<PAGE>
As filed with the Securities and Exchange Commission on December 21, 2000
Registration No. 333-
-------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ONVIA.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7375 91-1859172
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
1260 Mercer Street, Seattle, WA 98109
(206) 282-5170
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------
Glenn S. Ballman
Chief Executive Officer
1260 Mercer Street, Seattle, WA 98109
(206) 282-5170
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
<TABLE>
<S> <C>
Mark J. Handfelt Randolph H. Fields
John C. Morrow Kevin Ross
Charles P. Carter Greenberg Traurig, P.A.
Sofia Michelakis 111 North Orange Avenue
Venture Law Group Orlando, Florida 32801
A Professional Corporation
4750 Carillon Point
Kirkland, Washington 98033
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As promptly as practicable after this Registration Statement becomes
effective and the effective time of the proposed merger of a subsidiary of the
Registrant with and into DemandStar.com, Inc. as described in the Agreement
and Plan of Merger dated as of November 20, 2000, attached as Appendix A to
the Proxy Statement/Prospectus forming a part of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, 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(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. [_] __________
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
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Proposed
Proposed maximum
maximum aggregate Amount of
Title of each class of Amount to be offering price offering registration
securities to be registered registered per unit price(1) fee
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $.0001 par value per
share............................... 6,000,000 (1) $7,273,125 $1,921
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Rule 457(c) and (f) under the Securities Act of 1933, as
amended, the registration fee has been calculated based upon (a) $0.71875,
which is the average of the bid and ask prices per share of
DemandStar.com, Inc. on December 21, 2000 as reported on the OTC Bulletin
Board multiplied by (b) 10,119,130 which is the aggregate number of
DemandStar's shares of common stock (i) outstanding on the date hereof,
(ii) issuable upon conversion of shares of preferred stock outstanding on
the date hereof, and (iii) issuable upon exercise of outstanding options
to purchase DemandStar's common stock vested at the time of the merger.
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 this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this proxy statement/prospectus is not complete and may be +
+changed. Onvia may not issue the common stock to be issued in connection with +
+the merger described in this proxy statement/prospectus until the +
+registration statement filed with the Securities and Exchange Commission is +
+effective. Any representation to the contrary is a criminal offense. This +
+proxy statement/prospectus is not an offer to sell these securities, and +
+neither Onvia nor DemandStar is soliciting an offer to buy these securities +
+in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion
Dated December 21, 2000
[LOGO OF DEMANDSTAR.COM]
Dear DemandStar.com, Inc. Shareholder:
I am pleased to forward to you this proxy statement/prospectus for a special
meeting of the shareholders of DemandStar.com, Inc. to be held on , 2001,
at .m. local time, at , Plantation, Florida.
At the special meeting, you will be asked to vote upon the proposed merger of
DemandStar.com, Inc. with Onvia.com, Inc. The merger will be effected pursuant
to the Agreement and Plan of Merger, dated as of November 20, 2000, among
Onvia, Dragon Acquisition Corporation and DemandStar. Pursuant to the merger
agreement, each outstanding share of capital stock of DemandStar will be
converted into the right to receive approximately 0.6 shares of Onvia's common
stock. Onvia's common stock is listed on the Nasdaq National Market under the
symbol "ONVI." If the merger is approved and consummated, DemandStar will
become a wholly-owned subsidiary of Onvia. The merger is described more fully
in this proxy statement/prospectus.
DemandStar's board of directors has carefully reviewed and considered the
terms and conditions of the merger agreement and the proposed merger and has
concluded that they are fair to, and in the best interests of, DemandStar and
its shareholders. In reaching this determination, DemandStar's board of
directors received the opinion of Janney Montgomery Scott LLC that the merger
consideration was fair, from a financial point of view, to DemandStar's
shareholders on the day Onvia and DemandStar signed the merger agreement.
Holders of shares of DemandStar capital stock are urged to read such opinion in
its entirety. DemandStar's board of directors unanimously recommends that you
vote for approval of the merger agreement and the consummation of the merger.
The merger agreement and the consummation of the merger must be approved by
the holders of a majority of the outstanding shares of common stock of
DemandStar entitled to vote at the special meeting voting as a single class, a
majority of the outstanding shares of preferred stock entitled to vote at the
special meeting voting as a single class and a majority of the outstanding
shares of common stock and preferred stock entitled to vote at the special
meeting voting as a single class. You should note that shareholders of
DemandStar entitled to vote at the special meeting who collectively own
approximately 35.8% of DemandStar's outstanding common stock, 100% of
DemandStar's outstanding preferred stock and 37.7% of the combined voting power
of the common and preferred stock have already agreed to vote their shares in
favor of the merger agreement and the merger. In particular, you should review
the matters referred to under "Risk Factors" starting on page 12.
We have included a proxy card which you may use to vote your shares if you
are not able to attend the special meeting in person.
On Behalf of the Board of Directors,
/s/ Bernard B. Markey
Bernard B. Markey
Chairman of the Board
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction and the securities
being offered by Onvia or determined if this proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated , 2001 and was first mailed to
shareholders on or about , 2001.
This proxy statement/prospectus incorporates important business and
financial information about Onvia and DemandStar that is not included in or
delivered with this document. This information is available without charge to
DemandStar shareholders upon written or oral request. Shareholders should
contact Onvia at 1260 Mercer Street, Seattle, Washington 98109, Attn: Investor
Relations, (206) 282-5170, or DemandStar at 1200 S. Pine Island Court, Suite
600 Plantation, Florida, Attn: Investor Relations, (954) 577-6500.
To obtain timely delivery of requested documents before the special meeting,
you must request them no later than , 2001, which is five business days
before the date of the special meetings.
Also see "Where You Can Find More Information" in this proxy
statement/prospectus.
<PAGE>
DEMANDSTAR.COM, INC.
1200 S. Pine Island Road, Suite 600
Plantation, Florida 33324
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 2001
To the Shareholders of DemandStar:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
DemandStar.com, Inc., a Florida corporation, will be held at :00 .m., local
time, on , 2001, at , Plantation, Florida for the
following purposes:
. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of November 20, 2000, among Onvia.com, Inc.,
a Delaware corporation, Dragon Acquisition Corporation, a Florida
corporation and a wholly-owned subsidiary of Onvia, and DemandStar,
and the merger of Dragon Acquisition Corporation with and into
DemandStar whereby, among other things, each outstanding share of
DemandStar capital stock will be converted into the right to receive
approximately 0.6 shares of Onvia's common stock, as more fully
described in this proxy statement/prospectus; and
. To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
DemandStar's board of directors has determined that the merger agreement and
the merger are in your best interests and recommends that you vote to approve
the merger agreement.
Each of the foregoing items of business is more fully described in this
proxy statement/prospectus, which we urge you to read carefully.
Shareholders of record at the close of business on , 2001, are
entitled to notice of and to vote at the special meeting and any adjournment or
postponement thereof. Approval of the merger agreement and the merger will
require the affirmative vote of a majority of the holders of the outstanding
shares of common stock of DemandStar entitled to vote at the special meeting, a
majority of the outstanding shares of preferred stock entitled to vote at the
special meeting and a majority of the outstanding shares of common stock and
preferred stock entitled to vote at the special meeting voting together as a
single class.
If the merger agreement is effected, shareholders who dissent therefrom may
be entitled to be paid the fair value of their shares. A copy of Florida
Statutes, Sections 607.1301, 607.1302 and 607.1320 relating to dissenters'
rights is attached as Appendix D to this proxy statement/prospectus and
incorporated herein by reference. These sections must be complied with in order
for shareholders to exercise dissenters' rights.
To ensure that your shares are represented at the special meeting, please
complete, date and sign the enclosed proxy card and mail it promptly in the
postage-paid envelope provided, whether or not you plan to attend the special
meeting in person. Any executed but unmarked proxy cards will be voted for
approval and adoption of the merger agreement and the merger. You may revoke
your proxy in the manner described in this proxy statement/prospectus at any
time before it has been voted at the special meeting. Any shareholder attending
the special meeting may vote in person even if such shareholder has returned a
proxy.
Please do not send any DemandStar stock certificates in your proxy envelope.
By Order of the Board of Directors,
/s/ L.A. Gornto, Jr.
L.A. Gornto, Jr.
Secretary
Plantation, Florida
, 2001
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Questions and Answers..................................................... 1
Summary................................................................... 4
The companies........................................................... 4
The merger.............................................................. 4
Merger consideration.................................................... 4
Material federal income tax consequences................................ 5
Onvia's reasons for the merger.......................................... 5
DemandStar's reasons for the merger and recommendations of DemandStar's
board of directors..................................................... 5
Opinion of DemandStar's financial advisor............................... 6
The special meeting..................................................... 6
Record date for voting on the merger.................................... 6
Shareholder vote required to approve the merger......................... 6
Voting agreements....................................................... 6
No other negotiations................................................... 7
Conditions to completion of the merger.................................. 7
Termination of the merger agreement..................................... 7
Termination fees and expenses........................................... 7
Interests of certain persons in the merger.............................. 8
Dissenters' rights of DemandStar shareholders........................... 8
Accounting treatment.................................................... 8
Regulatory approvals.................................................... 8
Forward looking statements may prove inaccurate......................... 9
Comparative stock price data and dividend history....................... 10
Comparative per share data.............................................. 11
Risk Factors.............................................................. 12
General Risks Related to the Merger..................................... 12
Risks Related to Onvia.................................................. 15
Risks Related to DemandStar............................................. 23
The Special Meeting....................................................... 31
Time, place and date of meeting......................................... 31
Purposes of the special meeting......................................... 31
Recommendations of DemandStar's board of directors...................... 31
Record date; Voting at the meeting; Quorum.............................. 31
Broker non-votes........................................................ 31
Required shareholder vote............................................... 32
Voting and revocation of proxies........................................ 32
Action to be taken at the special meeting............................... 32
Proxy solicitation...................................................... 33
The Merger................................................................ 34
Background of the merger................................................ 34
Onvia's reasons for the merger.......................................... 36
DemandStar's reasons for the merger and recommendations of DemandStar's
board of directors..................................................... 38
Opinion of DemandStar's financial advisor............................... 40
Historical and projected operating results and financial condition...... 41
Stock price premium analysis............................................ 42
Analysis of selected publicly traded comparable companies............... 43
Analysis of selected comparable transactions............................ 44
Pro forma contribution analysis......................................... 45
Market and economic factors............................................. 45
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Interests of certain persons in the merger............................. 46
Material federal income tax consequences............................... 47
Accounting treatment................................................... 49
Regulatory approvals................................................... 49
Restrictions on affiliate resales...................................... 49
The Merger Agreement..................................................... 50
The merger............................................................. 50
Effective time......................................................... 50
Directors and officers................................................. 50
Conversion of shares in the merger..................................... 50
DemandStar stock option plan........................................... 50
DemandStar warrants.................................................... 51
Exchange agent......................................................... 51
Exchange procedures.................................................... 51
Distributions with respect to unexchanged shares....................... 52
No fractional shares................................................... 52
Representations and warranties......................................... 52
Conduct of business of DemandStar pending the merger................... 53
Conduct of business of Onvia pending the merger........................ 54
No other negotiations.................................................. 54
Director and officer indemnification................................... 55
Bridge financing....................................................... 56
Board observer......................................................... 56
Conditions to completion of the merger................................. 56
Termination of the merger agreement.................................... 58
Termination fee and expenses........................................... 60
Amendment and waiver................................................... 60
Voting Agreements........................................................ 61
Onvia Selected Financial Information..................................... 62
Onvia Selected Quarterly Financial Information........................... 63
DemandStar Selected Financial Information................................ 64
DemandStar Selected Quarterly Financial Information...................... 65
Onvia's Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 66
Result of operations................................................... 66
Liquidity and capital resources........................................ 70
Quantitative and qualitative disclosures about market risk............. 71
Recent accounting pronouncements....................................... 72
DemandStar's Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 73
Results of operations.................................................. 73
Liquidity and capital resources........................................ 74
Business of Onvia........................................................ 76
Overview............................................................... 76
Industry background.................................................... 76
Onvia's business solution.............................................. 78
Strategy............................................................... 79
Recent developments.................................................... 80
Services and products.................................................. 81
Strategic relationships................................................ 83
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Customers................................................................ 84
Sales strategy........................................................... 84
Marketing strategy....................................................... 84
Customer service......................................................... 85
Technology and operations................................................ 85
Competition.............................................................. 87
Intellectual property rights............................................. 88
Employees................................................................ 88
Facilities............................................................... 89
Legal proceedings........................................................ 89
Management of Onvia........................................................ 90
Executive Officers and Directors......................................... 90
Board Composition........................................................ 92
Board Compensation....................................................... 92
Board Committees......................................................... 92
Compensation Committee Interlocks and Insider Participation.............. 93
Executive Compensation................................................... 93
Option Grants in Last Fiscal Year........................................ 94
Option Exercises in Last Fiscal Year-End Option Values................... 95
Benefit Plans............................................................ 95
Principal Stockholders of Onvia............................................ 98
Onvia Certain Transactions................................................. 100
Business of DemandStar..................................................... 104
Overview................................................................. 104
DemandStar's History..................................................... 104
Industry Background...................................................... 105
Market................................................................... 107
DemandStar's services.................................................... 108
Business model........................................................... 108
Government sales......................................................... 109
Vendor sales............................................................. 109
Vendor solicitation...................................................... 109
Current contracts........................................................ 109
Sales and marketing...................................................... 110
Competition.............................................................. 110
Intellectual property and proprietary rights............................. 111
Technology and operations................................................ 111
Facilities............................................................... 112
Employees................................................................ 112
Sources of revenue....................................................... 112
Legal proceedings........................................................ 113
Management of DemandStar................................................... 114
Executive officers and directors......................................... 114
Staggered board of directors............................................. 115
Board committees......................................................... 115
Compensation of directors................................................ 116
Principal Shareholders of DemandStar....................................... 117
DemandStar Certain Transactions............................................ 119
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Description of Onvia Capital Stock....................................... 127
Common stock........................................................... 127
Preferred stock........................................................ 127
Warrants............................................................... 127
Registration rights.................................................... 127
Anti-takeover provisions............................................... 128
Listing................................................................ 129
Transfer agent and registrar........................................... 129
Comparison of Rights Between DemandStar Shareholders and Stockholders of
Onvia................................................................... 130
Dissenters' Rights of DemandStar Shareholders............................ 140
Stockholder Proposals.................................................... 142
Legal Matters............................................................ 143
Experts.................................................................. 143
Forward-Looking Statements May Prove Inaccurate.......................... 143
Where You Can Find More Information...................................... 144
Index To Financial Statements............................................ F-1
APPENDIX A Agreement and Plan of Merger dated as of November 20, 2000.... A-1
APPENDIX B Form of Voting Agreement dated November 20, 2000 with list of
signatories and shares subject to agreement................... B-1
APPENDIX C Opinion of Financial Advisor to DemandStar.................... C-1
APPENDIX D Florida Dissenters' Rights Provisions......................... D-1
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS
Q: Why are the companies proposing the merger?
A: Onvia and DemandStar believe that combining the products and technologies of
the two companies will allow the combined company to offer a more complete
internet procurement solution to a broader range of customers. The merger will
combine DemandStar's and Onvia's government-to-business exchange platforms,
creating a more compelling value proposition to government agency buyers and
small business vendors. In addition, the companies believe that a combined
company would have a larger customer base, greater depth of skilled personnel,
expanded distribution and support capability and a higher market profile, all
of which the companies believe will create greater market opportunities for the
combined company and greater value for their respective stockholders.
Q: What will happen in the merger?
A: In the merger, DemandStar will become a wholly owned subsidiary of Onvia.
Based upon the capitalization of Onvia and DemandStar as of December 20, 2000,
the holders of outstanding shares of DemandStar's capital stock will receive a
number of shares of Onvia's common stock representing approximately 6.4% of
Onvia's outstanding common stock following the merger. Approximately
additional shares of Onvia's common stock would be issuable upon the exercise
of DemandStar stock options and warrants assumed by Onvia.
Q: What will DemandStar's shareholders receive in the merger?
A: As a result of the merger, each share of capital stock of DemandStar will be
exchanged for that number of shares of Onvia's common stock equal to the
exchange ratio. The exchange ratio will be determined by dividing 6 million by
the aggregate number of outstanding shares of DemandStar's capital stock and
options to purchase DemandStar's common stock that are vested immediately prior
to the effective time of the merger. The exchange rate equals approximately 0.6
of a share of Onvia's common stock. Onvia will not issue fractional shares of
stock. Instead, DemandStar shareholders will receive cash based on the average
closing price of Onvia's common stock for the five business days preceding the
effective time of the merger.
For example, if you own 101 shares of DemandStar's common stock, you will
receive 60 shares of Onvia's common stock in exchange for your 100 shares of
DemandStar's common stock and an amount of cash equal to approximately 0.6
times the five-day average closing price of Onvia's common stock prior to the
effective date for your remaining 1 share of DemandStar's common stock.
Q: What is the value per share to be received by DemandStar shareholders?
A: The aggregate number of shares of Onvia's common stock to be issued in the
merger to holders of DemandStar capital stock is fixed and will not be adjusted
based upon changes in the values of DemandStar or Onvia's common stock. As a
result, the value of the Onvia shares you will receive in the merger will
fluctuate as the market price of Onvia's common stock goes up or down and will
not be known at the time you vote on the merger. Onvia and DemandStar encourage
you to obtain current market quotations of Onvia's common stock and
DemandStar's common stock.
Q: Does the board of directors of DemandStar recommend voting in favor of the
merger?
