trade or business; or
. effective after December 31, 2000, a foreign partnership if, at any time
during the taxable year, (A) at least 50% of the capital or profits
interest in the partnership is owned by U.S. persons or (B) the
partnership is engaged in a U.S. trade or business.
Effective after December 31, 2000, backup withholding may apply to the
payment of disposition proceeds by or through a non-U.S. office of a broker
that is a U.S. person or a "U.S. related person" unless certification
requirements are satisfied or an exemption is otherwise established and the
broker has no actual knowledge that the holder is a U.S. person. Non-U.S.
Holders should consult their own tax advisors regarding the application of the
information reporting and backup withholding rules to them, including changes
to these rules that will become effective after December 31, 2000.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the IRS.
51
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Lehman Brothers
Inc. and FleetBoston Robertson Stephens Inc. are acting as representatives, the
following respective numbers of shares of our common stock:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Credit Suisse First Boston Corporation................................
Lehman Brothers Inc. .................................................
FleetBoston Robertson Stephens Inc. ..................................
----
Total...............................................................
====
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
The selling stockholders have granted to the underwriters a 30-day option to
purchase on a pro rata basis up to additional outstanding shares from
the selling stockholders at the initial public offering price less the
underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to the
selling group members at that price less a concession of $ per share.
The underwriters and the selling group members may allow a discount of $
per share on sales to other broker/dealers. After the initial public offering,
the public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the underwriting compensation and estimated
expenses we and the selling stockholders will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions
paid by us.............. $ $ $ $
Expenses payable by us.. $ $ $ $
Underwriting Discounts
and Commissions
paid by selling
stockholders............ $ $ $ $
</TABLE>
We are required to pay all expenses in connection with this offering. The
principal components of the offering expenses payable by us will include the
fees and expenses of our accountants and attorneys, the fees of our transfer
agent and registrar, the cost of printing this prospectus, liability insurance
for our directors and officers, The Nasdaq Stock Market listing fees and filing
fees paid to the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc.
52
<PAGE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act relating to, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock or publicly disclose the
intention to make an offer, sale, pledge, disposition or filing, without the
prior written consent of Credit Suisse First Boston Corporation for a period of
180 days after the date of this prospectus, except in our case for grants of
employee stock options pursuant to the terms of a plan in effect on the date
hereof, issuances of securities pursuant to or filings of registration
statements relating to the exercise of employee stock options outstanding on
the date hereof, the exercise of any other stock options outstanding on the
date hereof and the filing of a Form S-8 registration statement.
The selling stockholders, our executive officers and directors and all of
our existing stockholders have agreed not to offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, or enter into a transaction which would have
the same effect, or enter into any swap, hedge or other arrangement that
transfers, in whole or in part, any of the economic consequences of ownership
of our common stock, whether any such aforementioned transaction is to be
settled by delivery of our common stock or such other securities, in cash or
otherwise, or publicly disclose the intention to make an offer, sale, pledge or
disposition, or to enter into any such transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of common stock for employees, directors and other
persons associated with us who have expressed an interest in purchasing common
stock in the offering. The number of shares of common stock available for sale
to the general public in this offering will be reduced to the extent these
persons purchase these reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act or contribute to payments which
the underwriters may be required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "NXGN."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the representatives, and may not reflect the market price for
our common stock that may prevail following this offering. We considered, among
others, the following principal factors in determining the initial public
offering price:
. the information in this prospectus and otherwise available to the
representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we will compete;
. our past and present operations;
. our past and present earnings and current financial position;
. the ability of our management;
. our prospects for future earnings;
53
<PAGE>
. the present state of our development and our current financial
condition;
. the recent prices of, and the demand for, publicly traded common stock
of generally comparable companies; and
. the general condition of the securities markets at the time of this
offering.
We cannot assure you that the initial public offering price will correspond
to the price at which our common stock will trade in the public market
subsequent to this offering or that an active trading market for our common
stock will develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by that
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids cause the price of our common stock to be higher than it would otherwise
be in the absence of these transactions. These transactions may be effected on
The Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares of our common
stock to underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the underwriters that will make
Internet distributions on the same basis as other allocations.
54
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of the common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling stockholders and
the dealer from whom such purchase confirmation is received that (i) such
purchaser is entitled under applicable provincial securities laws to purchase
our common stock without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, that such purchaser is purchasing
as principal and not as agent, and (iii) such purchaser has reviewed the text
above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein and the selling stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of shares of our common stock acquired on the same
date and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of the common stock should consult their own legal and
tax advisors about the tax consequences of an investment in the common stock in
their particular circumstances and about the eligibility of the common stock
for investment by the purchaser under relevant Canadian legislation.
55
<PAGE>
LEGAL MATTERS
Stradling Yocca Carlson & Rauth, a professional corporation, Newport Beach,
California will pass upon the validity of this offering of our common stock for
us. Cravath, Swaine & Moore, New York, New York represented the underwriters in
this offering. An investment partnership composed of shareholders of Stradling
Yocca Carlson & Rauth, as well as certain personnel of Stradling Yocca Carlson
& Rauth, beneficially own an aggregate of 29,000 shares of our common stock.
EXPERTS
The consolidated financial statements as of June 30, 1998 and 1999 and for
each of the three years in the period ended June 30, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-1 we filed
with the SEC. This prospectus does not contain all of the information contained
in the registration statement and all of its exhibits and schedules. For
further information about us, please see the complete registration statement.
Please refer to the exhibits to the registration statement for complete copies
of agreements or other documents that are summarized in this prospectus.
You may read and copy our registration statement and all of its exhibits and
schedules at the following SEC public reference rooms:
<TABLE>
<S> <C> <C>
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Judiciary Plaza Suite 1300 500 West Madison Street
Room 1024 New York, NY 10048 Suite 1400
Washington, D.C. 20549 Chicago, IL 60661
</TABLE>
You may obtain information on the operation of the SEC public reference room
in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The registration
statement is also available from the SEC's web site at http://www.sec.gov,
which contains reports, proxy and information statements and other information
regarding issuers that file electronically.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.
56
<PAGE>
NEXGENIX, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Nexgenix, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Nexgenix, Inc. and its subsidiary at June 30, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
October 29, 1999, except
as to the stock split
described in Note 1,
which is as of February
2, 2000
F-2
<PAGE>
NEXGENIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
June 30, Equity At
------------- December 31, December 31,
1998 1999 1999 1999
------ ------ ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......... $1,016 $ 728 $11,758
Receivables, net................... 5,059 7,230 7,823
Prepaid and other current assets... 574 591 1,014
------ ------ -------
Total current assets............. 6,649 8,549 20,595
Property and equipment, net.......... 822 980 1,272
Deferred income taxes................ -- -- 1,084
Other assets......................... 95 171 221
------ ------ -------
Total assets..................... $7,566 $9,700 $23,172
====== ====== =======
Liabilities, Mandatorily Redeemable
Preferred Stock
and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable................... $1,931 $2,507 $ 2,909
Accrued liabilities................ 1,006 1,250 1,437
Line of credit..................... 816 2,382 1,190
Other current liabilities.......... 994 919 1,145
------ ------ -------
Total current liabilities........ 4,747 7,058 6,681
Notes payable to stockholders........ 571 625 --
Other long-term liabilities.......... 192 111 557
------ ------ -------
Total liabilities................ 5,510 7,794 7,238
------ ------ -------
Minority interest in subsidiary...... 202 223 173
------ ------ -------
Commitments and contingencies
Mandatorily redeemable preferred
stock, $0.001 par value, 4,094
shares authorized; 3,762 shares
issued and outstanding at December
31, 1999 ($20,879 total liquidation
value); no shares pro forma......... -- -- 20,663
------ ------ -------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value,
5,906 shares authorized (10,000
authorized net of 4,094 designated
as mandatorily redeemable
preferred stock); no shares issued
and outstanding .................. -- -- --
Common stock, $.01 par value at
June 30, 1998, and $0.001 at June
30, 1999 and December 31, 1999;
80,000 shares authorized; 28,000
issued and outstanding at June 30,
1998 and 1999 and 26,918 issued
and outstanding at December 31,
1999; 34,442 shares pro forma..... 280 28 27 $ 34
Additional paid-in capital......... -- 252 -- 20,656
Notes receivable from
stockholders...................... -- -- (627) (627)
Deferred compensation.............. -- -- (1,251) (1,251)
Retained earnings (deficit)........ 1,574 1,403 (3,051) (3,051)
------ ------ ------- -------
Total stockholders' equity
(deficit)....................... 1,854 1,683 (4,902) $15,761
------ ------ ------- =======
Total liabilities, mandatorily
redeemable preferred stock and
stockholders' equity (deficit).. $7,566 $9,700 $23,172
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NEXGENIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six-Month
Period Ended
Year Ended June 30, December 31,
------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $16,790 $23,421 $32,376 $16,562 $20,715
------- ------- ------- ------- -------
Operating expenses:
Professional services (exclusive
of $16 reported below as stock-
based compensation)............ 9,568 15,155 17,771 9,569 11,369
Selling, general and
administrative (exclusive of
$1,768 reported below as stock-
based compensation)............ 6,542 7,972 14,663 6,473 12,405
Stock-based compensation........ -- -- -- -- 1,784
------- ------- ------- ------- -------
Total operating expenses...... 16,110 23,127 32,434 16,042 25,558
------- ------- ------- ------- -------
Income (loss) from operations..... 680 294 (58) 520 (4,843)
Other (expenses) income:
Interest income................. 21 72 52 19 106
Interest expense................ (64) (157) (198) (96) (134)
Other........................... (6) 21 -- -- --
------- ------- ------- ------- -------
Income (loss) before provision for
income taxes and minority
interest......................... 631 230 (204) 443 (4,871)
Income tax (provision) benefit.... (219) (122) 54 (117) 1,169
------- ------- ------- ------- -------
Income (loss) before minority
interest......................... 412 108 (150) 326 (3,702)
Minority interest................. (50) (2) (21) 8 50
------- ------- ------- ------- -------
Net income (loss)................. 362 106 (171) 334 (3,652)
Accretion of Series A Preferred
Stock discount and dividends..... -- -- -- -- (350)
------- ------- ------- ------- -------
Net income (loss) available to
common stockholders.............. $ 362 $ 106 $ (171) $ 334 $(4,002)
======= ======= ======= ======= =======
Net income (loss) per common
share:
Basic........................... $ 0.01 $ 0.00 $ (0.01) $ 0.01 $ (0.15)
======= ======= ======= ======= =======
Diluted......................... $ 0.01 $ 0.00 $ (0.01) $ 0.01 $ (0.15)
======= ======= ======= ======= =======
Shares used in computation:
Basic........................... 28,000 28,000 28,000 28,000 27,386
======= ======= ======= ======= =======
Diluted......................... 29,344 29,344 28,000 29,344 27,386
======= ======= ======= ======= =======
Pro forma basic and diluted net
loss per common share............ $ (0.12)
=======
Shares used in pro forma basic and
diluted net loss per common
share............................ 30,003
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NEXGENIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Notes
Common Stock Additional Receivable Retained
-------------- Paid-in from Deferred Earnings
Shares Amount Capital Stockholders Compensation (Deficit) Total
------ ------ ---------- ------------ ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996.. 28,000 $ 3 -- -- -- $ 1,383 $ 1,386
Net income............ 362 362
------ ---- ------- ----- ------- ------- -------
Balance, June 30, 1997.. 28,000 3 -- -- -- 1,745 1,748
Establishment of $.01
par value............ -- 277 -- -- -- (277) --
Net income............ -- -- -- -- -- 106 106
------ ---- ------- ----- ------- ------- -------
Balance, June 30, 1998.. 28,000 280 -- -- -- 1,574 1,854
Decrease in par value
from $.01 to $.001... -- (252) $ 252 -- -- -- --
Net loss.............. -- -- -- -- -- (171) (171)
------ ---- ------- ----- ------- ------- -------
Balance, June 30, 1999.. 28,000 28 252 -- -- 1,403 1,683
Series A Preferred
Stock issued in
exchange for common
stock................ (1,770) (2) (2,437) -- -- (802) (3,241)
Issuance of common
stock in exchange for
notes receivable..... 660 1 626 $(627) -- -- --
Exercise of stock
options.............. 28 -- 14 -- -- -- 14
Accretion of Series A
Preferred Stock
discount and
dividends............ -- -- (350) -- -- -- (350)
Deferred
compensation......... -- -- 1,362 -- $(1,362) -- --
Amortization of
deferred compensation
..................... -- -- -- -- 111 -- 111
Issuance of warrants.. -- -- 533 -- -- -- 533
Net loss.............. -- -- -- -- -- (3,652) (3,652)
------ ---- ------- ----- ------- ------- -------
Balance, December 31,
1999................... 26,918 27 -- (627) (1,251) (3,051) (4,902)
(Unaudited)
Conversion of Series A
Preferred Stock to
common stock......... 7,524 7 20,656 -- -- -- 20,663
------ ---- ------- ----- ------- ------- -------
Balance, December 31,
1999, pro forma
(Unaudited)............ 34,442 $ 34 $20,656 $(627) $(1,251) $(3,051) $15,761
====== ==== ======= ===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NEXGENIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six-Month Period
Ended
Year Ended June 30, December 31,
------------------------ -----------------
1997 1998 1999 1998 1999
----- ------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows used in operating
activities:
Net income (loss)............... $ 362 $ 106 $ (171) $ 334 $ (3,652)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Stock-based compensation...... -- -- -- -- 1,673
Amortization of deferred
compensation................. -- -- -- -- 111
Depreciation and
amortization................. 188 345 426 197 245
Provision for doubtful
accounts..................... 216 138 167 23 288
Loss (gain) on disposal of
equipment.................... -- (30) 3 -- --
Minority interest in earnings
of subsidiary................ 50 2 21 (8) (50)
Deferred income taxes......... (104) (3) (212) (84) (1,217)
Changes in operating assets
and liabilities:
Receivables................. (814) (1,943) (2,338) (1,977) (881)
Prepaids and other current
assets..................... 11 (319) 170 255 (278)
Other assets................ 30 (32) (76) (72) (62)
Accounts payable............ 83 951 576 35 402
Accrued liabilities......... 158 (422) 244 (222) 187
Other current liabilities... (306) 390 (111) 527 (206)
----- ------- -------- ------- --------
Net cash used in operating
activities:.............. (126) (817) (1,301) (992) (3,440)
----- ------- -------- ------- --------
Cash flows used in investing
activities:
Purchase of property and
equipment...................... (354) (451) (369) (421) (179)
Proceeds from disposal of
equipment...................... -- 108 -- -- --
----- ------- -------- ------- --------
Net cash used in investing
activities............... (354) (343) (369) (421) (179)
----- ------- -------- ------- --------
Cash flows from financing
activities:
Proceeds from issuance of Series
A Preferred Stock and
warrants, net.................. -- -- -- -- 15,933
Proceeds from issuance of common
stock.......................... -- -- -- -- 14
Proceeds from line of credit.... -- 6,647 12,977 7,183 15,183
Repayments under line of
credit......................... -- (5,831) (11,411) (6,145) (16,375)
Proceeds from issuance of long-
term debt...................... 92 186 313 303 450
Repayments of long-term debt.... (49) (33) (125) (50) (496)
Proceeds from notes payable to
stockholders................... 585 563 -- -- --
Repayments of notes payable to
stockholders................... (55) (123) (345) (345) --
Principal payments on capital
lease obligations.............. (14) (6) (27) (4) (60)
----- ------- -------- ------- --------
Net cash provided by
financing activities..... 559 1,403 1,382 942 14,649
----- ------- -------- ------- --------
Net increase (decrease) in cash... 79 243 (288) (471) 11,030
Cash and cash equivalents at
beginning of period.............. 694 773 1,016 1,016 728
----- ------- -------- ------- --------
Cash and cash equivalents at end
of period........................ $ 773 $ 1,016 $ 728 $ 545 $ 11,758
===== ======= ======== ======= ========
Supplemental disclosure of cash
flow information
Cash paid during the year for:
Income taxes.................. $ 683 $ 669 $ 89 $ -- $ 54
===== ======= ======== ======= ========
Interest...................... $ 28 $ 85 $ 141 $ 66 $ 111
===== ======= ======== ======= ========
Supplemental schedule of non-cash
financing activities:
Capital lease obligations....... $ -- $ -- $ 196 $ -- $ 359
===== ======= ======== ======= ========
Accretion of Series A Preferred
Stock discount and dividends
(Note 10)...................... $ 350
========
Series A Preferred Stock issued
in exchange for common
stock (Note 10)................ $ 4,914
========
Common stock issued for notes
receivable (Note 11)........... $ 627
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1--DESCRIPTION OF BUSINESS
Nexgenix, Inc. (the "Company"), is a professional services organization
specializing in Internet related services that include integrated offerings of
business strategy, branding, marketing, creative design and technology services
to customers primarily located in the United States. The Company also provides
client-server systems integration services, third-party software implementation
and management consulting services.