A: Yes. After careful consideration, DemandStar's board of directors
unanimously recommends that its shareholders vote in favor of adopting the
merger agreement. For a more complete description of the recommendations of
DemandStar's board of directors, see the section entitled "The Merger--
DemandStar reasons for the merger and recommendations of DemandStar's board of
directors."
1
<PAGE>
Q: Are there risks I should consider in deciding whether to vote for the
merger?
A: Yes. For example, the number of shares of Onvia's common stock that
DemandStar shareholders will receive will not change even if the market price
of Onvia's common stock increases or decreases before completion of the merger.
Onvia and DemandStar urge you to obtain current market quotations of Onvia's
common stock and DemandStar's common stock.
In evaluating the merger, you should also carefully consider these and other
factors discussed in the section titled "Risk Factors" beginning on page 12.
Q: What do I need to do now?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at your meeting. If you do not
include instructions on how to vote your properly signed proxy, your shares
will be voted "FOR" adoption of the merger agreement.
Q: What happens if I do not return a proxy card?
A: If you are a DemandStar shareholder, failure to return your proxy card will
have the same effect as voting against the merger.
Q: May I vote in person?
A: Yes. You may attend the special meeting of DemandStar shareholders and vote
your shares in person, rather than signing and returning your proxy card.
Q: What do I do if I want to change my vote?
A: If you want to change your vote, send the secretary of DemandStar a signed
proxy card, dated after your original proxy card, before the meeting or attend
the meeting in person. You may also revoke your proxy by sending a written,
dated notice of revocation to the secretary of DemandStar before the meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker.
Q: Should I send in my DemandStar stock certificates now?
A: No. After the merger is completed, Onvia will send you written instructions
for exchanging your DemandStar stock certificates for Onvia's stock
certificates.
Q: When do Onvia and DemandStar expect to complete the merger?
A: Onvia and DemandStar hope to complete the merger as soon as possible after
DemandStar's shareholders approve the merger. However, the companies cannot
predict the exact timing because completion of the merger is subject to a
number of conditions.
Q: Will I recognize a gain or loss on the transaction?
A: Onvia and DemandStar expect that if the merger is completed, you will not
recognize gain or loss for U.S. federal income tax purposes upon your exchange
of DemandStar capital stock solely for shares of Onvia's common stock, except
that DemandStar's shareholders will recognize gain or loss with respect to cash
received instead of fractional shares of Onvia's common stock. However,
DemandStar's shareholders are urged to consult their own tax advisors to
determine their particular tax consequences. Please refer to the more complete
2
<PAGE>
discussion of Federal income tax consequences in "The Merger--Material federal
income tax consequences" below.
Q: Am I entitled to dissenters' rights?
A: Yes. Under Florida law, holders of DemandStar capital stock are entitled to
dissenters' rights in the merger.
Q: Whom should I call with questions?
A: DemandStar's shareholders should call Sam Chesser at (954) 577-3924 with any
questions about the merger.
3
<PAGE>
SUMMARY
This Summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully, and for a more complete
description of the legal terms of the merger, you should carefully read this
entire document, including the appendices and other information referred to in
this document.
The companies
[LOGO OF ONVIA.COM]
1260 Mercer Street
Seattle, WA 98109
(206) 282-5170
Onvia.com, Inc. is a leading online exchange helping small businesses secure
additional revenue through buying and selling products and services to other
businesses and government agencies. Onvia is valued by buyers and sellers as a
matchmaker, helping almost one million small businesses find what they need
through an online exchange.
[LOGO OF DEMANDSTAR.COM(TM)]
1200 South Pine Island Road, 6th Floor
Plantation, FL 33324
(954) 577-6500
DemandStar's procurement system enables state and local government agencies
to purchase goods and services more efficiently and at lower administrative
costs while at the same time providing valuable services to businesses selling
goods and services to government agencies. DemandStar distributes bid requests
and associated documents to vendors for government agencies in an effort to
reduce administrative costs and increase the operational efficiency of its
member agencies and the competition in the agencies' bidding process.
The merger (page 34)
In the merger, DemandStar and a wholly owned subsidiary of Onvia will merge
and, as a result, DemandStar will become a wholly owned subsidiary of Onvia.
The merger agreement is attached to this proxy statement/prospectus as Appendix
A. We urge you to read the merger agreement carefully.
Merger consideration
As a result of the merger, each share of capital stock of DemandStar will be
exchanged for that number of shares of Onvia's common stock equal to the
exchange ratio. The exchange ratio will be determined by dividing 6 million by
the aggregate number of outstanding shares of DemandStar's capital stock and
options to purchase DemandStar's common stock that are vested immediately prior
to the effective time of the merger. The exchange rate equals approximately 0.6
of a share of Onvia's common stock. Onvia will not issue fractional shares of
stock. Instead, DemandStar shareholders will receive cash based on the average
closing price of Onvia's common stock for the five business days preceding the
effective time of the merger.
For example, if you own 101 shares of DemandStar's common stock, you will
receive 60 shares of Onvia's common stock in exchange for your 100 shares of
DemandStar's common stock and an amount of cash equal to approximately 0.6
times the five-day average closing price of Onvia's common stock prior to the
effective date for your remaining 1 share of DemandStar's common stock.
4
<PAGE>
Material federal income tax consequences (page 47)
The exchange of shares of DemandStar capital stock for shares of Onvia's
common stock is intended to be tax-free to DemandStar shareholders for federal
income tax purposes. Any cash received for any fractional share will result in
gain or loss as if you sold your fractional share. Your tax basis in Onvia's
common stock you receive in the merger will equal your current tax basis in
your DemandStar capital stock, reduced by the basis allocable to any fractional
share interest for which you receive cash.
Tax matters can be complicated and the tax consequences of the merger to you
will depend on your own tax situation. You should consult with your own tax
advisor to fully understand the tax consequences of the merger to you.
Onvia's reasons for the merger (page 36)
Onvia's board of directors unanimously approved the merger based on a number
of factors, including the following:
. Onvia and DemandStar together could provide government agencies buying
services and products and small business selling such services and
products a more compelling value proposition;
. Onvia's and DemandStar's product and service offerings and development
plans are complementary; and
. the merger would further Onvia's long-term strategies and goals of
expanding its service and product offerings and relationships with
government agencies.
DemandStar's reasons for the merger and recommendations of DemandStar's board
of directors (page 38)
DemandStar's board of directors approved the merger based on a number of
factors, including the following:
. the merger affords the new combined company the opportunity to increase
its presence in the business to government market and enables it to offer
its customers a broader and more varied array of products and services;
. the commitment by Onvia to loan DemandStar up to $5 million;
. the agreements to be entered into by holders of approximately 37.7% of
the outstanding shares of DemandStar capital stock to vote in favor of
the merger;
. the opportunity to create more shareholder value by reducing the risks
and shareholder dilution associated with DemandStar's need to obtain
additional capital in order to finance its operations and create positive
cash flow; and
. the detailed financial analysis and other information presented to
DemandStar's board of directors, by Janney Montgomery Scott LLC including
the fairness opinion dated November 17, 2000, stating that, as of such
date, the merger consideration to be received by DemandStar's
shareholders was fair.
5
<PAGE>
DemandStar's board of directors:
. has unanimously approved the merger agreement and declared it to be
advisable;
. has determined that the merger is consistent with and furthers the long-
term business strategy of DemandStar; and
. unanimously recommends that DemandStar's shareholders vote FOR the
adoption and approval of the merger agreement.
Opinion of DemandStar's financial advisor (page 40)
In deciding to approve the merger, one of the factors DemandStar's board of
directors considered was the opinion of its financial advisor, Janney
Montgomery Scott LLC that, as of November 17, 2000, the merger consideration
was fair to the shareholders of DemandStar from a financial point of view. The
full text of the Janney opinion is attached as Appendix C and we urge you to
read it in its entirety.
The special meeting (page 31)
There will be a special meeting of DemandStar's shareholders at
, , Plantation, Florida on ,
, 2001 at .m. local time. At this meeting, DemandStar's
shareholders will be asked to approve the merger agreement.
Record date for voting on the merger
Only record holders of DemandStar's capital stock on , 2001
will be entitled to vote at the special meeting.
Shareholder vote required to approve the merger
Under Florida law, the merger must be approved by:
. a majority of the outstanding shares of DemandStar's common stock
entitled to vote on the merger, voting separately as a class;
. a majority of the outstanding shares of DemandStar's Series A preferred
stock entitled to vote on the merger, voting separately as a class; and
. a majority of the outstanding shares of DemandStar's common stock and
Series A preferred stock entitled to vote on the merger, voting together
as a class.
Voting agreements (page 61)
DemandStar's largest shareholder, H.T.E., Inc., and each of the directors
and executive officers of DemandStar, entered into voting agreements pursuant
to which they have agreed to vote all of their shares in favor of the approval
of the merger agreement and the merger at the DemandStar special meeting. As of
December 20, 2000, H.T.E. owned approximately 23.8% of DemandStar's capital
stock, which represents 100% of DemandStar's outstanding Series A preferred
stock and approximately 16.4% of DemandStar's outstanding common stock,
although as a result of DemandStar's articles of incorporation, H.T.E.'s voting
power in the aggregate represented approximately 19.9% of DemandStar's common
and preferred stock voting together as a class. The other parties to voting
agreements in the aggregate own 17.8% of the outstanding voting power of
DemandStar (37.7% when combined with H.T.E.) and 19.4% of DemandStar's
outstanding common stock (35.8% when combined with H.T.E.).
6
<PAGE>
No other negotiations (page 54)
Until the merger is completed or the merger agreement is terminated,
DemandStar has agreed, with certain limited exceptions, not to take any action,
directly or indirectly, with respect to a business combination or other similar
transaction involving DemandStar.
Conditions to completion of the merger (page 56)
The obligations of Onvia and DemandStar to complete the merger are subject
to the satisfaction or waiver of specified closing conditions.
Termination of the merger agreement (page 58)
Onvia and DemandStar each have the right to terminate the merger agreement
under certain circumstances. In certain circumstances, either Onvia or
DemandStar may have to pay the other a termination fee and reimburse the other
party for its expenses.
Termination fee and expenses (page 60)
DemandStar must pay Onvia an amount equal to Onvia's documented expenses
incurred in connection with the merger agreement and a termination fee equal to
$600,000 upon termination of the merger agreement:
. by Onvia if a "triggering event," as provided in the merger agreement,
occurs;
. by either Onvia or DemandStar because the required DemandStar shareholder
vote was not obtained at a shareholder meeting; or
. by Onvia if DemandStar breaches any of its representations, warranties,
covenants or agreements in the merger agreement and those breaches are
not cured within a 20 day cure period.
If the merger agreement is terminated by Onvia or DemandStar because the
merger has not been consummated by June 30, 2001 and another acquisition
proposal has been announced or otherwise communicated to the board of directors
of DemandStar, then DemandStar must pay Onvia an amount equal to Onvia's
documented expenses incurred in connection with the transactions contemplated
by the merger agreement. If the merger does not occur by June 30, 2001 and on
or before June 30, 2002 DemandStar enters into a definitive agreement with a
third party with respect to an acquisition transaction, or consummates an
acquisition transaction with a third party, then DemandStar must pay Onvia an
amount equal to $600,000 immediately upon any such execution or consummation.
If DemandStar terminates the merger agreement because Onvia breaches any of
its representations, warranties, covenants or agreements in the merger
agreement and those breaches are not cured within a 20 day cure period, then
Onvia must pay DemandStar an amount equal to DemandStar's documented expenses
incurred in connection with the merger agreement and a fee equal to $600,000
immediately upon termination of the merger agreement.
In addition, if the merger agreement is terminated under circumstances
requiring DemandStar to pay a termination fee to Onvia, then the bridge notes
provided to DemandStar by Onvia become repayable or convertible into
DemandStar's Series C preferred stock, at Onvia's option, 30 days from
termination. If the merger agreement is terminated under circumstances
requiring Onvia to pay DemandStar a termination fee, then those bridge notes
become repayable or convertible into DemandStar's Series C preferred stock, at
Onvia's option, 12 months from termination.
7
<PAGE>
Interests of certain persons in the merger (page 46)
When considering the recommendation of DemandStar's board of directors to
approve the merger and the merger agreement, you should be aware that some of
DemandStar's directors, officers and shareholders have interests in the merger
that are different from, or in addition to, yours. These interests include:
. O.F. Ramos, President, Chief Executive Officer and a director of
DemandStar, Edward S. Jordan, DemandStar's Chief Operating Officer and
Executive Vice President, and William Knox North, DemandStar's Chief
Technology Officer, each entered into amended and restated employment
agreements pursuant to which they will become officers of Onvia following
the merger.
. Messrs. Ramos, Jordan and North each entered into amended and restated
option agreements that change the vesting of their options to purchase
DemandStar's common stock and, in the case of Messrs. Jordan and North,
provide that Onvia will make additional option grants to them following
the merger.
. Three of DemandStar's directors, L.A. Gornto, Bernard B. Markey and
Edward Moses, have agreed to amend their existing employment or
consulting agreements to provide post-merger consulting services.
. Under the terms of DemandStar's 1999 Employee Incentive Compensation
Plan, all options with time based vesting provisions accelerate 100% on
closing of the merger. Messrs. Gornto, Markey and Moses each have options
with time based vesting provisions that accelerate 100% on a change of
control.
. Directors and officers of DemandStar are entitled to specified
indemnification rights.
. H.T.E., DemandStar's largest shareholder, has loaned DemandStar $1.75
million and may be more likely to be repaid following the merger than
would otherwise be the case. Messrs. Gornto, Markey, Moses and Ramos are
directors of both H.T.E. and DemandStar.
As a result, these executive officers and directors could be more likely to
recommend the approval of the merger agreement than if they did not hold these
interests.
Dissenters' rights of DemandStar shareholders (page 140)
Florida law permits you to dissent from the merger and have the fair value
of your DemandStar shares appraised by a court and paid to you in cash. If you
elect to dissent, you must follow strict procedures mandated by Florida law,
including the filing of specified notices, and you must not vote in favor of
the merger. If you dissent and follow the required procedures, you will not
receive Onvia's common stock in the merger. Instead you will receive cash in an
amount determined under Florida law.
Accounting treatment
The merger will be accounted for under the purchase method of accounting.
This means that after the merger, Onvia will be required to record as
intangible assets the excess of the consideration given over the estimated fair
value of net assets acquired and will subsequently amortize this cost against
earnings.
Regulatory approvals
Onvia and DemandStar have determined that, as of the date of this proxy
statement/prospectus, no filings are required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. However, at any time before or after the
consummation of the merger, the Federal Trade Commission, the Department of
Justice or any state could take action under applicable antitrust laws as they
deem necessary or desirable. Such action could include seeking to enjoin the
consummation of the merger or seeking divestiture of particular assets or
businesses of Onvia or DemandStar. Private parties may also initiate legal
actions under the antitrust laws under certain circumstances.
8
<PAGE>
Forward-looking statements may prove inaccurate
This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to expectations concerning
matters that are not historical facts. Words such as "projects," "believes,"
"anticipates," "plans," "expects," "intends," and similar words and expressions
are intended to identify forward-looking statements. Although each of Onvia and
DemandStar believes that such forward-looking statements are reasonable,
neither can assure you that such expectations will prove to be correct.
Important language regarding factors that could cause actual results to differ
materially from such expectations are disclosed herein including, without
limitation, in the "Risk Factors" beginning on page 12. All forward-looking
statements attributable to Onvia or DemandStar are expressly qualified in their
entirety by such language. Neither Onvia nor DemandStar undertakes any
obligation to update any forward-looking statements.
9
<PAGE>
COMPARATIVE STOCK PRICE DATA AND DIVIDEND HISTORY
Onvia's common stock began trading on the Nasdaq National Market under the
trading symbol "ONVI" on March 1, 2000. DemandStar's common stock began
trading on the National Association of Securities Dealers, Inc.'s OTC Bulletin
Board, under the trading symbol "DMND" on May 5, 2000. The following table
sets forth, for the periods indicated, the quarterly high and low sale prices
per share of Onvia's common stock and DemandStar's common stock.
<TABLE>
<CAPTION>
Onvia DemandStar
Common Stock Common Stock
-------------- -------------
High Low High Low
------- ------ ------ ------
<S> <C> <C> <C> <C>
Year ending December 31, 2000
First Quarter.................................... $ 78.00 $20.00 -- --
Second Quarter................................... $21.875 $4.125 $ 2.50 $0.812
Third Quarter.................................... $11.875 $4.125 $1.437 $0.625
Fourth Quarter (up to December 20, 2000)......... $ 4.750 $1.125 $1.182 $0.469
</TABLE>
The following table sets forth the closing prices per share of Onvia's
common stock as reported on the Nasdaq National Market and DemandStar's common
stock as reported on the OTC Bulletin Board on November 17, 2000, the last
full trading day prior to the announcement that Onvia and DemandStar had
entered into the merger agreement, and December 20, 2000, the most recent
practicable date prior to the date of this proxy statement/prospectus. This
table also lists the equivalent per share price of DemandStar's common stock
on those dates. The equivalent price per share is equal to the closing price
per share of Onvia's common stock on that date multiplied by 0.6, the
approximate exchange ratio under the merger agreement.
<TABLE>
<CAPTION>
Onvia DemandStar Equivalent
Common Stock Common Stock per share price
------------ ------------ ----------------
<S> <C> <C> <C>
November 17, 2000.................... $ 2.063 $0.875 $1.2378
December 20, 2000.................... $1.3125 $0.625 $0.7875
</TABLE>
As of December 20, 2000, there were approximately 474 stockholders of
record of Onvia's common stock.