The Company's fiscal year ends on June 30; accordingly, all references to
1997, 1998 and 1999 are for the years ended June 30, 1997, 1998 and 1999,
respectively. The financial statements of the Company's foreign majority-owned
subsidiary are based on a fiscal year ending March 31 to facilitate timely
reporting of the Company's consolidated financial results.
In February 2000, a two-for-one stock split of the Company's common stock
was approved and became effective. All common stock share and per share amounts
for all periods presented have been retroactively adjusted to give effect to
the stock split.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 60% owned foreign subsidiary. All significant intercompany transactions
and balances have been eliminated.
Unaudited Interim Financial Information
The interim consolidated financial information of the Company for the six-
month periods ended December 31, 1998 and 1999 is unaudited. The unaudited
interim financial information has been prepared on the same basis as the annual
consolidated financial statements and, in the opinion of management, reflects
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows as
of and for the six-month periods ended December 31, 1998 and 1999. The results
for the six-month period ended December 31, 1999 are not necessarily indicative
of future results.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income
(loss) available to common stockholders for the period by the weighted average
number of common shares outstanding. Diluted earnings per share is based on the
weighted average number of shares of common stock outstanding, adjusted, if
dilutive, for the effects of potential issuances of common shares. Potential
common shares include incremental shares of common stock issuable on the
conversion of stock options, warrants and convertible preferred stock. Shares
associated with stock options, warrants and convertible preferred stock are not
included to the extent they are anti-dilutive.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed by dividing the net loss for the
period by the weighted average number of shares of common stock outstanding,
including the pro forma effects of the automatic conversion of the Company's
mandatorily redeemable preferred stock, into shares of the Company's common
stock effective upon the closing of the Company's initial public offering as if
such conversion occurred at the date of original issuance. The resulting pro
forma adjustment includes an increase in the weighted average shares used to
compute basic and diluted net loss per share of 2,617 for the six-month period
ended December 31, 1999.
F-7
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective periods. Actual results could differ from those estimates.
Financial Instruments
The carrying value of current assets and liabilities approximated their fair
value at June 30, 1998 and 1999 and at December 31, 1999. The carrying value of
the notes payable to stockholders approximates fair value based on current
rates of interest available to the Company for notes of similar maturities.
Foreign Currency Translation
The functional currency of the Company's foreign majority-owned subsidiary
is the U.S. dollar; accordingly, monetary assets and liabilities are remeasured
into U.S. dollars at the exchange rate in effect at the balance sheet date.
Revenues, expenses, gains and losses are remeasured at the average exchange
rate for the period, and non-monentary assets and liabilities are remeasured at
historical rates. The resultant remeasurement gains or losses are recognized in
the consolidated results of operations.
Revenue Recognition
The Company derives substantially all of its revenues from fixed price and
time and material type contracts. Revenues from services performed under fixed
price contracts are recognized on the percentage of completion method,
primarily based on contract labor hours incurred to date compared with total
labor hours estimated at contract completion. The cumulative effects of
revisions in percentage of completion estimates are recognized in the period in
which the changes become known. Revenues earned under time and material type
contracts are recognized as services are performed. The Company provides for
anticipated losses on contracts by a charge to income in the period the losses
are first identified.
Unbilled receivables primarily represent revenues recognized based on
services performed in excess of contractually billable amounts. Unbilled
amounts are classified as current assets, since substantially all of these
amounts are expected be realized within one year. Unbilled receivables are
generally billable on the achievement of contract milestones. Deferred revenue
represents billings recorded or cash received in excess of revenue recognized.
Professional Services
Costs of professional services primarily consist of compensation, benefits
and training for billable professional staff, costs of subcontractors,
unreimbursed travel and, where applicable, software purchases.
Advertising
Advertising costs are expensed as incurred. Advertising expense for 1997,
1998, 1999 and the six-month periods ended December 31, 1998 and 1999 was $20,
$76, $171 and $31 (unaudited), and $213 (unaudited), respectively.
F-8
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
Comprehensive Income (Loss)
Comprehensive income (loss), as defined, includes all changes in equity (net
assets) during a period from non-owner sources. For all periods presented,
there are no differences between the Company's income (loss), as reported, and
comprehensive income (loss).
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
accounts receivable. The Company maintains its cash and cash equivalents with
high credit quality financial institutions. The Company performs ongoing credit
evaluations on its customers and maintains reserves for potential credit
losses. Such losses have been within management's expectations.
Information regarding significant customers is summarized below:
<TABLE>
<CAPTION>
June 30,
---------- December 31,
1998 1999 1999
---- ---- ------------
(Unaudited)
<S> <C> <C> <C>
Receivables:
Most significant ................................... 12% 17% 14%
Second most significant............................. 12 16 10
Third most significant.............................. 11 13 7
--- --- ---
35% 46% 31%
=== === ===
</TABLE>
<TABLE>
<CAPTION>
Six-Month
Period Ended
Year Ended December 31,
---------------- ---------------
1997 1998 1999 1998 1999
---- ---- ---- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Most significant.......................... 16% 13% 25% 27% 13%
Second most significant................... 8 9 8 9 10
Third most significant.................... 7 8 7 7 9
--- --- --- ------ ------
31% 30% 40% 43% 32%
=== === === ====== ======
</TABLE>
Cash and Cash Equivalents
Cash equivalents are highly liquid investments purchased with an original
maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost and amortized using the straight-
line method over the following estimated useful lives:
<TABLE>
<S> <C>
Computers and related equipment.................................... 3 years
Furniture and fixtures............................................. 5 years
Leasehold improvements............................................. 5 years
</TABLE>
F-9
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
Leasehold improvements are amortized over the shorter of the useful life of
the asset or the life of the related lease. Additions to property and equipment
together with major renewals and betterments are capitalized. Maintenance,
repairs, minor renewals and betterments are charged to expense when incurred.
When assets are sold or otherwise disposed of, the cost and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is recognized.
In July 1997, the Company changed the estimated useful lives for certain
computer equipment from five to three years. This change was made to more
accurately reflect the estimated periods that such assets will remain in
service. The change in estimate resulted in additional depreciation expense of
$154 in 1998.
Long-lived Assets
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying value. If an asset is
determined to be impaired, the impairment is measured by the amount that the
carrying amount of the asset exceeds its fair value. The Company has not
identified any such impairment losses.
Income Taxes
Income taxes are provided utilizing the liability method. The liability
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities. Additionally, under the
liability method, changes in tax rates and laws will be reflected in income in
the period such changes are enacted. A valuation allowance is recorded when it
is more likely than not that deferred tax assets will not be realized.
Stock-Based Compensation
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under APB 25, compensation expense is based on the
difference, if any, on the date of grant between the fair value of the
Company's common stock and the exercise price of the stock option.
Segment Information
The management approach is utilized for the identification of the Company's
reportable segments. This approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments.
Reclassifications
Certain reclassifications of the 1997 and 1998 financial statements have
been made to conform to the 1999 presentation.
F-10
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
NOTE 3--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Boards ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
new standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not expect SFAS No. 133 to have a material effect on its
financial position or results of operations.
NOTE 4--FORMATION OF JOINT VENTURE
In July 1999, the Company formed a Limited Liability Company (the "LLC")
with another entity for the purpose of providing end-to-end E-Business software
solutions to third parties, including internet consulting, interactive
marketing, design development, and software integration services. The Company
has a 50% interest in the LLC which is accounted for under the equity method.
During the six-month period ended December 31, 1999, the Company's investment
and equity in earnings from the LLC was insignificant.
NOTE 5--COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
June 30,
--------------- December 31,
1998 1999 1999
------ ------- ------------
(Unaudited)
<S> <C> <C> <C>
Receivables, net:
Billed...................................... $5,032 $ 6,941 $ 7,237
Unbilled.................................... 141 570 1,155
------ ------- -------
5,173 7,511 8,392
Allowance for doubtful accounts............. (114) (281) (569)
------ ------- -------
$5,059 $ 7,230 $ 7,823
====== ======= =======
Property and equipment:
Computers and related equipment............. $1,084 $ 1,638 $ 2,186
Furniture and fixtures...................... 389 360 356
Leasehold improvements...................... 14 54 47
------ ------- -------
1,487 2,052 2,589
Accumulated depreciation and amortization... (665) (1,072) (1,317)
------ ------- -------
$ 822 $ 980 $ 1,272
====== ======= =======
</TABLE>
F-11
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
Included in computers and related equipment are capitalized leases in the
aggregate amount of $25, $149 and $508 (unaudited) with related accumulated
depreciation of $25, $12 and $76 (unaudited) at June 30, 1998 and 1999 and at
December 31, 1999, respectively.
<TABLE>
<CAPTION>
June 30,
------------- December 31,
1998 1999 1999
------ ------ ------------
(Unaudited)
<S> <C> <C> <C>
Accrued liabilities:
Vacation....................................... $ 419 $ 614 $ 796
Commissions.................................... 214 135 256
Other.......................................... 373 501 385
------ ------ ------
$1,006 $1,250 $1,437
====== ====== ======
Other current liabilities:
Deferred revenue............................... $ 521 $ 410 $ 204
Notes payable to stockholders.................. 399 -- 625
Current portion of notes payable............... 74 446 150
Current portion of capital lease obligation.... -- 63 166
------ ------ ------
$ 994 $ 919 $1,145
====== ====== ======
</TABLE>
NOTE 6--BORROWINGS
Line of credit
In June 1999, the Company executed a one-year revolving line of credit with
a bank that provides for borrowings up to the lesser of $4,000 or 80% of
eligible accounts receivable. The line of credit is personally guaranteed by
two stockholders and current officers of the Company. Interest is payable on
the outstanding balance at the bank's lending rate. Under the provisions of the
revolving line of credit agreement, the Company must comply with certain
restrictive covenants including requirements to limit the ratio of debt to
effective tangible net worth and consecutive quarterly losses, to maintain a
specified level of working capital and to comply with specified fixed charge
coverage ratios. There were no amounts outstanding as of June 30, 1999.
The Company maintained a revolving line of credit with a different bank
under which substantially all of the Company's assets were pledged as
collateral. The line of credit was also personally guaranteed by two
stockholders and current officers of the Company. The line of credit expired in
July 1999 and provided for borrowings up to the lesser of $2,500 or 80% of the
eligible accounts receivable with interest payable monthly at the bank's prime
rate (8.5% and 7.75% per annum at June 30, 1998 and 1999, respectively) plus
1.0%.
In May 1999, the Company entered into a master lease agreement with a
company primarily for the leasing of computer equipment. As of June 30, 1999 no
equipment had been leased under the agreement. As of December 31, 1999, $269
(unaudited) had been used under the lease agreement.
The Company had two equipment lines of credit available from a bank for $170
and $150, which expired in October 1997 and April 1998, respectively.
Borrowings under these agreements automatically converted to long-term debt and
were collateralized by the equipment purchased. Additionally, the Company had
an equipment line of credit available from a bank for $500, which expired in
July 1999. At the point of borrowing, the Company selected from various
repayment terms (ranging from 12 to 48 months) and interest rate options. All
borrowings under these agreements were personally guaranteed by two
stockholders and current officers of the Company. At June 30, 1998 and 1999,
the Company had $256 and $446 in outstanding debt under these agreements at
interest rates ranging from 7.75% to 12.30% per annum. In July 1999, the
outstanding balance was paid; accordingly, it was classified as a current
liability at June 30, 1999.
F-12
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
Notes Payable To Stockholders
The Company has four unsecured notes payable to two stockholders and current
officers in the aggregate amount of $625 at June 30, 1999. The notes bear
interest at rates ranging from 5.75% to 7.25% per annum, compounded semi-
annually, and are subordinate to the Company's other borrowings. Outstanding
balances of $466 as of June 30, 1999 and December 31, 1999 are due in September
2000. The remaining balance of $159 is not due prior to July 2000 in accordance
with agreements entered into between the stockholders and the Company.
Promissory Note
In September 1999, the Company issued a promissory note to a bank in the
principal amount of $450 which is due in August 2002 with monthly interest
payments based on an 8.5% annual interest rate. Substantially all of the
Company's assets are pledged as collateral and the promissory note is
personally guaranteed by two stockholders and current officers of the Company.