Because the market price of Onvia's common stock is subject to fluctuation,
the market value of the shares of Onvia's common stock that the DemandStar
shareholders will receive in the merger may increase or decrease prior to the
merger.
DemandStar shareholders are urged to obtain a current market quotation for
Onvia's common stock.
Following the merger, Onvia's common stock will continue to be traded on
the Nasdaq National Market under the symbol "ONVI."
Neither Onvia nor DemandStar have ever paid cash dividends on shares of
their common stock. Under the merger agreement, DemandStar has agreed not to
pay cash dividends pending completion of the merger without the written
consent of Onvia. Onvia's board of directors intends to retain all earnings
for use in its business and has no present intention to pay cash dividends
after the merger. If the merger is not completed, DemandStar's board of
directors intends to continue its policy of retaining all earnings for use in
its business.
10
<PAGE>
COMPARATIVE PER SHARE DATA
The following table reflects:
. the historical net loss and book value per common share of Onvia in
comparison with the pro forma net loss and book value per common share of
Onvia after giving effect to the proposed merger with DemandStar as if
the merger had occurred at the beginning of the periods presented; and
. the historical net loss and book value per common share of DemandStar in
comparison with the pro forma net loss and book value per common share of
DemandStar assuming an exchange ratio of approximately 0.6 of a share of
Onvia's common stock which will be received for each share of DemandStar
capital stock.
The information presented in this table should be read in conjunction with
the unaudited pro forma consolidated financial statements, the consolidated
financial statements and notes to the consolidated financial statements and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the respective companies, which are included elsewhere in this
proxy statement/prospectus.
The pro forma information, while helpful in illustrating the financial
characteristics of the new company under one set of assumptions, does not
attempt to predict or suggest future results. It also does not necessarily
reflect the historical results the combined company would have experienced if
Onvia and DemandStar had been combined during the periods presented. The pro
forma data does not reflect any costs associated with the integration and
consolidation of the companies anticipated by the management of Onvia.
Onvia
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Basic and diluted net loss per common share:
Historical......................................... $(1.48) $(4.59)
Pro forma.......................................... $(1.59) $(4.91)
Book value per common share:
Historical(1)...................................... $ 2.71 $ 0.91
Pro forma.......................................... $ 2.65 $ 1.29
</TABLE>
DemandStar
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Basic and diluted net loss per common share:
Historical......................................... $(1.31) $(0.91)
Equivalent pro forma(2)............................ $(0.95) $(2.95)
Book value per common share:
Historical(1)...................................... $ 0.08 $(0.26)
Equivalent pro forma(2)............................ $ 1.59 $ 0.77
</TABLE>
--------
(1) Computed by dividing stockholders' equity by the number of shares of common
stock outstanding at the end of each period.
(2) Computed by multiplying Onvia's pro forma basic and diluted net loss per
common share and pro forma book value per common share by the assumed
exchange ratio of 0.6.
11
<PAGE>
RISK FACTORS
This section describes potential risks of the proposed merger and the merger
agreement. Onvia and DemandStar believe that the description covers the
potential risks of material terms of the proposed merger, but this summary may
not contain all of the information that is important to you. You should
carefully read this entire document and the other documents referred to herein,
such as the merger agreement, for a more complete understanding of the merger.
The merger involves a high degree of risk. By voting in favor of the merger,
current DemandStar shareholders will be choosing to invest in Onvia's common
stock. An investment in Onvia's common stock involves a high degree of risk. In
addition to the other information contained in this proxy statement/prospectus,
you should carefully consider all of the following risk factors relating to the
proposed merger, Onvia, DemandStar and the combined company, in deciding
whether to vote for the merger.
General risks related to the merger
The approximate exchange ratio will not change due to changes in the value of
Onvia's or DemandStar's common stock.
The market price of Onvia's common stock, like that of the shares of many
other technology and Internet companies, has been and is expected to continue
to be volatile. As consideration in the merger, Onvia will issue approximately
0.6 share of Onvia's common stock for each outstanding share of DemandStar's
capital stock. The value of the Onvia common stock issued in the merger will
depend on the market price of Onvia's common stock at the time of the merger
and no adjustment will be made as a result of changes in the market price of
Onvia's common stock. Any reduction in Onvia's common stock price will result
in DemandStar shareholders receiving less value in the merger at closing.
DemandStar shareholders will not know the exact value of Onvia's common stock
to be issued to them when they vote to approve the merger at the special
meeting of DemandStar shareholders. Neither Onvia nor DemandStar may terminate
or renegotiate the merger agreement, and DemandStar may not resolicit the vote
of its shareholders because of changes in the market price of Onvia's common
stock or DemandStar's common stock.
Onvia's stock price is very volatile.
The market price of Onvia's common stock has been and is expected to
continue to fluctuate significantly in response to various factors, including:
. actual or anticipated variations in quarterly results of operations;
. announcements of technological innovations, new products or services by
Onvia or its competitors;
. changes in financial estimates or recommendations by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market values of other Internet, online service or
software companies;
. announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
. additions or departures of key personnel;
. sales of its common stock;
. general market conditions; and
. other events or factors, many of which are beyond Onvia's control.
In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet and technology companies in particular, have
experienced extreme price fluctuations that have often been unrelated
12
<PAGE>
or disproportionate to the operating performance of these companies. These
broad market and industry conditions may materially and adversely affect
Onvia's stock price, regardless of its operating performance.
Onvia will face challenges that may prevent it from successfully integrating
Onvia and DemandStar.
There are significant challenges to integrating Onvia and DemandStar.
Because integrating the companies involves significant challenges and is a
complex process, the anticipated benefits of the merger may not be achieved.
The challenges involved in this integration include:
. retaining existing customers and strategic partners of Onvia and
DemandStar;
. retaining and integrating management and other key employees of both
Onvia and DemandStar;
. coordinating research and development activities to enhance the
introduction of new products, services and technologies;
. addressing public perceptions of changes in Onvia's business focus;
. combining service and product offerings effectively and quickly;
. transitioning two systems to a common information technology system;
. integrating the sales forces of the two companies;
. persuading employees that the business cultures of Onvia and DemandStar
are compatible;
. offering services and products of Onvia and DemandStar to each other's
customers and partners;
. marketing the combined company;
. blending the pricing models;
. developing and maintaining uniform standards, controls, procedures and
policies;
. minimizing the potential disruption of Onvia's business and distraction
of its management;
. incorporating DemandStar's technology and products and services into the
product and service offerings of Onvia; and
. controlling expenses related to the integration of the two companies.
Onvia may not succeed in overcoming these risks or any other problems
encountered in connection with the merger. The diversion of the attention of
Onvia's management and any difficulties encountered in the process of combining
the companies could cause the disruption of, or a loss of momentum in, the
activities of Onvia's business. If Onvia does not successfully integrate
DemandStar, the market price of Onvia's common stock may decline.
If the merger does not meet the expectations of financial or industry analysts
or Onvia's investors, the market price of Onvia's common stock may decline.
Onvia may have made incorrect assumptions about DemandStar's business and
operations, such as the ability of DemandStar to secure additional business
from government customers and vendors selling to those customers, and to
continue to execute its strategic plan. Consequently, Onvia may not achieve the
forecasted benefits of the merger, including improved financial results, to the
extent anticipated by Onvia, or financial or industry analysts. In addition,
significant stockholders of Onvia following the merger may decide to dispose of
their shares if the merger fails to meet their expectations. In either event,
the market price of Onvia's common stock may decline.
13
<PAGE>
DemandStar's officers and directors have conflicts of interest that may
influence them to support or approve the merger.
Certain officers and directors of DemandStar have received employment and
consulting arrangement commitments from Onvia and Onvia has agreed to provide
them with continuing indemnification against liabilities that provide these
officers and directors with interests in the merger that are different from, or
in addition to, those of other DemandStar shareholders. In connection with the
merger, certain executive officers of DemandStar have entered into amended and
restated employment agreements providing for their employment by Onvia after
the merger. Upon completion of the merger, O.F. Ramos, currently Chief
Executive Officer, President and a director of DemandStar, will become Onvia's
Vice President, Government Operations. In addition, Edward S. Jordan,
DemandStar's Chief Operating Officer, will become Onvia's Vice President,
Government Sales and William Knox North, DemandStar's Chief Technology Officer,
will become Onvia's Vice President, Government Exchange Technology.
Each of these executive officers has also entered into amended and restated
option agreements with Onvia that change the vesting and exercise terms of
their existing option agreements and, in the case of Messrs. Jordan and North,
that also obligate Onvia to make additional grants of options to purchase
Onvia's common stock to each of them.
As a condition to the closing of the merger, Bernard B. Markey, Chairman of
the Board of DemandStar, L.A. Gornto, Jr., Executive Vice President, Secretary
and a director of DemandStar, and Edward Moses, a director of DemandStar, must
amend their existing employment and consulting arrangements with DemandStar so
that they will provide post-merger consulting services to Onvia. Each of these
individuals also must amend their existing option arrangements to provide for
different exercise and vesting terms as provided in the merger agreement.
Messrs. Markey, Gornto, Moses and Ramos also serve as directors of H.T.E.,
Inc., DemandStar's largest shareholder. DemandStar previously borrowed $1.75
million from H.T.E. The terms of the bridge financing between Onvia and
DemandStar permit H.T.E. to be paid accrued interest in connection with its
loan to DemandStar that it would not otherwise be paid subject to the
satisfaction of certain conditions.
Onvia will cause the surviving corporation of the merger to fulfill and
honor in all respects DemandStar's obligations pursuant to any indemnification
agreements between DemandStar and its officers and directors. Onvia will also
cause the surviving corporation to maintain officers' and directors' liability
insurance to cover any such liabilities for the next three years.
DemandStar's directors and officers may therefore have been and may be more
likely to vote to adopt the merger agreement and approve the merger than if
they did not have these interests. DemandStar shareholders should consider
whether these interests may have influenced these directors and officers to
support or recommend the merger. You should read more about these interests
under "The Merger--Interests of certain persons in the merger."
DemandStar may be unable to repay loans made by Onvia under the merger
agreement if the merger agreement is terminated.
Under the merger agreement, Onvia agreed to lend DemandStar an aggregate of
$5 million in the form of convertible promissory notes. On December 1, 2000,
Onvia loaned DemandStar $2 million, and Onvia is obligated to lend DemandStar
$1 million on each of January 1, 2001, February 1, 2001 and March 1, 2001.
These funds are needed for DemandStar to continue operations through the
closing of the merger without seeking third party debt or equity financing.
If the merger agreement is terminated under circumstances requiring
DemandStar to pay a termination fee to Onvia, then these loans become repayable
or convertible into DemandStar's Series C preferred stock, at Onvia's option,
30 days from termination. If the merger agreement is terminated under
circumstances requiring
14
<PAGE>
Onvia to pay DemandStar a termination fee, then these loans become repayable or
convertible into DemandStar's Series C preferred stock, at Onvia's option, 12
months from termination. DemandStar cannot assure you that it will be able to
repay these loans if the merger does not occur. If the loans are converted into
DemandStar's Series C preferred stock, then DemandStar's existing shareholders
will suffer immediate and substantial dilution.
Uncertainties associated with the merger may cause DemandStar to lose key
personnel.
Current and prospective DemandStar employees may be uncertain about their
future roles with Onvia. This uncertainty may adversely affect DemandStar's
ability to retain and attract key management, sales, marketing and technical
personnel.
The merger could adversely affect combined financial results.
Onvia and DemandStar expect to incur direct transaction costs of
approximately $800,000 in connection with the merger. If the benefits of the
merger do not exceed the costs associated with the merger, Onvia's financial
results could be adversely affected. Such adverse effect, especially when
coupled with the dilution to Onvia stockholders resulting from the issuance of
shares in connection with the merger, may increase Onvia's loss per share.
Risks Related to Onvia
Onvia depends on government agencies and small businesses for the success of
its exchange.
Onvia's success depends on government agencies and small businesses joining
and actively participating in its exchange. Any failure of government agencies
and small businesses to participate in Onvia's exchange in sufficient and
increasing numbers would make the exchange less attractive to buyers and
consequently sellers. In order to provide buyers on the exchange an organized
method for accessing operating resources, Onvia relies on sellers to maintain
web-based catalogs, indexes identifying services and other means of organizing
content. Onvia's inability to access and index this information would result in
its customers having fewer products and services available to them through
Onvia's exchange, which would adversely affect the usefulness of the exchange.
Onvia's ability to grow its business depends in part on governments and small
businesses increasing their use of the Internet to conduct commerce and the
Internet being able to support the demands of this growth.
Onvia's growth depends in part on increased use of the Internet by
governments and small businesses. If use of the Internet as a medium for
government, consumer and business communications and commerce does not continue
to increase, demand for Onvia's services and products will be limited and its
financial results may suffer.
Even if governments and small businesses increase their use of the Internet,
the Internet infrastructure may not be able to support the demands of this
growth. The Internet infrastructure must be continually improved and expanded
in order to alleviate overloading and congestion. If the Internet's
infrastructure is not improved or expanded, the Internet's performance and
reliability will be degraded. Internet users may experience service
interruptions as a result of outages and other delays occurring throughout the
Internet. Frequent outages or delays may cause consumers and businesses to slow
or stop their use of the Internet as a transaction-based medium.
15
<PAGE>
Business-to-business and government-to-business exchange service platforms are
at an early stage of development and market acceptance and may not prove to be
viable.
Broad and timely acceptance of Onvia's exchange services, which is critical
to Onvia's future success, is subject to a number of significant risks. These
risks include:
. operating resource management and procurement services on the Internet is
a new market;
. Onvia's need to significantly enhance the features and services of its
exchange to achieve acceptance and scalability;
. a significant number of small businesses and government agencies will not
be willing to purchase their business services and products online;
. a significant number of small businesses, government agencies and their
vendors will not use Onvia's exchange model to buy and sell services and
products; and
. small business customers will not provide Onvia data about themselves.
Although Onvia expects to derive a significant portion of its revenue in the
future from exchange services, Onvia has not yet fully evolved its revenue
model for services associated with the exchange. The revenue associated with
exchange services may be a combination of transaction and/or annual
subscription fees. Examples of such services might include electronic payment
and bid/quote, among others. However, Onvia cannot predict whether these
services will be commercially successful or whether they will adversely impact
revenues. Onvia would be seriously harmed if its exchange model is not
commercially successful.
If Onvia fails to expand its current technology infrastructure and exchange
software system, it will be unable to accommodate its anticipated growth.
To be successful, Onvia must expand and develop its technology
infrastructure and exchange software system. To maintain the necessary
technology in the future, Onvia must continue to expand and stabilize the
performance of its web servers, optimize the performance of its network servers
and ensure the stable performance of its entire network. Onvia must improve,
and potentially replace, its exchange software system to handle additional
customers and to provide additional functionality. Onvia may not be successful
in its ongoing efforts to upgrade its systems, or if it does successfully
upgrade its systems, Onvia may not do so on time and within budget. Failure to
achieve a stable technological platform in time to handle increasing exchange
traffic may discourage potential customers from using Onvia's exchange, and
therefore harm its reputation and business.
Onvia has a limited operating history, making it difficult to evaluate its
business and future prospects.
Onvia was incorporated in March 1997. Onvia has been serving small business
since that time and has been focusing on including government agencies in its
exchange only for the last year. Onvia has a limited operating history upon
which an investor may evaluate its business and prospects. Onvia's potential
for future profitability must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
early stages of development, particularly companies in new and rapidly evolving
markets, such as emarketplaces in general and those catering to small
businesses in particular. Onvia may not successfully address any of these
risks. If Onvia does not successfully address these risks, its business will be
seriously harmed.
Potential employment litigation against Onvia could distract management and
negatively impact its operating results.
In December 2000, in connection with entering into its strategic
relationship with firstsource corp., Onvia laid off 48% of its workforce, most
of whom were employed in its Purchase Now business unit. Former employees may
file claims against Onvia related to their layoffs, resulting in large
expenditures to defend these
16
<PAGE>
claims and the distraction of Onvia's management. The results of any potential
employment litigation proceedings are inherently unpredictable, and Onvia is
unable to provide assurance regarding the outcome of any potential actions or
possible damages that may be incurred. If any former employees were to prevail
on any claims against Onvia, this could severely harm Onvia's business,
operating results and financial condition.
Onvia's strategic partnership with firstsource will cause a significant
decrease in Onvia's gross revenue in 2001 and beyond, which may cause Onvia's
stock price to decline.
Prior to Onvia's strategic partnership with firstsource corp., substantially
all of Onvia's revenue was derived from product sales. Under the strategic
partnership with firstsource, Onvia's revenue derived from product sales is
limited to a fixed percentage of sales made by firstsource to Onvia's
customers, with certain guaranteed revenues in 2001. The commissions received
by Onvia from firstsource will be significantly lower than the gross product
revenues recognized by Onvia prior to entering into the firstsource
relationship, and this decrease may have an adverse affect on Onvia's stock
price.
Problems with firstsource's performance could reduce Onvia's commission
revenue.
Onvia relies on firstsource to service its customers and fulfill a portion
of its obligations under its contracts with third parties. Problems may occur
with firstsource's performance, including its failure to fill orders correctly
or in a timely manner, technical problems with its systems, or firstsource's
becoming insolvent or otherwise unable to perform its obligations to Onvia.
These and other problems with firstsource could damage Onvia's reputation,
discourage potential customers from using Purchase Now, result in Onvia
breaching its obligations to third parties under existing contracts, and result
in Onvia obtaining lower than projected commission revenue.
Onvia has incurred negative cash flows in each quarter since inception, and it
expects to incur significant negative cash flows in the future.