Annual maturities of borrowings as of June 30, 1999 are presented below:
<TABLE>
<CAPTION>
Year Ending
June 30,
-----------
<S> <C>
2000............................................................... $2,828
2001............................................................... 625
------
$3,453
======
</TABLE>
NOTE 7--INCOME TAXES
The provision (benefit) for income taxes consists of the following
components:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
1997 1998 1999
----- ---- -----
<S> <C> <C> <C>
Current:
Federal...................................... $ 263 $100 $ 131
State........................................ 60 25 27
----- ---- -----
323 125 158
----- ---- -----
Deferred:
Federal...................................... (84) (1) (175)
State........................................ (20) (2) (37)
----- ---- -----
(104) (3) (212)
----- ---- -----
$ 219 $122 $ (54)
===== ==== =====
</TABLE>
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
June 30,
----------
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................................ $ 45 $112
Accrued vacation............................................... 125 189
Accrued bonuses................................................ -- 60
Other.......................................................... 6 17
---- ----
176 378
Deferred tax liabilities:
Depreciation................................................... (10) --
---- ----
$166 $378
==== ====
</TABLE>
F-13
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
The following is a reconciliation of income tax computed at the federal
statutory rate to the Company's actual tax expense:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
1997 1998 1999
----- ----- ----
<S> <C> <C> <C>
Tax (provision) benefit at statutory U.S. rate........ $(215) $ (78) $ 69
State and local taxes, net............................ (20) (15) 19
Nondeductible items................................... (15) (22) (40)
Other................................................. 31 (7) 6
----- ----- ----
$(219) $(122) $ 54
===== ===== ====
</TABLE>
No provision has been made for future U.S. income taxes on the undistributed
earnings of the Company's majority-owned subsidiary as the earnings are
expected to be permanently reinvested in the foreign operations.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under a capital lease agreement. The
agreement expires in 2002 and provides for monthly payments of principal and
interest of approximately $6. Additionally, the Company is obligated under
various non-cancelable operating lease agreements for facilities and equipment,
which expire between October 1999 and April 2002. Rental expenses for
facilities and equipment totaled $281, $455 and $635 in 1997, 1998 and 1999,
and $325 (unaudited) and $514 (unaudited) for the six-month periods ended
December 31, 1998 and 1999, respectively.
Future minimum rental commitments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Capital Operating
----------- ------- ---------
<S> <C> <C>
2000....................................................... $ 68 $507
2001....................................................... 68 235
2002....................................................... 57 57
---- ----
193 $799
====
Amount representing interest............................... (19)
----
174
Current portion............................................ (63)
----
Long-term portion of capital lease obligations............. $111
====
</TABLE>
The Company is involved in various claims and lawsuits arising in the normal
conduct of its business, none of which, in the opinion of the Company's
management, will have a material adverse effect on its consolidated financial
position, results of operations, cash flows or its ability to conduct business.
NOTE 9--EMPLOYEE BENEFITS
The Company has a defined contribution employee benefit plan (the Plan)
under which eligible participants may contribute up to a maximum of 15% of
their pre-tax earnings subject to certain statutory limitations. The Company
provides matching contributions of 25% on the first 6% contributed. The Plan
also provides for additional contributions by the Company at the discretion of
the Board of Directors. Twenty-five percent of the Company contributions vest
on the second anniversary of the participant's commencement of
F-14
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
services to the Company and 25% on each anniversary thereafter. The Company's
contributions were $42, $66 and $115 in 1997, 1998 and 1999, respectively, and
$52 (unaudited) and $74 (unaudited) for the six-month periods ended December
31, 1998 and 1999, respectively.
NOTE 10--PREFERRED STOCK
Amendment to Articles of Incorporation
In October 1999, the Company amended its Articles of Incorporation to
increase the total authorized shares of Preferred Stock to 10,000 at a par
value of $0.001 per share. Of the total 10,000 shares authorized 3,762 have
been issued as mandatorily redeemable preferred stock.
Issuance of Mandatorily Redeemable Convertible Preferred Stock and Warrants
In October 1999, the Company issued 2,877 shares of Series A Mandatorily
Redeemable Preferred Stock (the "Series A Preferred Stock") plus warrants to
purchase an additional 332 shares of Series A Preferred Stock for gross
proceeds of $15,966. The warrants have an exercise price of $5.55 per share and
are exercisable on the earlier of one year from the issuance date or the
closing of an initial public offering ("IPO") of the Company's common stock.
Concurrent with the issuance of the Series A Preferred Stock, the Company
provided for the exchange of 1,770 shares of common stock, which had been
purchased by the Series A Preferred Stock investors from the founders and
current officers of the Company (immediately prior to the issuance of the
Series A Preferred Stock), for 885 shares of Series A Preferred Stock. The
common stock held by the founders and current officers were sold to the
investors for $4,913 ($2.78 per share).
The net proceeds were allocated between the Series A Preferred Stock and
warrants based on their relative fair values. As a result, $15,400 has been
allocated to the Series A Preferred Stock and $533 has been allocated to the
warrants. The estimated value of the warrants was determined using an option
pricing model with the following assumptions: a) seven month term, b) 5.34%
risk free interest rate, and c) an expected volatility of 74%. The price for
the common stock purchased from the founders and current officers of the
Company exceeded the estimated fair value of the common stock on the date of
purchase; accordingly, $1,673 in compensation expense has been recorded in the
statement of operations. The Company has reserved 332 shares of Series A
Preferred Stock to be issued upon the exercise of the warrants.
The Series A Preferred Stockholders are entitled to: a) 8% non-cumulative
dividends, b) a liquidation preference equal to the original issue price
($5.55) plus all declared but unpaid dividends, c) conversion into common stock
on a two-for-one basis at the option of the holder at any time, subject to
adjustment, d) automatic conversion in the event of an IPO of the Company's
common stock on a two-for-one basis, e) voting rights on an as-converted basis,
and f) redemption at the election of the holders commencing six years from the
issuance date in three annual installments at a redemption price equal to the
original issue price plus all declared but unpaid dividends. The difference
between the net issuance price and the redemption value of the Series A
Preferred Stock is being accreted over the first periods that the Series A
Preferred Stock is redeemable using the effective interest method by periodic
charges to additional paid-in capital and retained earnings (deficit).
NOTE 11--STOCKHOLDERS' EQUITY (DEFICIT)
Amended Articles of Incorporation and Stock Splits
In March 1999, the Company amended its Articles of Incorporation to reduce
the par value of its common stock from $.01 to $.001. Additionally, a two-for-
one stock split of its outstanding common stock was approved. In August 1997,
the Company amended its Articles of Incorporation to increase the number of
F-15
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
authorized voting common shares from 1 with no par value per share to 80,000
with a par value of $.01 per share. As a result, $277 was transferred from
retained earnings to common stock during 1998 representing the aggregate par
value of the Company's outstanding common stock. Additionally, a 33,333.33-for-
1 stock split of its outstanding common stock was approved. All common share
and per share amounts have been retroactively adjusted to give effect to the
stock splits.
Stock Option Plans
The Company granted options to certain key executives in 1993 and 1994 to
purchase shares of common stock that vest over five years and expire ten years
from the date of grant under its 1993 Stock Option Plan ("the 1993 Plan"). The
options were issued at an exercise price of $.000006 per share. In October 1999
the Company terminated the 1993 Plan.
The Company has a 1997 Stock Option Plan (the "1997 Plan") which provides
for the issuance of options and restricted common stock to officers, key
employees and consultants of the Company and its subsidiary to purchase shares
of the Company's common stock at a price not less than the estimated market
value on the date of grant (or at a price not less than 110% of the estimated
market value for options issued to significant stockholders) as determined by
the board of directors. As of June 30, 1999, a total of 16,000 shares have been
reserved for issuance under the 1997 Plan and 14,120 were available for future
grants. In October 1999, the Company reduced the maximum number of common stock
shares that can be issued under the 1997 Plan from 16,000 to 6,960.
Options granted become exercisable in installments as determined by the
board of directors, which have been granted with four year vesting terms as of
June 30, 1999. The options have terms that do not exceed ten years from the
date of grant unless the holder owns 10% or more of the total combined voting
power of the Company, in which case, the option term will not exceed five
years. The 1997 Plan terminates on the earliest to occur of the following: (i)
October 2007, (ii) the date on which all shares available for issuance have
been issued as vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction, as defined.