Onvia has incurred negative cash flows from operations in each quarter since
inception. Under Onvia's current operating plan, it expects to continue to
incur negative cash flows until the fourth quarter of 2002. To increase
revenue, Onvia will need to continue to attract customers and suppliers to its
exchange and expand its service offerings. Under its operating plan, it is also
projected that Onvia will continue to incur significant sales and marketing,
technology development, general and administrative expenses. As a result, Onvia
will need to generate significant revenue to achieve profitability in the
future. Any failure to significantly increase revenue and achieve and maintain
profitability would materially affect Onvia's business, operating results and
financial condition and may adversely affect the market price of Onvia's stock.
Onvia has completed other acquisitions and expects to make future acquisitions,
which may harm its operating results.
Onvia has completed other acquisitions and expects to continue making
acquisitions designed to increase its customer base, broaden its offerings and
expand its technology platform. Onvia's ability to integrate its past
acquisitions is unproven. In addition, failure to successfully evaluate and
execute future acquisitions may seriously harm Onvia's business. To evaluate
and execute an acquisition successfully, Onvia must:
. properly evaluate the technology, personnel and customers;
. accurately forecast the financial impact of the transaction, including
charges and transaction and professional expenses;
. integrate and retain personnel;
. combine potentially different corporate cultures; and
. effectively integrate services and products and technology, sales,
marketing and support operations.
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If Onvia fails to do any of these tasks, it may complete unsuccessful
acquisitions, possibly resulting in adverse consequences to Onvia's business.
Onvia currently intends to finance future acquisitions by using Onvia's common
stock and cash for all or a portion of the consideration to be paid. In the
event that Onvia's common stock does not maintain sufficient value, or
potential acquisition candidates are unwilling to accept Onvia's common stock
as consideration for the sale of their businesses, Onvia may be required to use
more cash, if available, in order to continue making acquisitions. If Onvia
does not have sufficient cash, Onvia's growth through acquisitions could be
limited unless it is able to obtain capital through additional debt or equity
financings.
Onvia's quarterly financial results are subject to fluctuations which may make
it difficult to forecast its future performance.
Onvia expects its revenue and operating results to vary significantly from
quarter to quarter, making it difficult to formulate meaningful comparisons of
its results between quarters. Onvia's limited operating history and unproven
business model further contribute to the difficulty of making meaningful
quarterly comparisons. Factors that may affect its quarterly results include
those discussed throughout this section. A significant portion of Onvia's
revenue for a particular quarter is derived from transactions that are
initiated and completed during that quarter.
Onvia's current and future levels of operating expenses and capital
expenditures are based largely on its growth plans and estimates of future
revenue. These expenditure levels are, to a large extent, fixed in the short
term. Onvia may not be able to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall, and any significant shortfall in revenue
relative to planned expenditures could harm its business and results of
operations. Onvia's strategic partnership with firstsource is expected to
result in a significant decline in Onvia's revenue. Additionally, any reduction
in marketing expenditures for the sale of products may cause a decrease in
traffic to the private label site, resulting in lower commission revenue from
firstsource.
Onvia's limited operating history and rapid growth make it difficult to
assess the seasonal factors in its business. Nevertheless, Onvia expects
seasonal fluctuations in its business, reflecting a combination of seasonal
trends for the services and products it offers, seasonal trends in the buying
habits of its target small business customers and government agency buyers and
seasonal trends reflecting Internet usage.
Onvia may be unable to maintain its listing on Nasdaq, which could cause
Onvia's stock price to fall and decrease the liquidity of Onvia's common stock.
Onvia's common stock trades on the Nasdaq National Market, which has certain
compliance requirements for continued listing of common stock, including a
requirement that Onvia's common stock have a minimum bid price of $1.00 per
share. If the minimum closing bid price per share is less than $1.00 for a
period of 30 consecutive business days, Onvia's shares may be delisted
following a 90 day notice period during which the minimum closing bid price
must be $1.00 or above per share for a period of 10 consecutive business days,
if Onvia does not file an appeal. On December 20, 2000, Onvia's common stock
closed at a minimum bid price per share of $1.3125. Onvia anticipates that it
would appeal any determination to delist its common stock from the Nasdaq
National Market.
If Onvia's common stock is delisted and any appeal it might file receives an
unfavorable determination by Nasdaq, its common stock would be removed from
listing on the Nasdaq National Market, and Onvia would seek to have it listed
for trading on the Nasdaq SmallCap Market. Onvia cannot assure you that it
would be able to obtain listing for its common stock on the Nasdaq SmallCap
Market or that it will be able on an ongoing basis to meet the maintenance
requirements thereof.
If Onvia's common stock were to be delisted from trading on the Nasdaq
National Market, in order to obtain relisting on the Nasdaq National Market,
Onvia would need to satisfy certain quantitative designation criteria which it
does not currently meet.
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If Onvia's common stock were to be delisted from trading on the Nasdaq
National Market and were neither relisted thereon nor listed for trading on the
Nasdaq SmallCap Market, trading, if any, in its common stock may continue to be
conducted on the OTC Bulletin Board or in a non-Nasdaq over-the-counter market,
such as the "pink sheets." Delisting of Onvia's common stock would result in
limited release of the market price of the common stock and limited news
coverage of Onvia and could restrict investors' interest in the common stock.
Also, a delisting could materially adversely affect the trading market and
prices for Onvia's common stock and Onvia's ability to issue additional
securities or to secure additional financing. In addition, if Onvia's common
stock were not listed and the trading price of the common stock was less than
$5 per share, Onvia's common stock could be subject to Rule 15g-9 under the
Securities Exchange Act of 1934 which, among other things, requires that
broker/dealers satisfy special sales practice requirements, including making
individualized written suitability determinations and receiving a purchaser's
written consent prior to any transaction. In such case, Onvia's common stock
could also be deemed to be a "penny stock" under the Securities Enforcement and
Penny Stock Reform Act of 1990, which would require additional disclosure in
connection with trades in the common stock, including the delivery of a
disclosure schedule explaining the nature and risks of the penny stock market.
Such requirements could severely limit the liquidity of Onvia's common stock.
Onvia's network and software are vulnerable to security breaches and similar
threats that could result in its liability for damages and harm its reputation.
Onvia's network infrastructure is vulnerable to computer viruses, break-ins,
network attacks and similar disruptive problems. This could result in Onvia's
liability for related damages, and its reputation could suffer, thus deterring
existing and potential customers from transacting business with Onvia. Security
problems caused by third parties could lead to interruptions and delays or to
the cessation of service to Onvia's customers. Furthermore, inappropriate use
of the network by third parties could also jeopardize the security of
confidential information stored in Onvia's computer systems.
Onvia intends to continue to implement industry-standard security measures,
but it cannot assure you that the measures it implements will not be
circumvented. The costs and resources required to alleviate security problems
may result in interruptions, delays or cessation of service to its customers,
which could harm Onvia's business.
Success by John Meier in his action against Onvia could negatively impact its
operating results and result in dilution to its stockholders.
In February 2000, John Meier filed an action in the Supreme Court of British
Columbia, Canada against Onvia and Glenn Ballman, its founder, Chief Executive
Officer and Chairman. Mr. Meier's claim is based upon allegations that he and
Mr. Ballman had intentions to form a company similar to Onvia's and that
Mr. Ballman's role in founding Onvia breached an alleged partnership with Mr.
Meier and fiduciary duties owed to him. In this action, Mr. Meier asserts that
he is entitled to 50% of Mr. Ballman's interest in Onvia, as well as 50% of the
assets and business of Onvia. Based upon its investigation to date, Onvia
believes that the allegations against it are wholly without merit and that the
outcome of this action will not harm its business. Onvia believes that it has
valid defenses to this claim and intends to defend the action vigorously.
The results of litigation proceedings are inherently unpredictable, and
Onvia is unable to provide assurance regarding the outcome of this action or
possible damages that may be incurred. Although Onvia believes that it is
unlikely, if Mr. Meier were to prevail on his claim against Onvia in its
entirety, it would severely harm Onvia's business, operating results and
financial condition. Any cash award or settlement paid by Onvia to Mr. Meier
could have a material negative impact on its operating results and financial
condition. Any shares of common stock issued to Mr. Meier by Onvia would be
dilutive to its stockholders. It is also possible that defense of this claim
will result in a significant diversion of management attention. In the event
that Mr. Meier is successful in his claim against Mr. Ballman, it is possible
that Mr. Meier could become one of Onvia's principal stockholders and have an
ability to exert influence over matters submitted to its stockholders.
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Intense competition could impede Onvia's ability to gain market share and harm
its financial results.
The business-to-business, government-to-business and business-to-government
ecommerce markets are new, rapidly evolving and intensely competitive, and
Onvia expects competition to intensify in the future. Onvia's business could be
severely harmed if Onvia is not able to compete successfully against current or
future competitors. Although Onvia believes that there may be opportunities for
several providers of products and services similar to Onvia's, a single
provider may dominate the market. Onvia expects that additional companies will
offer competing ecommerce solutions in the future. Onvia's current and
potential competitors include:
. companies such as America Online, Microsoft, NBCi and Yahoo! that offer a
broad array of Internet-related services and either offer business-to-
business ecommerce services presently or have announced plans to
introduce such services in the future;
. companies such as Ariba, CommerceOne and PurchasePro.com that offer
business-to-business exchange services;
. companies such as AMS, Digital Commerce, NIC Commerce, ProcureNet and
other companies focused on providing services to government agencies;
. Internet sites that provide customized computing solutions through the
direct marketing of computer products including hardware, software,
peripherals, networking and accessories;
. companies such as Bigstep.com, eCongo, Infospace's HyperMart and Network
Commerce, Inc. that enable the creation and hosting capability of
customized ebusinesses; and
. companies such as Oracle, PeopleSoft and SAP that offer enterprise
software platforms targeted at the business-to-business market.
Many of Onvia's current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition in business and
Internet markets and significantly greater financial, marketing and technical
resources than Onvia does. Onvia's competitors may be more successful than
Onvia in developing their technologies, adapting more aggressive pricing
policies and establishing more comprehensive marketing and advertising
campaigns.
Onvia's competitors may develop web sites that are more sophisticated than
Onvia's with better online tools and service and product offerings superior to
Onvia's. For these or other reasons, Onvia's competitors' web sites may achieve
greater acceptance than Onvia's, limiting its ability to gain market share and
customer loyalty and to generate sufficient revenue to achieve profitability.
Onvia has grown very quickly and if it fails to manage this growth, its ability
to increase revenue and achieve profitability may be harmed.
Onvia has rapidly and significantly expanded its operations, and Onvia needs
to grow quickly in the future. This growth has placed a significant strain on
Onvia's employees, management systems and other resources and will continue to
do so. If Onvia does not manage its growth effectively, its revenue may not
grow as expected, and Onvia may never achieve profitability.
Effectively managing its expected future growth will require, among other
things, that Onvia successfully upgrade its operating systems, improve its
management reporting capabilities and strengthen internal controls. Onvia will
also need to attract, hire and retain highly skilled and motivated officers and
employees. Onvia must also maintain close coordination among its marketing,
operations, engineering and accounting departments. Onvia may not succeed in
achieving any of these objectives.
Onvia's business will suffer if it is unable to hire and retain highly
qualified employees.
Onvia's future success depends on its ability to identify, hire, train and
retain highly qualified sales and marketing, technical, managerial and
administrative personnel. As Onvia continues to build an outside sales
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force and introduce new services, products and features on its web site, and as
its customer base continues to grow, Onvia will need to hire qualified
personnel. Competition for qualified personnel, especially those with Internet
experience, is intense, and Onvia may not be able to retain existing employees
and attract, train, assimilate or retain qualified personnel in the future. In
addition, Onvia's recent layoffs and reductions in workforce may affect its
ability to attract new qualified personnel as it grows. Onvia's failure to
attract, train, assimilate and retain qualified personnel could seriously
disrupt its operations and increase its costs because Onvia would be required
to use more expensive outside consultants.
Onvia's executive officers and key employees are critical to its business, and
these officers and key employees may not remain with Onvia in the future.
Onvia believes that its success will depend on the continued employment of
its senior management team and key technical personnel. If one or more members
of Onvia's senior management team were unable or unwilling to continue in their
present positions, its business would suffer. Onvia does not maintain "key
person" life insurance on any of its executives other than Glenn Ballman, its
founder, Chief Executive Officer and Chairman of the Board. The loss of Mr.
Ballman, Michael Pickett, its President, Chief Operating Officer and director,
or other key employees would likely harm Onvia's business.
Onvia may require significant additional capital in the future, which may not
be available on suitable terms, or at all.
The expansion and development of its business may require significant
additional capital, which Onvia may be unable to obtain on suitable terms, or
at all. If Onvia is unable to obtain adequate funding on suitable terms or at
all, it may have to delay, reduce or eliminate some or all of its advertising,
marketing, engineering efforts, general operations or any other initiatives.
Onvia may require substantial additional funds to expand its advertising and
marketing activities, to continue to develop and upgrade its technology and to
acquire other businesses. If Onvia issues convertible debt or equity securities
to raise additional funds, Onvia's existing stockholders will be diluted.
The performance of its web site is critical to Onvia's business and its
reputation.
Any system failure that causes an interruption in Onvia's hosting or
exchange web site service or a decrease in its responsiveness could result in
reduced activity and reduced revenue. Further, prolonged or ongoing performance
problems with its web site could damage Onvia's reputation and result in the
permanent loss of customers. In the past, system interruptions have made
Onvia's web site totally unavailable, slowed its response time or prevented
Onvia from making its services available to its customers, and these problems
may occur again in the future.
In April 1999, Onvia entered into an agreement with Exodus Communications to
maintain all of its web servers and database servers at Exodus' Seattle
location. Onvia's operations depend on Exodus's ability to protect its systems
against damage from fire, power loss, water damage, telecommunications
failures, vandalism and similar unexpected adverse events. Any disruption in
the services provided by Exodus could severely disrupt Onvia's operations.
Onvia may begin to maintain its web and database servers internally. Onvia's
lack of experience and expertise in maintaining web and database servers may
increase the likelihood of interruptions and failures of its hosting or
exchange web site service. Regardless of whether Onvia's servers are maintained
by Exodus or Onvia, Onvia's backup systems may not be sufficient to prevent
major interruptions to its operations, and it has not finalized and tested its
disaster recovery plan. Onvia may not have sufficient business interruption
insurance to cover losses from major interruptions.
Onvia's customers and visitors to its web site depend on their own Internet
service providers, online service providers and other web site operators for
access to the Onvia.com web site. Each of these providers has experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to Onvia's systems.
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Onvia's services and products depend upon the continued availability of
licensed technology from third parties.
Onvia licenses and will continue to license technology integral to its
services and products from third parties. If Onvia is unable to acquire or
retain key third-party product licenses or integrate the related third-party
products into its exchange services and products, Onvia's service and product
development may be delayed. Onvia also expects to require new licenses in the
future as its business grows and technology evolves. Onvia may not be able to
obtain these licenses on commercially reasonable terms, if at all.
Onvia may not be able to keep up with rapid technological and industry changes.
The Internet and online commerce markets are characterized by rapid
technological change, frequent introductions of new or enhanced hardware and
software products, evolving industry standards and changes in customer
preferences and requirements. Onvia may not be able to keep up with any of
these or other rapid technological changes, and if it does not, its business
may be harmed. These changes and the emergence of new industry standards and
practices could render Onvia's existing web site and operational infrastructure
obsolete. The widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
Onvia to incur substantial expenditures to modify or adapt its operating
practices or infrastructure. To be successful, Onvia must enhance its web site
responsiveness, functionality and features, acquire and license leading
technologies, enhance its existing service and product offerings, and respond
to technological advances and emerging industry standards and practices in a
timely and cost effective manner.
Future regulations could be enacted that either directly restrict Onvia's
business or indirectly impact its business by limiting the growth of ecommerce.
As ecommerce evolves, federal, state and foreign agencies could adopt
regulations covering issues such as privacy, content and taxation of services
and products. If enacted, government regulations could limit the market for
Onvia's services and products. Although many regulations might not apply to its
business directly, Onvia expects that laws regulating the collection or
processing of personal or consumer information could indirectly affect its
business. It is possible that legislation could expose companies involved in
ecommerce to liability, which could limit the growth of ecommerce generally.
Legislation could hinder the growth in Internet use and decrease its acceptance
as a medium for communication and commerce.
Onvia's principal stockholders, officers and directors own a controlling
interest in its voting stock.
Onvia's officers, directors and stockholders with greater than 5% holdings
beneficially own a majority of its outstanding common stock. As a result, these
stockholders, acting together, will have the ability to control substantially
all matters submitted to its stockholders for approval, including:
. election of Onvia's board of directors;
. removal of any of Onvia's directors;
. amendment of Onvia's certificate of incorporation or bylaws; and
. adoption of measures that could delay or prevent a change in control or
impede a merger, takeover or other business combination involving Onvia.
These stockholders have substantial influence over Onvia's management and
its affairs.
Onvia has implemented anti-takeover provisions that may discourage takeover
attempts and depress the market price of its stock.
Provisions of Onvia's certificate of incorporation and bylaws, as well as
provisions of Delaware and Washington law, can have the effect of making it
difficult for a third party to acquire Onvia, even if doing so would be
beneficial to its stockholders.
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Onvia does not intend to pay dividends.
Onvia has never declared or paid any cash dividends on its capital stock and
does not intend to pay dividends in the foreseeable future. Onvia intends to
invest its future earnings, if any, to fund its growth.
Risks Related to DemandStar
DemandStar anticipates incurring significant losses for the foreseeable future.
To date, DemandStar has not been profitable. DemandStar may never be
profitable or, if DemandStar becomes profitable, it may be unable to sustain
profitability. DemandStar has incurred significant losses since inception.
Together with its predecessor, DemandStar reported a total net loss of $1.4
million for the year ended December 31, 1999 and $6.4 million for the nine
months ended September 30, 2000. DemandStar expects to continue to incur
significant losses for the foreseeable future. As of September 30, 2000,
DemandStar's accumulated deficit was $7.4 million. DemandStar's limited
operating history makes predicting its future operating results, including
operating expenses, difficult. DemandStar's revenue may not grow or may not
continue at their current level.
DemandStar received a qualified accountants' report which indicates doubts
about DemandStar's ability to continue as a going concern.
As noted in DemandStar's Report of Independent Certified Public Accountants
included in the December 31, 1999 financial statements in this proxy
statement/prospectus, DemandStar has experienced significant operating losses
and an accumulated deficit which raise substantial doubt about DemandStar's
ability to continue as a going concern. The report contains an explanatory
paragraph indicating factors which create doubt about DemandStar's ability to
continue as a going concern. These factors include the fact that DemandStar has
generated losses since its inception and has relied on capital contributions
and loans from shareholders to fund its operations.
Because DemandStar has a limited operating history, it may be difficult to
evaluate its business.
DemandStar has a limited operating history on which to base an evaluation of
its business and prospects. You must consider DemandStar's business in the
light of the risks, expenses and problems frequently encountered by early stage
companies like DemandStar in the new and rapidly evolving ecommerce market.
These risks include DemandStar's ability to:
. scale its business model;
. increase the efficiency and functionality of its services;
. anticipate and adapt to rapid changes in its markets;
. retain existing customers, attract new customers and maintain customer
satisfaction;
. introduce its enhanced web sites, services, products and alliances; and
. minimize technical difficulties, system downtime and the effect of
Internet brownouts.
If DemandStar does not successfully manage these risks, its business will
suffer.
If DemandStar does not increase its revenue, its fixed and operating expenses
will generate increased losses.
Some of DemandStar's expenses are fixed, including obligations under non-
cancelable agreements, equipment leases and real estate leases. Consequently,
DemandStar may not be able to reduce expenses in a timely manner. In addition,
DemandStar plans to increase its operating expenses to:
. increase its sales and marketing operations;
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. broaden its customer support capabilities; and
. develop new and enhanced products and services.
Expenses may also increase due to the potential impact of goodwill and other
charges resulting from completed and future acquisitions. If DemandStar's
expenses are greater than expected or these expenses are not accompanied by
increased revenue, its business, financial condition and operating results may
be materially adversely affected.
DemandStar may not be able to obtain adequate additional capital on acceptable
terms, or at all.
DemandStar must raise capital through debt and/or equity financing for its
operations. If adequate funds are not available on acceptable terms,
DemandStar's ability to continue as a going concern will be adversely affected.
DemandStar may need to raise capital to:
. maintain current operations;
. support its expansion into other states, cities, and municipalities, as
well as internationally;
. respond to competitive pressures; and
. acquire complementary businesses or technologies, should such
opportunities arise.
Necessary funding may not be available on terms acceptable to DemandStar, or
at all. If adequate funds are not available on acceptable terms, DemandStar's
ability to develop or enhance its products and services to take advantage of
future opportunities or respond to competitive pressures would be significantly
limited. This limitation could harm DemandStar's business, operating results
and financial condition.
Termination of the merger may have a material adverse impact on DemandStar's
business.
The merger agreement obligates Onvia to loan DemandStar an aggregate of $5
million to fund its operations as follows: $2 million on December 1, 2000; and
three installments of $1 million on each of January 1, 2001, February 1, 2001
and March 1, 2001. DemandStar will execute a convertible promissory note for
each of the four installments. Each note shall bear interest at the rate of 9%
per year and shall mature on November 1, 2003. If the merger agreement is
terminated under circumstances that would require DemandStar to pay Onvia a
termination fee, then each note will accelerate and become due within 30 days
after such termination. However, if the merger agreement is terminated under
circumstances that would require Onvia to pay DemandStar a termination fee,
then each note will become due within 12 months after such termination. In
either event, each of these circumstances would have a material adverse impact
on DemandStar because it would be obligated to repay such debt. In order to
repay such debt, DemandStar would most likely need to obtain other financing
and there is no assurance that such refinancing could be arranged, or if
arranged that it would be on favorable terms.
DemandStar may be unable to manage its growth effectively, which could cause
its business and operating results to suffer.
DemandStar's growth rate may increase rapidly in response to the acceptance
of its products and services under new or existing government contracts. This
growth will place a substantial strain on DemandStar's limited management,
operational and financial resources and systems. Integrating DemandStar's
operations and managing the growth of its operations will require the
development and implementation of its operational and financial systems,
procedures and controls and training, and management and expansion of its
employee base. DemandStar might be unable to manage effectively the expansion
of its operations and systems, and the procedures or controls that it adopts
might be inadequate to support the rapid execution necessary to exploit fully
the market opportunity it has identified. If DemandStar does not manage its
growth effectively, its business and operating results will suffer.
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DemandStar's business may be adversely affected by governmental agencies'
business decisions.
There are various factors which could delay acceptance by or prevent
governmental agencies from contracting with DemandStar for its service,
including:
. changes to state legislation authorizing governments contracting with
third parties to distribute public information;
. the high cost of implementing and maintaining Internet technology in a
budget-constrained environment;
. the risks associated with moving from older, established technologies to
rapidly evolving Internet technologies;
. the intense competition for qualified technical personnel; and
. the lengthy political appropriations process for obtaining funds to
acquire and implement new technology.
Delays in the approval process or the failure to obtain these approvals from
government agencies or slow adoption rates by government agencies could harm
DemandStar's business, operating results and financial condition.
The termination of contracts may harm DemandStar's business.
Currently, DemandStar has contracts with over 200 governmental entities.
Generally, these contracts are cancelable by either party upon 30 days' notice.
The decision by a number of governments not to renew existing contracts or the
termination of several of these contracts may result in significant revenue
shortfalls. Revenue shortfalls would result because agreements with vendors,
who pay fees to DemandStar in order to use its systems to sell to government
agencies, are cancelable by either party upon 30 days' notice. DemandStar will
notify appropriate vendors if a government terminates or fails to renew an
agreement. The vendor could then choose to cancel its vendor agreement with
DemandStar, which would result in revenue shortfalls. If these revenue
shortfalls occur, DemandStar's business and financial condition would be
harmed. DemandStar cannot be certain if, when, or to what extent governments
might fail to renew or terminate any or all of their contracts with DemandStar.
DemandStar may be unable to obtain future contracts through the request for
proposal process.
Once a government decides to use DemandStar's services, it sometimes
involves a selection process that operates under special rules imposed by law
applicable to government purchasing. These rules typically require open bidding
by possible service providers like DemandStar against a list of requirements
established by governments under existing or specially created procedures
generally involving requests for proposals made by governments. To respond
successfully to these requests for proposals, DemandStar must estimate the time
and costs required to establish operations for the proposed government client
and the likely terms of any other proposals submitted. DemandStar must also
assemble and submit a large volume of information within the strict time
schedule mandated by a request for proposal. Whether or not DemandStar is able
to respond successfully to requests for proposals in the future will
significantly impact its business.
DemandStar cannot guarantee that it will win any bids in the future through
the request for proposal process. DemandStar also cannot guarantee that any
winning bids will ultimately result in contracts because after the winning bid
is identified, negotiations then occur between the winning party and the
agency. Typically, these negotiations are over legal terms and conditions of
the agreement, not price or delivery time. DemandStar cannot guarantee the
success of those negotiations. If negotiations fail, the agency is free to
negotiate with other bidders or restart the request for proposal process.
DemandStar generates most of its revenue from vendors who pay fees to it in
order to use its systems to sell goods and services to government agencies. If
DemandStar is unable to secure contracts with governments, then it will be
unable to secure revenue generating agreements with new vendors and existing
vendors may terminate their agreements with DemandStar.
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DemandStar's business, financial condition and operating results would be
harmed if it fails to obtain profitable future contracts through the request
for proposal process.
If demand for DemandStar's core service weakens, DemandStar's business and
financial condition would be harmed.
DemandStar's core service, which generates subscription-based fees charged
for access to governmental procurement information, accounted for approximately
85% of DemandStar's revenue for the year ended December 31, 1999. DemandStar
anticipates that such fees will represent approximately 84% for the year that
will end December 31, 2000, and are expected to continue to account for a
significant portion of DemandStar's revenue in the near future. Regulatory
changes or the development of alternative information sources could materially
reduce DemandStar's revenue from this core service.
Because DemandStar relies on a contractual bidding process whose parameters are
established by governments, the length of its sales cycles can lead to revenue
shortfalls.
DemandStar's reliance on a bidding process to initiate new projects, the
parameters of which are established by governments, results in uncertainty in
its sales cycles because the duration and the procedures for each bidding
process vary significantly according to each government entity's policies and
procedures. The time between the date of initial contact with a government for
a bid and the award of the bid may range from as little as 30 days to as much
as 180 days. The bidding process is subject to factors over which DemandStar
has little or no control, including:
. the internal review process by the government agencies for bid
acceptance;
. changes to the bidding procedure by the government agencies;
. changes in government administrations and personnel;
. budget restrictions of government entities;
. competition generated by the bidding process; and
. the possibility of cancellation or delay by the government entities.
Any delay in the bidding process, changes to the bidding practices and
policies, the failure to receive the bid or the failure to execute a contract
may disrupt DemandStar's financial results for a particular period and harm
DemandStar's business and financial condition. For example, vendors do not sign
up with DemandStar until it receives government approval of its contract. The
government approval process can take as long as 90 days or longer to complete.
DemandStar does not receive service fees from its new vendors during this
approval process.
DemandStar's contracts with governmental entities could be voided.
Generally, DemandStar's contracts with governments may be canceled by either
party upon 30 days' notice. Further, DemandStar's competitors or other third
parties could bring lawsuits, seek legislation or in other ways attempt to have
DemandStar's contracts voided by alleging incorrect procurement processes or
otherwise protesting DemandStar's contracts. This would harm DemandStar's
business, results of operations and financial condition.
Entrance of potential competitors into the marketplace could harm DemandStar's
ability to maintain or improve its position in the market.
DemandStar operates in a very competitive business environment. The market
for online information services is rapidly evolving and intensely competitive,
with few barriers to entry. Many companies exist that provide one or more parts
of the products and services that DemandStar offers. Moreover, government
entities
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providing data to DemandStar are not subject to exclusive agreements with
DemandStar and, as a result, data included in DemandStar's products and
services may be included in those of its potential competitors. Many of
DemandStar's existing and potential competitors are national or international
in scope, have greater resources, and may devote a significantly greater amount
of resources to development of their products and services than DemandStar
does. These resources could enable DemandStar's competitors to initiate price
cuts or take other measures in an effort to gain market share. Additionally, in
some geographic areas, DemandStar may face competition from smaller consulting
firms with established reputations and political relationships with potential
government clients. DemandStar may be unable to compete successfully with new
or existing competitors. If DemandStar does not compete effectively or if it
experiences any pricing pressures, reduced margins or loss of market share
resulting from increased competition, its business and financial condition may
be harmed.
The unpredictability of DemandStar's quarter-to-quarter results may harm the
trading price of its common stock and affect its long-term viability.
DemandStar's future revenue and operating results may vary significantly
from quarter to quarter due to a number of factors, any of which may harm its
business. Many of these factors are outside DemandStar's control, including:
. the commencement, completion or termination of contracts during any
particular quarter;
. the introduction of new electronic products and services by DemandStar's
competitors;
. technical difficulties or system downtime affecting the Internet
generally or the operation of DemandStar's electronic products and
services; and
. general economic and market conditions and economic conditions specific
to the Internet and ecommerce.
Because DemandStar has a limited operating history, it is difficult to
forecast the impact of these factors on its future revenue. DemandStar's long-
term viability depends on, among other things, a favorable effect of many of
these factors on DemandStar. Due to the factors noted above, DemandStar's
revenue in a particular quarter may be lower than it anticipates. If DemandStar
is unable to reduce spending in that quarter, its operating results for that
quarter may be harmed. You should not rely on quarter-to-quarter comparisons of
DemandStar's results of operations as an indication of future performance. It
is possible that in some future periods DemandStar's results of operations may
be below your expectations. If this occurs, the price of DemandStar's common
stock may decline.
DemandStar may lose the right to the content that it distributes, which is
provided to it entirely by government entities.
DemandStar does not own or create the governmental content distributed to
its vendors in the form of request for proposal and related information.
DemandStar does not have an exclusive right to this content. DemandStar cannot
assure you that these data sources will continue to be available in the future.
Government entities could terminate their contracts to provide data. The loss
or the unavailability of DemandStar's data sources in the future, or the loss
of its right to distribute some of the data sources, would harm its business,
operating results and financial condition.
DemandStar relies on the timeliness and accuracy of content provided to it by
government entities.
DemandStar depends on the governments with which it contracts to supply
information and data feeds to it on a timely basis to allow businesses and
citizens to complete transactions and obtain government information. In
addition, DemandStar is dependent upon the accuracy and reliability of
government computer systems and data collection for the content of DemandStar's
systems. If the information provided to DemandStar is not timely, accurate or
complete for any reason, its business, operating results and financial
condition would be harmed.
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DemandStar may be unable to hire, integrate or retain key and/or qualified
personnel.
The recent growth in DemandStar's business has resulted in an increase in
the responsibilities for both existing and new management personnel. The loss
of any of DemandStar's executives or key employees, particularly O. F. Ramos,
DemandStar's Chief Executive Officer and President, Edward Jordan, DemandStar's
Chief Operating Officer, and William Knox North, DemandStar's Chief Technology
Officer, would likely harm DemandStar's business. DemandStar does not currently
maintain any key-man life insurance on its executives or key employees.
In addition, DemandStar expects that it will need to hire additional
personnel in all areas in 2001. Competition for personnel in the technology
industry is intense. DemandStar may not be able to retain its current key
employees or attract, integrate or retain other qualified employees in the
future. If DemandStar does not succeed in attracting new personnel or
integrating, retaining and motivating its current personnel, its business could
be harmed. In addition, new employees generally require substantial training in
the presentation, policies and positioning of DemandStar's products and
services. This training will require substantial resources and management
attention.
DemandStar may fail to develop and market comprehensive, efficient, cost-
effective and secure electronic access to public information and new products
and services.
DemandStar's success depends in part upon its ability to rapidly establish
its own products and services in all the principal governmental bodies in the
United States. In order to increase revenue in the future, DemandStar must
continue to develop products and services that businesses and citizens will
find valuable, and there is no guarantee that it will be able to do so. If
DemandStar is unable to develop products and services that allow it to attract,
retain and expand its current user base, its revenues and future operating
results may be harmed. DemandStar cannot assure you that its products and
services will appeal to a sufficient number of Internet users to generate
continued revenue growth.
Deficiencies in DemandStar's performance under a government contract could
result in contract termination, reputational damage and financial liability.
Each government entity with which DemandStar contracts has the authority to
review its performance. DemandStar cannot assure you that a future review will
not find any material performance deficiencies that would lead to contract
termination and possible liability for subscription refunds. Moreover, the
consequent negative publicity could harm DemandStar's reputation among other
governments with which it would like to contract. All of these factors could
harm DemandStar's business, results of operations and financial condition.
DemandStar may be unable to protect its intellectual property rights.
DemandStar relies on a combination of nondisclosure and other contractual
arrangements with governments, its employees and third parties, as well as
privacy and trade secret laws to protect and limit the distribution of the
proprietary applications, documentation and processes DemandStar has developed.
If DemandStar fails to adequately protect its intellectual property rights and
proprietary information or if DemandStar becomes involved in litigation
relating to its intellectual property rights and proprietary technology, its
business could be harmed. Any actions DemandStar takes may not be adequate to
protect its proprietary rights and other companies may develop technologies
that are similar or superior to its proprietary technology.
Additionally, it is possible that in the future DemandStar could become
subject to claims alleging infringement of third party intellectual property
rights. Any claims could subject DemandStar to costly litigation, and may
require it to pay damages, develop non-infringing intellectual property or
acquire licenses to the intellectual property that is the subject of the
alleged infringement. Such licenses may not be available on acceptable terms or
at all.
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DemandStar's inability to maintain or obtain upgrades to the products and
services supplied by its third-party technology and service providers may
cause, among other things, a decline in the quality of these products and
services.
DemandStar's products and services are made possible by computer software,
the Internet and telephony services provided by third parties. DemandStar's
inability to maintain or obtain upgrades to the technology licenses or hardware
systems deployed in its operating infrastructure could result in delays, which
would adversely affect DemandStar's ability to operate its business. This would
cause DemandStar's business and operating results to suffer until equivalent
technology could be identified and implemented. If DemandStar is unable to
maintain satisfactory relationships with third parties who provide services or
products necessary to operate its network on acceptable commercial terms, or
the quality of products and services provided by these third parties falls
below a satisfactory standard, DemandStar could experience a disruption in the
delivery of products and services, which could have a negative impact on
DemandStar's business and its revenue.
DemandStar may be unable to integrate new technologies and industry standards
effectively.
DemandStar's future success will depend on its ability to enhance and
improve the responsiveness, functionality and features of its products and
services in accordance with industry standards and to address the increasingly
sophisticated technological needs of its customers on a cost-effective and
timely basis. DemandStar's ability to remain competitive will depend, in part,
on its ability to:
. enhance and improve the responsiveness, functionality and other features
of the products and services it offers;
. continue to develop its technical expertise;
. develop and introduce new services, applications and technology to meet
changing customer needs and preferences; and
. influence and respond to emerging industry standards and other
technological changes in a timely and cost-effective manner.