The following table summarizes the stock option activity under the 1993 Plan
and the 1997 Plan:
<TABLE>
<CAPTION>
Weighted Average Options
Shares Exercise Price Exercisable
------ ---------------- -----------
<S> <C> <C> <C>
Options outstanding at June 30, 1996.. 2,240 $0.000006 1,176
----- =====
Options outstanding at June 30, 1997.. 2,240 0.000006 1,624
=====
Granted............................. 2,648 0.48
Canceled............................ (953) 0.48
-----
Options outstanding at June 30, 1998.. 3,935 0.20 2,072
=====
Granted............................. 1,028 0.68
Canceled............................ (849) 0.48
-----
Options outstanding at June 30, 1999.. 4,114 0.27 2,673
=====
Granted (unaudited)................. 2,626 0.95
Exercised (unaudited)............... (28) 0.48
Canceled (unaudited)................ (306) 0.76
-----
Options outstanding at December 31,
1999 (unaudited)..................... 6,406 0.52 3,018
===== =====
Available for future grants........... 2,766
=====
</TABLE>
F-16
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
The following table summarizes information regarding options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Shares Life Exercise Shares Exercise
Range of Exercise Prices Outstanding (years) Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.000006............... 2,240 4.07 $0.000006 2,240 $0.000006
$.48-$0.53.............. 1,451 8.69 0.49 433 0.48
$0.95................... 423 9.91 0.95 -- --
----- -----
4,114 2,673
===== =====
</TABLE>
Fair Value Disclosure
The Company applies the measurement principles of APB 25 in accounting for
options issued to employees. If the Company had elected to recognize
compensation expense based on the fair value at the grant dates as prescribed
by SFAS 123, the Company's net income (loss) would have been adjusted to the
pro forma amounts below.
<TABLE>
<CAPTION>
Year Ended
June 30,
----------
1998 1999
---- -----
<S> <C> <C>
Net income (loss) available to common stockholders:
As reported................................................... $106 $(171)
Pro forma..................................................... 65 (206)
</TABLE>
There was no impact to basic and diluted net income (loss) per common share
for the pro forma effect of stock options under SFAS 123. The fair value of
options issued to employees was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions.
<TABLE>
<CAPTION>
Year Ended
June 30,
-----------
1998 1999
---- ----
<S> <C> <C>
Dividend yield............................................. 0% 0%
Risk free interest rate.................................... 5.99% 5.38%
Expected volatility........................................ 0% 0%
Expected term-years........................................ 4.5 4.5
</TABLE>
The weighted average fair value and exercise price of the options on the
date of grant follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
1998 1999
-------------- --------------
Fair Exercise Fair Exercise
Value Price Value Price
----- -------- ----- --------
<S> <C> <C> <C> <C>
Issued at market value......................... $0.11 $0.48 $0.10 $0.48
Issued at above market value................... -- -- 0.06 0.78
</TABLE>
F-17
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
Contingent Warrants
In May and August 1999, the Company entered into a total of three agreements
with an executive search firm, in which a component of the compensation for the
services to be performed included contingent warrants to purchase stock (such
stock to be the same type as that issued to the placed executives under the
Company's 1997 Plan). The number of shares of stock that can be issued upon the
exercise of the warrant will be equal to one third of the number of shares
subject to options granted to the placed executives that vest in the first year
of employment. The warrants will expire seven years from the date of issuance
and will have an exercise price equal to the exercise price given to the placed
executives for their options and will vest immediately on the start date of the
placed executive. As of December 31, 1999, no executive had been hired through
the executive search firm; accordingly, no warrants have been issued.
Stock Issuance Agreements
In October 1999, the Company issued a total of 660 shares of restricted
common stock under its 1997 Plan to two directors of the Company for $0.95 per
share in exchange for full recourse promissory notes that are due on or before
October 2009 with interest at 5.96% per annum. The restricted common stock is
subject to a repurchase right by the Company and restrictions on transfer,
which repurchase rights and restrictions lapse ratably over a four year period.
The notes are secured by the shares of common stock issued and have been
presented as a reduction to stockholders' equity (deficit). In addition, at the
earliest to occur of the closing of an initial public offering, the sale of
stock or securities convertible into stock for cash in an equity private
placement or October 2000, the two directors had the right to select either (a)
the purchase of an additional 660 shares of common stock for $2.50 per share,
or (b) to receive 660 stock options to purchase shares of common stock with an
exercise price equal to $2.50 per share. In connection with the issuance of the
mandatorily redeemable preferred stock (Note 10), the directors selected the
option to purchase shares of common stock.
NOTE 12--BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The following table sets forth the reconciliation of shares used in basic
net income (loss) per common share and diluted net income (loss) per common
share:
<TABLE>
<CAPTION>
Six-Month
Period Ended
Year Ended June 30, December 31,
-------------------- -------------
1997 1998 1999 1998 1999
------ ------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Shares used in basic net income (loss)
per share computation.................. 28,000 28,000 28,000 28,000 27,386
Effect of dilutive potential common
shares (employee stock options)........ 1,344 1,344 -- 1,344 --
------ ------ ------ ------ ------
Shares used in diluted net income (loss)
per share computation.................. 29,344 29,344 28,000 29,344 27,386
====== ====== ====== ====== ======
</TABLE>
F-18
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
The following table sets forth the potential common shares that are excluded
from the diluted net loss per share calculation because their effect is
antidilutive:
<TABLE>
<CAPTION>
Year Six-Month
Ended Period Ended
June 30, December 31,
1999 1999
-------- ------------
(Unaudited)
<S> <C> <C>
Series A Preferred Stock (as if converted)........... -- 2,617
Unvested restricted common stock subject to
repurchase.......................................... -- 155
Employee stock options............................... 1,344 2,132
----- -----
1,344 4,904
===== =====
</TABLE>
The exercise price for each of the outstanding warrants to purchase 332
shares of Series A Preferred Stock and 660 shares of unvested restricted common
stock subject to repurchase exceeds the average value of the common stock for
the six-month period ended December 31, 1999. Accordingly, such warrants and
stock are excluded from diluted net income (loss) per share calculation.
NOTE 13--SEGMENT INFORMATION
The Company operates in a single business segment that provides professional
services in the information technology arena. Revenues from external customers
are derived primarily from E-Commerce and Custom Applications services, which
primarily consist of Internet-based solutions and information technology
consulting, respectively. Revenues by service area for 1997 and 1998 have not
been presented as the Company's revenues in these periods were primarily
derived from Custom Applications.
<TABLE>
<CAPTION>
Six-Month Period
Year Ended Ended
June 30, December 31,
---------- -----------------
1999 1998 1999
---------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Revenues:
E-Commerce.................................... $16,895 $ 7,099 $ 15,434
Custom applications........................... 15,481 9,463 5,281
------- -------- --------
$32,376 $ 16,562 $20,715
======= ======== ========
</TABLE>
Long-lived asset information by geographic area is provided below:
<TABLE>
<CAPTION>
June 30,
--------- December 31,
1998 1999 1999
---- ---- ------------
(Unaudited)
<S> <C> <C> <C>
United States......................................... $563 $694 $ 947
Foreign majority-owned subsidiary..................... 259 286 325
---- ---- ------
$822 $980 $1,272
==== ==== ======
</TABLE>
Revenues from the Company's foreign majority-owned subsidiary were not
significant in 1997, 1998, 1999 and the six-month periods ended December 31,
1998 and 1999.
F-19
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
NOTE 14--RELATED PARTY TRANSACTIONS
During 1998, 1999 and the six-month periods ended December 31, 1998 and
1999, the Company incurred approximately $155, $198, $78 (unaudited) and $80
(unaudited) in training and recruiting expenses, respectively, with a company
owned by a related party to the founders and current officers.
In November 1998, two of the Company's stockholders purchased the 40%
minority interest (20% each) in the Company's majority-owned foreign subsidiary
for $204 from a related party.