DemandStar cannot assure you that it will be successful in responding to the
above technological and industry challenges in a timely and cost-effective
manner. If DemandStar is unable to integrate new technologies and industry
standards effectively, DemandStar's results of operations could be harmed.
DemandStar may have difficulty integrating businesses involving or generating
acceptable returns from future acquisitions or investments.
DemandStar may in the future make selective acquisitions or strategic
investments in complementary businesses, products, services or technologies. If
DemandStar buys a company, it could have difficulty in integrating and
assimilating that company's operations, technologies, products and personnel.
In addition, the key personnel of the acquired company may decide not to work
for DemandStar, leaving it without any experience in a new market. These
difficulties could disrupt DemandStar's ongoing business and distract its
management and employees. DemandStar may not successfully overcome these and
other problems encountered in connection with potential acquisitions or
strategic investments. In addition, an acquisition could materially impair
DemandStar's operating results by diluting its shareholders' equity, causing it
to incur additional debt or requiring it to amortize acquisition expenses and
acquired assets.
DemandStar's common stock trades on the OTC Bulletin Board and is subject to
the SEC's "penny stock" rules.
DemandStar's shareholders may find it difficult to buy, sell and obtain
pricing information, as well as news coverage about DemandStar's common stock
because it is traded on the OTC Bulletin Board. Being traded on the OTC
Bulletin Board, rather than on a national securities exchange, may lessen
investors' interest in DemandStar's securities generally and materially
adversely affect the trading market and prices for those securities and its
ability to issue additional securities or to secure additional financing.
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The price of DemandStar's common stock could make it more difficult for
shareholders to sell their shares. DemandStar's common stock will be subject to
Rule 15g-9 under the Securities Exchange Act of 1934 as long as its price is
less than $5.00 per share. The closing bid price on December 20, 2000 was
$0.625. A low stock price could also cause DemandStar's common stock to become
subject to the SEC's "penny stock" rules and the Securities Enforcement and
Penny Stock Reform Act of 1990. The penny stock rules impose additional sales
practice requirements on broker-dealers who sell penny stock securities to
people who are not established customers or accredited investors. For example,
the broker must make a special suitability determination for the buyer and the
buyer must be given written consent before the sale. The rules also require
that the broker-dealer:
. send buyers an SEC-prepared disclosure schedule before completing the
sale, disclose the broker's commissions and current quotations for the
security;
. disclose whether the broker-dealer is the sole market maker for the penny
stock and, if so, the broker's control over the market; and
. send monthly statements disclosing recent price information held in the
customer's account and information on the limited market in penny stocks.
These additional burdens may discourage broker-dealers from effecting
transactions in DemandStar's common stock. Thus, if DemandStar's common stock
were to fall within the definition of a penny stock, DemandStar's liquidity
could be reduced, and there could be an adverse effect on the trading market in
its common stock.
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THE SPECIAL MEETING
Time, place and date of meeting
The special meeting will be held at 9:00 a.m. local time on ,
, 2001, at , Plantation, Florida.
Purposes of the special meeting
At the special meeting, DemandStar's shareholders will be asked to consider
and vote upon the following matters:
. to approve and adopt the agreement and plan of merger by and among Onvia,
Dragon Acquisition Corporation and DemandStar, dated as of November 20,
2000, and the transactions contemplated thereby, including the merger of
Dragon Acquisition Corporation with and into DemandStar, with DemandStar
as the surviving corporation of the merger; and
. to transact such other business as may properly come before the special
meeting and any adjournment or postponement thereof.
Recommendations of DemandStar's board of directors
DemandStar's board of directors:
. has unanimously approved the merger agreement and declared it to be
advisable and fair to, and in the best interests of DemandStar's
shareholders;
. has determined that the merger is consistent with and in furtherance of
DemandStar's long-term business strategy; and
. unanimously recommends that DemandStar's shareholders vote FOR the
adoption and approval of the merger agreement and the merger.
Record date; Voting at the meeting; Quorum
The record date for the shares entitled to vote at the special meeting is
, 2001.
On the record date, DemandStar had outstanding shares of common
stock, held by approximately record holders and shares of
Series A preferred stock, held by H.T.E., Inc. Holders of the common stock and
Series A preferred stock are entitled to one vote per share. The holders of
outstanding common stock and Series A preferred stock each vote as separate
classes, and all holders of outstanding Series A preferred stock and common
stock vote together as a class on an as converted basis. A quorum of
shareholders is necessary to hold a shareholder meeting. The presence in person
or by proxy of the holders of not less than a majority of the voting power of
the common stock, the Series A preferred stock and the common stock and Series
A preferred stock (on an as converted basis) considered as a single class,
entitled to vote at the special meeting constitutes a quorum. In determining
the presence of a quorum at the special meeting, abstentions and broker non-
votes are not counted.
Broker non-votes
If you are a DemandStar shareholder and your broker holds shares in its
name, your broker cannot vote your shares on the proposal to adopt the merger
agreement without your instructions. This is a "broker non-vote." A broker non-
vote or abstention with respect to the proposal will have the effect of a vote
against the proposal.
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Required shareholder vote
Pursuant to DemandStar's articles of incorporation, and consistent with
Florida law, the merger must be approved by:
. a majority of the outstanding shares of DemandStar's common stock
entitled to vote at the special meeting, voting separately as a class;
. a majority of the outstanding shares of DemandStar's Series A preferred
stock entitled to vote at the special meeting, voting separately as a
class; and
. a majority of the outstanding shares of DemandStar's common stock and
Series A preferred stock entitled to vote at the special meeting, voting
together as a class.
H.T.E. and the directors and executive officers of DemandStar entered into
voting agreements pursuant to which they have agreed to vote all of their
shares in favor of the approval of the merger agreement and the merger at the
DemandStar special meeting. As of December 20, 2000, H.T.E. owned approximately
23.8% of DemandStar's capital stock (representing 100% of DemandStar's
outstanding Series A preferred stock and approximately 16.4% of DemandStar's
outstanding common stock), although as a result of DemandStar's articles of
incorporation H.T.E.'s voting power in the aggregate represents approximately
19.9% of DemandStar's common and preferred stock voting together. As of
December 20, 2000, the directors and executive officers of DemandStar in the
aggregate owned 17.8% of the outstanding voting power of DemandStar
(approximately 37.7% when combined with H.T.E.) and 19.4% of DemandStar's
outstanding common stock (35.8% when combined with H.T.E.).
Failure to return an executed proxy card or to vote in person at the special
meeting or abstaining from the vote will constitute, in effect, a vote against
approval of the merger agreement and the transactions contemplated thereby for
purposes of Florida law.
Voting and revocation of proxies
The enclosed proxy card is solicited on behalf of DemandStar's board of
directors. The giving of a proxy does not preclude the right to vote in person
should any shareholder giving the proxy so desire. Shareholders have an
unconditional right to revoke their proxy at any time prior to its exercise,
either by filing with DemandStar's Secretary at DemandStar's principal
executive offices a written revocation or a duly executed proxy bearing a later
date or by voting in person at the DemandStar special meeting. Attendance at
the DemandStar special meeting without casting a ballot will not, by itself,
constitute revocation of a proxy. Any written notice revoking a proxy should be
sent to DemandStar.com, Inc., c/o Corporate Secretary, 1200 S. Pine Island
Road, Suite 600, Plantation, Florida 33324.
Action to be taken at the special meeting
All shares of outstanding common stock and preferred stock represented at
the special meeting by properly executed proxies received prior to or at the
special meeting, unless previously revoked, will be voted at the special
meeting in accordance with the instructions on the proxies. If no instructions
are indicated, proxies will be voted:
. ""FOR'' the approval of the merger agreement and the transactions
contemplated thereby; and
. in the discretion of the proxy holders as to any other matter which may
properly come before the special meeting.
As explained in the section entitled "Dissenters' Rights of DemandStar
Shareholders," a vote in favor of the merger agreement and the merger means
that the shareholder owning those shares will not have the right to dissent and
seek appraisal of the fair value of such shareholder's shares. DemandStar does
not know of any matters, other than as described in the notice of special
meeting of shareholders, which are to come before the
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special meeting. If any other matters are properly presented at the special
meeting for action, including, among other things, consideration of a motion to
adjourn such meeting to another time and/or place (including, without
limitation, for the purpose of soliciting additional proxies or allowing
additional time for the satisfaction of conditions to the merger), the persons
named in the enclosed proxy card and acting thereunder generally will have
discretion to vote on such matters in accordance with their best judgment.
Proxy solicitation
DemandStar will pay its own costs of soliciting proxies. The extent to which
these proxy soliciting efforts will be necessary depends entirely upon how
promptly proxies are received. You should send in your proxy by mail, telephone
or the Internet without delay. DemandStar also reimburses brokers and other
custodians, nominees and fiduciaries for their expenses in sending these
materials to you and getting your voting instructions.
Do not send in any stock certificates with your proxy. Onvia's exchange
agent will mail transmittal forms with instructions for the surrender of stock
certificates for DemandStar common shares to former shareholders as soon as
practicable after the completion of the merger.
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THE MERGER
Background of the merger
Globe-1, Incorporated, which was acquired by Onvia in August 2000, and
DemandStar have been familiar with each other's business since late 1999. Onvia
and DemandStar have been competing for the business of government buyers and
small business vendors in many of the same geographical regions of the country
and in doing so have become familiar with each other's product and service
offerings and sales and management teams.
In August 2000, DemandStar's board of directors determined that DemandStar
required additional capital to execute its business plan. As a consequence,
DemandStar's board of directors developed a comprehensive plan to either obtain
equity capital for the company or merge the company into another company in the
business-to-government, or B2G, industry having a strong capital base.
Individual members of DemandStar's board of directors contacted individuals
at private equity firms, strategic investors, money management firms, other
companies in the B2G space, as well as individual investors. Over 40 potential
investor or merger candidates were contacted as part of this effort.
During August and September 2000, DemandStar's board members contacted 15
private equity firms resulting in three meetings during mid to late September.
These meetings were held in Boston, Massachusetts and Philadelphia,
Pennsylvania. Two of the firms expressed interest in investing at prices equal
to or slightly below the trading price of $0.60 to $0.80 per share. Both firms
indicated that they were busy and could not move quickly on an investment, but
were interested in staying in contact with the company. The member of
DemandStar's board of directors who knew the two firms maintained contact with
them but found it difficult to move them forward in a timely manner. The other
private equity firms responded that DemandStar was not an appropriate candidate
for an investment due to one or more of the following reasons:
. stage of development of DemandStar;
. status as a public company;
. apparent level of financing required;
. state of "dot-com" capital markets; and
. quality of the DemandStar opportunity relative to other investment
opportunities they were evaluating.
One member of DemandStar's board of directors contacted a multi-billion
dollar financial institution in late August. The institution, which sells
financial services to local governments, expressed interest in making an
investment and developing a strategic relationship. Meetings were held during
September and October at the institution's headquarters in the New York City
area, the offices of its Chief Investment Officer in the Philadelphia,
Pennsylvania area, and at DemandStar's offices in Plantation, Florida. The
institution performed extensive due diligence on DemandStar. DemandStar's
Chairman and Chief Executive Officer made presentations to the institution's
President, Chief Investment Officer, Treasurer, Chief Financial Officer, and
other executives. Representatives of the institution were optimistic about the
prospects of closing an investment as the institution's executives supported an
investment. A term sheet was being negotiated for an equity investment priced
above DemandStar's trading range.
During August and September 2000, a member of DemandStar's board of
directors also contacted three money management firms, and these contacts
resulted in one meeting. These firms were preoccupied with other issues in
their portfolio given the weakness in the "dot-com" market. The firm with whom
representatives of DemandStar met indicated initial interest, but there was
little interest upon follow-up.
DemandStar's Chairman and Chief Executive Officer had meetings with over 20
companies operating in the B2G space from August through October 2000. These
meetings occurred in Baltimore, Maryland,
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San Francisco, California, the Washington, DC area, Seattle, Washington and
Plantation, Florida. Six of these companies were thought to have the requisite
financial strength to make pursuing a strategic investment or merger
worthwhile. Three of these companies did not express interest in pursuing an
investment, or, upon closer examination, did not have appropriate capital to be
considered for a merger. One of the other firms was slow to meet and slow to
return calls after the initial meeting. Another of the firms expressed very
strong interest in merging but continually postponed follow-on meetings. The
last firm was Onvia, which first contacted DemandStar's Chairman in October
2000 and moved very quickly to meet with DemandStar executives and members of
the board of directors.
DemandStar's Chairman and Chief Executive Officer held several meetings with
individual investors and their respective representatives. Many of these
individuals expressed strong interest in leading or participating in a multi-
million dollar equity financing. Management decided to pursue the Onvia
opportunity rather than this type of financing due to the likelihood of closure
in a short period of time.
Early in October 2000, John Heffernan, Vice President, Corporate Development
of Onvia, called Bernard Markey, Chairman of the Board of DemandStar, to
discuss the merits of a possible strategic relationship between Onvia and
DemandStar, including, among other things, a possible combination of the two
companies. This discussion resulted in the scheduling of meetings between
representatives of the two companies.
On October 17, 2000, Mr. Heffernan and Robert Gilmore, Vice President,
Government Sales of Onvia, met with Mr. Markey and O.F. Ramos, Chief Executive
Officer of DemandStar, at DemandStar's offices in Plantation, Florida, for
further preliminary discussions regarding the possibility of a business
relationship or strategic transaction between Onvia and DemandStar. Following
the meeting, Messrs. Markey and Ramos consulted with members of DemandStar's
board of directors.
On October 25, 2000, Messrs. Markey and Ramos of DemandStar, met with Glenn
Ballman, Chairman of the Board and Chief Executive Officer of Onvia, Michael
Pickett, President, Chief Operating Officer and a director of Onvia, Kristen
McLaughlin, Chief Strategy Officer of Onvia, Clayton Lewis, Vice President,
Marketing of Onvia, Christopher Bifone, Director, Corporate Development of
Onvia, and Mr. Heffernan at Onvia's offices in Seattle, Washington. At this
meeting, the management of the two companies discussed the strategic and
cultural fit of the organizations.
On October 30, 2000, Messrs. Heffernan and Lewis, accompanied by Clark
Westmoreland, Vice President, Operations of Onvia, Ross Paul, Chief Technology
Officer of Onvia, and Jeff Meyer, Director, Integration of Onvia, visited
DemandStar's offices to conduct preliminary due diligence on DemandStar's
operations. Before the due diligence meetings, the parties executed a mutual
nondisclosure agreement. The next day, Mr. Heffernan, joined by Messrs. Ballman
and Pickett and Ms. McLaughlin of Onvia, met with Edward Jordan, Chief
Operating Officer of DemandStar, and Messrs. Markey and Ramos of DemandStar,
and discussed in broad terms the financial structure and the potential
synergies of a possible business combination transaction and agreed to continue
discussions.
Four days later, on November 3, 2000, Mr. Heffernan spoke with Mr. Markey
regarding the financial structure of a potential business combination of the
companies. Following their discussion, Onvia delivered to DemandStar and its
legal counsel, Greenberg Traurig, P.A., a non-binding memorandum of
understanding outlining in broad terms valuation and possible terms of such a
transaction.
On November 6 and 7, 2000, Messrs. Ramos, Jordan and L.A. Gornto, Executive
Vice President and a director of DemandStar, met in Seattle, Washington with
Messrs. Bifone and Meyer and Ms. McLaughlin and various other representatives
of Onvia, to conduct in depth due diligence of Onvia's operations. During the
meetings, the companies executed a confidentiality agreement, supplementing the
provisions of the mutual nondisclosure agreement previously executed by the
companies. Additionally, at these meetings the parties discussed, among other
things, the companies' accounting and other policies, operational issues
associated with a potential business combination and opportunities for the
combined companies. On November 7, 2000,
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Venture Law Group, A Professional Corporation, legal counsel to Onvia,
delivered a draft of a proposed merger agreement and related documents.
During the period from November 6, 2000 through November 14, 2000, Onvia and
DemandStar exchanged information and the two companies' management teams and
legal and accounting advisors continued business, financial, legal and
accounting due diligence.
On November 8, 2000, several representatives of Onvia in Onvia's product
development group visited DemandStar's offices to conduct product-related due
diligence.
On November 12, 2000 and November 13, 2000, Messrs. Ballman and Pickett
telephonically reviewed with members of Onvia's board of directors the status
of the proposed transaction with DemandStar. Messrs. Ballman and Pickett
provided the members with a summary of the discussions with DemandStar and an
update on the results of the due diligence. Based on that information, the
members of Onvia's board of directors directed Messrs. Ballman and Pickett to
continue discussions with DemandStar.
In the evening of November 14, 2000, and throughout the day on November 15,
2000, representatives of DemandStar, Onvia, Venture Law Group and Greenberg
Traurig held various telephonic conference calls to continue negotiating the
terms of the transaction, including provisions in the draft merger agreement,
voting agreements and key employment agreements.
On November 15, 2000, Messrs. Ramos and Jordan met with various members of
Onvia's management to discuss due diligence issues, potential operational
synergies between the companies, and roles and responsibilities of management
of the combined company. Later that day, at a special meeting held via
teleconference, Onvia's board of directors, discussed the status of the
proposed transaction with DemandStar. Messrs. Ballman, Pickett and Heffernan
presented to Onvia's board of directors a summary of all discussions with
DemandStar, including the financial aspects of the transaction and the final
terms of the transaction. Onvia's board of directors approved a resolution
authorizing the transaction on that basis, subject to satisfactory resolution
of the remaining issues with DemandStar.