NOTE 15--SUBSEQUENT EVENTS (UNAUDITED)
Initial Public Offering and Unaudited Pro Forma Balance Sheet
In March 2000, the Company initiated the filing of a registration statement
with the Securities and Exchange Commission ("SEC") that would permit the
Company to sell shares of the Company's common stock in connection with a
proposed initial public offering. If the initial public offering is consummated
under the terms presently anticipated, upon the closing of the proposed initial
public offering all of the then outstanding shares of the Company's Series A
Preferred Stock will automatically convert into shares of common stock on a
two-for-one basis. The conversion of the Series A Preferred Stock has been
reflected in the accompanying unaudited pro forma stockholders' equity as if it
had occurred on December 31, 1999.
Amendment to Line of Credit
As of December 31, 1999, the Company was in violation of its debt covenants
related to its ratio of debt to effective tangible net worth and limitation on
consecutive quarterly losses. In March 2000, the Company amended its line of
credit as follows: a) increased the maximum borrowing from $4,000 to $7,000; b)
extended the maturity date from June 2000 to October 2000; c) replaced its
existing covenants with new covenants which require minimum working capital of
$10,000 and a limit on monthly losses to no more than 25% of the Company's
projected monthly loss; and d) released two stockholders and current officers
of their personal guarantees.
Exercise of Stock Options
In March 2000, two current officers of the Company entered into secured
promissory notes for a total of $200, in exchange for the exercise of stock
options, that bear an interest rate of 5.96% per annum and are secured by 300
shares of common stock held by the current officers. The notes are due the
earlier of sixty days from written demand by the Company after removal of the
lock-up provisions applicable upon the completion of an IPO of the common stock
of the Company or January 2005. The Company has also entered into shareholder
buy out agreements with the officers in which the Company has the right to
repurchase the officers' stock options, or any shares issued as a result of the
exercise of stock options, upon the occurrence of certain events as defined. In
such cases, the repurchase price for the stock options or shares is based on a
percentage of the Company's operating revenue, as defined, and the total number
of shares of common stock outstanding at the date of repurchase. The
shareholder buy out agreements terminate under certain conditions, including an
IPO of the Company's common stock.
Issuance of Restricted Stock
In February 2000, the Company issued a total of 660 shares of restricted
common stock under the 1997 Plan to two directors in exchange for a promissory
note for $817 each with an annual interest rate of 5.96% per annum. Each note
is secured by the common stock purchased. These promissory notes were paid in
full in March 2000.
In March 2000, the Company issued 80 shares of restricted common stock under
the 1997 Plan to two officers of the Company for an aggregate purchase price of
$223.
F-20
<PAGE>
NEXGENIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share data)
Equity Issuances
In February 2000, the Company sold 54 shares of its Series A Preferred Stock
to an individual investor at a per share price of $5.55. Also in February 2000,
the Company sold an aggregate of 29 shares of its restricted common stock under
its 1997 Plan to a law firm and certain of its personnel for an aggregate
purchase price of $80. In March 2000, the Company sold 9 shares of Series A
Preferred Stock to an entity for an aggregate purchase price of $50.
Lease
In January 2000 (as amended in February 2000), the Company entered into a
five year operating lease with annual payments of $848 that are subject to
fixed annual increases.
F-21
<PAGE>
[LOGO OF NEXGENIX(TM) APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of the common stock being registered hereunder. All of the amounts shown
are estimates except for the SEC registration fee, the Nasdaq National Market
application fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $15,180
NASD filing fee................................................... 6,250
Nasdaq application fee............................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Transfer agent fees............................................... *
Miscellaneous..................................................... *
-------
Total......................................................... $ *
=======
</TABLE>
- ---------------------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
(a) Our amended and restated certificate of incorporation eliminates the
liability of directors to us or our shareholders for monetary damages for
breach of fiduciary duty as directors to the fullest extent permitted under
California law.
(b) Our restated bylaws authorize us to indemnify each person who was or is
made a party to any proceeding by reason of the fact that such person is or was
acting on behalf of the company and in good faith against all expense,
liability and loss reasonably incurred or suffered by such person in connection
therewith.
(c) We maintain liability insurance upon our officers and directors.
(d) Our amended and restated certificate of incorporation authorizes us to
enter into indemnification agreements with each of our directors and officers
for breach of duty to the corporation and its shareholders. We have entered
into indemnification agreements with each of our directors and officers to
indemnify them against any and all expenses, judgments, fines, penalties and
amounts paid in settlement, to the fullest extent permitted by law.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions by us during the past three years
involving sales of our securities that were not registered under the Securities
Act:
1. On October 1, 1999, we sold 330,000 shares of our restricted common stock
under our 1997 stock incentive plan to Messrs. Qureshey and Dukes at a per
share price of $0.95. Messrs. Dukes and Qureshey purchased these shares by
delivering to us promissory notes for the entire purchase price.
2. On October 28, 1999 we sold to Redpoint Ventures I, L.P., Redpoint
Associates I, LLC and GC&H Investments an aggregate of 3,761,871 shares of our
preferred stock for a total consideration of $16,132,323 in cash and 855,146
shares of our common stock. We also issued on the same date to Redpoint
Ventures I, L.P. a warrant to purchase 321,972 shares of our preferred stock at
$5.55 per share and to Redpoint Associates I, LLC a warrant to purchase 9,958
shares of our preferred stock at $5.55 per share.
II-1
<PAGE>
3. On December 22, 1999, we issued 28,166 shares of our restricted common
stock to one of our employees pursuant to an exercise of a stock option granted
under our 1997 stock incentive plan at an exercise price of $0.48 per share.
4. On February 1, 2000, we sold to each Mssrs. Qureshey and Dukes 330,000
shares of our restricted common stock under our 1997 Stock Incentive Plan at a
per share price of $2.48. Messrs. Qureshey and Dukes purchased these shares by
delivering to us promissory notes for the entire purchase price.
5. On February 16, 2000, we sold to Theodore J. Smith 54,054 shares of our
preferred stock at a per share price of $5.55.
6. On February 18, 2000, we sold an aggregate of 29,000 shares of our
restricted common stock under our 1997 stock incentive plan to Stradling Yocca
Carlson & Rauth, P.C., and certain of its personnel, for an aggregate purchase
price of $79,850.
7. On March 9, 2000, we sold to Stanford University 9,009 shares of our
preferred stock at a per share price of $5.55.
As of December 31, 1999, we have granted options to purchase an aggregate of
2,240,000 shares of common stock pursuant to our 1993 stock incentive plan and
options to purchase an aggregate of 4,165,614 shares of common shares pursuant
to our 1997 stock incentive plan. These options have a weighted average
exercise price of $0.52 per share.
The sales of the securities listed above were claimed to be exempt from
registration under the Securities Act in reliance on Rule 701 promulgated under
Section 3(b) of the Securities Act as transactions pursuant to compensatory
benefit plans and contracts relating to compensation and in reliance on Rule
506 promulgated under Section 4(2) of the Securities Act as transactions not
involving a public offering. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the instruments
representing such securities issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
Item 16. Exhibits and Financial Statement Schedule
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation, to be
effective upon the closing of this offering
3.2* Amended and Restated Bylaws, to be effective upon the closing of
this offering
5.1* Opinion of Stradling Yocca Carlson & Rauth, P.C.