On November 10, 2000, Mr. Markey had a conversation with Janney Montgomery
Scott LLC and another financial advisor regarding their availability for the
purpose of evaluating the merger and providing a fairness opinion. Janney
Montgomery was retained for that purpose on November 15, 2000.
On November 17, 2000, at a special meeting held via teleconference,
DemandStar's board of directors met to consider the merger. All directors were
present. Janney Montgomery Scott orally presented its report and analysis on
fairness and after discussion and analysis the board of directors unanimously
approved the merger and terminated discussions with third parties. On November
17, 2000, Janney Montgomery Scott delivered its written fairness opinion to
DemandStar's board of directors.
From November 15 through November 20, 2000, the parties held discussions to
resolve final due diligence related issues and continued to negotiate the
merger agreement and all other related agreements.
On November 20, 2000, the parties agreed to and finalized the merger
agreement, voting agreements, key employment agreements and all other related
agreements. DemandStar and Onvia then executed the merger agreement and other
related documents and publicly announced the execution prior to opening of the
stock market on November 20, 2000.
Onvia's reasons for the merger
At a telephonic meeting held on November 15, 2000, Onvia's board of
directors unanimously concluded that the merger and the transactions
contemplated thereby were in the best interests of Onvia and its stockholders.
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<PAGE>
The decision of Onvia's board of directors was based upon several potential
benefits of the merger, including the following:
. Onvia and DemandStar together could provide state and local government
agency buyers and small business sellers a more compelling value
proposition;
. Onvia's and DemandStar's product and service offerings and development
plans are complementary;
. Onvia and DemandStar can market the combined company's services through a
larger, combined sales force;
. the creation of a larger customer base and a higher market profile would
present greater opportunities for marketing the products and services of
both companies;
. the merger would provide the combined company with the potential for
greater depth of skilled personnel and strengthened development activity;
. Onvia and DemandStar share similar strategic objectives and goals;
. DemandStar's local government sales force enhances Onvia's presence and
ability to service government agencies and small businesses and expand
its products and markets; and
. the merger would further Onvia's long-term strategies and goals of
expanding its service offerings and relationships with government
agencies.
In evaluating the merger, Onvia's board of directors reviewed several
factors, including, but not limited to, the following:
. historical information concerning Onvia's and DemandStar's respective
businesses, financial performance and condition, operations, technology
and management, including reports filed by each company with the SEC;
. Onvia's management's view of the financial condition, results of
operations and businesses of Onvia and DemandStar before and after giving
effect to the merger;
. the predicted effect of the merger on Onvia's stockholders;
. current financial market conditions and historical market prices,
volatility and trading information of DemandStar;
. the consideration DemandStar's shareholders will receive in the merger in
light of comparable merger transactions Onvia was considering;
. the ownership of the combined company by Onvia's stockholders;
. the terms of the merger agreement;
. the impact of the merger on Onvia's customers and employees;
. reports from management and legal and accounting advisors of the results
of the due diligence investigation of DemandStar; and
. the expectation that the merger will be tax-free for federal income tax
purposes.
Onvia's board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger
including the following:
. the risk that the potential benefits sought in the merger may not be
realized;
. the risk that the issuance of stock in the merger could be dilutive to
Onvia's stockholders if anticipated synergies are not realized;
. the effect of the public announcement of the merger on DemandStar's and
Onvia's customers;
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<PAGE>
. the effect of the merger on DemandStar's strategic relationships with
competitors of Onvia;
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not remain
employed by the combined company;
. the substantial charges to be incurred in connection with the merger,
including the costs of integrating the businesses and transaction
expenses arising from the merger;
. the risk that the merger could adversely affect Onvia's or DemandStar's
relationships with certain of its customers and strategic partners; and
. other applicable risks described in this proxy statement/prospectus under
"Risk Factors."
Onvia's board of directors concluded, however, that on balance, the
potential benefits of the merger to Onvia and its stockholders outweighed the
risks associated with the merger.
The discussion of the information and factors considered by Onvia's board of
directors is not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of the merger and the complexity
of these matters, Onvia's board of directors did not find it practicable to,
and did not quantify or otherwise assign relative weight to, the specific
factors considered in reaching its determination. In addition, Onvia's board of
directors did not undertake any specific determination as to whether any
particular factor, or any aspect of any particular factor, was favorable or
unfavorable to the ultimate determination of Onvia's board of directors, but
rather the board conducted an overall analysis of the factors described above,
including discussions with and questioning of Onvia's senior management, and
legal and financial advisors.
DemandStar's reasons for the merger and recommendations of DemandStar's board
of directors
DemandStar's board of directors believes that the merger with Onvia will
create a new combined company with greater financial resources and flexibility,
competitive strengths and business opportunities than DemandStar would
otherwise be able to achieve alone. DemandStar's board of directors has
considered several alternative means to achieve such ends, including other
potential business combinations, the private placement of stock, an
underwritten public offering and debt financing. Nevertheless, after
consultation with Janney Montgomery Scott, DemandStar's financial advisor,
DemandStar's board of directors concluded that the terms of the merger
agreement were fair to, and in the best interests of, DemandStar and its
shareholders. Accordingly, DemandStar's board of directors unanimously approved
the merger agreement and now recommends that DemandStar's shareholders vote FOR
the adoption of the merger agreement and consummation of the merger.
DemandStar's board of directors reviewed with its financial and legal
advisors the following material factors in reaching its conclusion:
. The merger affords the new combined company the opportunity to increase
its presence in the business- to-government market and enable it to offer
its customers a broader and more varied array of products and services.
. The potential to create a company that is better positioned than
DemandStar would be to adapt to, and benefit from, technological and
other developments in the ecommerce industry, which should result in the
acceleration of product development and technological innovation.
DemandStar believes that the merger brings two market and technology
leaders dedicated to the development of innovative, cost-effective
Internet based procurement services together and enables the combined
company to accelerate its efforts to penetrate existing markets more
efficiently and investigate and develop new products in emerging markets.
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<PAGE>
. The opportunity to create more shareholder value by reducing the risks
associated with DemandStar's reliance on a single market and the
difficulty of competing against larger, more diversified companies with
substantially greater financial resources.
. The advantages of combining two highly capable management teams, each
with established track records. DemandStar expects the Internet-based
procurement industry to continue to be characterized by substantial
uncertainty and continuing consolidation. By combining the expertise of
DemandStar's and Onvia's management, the combined company will be better
able to respond to these changes and take advantage of the opportunities
that these changes may create.
. The potential revenue synergies offered by the merger through the
broadening of both companies' existing product lines.
. The potential cost synergies offered by the merger through consolidation
and integration of certain operations and functions.
. The commitment by Onvia to loan DemandStar up to $5 million.
. The agreements to be entered into by holders of approximately 37.7% of
the outstanding shares of DemandStar capital stock to vote in favor of
the merger including shares held by H.T.E. H.T.E.'s determination to
enter into the voting agreements was approved by its directors who are
not also affiliated with DemandStar.
. The expectation that the merger, in general, will not result in federal
income tax for DemandStar or its shareholders.
. The employment and non-competition agreements to be entered into by
certain members of DemandStar's management team.
. The lock-up agreements to be entered into by certain members of
DemandStar's officers and directors.
. The opportunity to create more shareholder value by reducing the risks
and dilution associated with DemandStar's need to obtain additional
capital in order to finance its operations and create positive cash flow.
. The detailed financial analysis, pro forma financial statements and other
information with respect to the companies presented to DemandStar's
board, as well as Janney Montgomery Scott's fairness opinion dated
November 17, 2000, stating that, as of such date, the merger
consideration to be received by DemandStar's shareholders is fair.
In addition to the factors set forth above, DemandStar's board of directors
reviewed and considered a wide variety of information relevant to the merger,
including:
. information concerning Onvia's and DemandStar's respective businesses,
historical financial performance and condition, operations, technology,
products, customers, competitive positions, prospects and management;
. DemandStar management's view as to the financial condition, results of
operations and business and financial potential of Onvia and DemandStar
before and after giving effect to the merger, based on DemandStar
management's due diligence;
. the consideration to be received by the DemandStar shareholders in the
merger and the relationship between the market value of Onvia's common
stock to be issued in exchange for DemandStar capital stock, the trading
price histories of both companies' stock and a comparison of comparable
merger and financing transactions;
. the belief that the terms of the merger agreement, including the parties'
representations, warranties and covenants, and the conditions to their
respective obligations, are reasonable;
. reports from management and legal and financial advisors as to the
results of their due diligence investigation of Onvia;
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<PAGE>
. the view of DemandStar's management and the DemandStar board as to the
long-term opportunities and prospects of DemandStar as an independent
company and of Onvia and DemandStar as a combined company;
. the potential for DemandStar to enter into strategic relationships with
alternative companies; and
. the potential impact of the merger on customers and employees of Onvia
and DemandStar.
DemandStar's board of directors also considered the following potentially
negative factors concerning the merger:
. The loss of control over DemandStar's future operations following the
merger;
. The risk that the combined company would be unable to retain key
employees;
. The risk that the benefits sought to be achieved in the merger may not be
achieved;
. The possibility that the merger may not be consummated;
. The risk that the combined company might not realize the anticipated cost
savings and revenue synergy;
. The risk of intellectual property or other litigation associated with
Onvia's business activities; and
. The other risks described under "Risk Factors" section beginning on page
12 of this proxy statement/prospectus.
In light of the extensive variety of factors, both positive and negative,
considered by DemandStar's board of directors, the board did not find it
practicable to quantify or otherwise assign relative weight to the specific
factors considered in making its determination. However, after taking into
consideration all of the factors set forth above, DemandStar's board of
directors agreed that the merger is fair to, and in the best interests of,
DemandStar and its shareholders.
Opinion of DemandStar's financial advisor
DemandStar's board of directors retained Janney Montgomery Scott LLC, or
Janney, as its financial advisor to review the merger and to render an opinion
as to the fairness, from a financial point of view, of the merger consideration
to be received by the shareholders of DemandStar. As described herein, Janney's
opinion, dated November 17, 2000, together with the related presentation to
DemandStar's board of directors, was only one of many factors taken into
consideration by DemandStar's board of directors in making its determination to
approve the merger.
At the November 17, 2000 telephonic meeting of DemandStar's board of
directors, representatives of Janney made a presentation with respect to the
merger and rendered to DemandStar's board of directors its oral opinion,
subsequently confirmed in writing as of the same date, that, as of such date,
and based on the assumptions made, matters considered and limits of the review
undertaken by Janney, the merger consideration to be received by DemandStar's
shareholders was fair, from a financial point of view.
The full text of Janney's written opinion, dated November 17, 2000, which
sets forth the assumptions made, matters considered and limitations on review
undertaken, is attached to this proxy statement/prospectus as Appendix C and is
incorporated herein by reference. Janney's opinion is directed to DemandStar's
board of directors and addresses the fairness of the merger consideration to be
received by DemandStar's shareholders from a financial point of view. Janney's
opinion does not address the underlying decision of DemandStar to engage in the
merger and does not constitute a recommendation to any shareholder as to how
such shareholder should vote or as to any other action such shareholder should
take in connection with the merger. The discussion of the Janney opinion set
forth in this proxy statement/prospectus is qualified in its entirety by
reference to the full text of the opinion.
40
<PAGE>
In connection with its opinion, Janney reviewed certain publicly available
financial and other information concerning DemandStar and Onvia, and certain
internal financial and other information furnished to it by DemandStar and
Onvia. Janney also held discussions with the members of management of
DemandStar and Onvia regarding this information and the business and prospects
of DemandStar and Onvia. Janney did not independently verify any of the
information described above and for purposes of its opinion assumed the
accuracy, completeness and fairness of all such information. Janney did not
make and it was not provided with an independent evaluation or appraisal of the
assets of DemandStar or Onvia. With respect to the financial forecast
information furnished by or discussed with DemandStar and Onvia, Janney assumed
that such information was prepared on the basis of reasonable assumptions and
reflected the best currently available estimates and judgments of the
managements of DemandStar and Onvia as to the likely future financial
performance of DemandStar and Onvia. Janney's opinion is based on market,
economic and other conditions as they existed and could be evaluated as of the
date of such opinion.
In reaching its opinion, Janney:
. reviewed the terms of the merger agreement and certain related documents
in draft form;
. reviewed the Registration Statements on Form S-1, certain interim
reports to shareholders and quarterly reports on Form 10-Q of DemandStar
and Onvia and certain other communications from DemandStar and Onvia to
their respective shareholders;
. reviewed the reported price and trading activity for the common stock of
DemandStar and Onvia;
. reviewed certain internal financial analyses and forecasts for
DemandStar prepared by the management of DemandStar and certain analyses
and forecasts of operating synergies anticipated to result from the
merger prepared by the management of DemandStar and Onvia;
. held discussions with members of the senior management of DemandStar and
Onvia regarding the strategic rationale for, and potential benefits of,
the merger, and the past and current business operations, financial
condition and future prospects of DemandStar and Onvia;
. reviewed selected financial and stock market data for DemandStar and
certain other publicly traded companies;
. reviewed financial information relating to selected merger and
acquisition transactions; and
. performed such other analyses, and considered such other factors, as it
deemed appropriate.
Janney assumed that the final terms of the merger agreement and certain
related documents reviewed by it in draft form would not vary materially from
the drafts reviewed by it.
The following is a brief summary of the material factors considered and
analyses performed by Janney and presented to DemandStar's board of directors
at its telephonic meeting on November 17, 2000.
Historical and projected operating results and financial condition
In rendering its opinion, Janney reviewed and analyzed the historical,
current and projected financial information of DemandStar which included:
. DemandStar's recent financial statements;
. DemandStar's recent revenue growth and operating performance trends;
. DemandStar's cash position, burn rate and need for additional financing;
and
. DemandStar's projected revenue growth and operating performance trends.
Concerning DemandStar's need for additional financing, it was disclosed to
Janney that the management of DemandStar had been seeking investors since the
middle of August 2000 without positive result and that
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<PAGE>
DemandStar would be out of cash by December 15, 2000. The projected financial
information prepared by the management of DemandStar, which assumes a cash
infusion of $5 million, includes strong revenue growth for 2000 and 2001, and
continuing negative gross margins through mid-2001 and continuing losses
through 2001.
In rendering its opinion, Janney also reviewed and analyzed the historical,
current and projected financial information of Onvia, which included:
. Onvia's recent financial statements;
. Onvia's recent revenue growth and operating performance trends;
. Onvia's cash position and burn rate; and
. Onvia's revenue projections and operating performance trends.
As of the date Janney rendered its opinion to DemandStar's board of
directors, Onvia had approximately $120 million of cash reserves, and the
management of Onvia projected that Onvia would utilize approximately half of
that amount to achieve profitability. It was disclosed to Janney by the
management of Onvia that Onvia planned to outsource its Purchase Now product
sales business in order to:
. expand its focus on small and medium business to include the government
marketplace, and
. discontinue the pass-through of products to dramatically increase
operating margins.
The planned change in Onvia's business model would impact Onvia's revenue
stream and revenue growth resulting in Onvia achieving profitability in the
fourth quarter of 2002.
As mentioned above, Janney analyzed projections for DemandStar, Onvia and
the combined entity in support of its fairness opinion. Such projections were
based on numerous estimates and other assumptions and are inherently subject to
significant uncertainties and contingencies. There is no assurance that the
projections will be achieved and the use thereof by Janney should not be
regarded as an indication that DemandStar or any other person considers such
estimates an accurate prediction of future events.
Stock price premium analysis
Janney reviewed and analyzed the reported daily closing market prices and
trading volume of common stock for the period from DemandStar's initial public
offering on May 15, 2000 until November 16, 2000. The common stock closed at
its high of $1.50 per share on May 15, 2000 and its low of $0.50 per share on
various dates in October and early November 2000. The ten-day average daily
closing price of DemandStar's common stock during the period from November 3,
2000 to November 16, 2000 was $0.73 per share. The thirty-day average daily
closing price of the common stock during the period from October 6, 2000 to
November 16, 2000 was $0.60 per share. The average trading volume between May
15, 2000 and November 16, 2000 was 25,731 shares per day.
Janney calculated, reviewed and analyzed the premium that would be paid to
DemandStar's shareholders based on the implied value payable in the merger. The
premium calculations are based upon an assumed announcement date of November
20, 2000 and are as follows.
<TABLE>
<CAPTION>
DemandStar Premium
---------- -------
<S> <C> <C>
November 16, 2000 Closing Price......................... $0.75 80.0%
Last 10 Day Average..................................... $0.73 84.7%
Last 30 Day Average..................................... $0.60 123.5%
52 Week High............................................ $2.50 -46.0%
52 Week Low............................................. $0.47 187.8%
</TABLE>
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<PAGE>
Analysis of selected publicly traded comparable companies
Using publicly available information, Janney compared certain financial,
stock market and operating information and commonly used valuation measurements
for DemandStar with corresponding data and ratios of certain similar publicly
traded companies. Janney selected these companies from the universe of possible
companies based upon Janney's view as to the comparability of financial and
operating characteristics of these companies to DemandStar. With respect to
each such analysis, Janney made such comparisons among the following companies:
Ariba Inc., Calico Commerce Inc., Clarus Corporation, Commerce One Inc., Concur
Technologies Inc., Elcom International Inc., Freemarkets Inc., i2 Technologies
Inc., Onvia.com Inc., and PurchasePro.com Inc. (the "Comparable Companies").
Among other multiples calculated and reviewed by Janney were the Comparable
Companies' common stock equity market value to historical latest twelve months,
or LTM, revenue, and estimated revenue for calendar years 2000 and 2001. The
revenue estimates were based upon those reported by the Institutional Brokers'
Estimates System, or IBES. IBES is a data service that monitors and publishes
compilations of financial estimates by selected research analysts regarding
companies of interest to institutional investors.