10.1* First Amended and Restated 1997 Stock Incentive Plan
10.2* Form of Notice of Grant of Stock Option under First Amended and
Restated 1997 Stock Incentive Plan
10.3* Form of Stock Option Agreement under First Amended and Restated
1997 Stock Incentive Plan
10.4* Form of Stock Purchase Agreement under First Amended and
Restated 1997 Stock Incentive Plan
10.5* Form of Addendum to Stock Option Agreement under First Amended
and Restated 1997 Stock Incentive Plan
10.6* Form of Addendum to Stock Purchase Agreement under First Amended
and Restated 1997 Stock Incentive Plan
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.7* Form of Stock Issuance Agreement under First Amended and Restated
1997 Stock Incentive Plan
10.8* Form of Industrial Lease dated by and between Insignia/ESG of
California, Inc. and Nexgenix
10.9* 1993 Stock Option Plan
10.10* Investors' Rights Agreement dated October 28, 1999 by and among
Nexgenix, the purchasers of Series A Preferred Stock set forth
therein, Safi Qureshey, David Dukes, A. Rick Dutta and Don Ganguly
10.11* Secured Promissory Note dated October 1, 1999 issued by Safi Qureshey
to Nexgenix
10.12* Stock Pledge Agreement dated October 1, 1999 by and between Safi
Qureshey and Nexgenix
10.13* Secured Promissory Note dated October 1, 1999 issued by David R.
Dukes to Nexgenix
10.14* Stock Pledge Agreement dated October 1, 1999 by and between David R.
Dukes and Nexgenix
10.15* Secured Promissory Note dated February 1, 2000 issued by Safi
Qureshey to Nexgenix
10.16* Stock Pledge Agreement dated February 1, 2000 by and between Safi
Qureshey and Nexgenix
10.17* Secured Promissory Note dated February 1, 2000 issued by David R.
Dukes to Nexgenix
10.18* Stock Pledge Agreement dated February 1, 2000 by and between David R.
Dukes and Nexgenix
10.19* Promissory Note dated September 29, 1997, as amended, issued by
Nexgenix to S. Don Ganguly
10.20* Promissory Note dated September 11, 1996, as amended, issued by
Nexgenix to S. Don Ganguly
10.21* Promissory Note dated July 1, 1996, as amended, issued by Nexgenix to
A. Rick Dutta
10.22* Promissory Note dated September 29, 1997, as amended, issued by
Nexgenix to A. Rick Dutta
10.23* Letter Representation dated September 30, 1999 by and between A. Rick
Dutta and Nexgenix
10.24* Letter Representation dated September 30, 1999 by and between S. Don
Ganguly and Nexgenix
10.25* Letter confirmation dated September 7, 1999 by A. Rick Dutta
10.26* Employment Agreement dated October 28, 1999 by and between A. Rick
Dutta and Nexgenix
10.27* Employment Agreement dated October 28, 1999 by and between S. Don
Ganguly and Nexgenix
10.28* Employment Agreement dated February 28, 2000 by and between Mark
St.Clare and Nexgenix
10.29* Investors' Rights Agreement, Right of First Refusal and Co-Sale
Agreement, and Voting Agreement Joinder Agreement dated as of January
, 2000 by and between Nexgenix and Ted Smith
10.30* Investors' Rights Agreement, Right of First Refusal and Co-Sale
Agreement, and Voting Agreement Joinder Agreement dated as of January
, 2000 by and between Nexgenix and Stanford University
10.31* Employment Agreement dated October 29, 1999 by and between Keith
Yagnik and Nexgenix
21.1* Subsidiaries of the Registrant
23.1* Consent of Stradling Yocca Carlson & Rauth, a professional
corporation (included in Exhibit 5.1)
23.2 Consent of Independent Accountants
24.1 Power of Attorney (included on the signature page to this
Registration Statement--see page II-5)
27.1 Financial Data Schedule
</TABLE>
- ---------------------
*To be filed by amendment.
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
II-3
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on March 24, 2000.
NEXGENIX, INC.
/s/ A. Rick Dutta
By: _________________________________
A. Rick Dutta
Chairman and Co-Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Nexgenix, Inc., do hereby
constitute and appoint A. Rick Dutta, S. Don Ganguly and Mark St. Clare or any
of them, our true and lawful attorneys-in-fact and agents, each with full power
to sign for us or any of us in our names and in any and all capacities, any and
all amendments (including post-effective amendments) to this registration
statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and to file the same, with all exhibits thereto and other documents required in
connection therewith, and each of them with full power to do any and all acts
and things in our names and in any and all capacities, which such attorneys-in-
fact and agents, or either of them, may deem necessary or advisable to enable
Nexgenix, Inc. to comply with the Securities Act of 1933, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with this Registration Statement; and we hereby do ratify and
confirm all that such attorneys-in-fact and agents, or any of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ A. Rick Dutta Co-Chief Executive Officer and Chairman of March 24, 2000
___________________ the Board of Directors (principal
A. Rick Dutta executive officer)
/s/ S. Don Ganguly Co-Chief Executive Officer and Co-Chairman March 24, 2000
___________________ of the Board of Directors
S. Don Ganguly
/s/ Mark St. Clare Chief Financial Officer (principal March 24, 2000
___________________ financial and accounting officer)
Mark St. Clare
/s/ David R. Dukes Director March 24, 2000
___________________
David R. Dukes
/s/ Safi U. Qureshey Director March 24, 2000
___________________
Safi U. Qureshey
/s/ John Walecka Director March 24, 2000
___________________
John Walecka
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Nexgenix, Inc.
Our audits of the consolidated financial statements of Nexgenix, Inc.
referred to in our report dated October 29, 1999, except as to the stock split
described in Note 1, which is as of February 2, 2000, appearing in the
registration statement on Form S-1 of Nexgenix, Inc. also included an audit of
the financial statement schedule listed in Item 16(b) of this Form S-1. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Costa Mesa, California
October 29, 1999, except as to the stock split
described in Note 1, which is as of
February 2, 2000
<PAGE>
NEXGENIX, INC
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
-----------------
Balance Charges Balance
at to costs Charged at end
beginning and to other of
of period expenses accounts Deductions(a) period
--------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
1997 Allowance for
Doubtful Accounts...... 47 223 -- (18) 252
1998 Allowance for
Doubtful Accounts...... 252 126 -- (264) 114
1999 Allowance for
Doubtful Accounts...... 114 249 -- (82) 281
</TABLE>
- ---------------------
(a) Accounts receivable write-offs, net of recoveries.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated October 29, 1999, except as to the stock split described in
Note 1, which is as of February 2, 2000, relating to the consolidated financial
statements and financial statement schedule of Nexgenix, Inc., which appear in
such Registration Statement. We also consent to the references to us under the
heading "Experts" and "Selected Consolidated Financial Data" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Costa Mesa, California
March 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 DEC-31-1999
<PERIOD-START> JUL-01-1998 JUL-01-1999
<PERIOD-END> JUN-30-1999 DEC-31-1999
<CASH> 728 11,758
<SECURITIES> 0 0
<RECEIVABLES> 7,511 8,392
<ALLOWANCES> 281 569
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,549 20,595
<PP&E> 2,052 2,589
<DEPRECIATION> 1,072 1,317
<TOTAL-ASSETS> 9,700 23,172
<CURRENT-LIABILITIES> 7,058 6,681
<BONDS> 0 0
0 20,663
0 0
<COMMON> 28 27
<OTHER-SE> 1,655 (4,929)
<TOTAL-LIABILITY-AND-EQUITY> 9,700 23,172
<SALES> 0 0
<TOTAL-REVENUES> 32,376 20,715
<CGS> 0 0
<TOTAL-COSTS> 32,434 25,558
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 198 134
<INCOME-PRETAX> (204) (4,871)
<INCOME-TAX> (54) (1,169)
<INCOME-CONTINUING> (171) (3,652)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (171) (3,652)
<EPS-BASIC> (0.01) (0.15)
<EPS-DILUTED> (0.01) (0.15)
</TABLE>