This analysis produced multiples of selected valuation data as follows:
<TABLE>
<CAPTION>
Stock Market Cap/Revenue (x)
Price Market Cap LTM Rev -----------------------
($) ($millions) ($millions) LTM 2000E 2001E
------- ----------- ----------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Ariba Inc............... $ 77.94 $ 18,752.9 $ 279.0 67.2 x 67.2 x 24.4 x
Calico Commerce......... 2.25 78.9 26.6 3.0 x 1.8 x 1.0 x
Clarus Corp............. 10.63 165.0 10.7 15.4 x 3.4 x 1.4 x
Commerce One Inc........ 53.38 10,306.8 227.3 45.3 x 26.7 x 13.8 x
Concur Tech Inc......... 2.81 70.3 34.8 2.0 x 1.3 x 0.8 x
Elcom Intl Inc.......... 2.44 75.1 311.7 0.2 x 0.2 x 0.2 x
Freemarkets Inc......... 38.06 1,446.6 64.6 22.4 x 16.4 x 8.3 x
i2 Technologies Inc..... 122.63 24,810.2 923.7 26.9 x 23.2 x 16.1 x
Onvia.com............... 2.13 184.2 110.1 1.7 x 1.3 x 0.7 x
Purchasepro.com Inc..... 18.25 1,210.5 34.1 35.5 x 20.2 x 6.7 x
Average 22.0 x 16.2 x 7.3 x
Adjusted Average (1) 19.0 x 11.8 x 6.1 x
Median 18.9 x 9.9 x 4.0 x
Demand Star (2):
Equity Value.......... $ 13.5 $ 0.4 31.7 x 18.0 x 1.4 x
Enterprise Value with
Cash Infusion........ 18.5 0.4 43.5 x 24.7 x 2.0 x
</TABLE>
--------
(1) Adjusted Average eliminates high and low values.
(2) For DemandStar, Market Cap represents the equity value and the enterprise
value plus cash infusion.
Comparable Companies' Valuation Multiples:
<TABLE>
<CAPTION>
Market Capitalization/Revenue
---------------------------------------------------------------
LTM 2000 2001
Revenue Revenue Revenue
------- ------- -------
<S> <C> <C> <C>
Average (1) 19.03 x 11.81 x 6.10 x
Median 18.92 x 9.92 x 4.04 x
High (1) 45.35 x 26.72 x 16.09 x
Low (1) 1.67 x 1.33 x 0.75 x
</TABLE>
--------
(1) Adjusted to eliminate high and low values.
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<PAGE>
The foregoing comparisons are based upon the enterprise valuation including
a cash infusion of $5.0 million into DemandStar by Onvia. DemandStar could not
achieve the projected 2001 financial results without such a cash infusion.
Based on these comparisons, Janney noted that the merger consideration
represented an enterprise value which, as a multiple of DemandStar's historical
and estimated future financial results set forth above, was above the adjusted
average per share trading values of the Comparable Companies for LTM and 2000
revenue. Janney further noted that the resulting merger consideration multiples
were above the values for the Comparable Companies with market capitalizations
below $1 billion. These facts supported a determination that the merger
consideration was fair to DemandStar's shareholders from a financial point of
view.
Analysis of selected comparable transactions
Janney reviewed merger and acquisition transactions that it deemed
comparable to the merger. It selected these transactions by searching SEC
filings, public company disclosures, press releases, databases and other
sources and by applying the following criteria:
. transactions that were announced or completed between June 1, 1999 and
November 16, 2000;
. transactions in which the acquiring company purchased 50% or more of the
target company; and
. transactions in which the target company operates in the Internet-
related industries.
Current market conditions differ dramatically from six months ago,
particularly in the Internet-related markets. Due to the worsening industry
environment and the financial distress of DemandStar, Janney believes that this
valuation technique has little relevance for evaluating the merger. However,
Janney did note that the enterprise value multiple of the merger was above
those of the three most recent transactions reviewed.
This analysis produced multiples of selected valuation data as follows:
<TABLE>
<CAPTION>
Entp.
Ann. Comp. Value Target Entp.
Date Date Acquiror Name Target Name (mm) Revenue Value/Rev EBITDA
-------- ----- ------------- ----------- -------- ------- --------- ------
<C> <C> <S> <C> <C> <C> <C> <C>
11/7/00 Pending VerticalNet SierraCities $ 956.0 $126.1 7.6 x $ 58.4
6/20/00 Pending Commerce One, Inc. Appnet, Inc. 1,647.5 160.9 10.2 x (15.1)
7/26/00 8/10/00 Onvia.com Globe-1 11.4 0.6 20.4 x (1.1)
3/8/00 6/15/00 Internet Capital Group, Rightworks 202.3 2.2 94.0 x (9.1)
Inc.
6/9/00 6/12/00 Onvia.com Zanova 21.3 0.5 40.6 x (3.9)
3/27/00 4/28/00 Neoforma.com EquipMD 37.4 0.2 220.3 x (4.0)
12/13/99 2/11/00 Chemdex Corp. SpecialtyMD.com N/A N/A N/A N/A
11/29/99 2/2/00 Calico Commerce, Inc. Connectinc.com 47.2 4.9 9.7 x (0.9)
11/15/99 1/25/00 Ariba, Inc. Trading Dynamics, Inc. 737.1 0.5 1,459.6 x (5.2)
12/16/99 12/16/99 Ariba, Inc. TRADEX Technologies, Inc. 1,845.0 6.6 280.5 x (14.2)
10/10/99 11/30/99 Agile Software Corp. Digital Market Inc. 107.6 1.9 57.9 x (6.0)
11/4/99 11/7/99 Commerce One, Inc. CommerceBid.com 195.2 N/A NM (0.9)
9/15/99 9/15/99 National Information eFed (division of Electronic Press) 29.5 2.7 N/A 0.2
Consortium
7/19/99 8/31/99 Century Business Tri-Tek Information Systems N/A 30.0 N/A N/A
Services, Inc.
6/1/99 6/1/99 Concur Technologies, Seeker Software 114.7 4.9 23.5 x (9.4)
Inc.
Average $ 457.8 $ 26.3 202.2 x $ (0.9)
Median 114.7 2.7 40.6 x (4.0)
Adjusted Average (1) 372.3 16.4 84.1 x (5.0)
</TABLE>
--------
(1) Adjusted average eliminates high and low values.
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<PAGE>
Pro forma contribution analysis
Based on estimates provided by the managements of DemandStar and Onvia,
Janney compared the estimated financial performance of DemandStar and Onvia for
calendar years 2000 and 2001 to the pro forma financial performance of the
combined company. Janney reviewed the pro forma relative contributions of
DemandStar and Onvia to certain income statement items for the calendar years
2000 and 2001 and the relative cash contribution of DemandStar and Onvia to the
combined entity. Based on estimates provided by the managements of DemandStar
and Onvia, the review indicated that the relative contribution by DemandStar to
a combined entity was projected to be 26.2% of revenue for calendar year 2001.
However, DemandStar is not expected to contribute to the combined entity's
gross profit as DemandStar is projected to generate negative gross margins and
losses in calendar year 2001, whereas Onvia is expected to generate substantial
gross profit in calendar year 2001. The pro forma merger analysis is
complicated by the change in strategy indicated by the senior management of
Onvia, which will significantly reduce the amount of revenue reported in
calendar year 2001. Janney also reviewed pro forma financial statements for the
combined entity for calendar years 2001 and 2002 that were prepared by the
senior management of Onvia, which take into account operating synergies of the
merger and indicate that the combined entity will become profitable in late
2002.
Market and economic factors
In rendering its opinion, Janney considered, among other factors, the
condition of the U.S. stock markets and the current level of economic activity,
particularly in the electronic-procurement software industry. No Comparable
Company used in the analysis of certain other publicly traded companies
summarized above is identical to DemandStar. In addition, Janney believes that
the analysis of certain other publicly traded companies is not simply
mathematical. Rather, such analysis must take into account differences in the
financial and operating characteristics of these companies and other factors,
such as general economic conditions, conditions in the markets in which such
companies compete and strategies and operating plans for such companies, that
could affect the public trading value and acquisition value of these companies.
In arriving at its opinion, Janney did not ascribe a specific range of
values to DemandStar, but made its determination as to the fairness, from a
financial point of view, of the merger consideration to be received by the
shareholders of DemandStar on the basis of a variety of financial and
comparative analyses, including those described above. The summary of analyses
performed by Janney as set forth above does not purport to be a complete
description of the analyses underlying Janney's opinion. The presentation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial or summary description.
The estimates contained in such analyses and the ranges of valuations resulting
from any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of the business or securities do not purport to be appraisals or
to reflect the prices at which businesses, companies or securities actually may
be sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty. In arriving at its opinion, Janney made qualitative
judgments as to the significance and relevance of each analysis and factor
considered by it. Accordingly, Janney believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors,
without considering all analyses and factors, could create an incomplete view
of the processes underlying such analyses and its opinion.
Janney is a nationally recognized investment banking firm and, as part of
its investment banking activities, is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate and other purposes. DemandStar's board
of directors retained Janney to act as its financial advisor based on Janney's
qualifications, reputation and experience. Pursuant to the terms of Janney's
engagement, the fee paid to Janney upon rendering this opinion was equal to
$125,000. In addition, DemandStar has agreed to reimburse Janney for its
reasonable out-of-pocket expenses and to indemnify Janney for certain costs,
expenses and
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<PAGE>
liabilities related to or arising out of Janney's rendering of services under
its engagement as financial advisor, or to contribute to payments Janney may be
required to make in respect thereof.
Interests of certain persons in the merger
In considering the recommendation of DemandStar's board of directors to vote
for the proposals to adopt the merger agreement and approve the merger,
DemandStar's shareholders should be aware that certain members of DemandStar's
board of directors and management team have agreements or special arrangements
that provide such persons with interests in the merger that differ from those
of DemandStar's shareholders. DemandStar's board of directors was aware of such
agreements and arrangements during its deliberation of the merits of the merger
and in determining to recommend to DemandStar's shareholders that they vote in
favor of the adoption of the merger agreement and the approval of the merger.
Registration of Option Plan. Under the terms of the merger agreement, Onvia
is obligated to file a registration statement on Form S-8 within 45 days after
the effective time of the merger, registering the shares of Onvia's common
stock issuable with respect to the assumed options under DemandStar's executive
incentive compensation plan. Those shares are not subject to the lock-up
agreement to be entered into between Onvia and certain affiliates of
DemandStar.
Amended and Restated Employment and Option Agreements. Messrs. Ramos, Jordan
and North have each entered into amended and restated employment and option
agreements which provide that they will become officers of Onvia following the
merger. Messrs. Ramos, Jordan and North each entered into amended and restated
option agreements that change the vesting of their options to purchase
DemandStar's common stock and, in the case of Messrs. Jordan and North, provide
that Onvia will make additional option grants to them following the merger. The
employment and option agreements are discussed in the section entitled
"Management of DemandStar--Employment agreements."
Amended and Restated Consulting Agreements and Part-Time Employment
Agreements, and Option Agreements for Messrs. Markey, Gornto and Moses. In
connection with the merger, each of Bernard B. Markey, L.A. Gornto, Jr. and
Edward Moses will amend their existing employment and consulting agreements
with DemandStar, effective at the effective time of the merger. The amended
agreements will provide that they shall provide transition consulting services
as requested by Onvia for a period of 180 days after the merger closing date.
Messrs. Markey and Gornto will be compensated $1,000 per month for a specified
number of hours and at the rate of $100 per hour for each hour of rendered
services after that number of hours. Mr. Moses will be compensated at the rate
of $100 per hour. Further, each of their DemandStar options that are
exercisable at the effective time of the merger (including options vesting as a
result of the merger) shall be converted, but shall be exercisable until the
270th day after the merger closing date, which is 90 days after the termination
of consulting services in accordance with DemandStar's 1999 Employee Incentive
Compensation Plan.
H.T.E. Matters. Subject to the closing of the merger, H.T.E. and DemandStar
will terminate H.T.E.'s registration rights agreement dated as of December 21,
1999. Onvia will advance a total of $5 million of bridge financing to
DemandStar between December 1, 2000 and March 1, 2001. Up to $140,000 of those
loan proceeds may be used to pay to H.T.E. interest accrued but unpaid as of
November 20, 2000 on the promissory note dated as of October 31, 1999 in the
principal amount of $1.75 million executed by DemandStar in favor of H.T.E., as
modified by the modification dated as of October 31, 2000. H.T.E.'s receipt of
such funds is subject to H.T.E. terminating its right to receive warrants and
other securities from DemandStar as a result of Onvia's bridge financing. One
of the likely benefits to H.T.E. of the merger is that H.T.E. is more likely to
be repaid its loan to DemandStar than would have otherwise been the case.
Governance Structure and Management Positions. Pursuant to the terms of the
merger agreement, upon completion of the merger:
. O.F. Ramos, Director, President and Chief Executive Officer of
DemandStar, will serve as Vice President and General Manager, Government
Operations of Onvia pursuant to the terms of an amended and restated
employment agreement among Mr. Ramos, DemandStar and Onvia.
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. William Knox North, Vice President and Chief Operating Officer of
DemandStar, will serve as Vice President, Government Exchange Technology
of Onvia pursuant to the terms of an amended and restated employment
agreement among Mr. North, DemandStar and Onvia.
. Edward S. Jordan, Vice President and Chief Technology Officer of
DemandStar, will serve as Vice President, Government Sales of Onvia
pursuant to the terms of an amended and restated employment agreement
among Mr. Jordan, DemandStar and Onvia.
Stock Options. Option agreements to purchase DemandStar's common stock held
by DemandStar directors and executive officers contain change of control
provisions wherein upon a change of control of DemandStar after the merger, 25%
of the unvested options shall immediately vest and be fully exercisable at the
time of the change of control, with the remainder continuing to vest on a pro
rata basis in accordance with the option agreements vesting schedules. If the
executive's employment is terminated other than for cause within 12 months
following a change of control, then 100% of the remaining options vest at the
time of the termination. Pursuant to the terms of the merger agreement, upon
completion of the merger, Onvia will assume each outstanding stock option
agreement for each DemandStar employee, executive officer and director under
the same general terms and conditions as originally issued by DemandStar,
except that:
. each option will be exercisable (or will become exercisable in accordance
with its terms) for that number of shares of Onvia's common stock equal
to the product of the number of shares of DemandStar's common stock that
were issuable upon exercise of such option immediately prior to the
effective time of the merger multiplied by the exchange ratio, rounded
down to the nearest whole number of shares of Onvia's common stock; and
. the per share exercise price for the shares of Onvia's common stock
issuable upon exercise of such assumed option will be equal to the
quotient determined by dividing the exercise price per share of
DemandStar's common stock at which such option was exercisable
immediately prior to the effective time of the merger by the exchange
ratio, rounded up to the nearest whole cent.
However, option agreements of Bernard Markey, L.A. Gornto, Jr. and Edward Moses
will be modified as described earlier in this merger section.
Indemnification Obligations. Under the terms of the merger agreement,
DemandStar, after the merger, will be required to meet its obligations under
any of its indemnification agreements and indemnification provisions contained
in its articles of incorporation and bylaws pursuant to which it is obligated
to indemnify its officers, directors, employees and/or agents. Further, the
indemnification provisions in DemandStar's articles of incorporation and bylaws
post-merger will be no less favorable than the comparable provisions in its
articles of incorporation and bylaws pre-merger. The indemnification provisions
contained in DemandStar's articles of incorporation and bylaws post-merger may
not be amended, repealed or otherwise modified for a period of six years from
the effective time of the merger in any manner that would adversely affect the
rights of those individuals who, immediately prior to the effective time of the
merger, were directors, officers, employees or agents of DemandStar, unless
such modification is required by law.
Further, for a period of three years after the effective time of the merger,
DemandStar will be required to maintain, if available, directors' and officers'
liability insurance covering those persons who are currently covered by
DemandStar's directors' and officers' liability policy. The maximum premium
that DemandStar will be required to pay pursuant to the terms of the merger
agreement will not exceed 125% of the annual premium currently paid by
DemandStar for its present policy.
Material federal income tax consequences
The following discussion summarizes the material federal income tax
consequences of the merger that apply generally to holders of DemandStar
capital stock. This discussion assumes that the merger is consummated as
contemplated herein. In addition, this discussion does not deal with all
federal income tax consequences that may be relevant to particular DemandStar
shareholders in light of their specific
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circumstances, like shareholders who are dealers in securities, banks,
insurance companies, foreign persons or tax-exempt organizations, who are
subject to the alternative minimum tax provisions of the Internal Revenue Code,
who hold their shares as part of a hedging, straddle, conversion or other risk
reduction transaction, or who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory transactions. In
addition, the following discussion does not address the tax consequences of
transactions effectuated prior to or after the merger (whether or not these
transactions are in connection with the merger), including without limitation
transactions in which shares of DemandStar capital stock were or are acquired
or shares of Onvia's common stock were or are disposed of. Furthermore, no
state, local, foreign or other tax considerations are addressed herein. This
discussion is based on federal income tax law as currently in effect, which
could change at any time (possibly with retroactive effect).
Each DemandStar shareholder is urged to consult his own tax advisors as to
the specific federal, state, local, and foreign and any other tax consequences
to him of the merger and tax reporting requirements with respect thereto.
The parties are not requesting a ruling from the Internal Revenue Service in
connection with the merger. As a condition to consummation of the merger,
Venture Law Group, A Professional Corporation, counsel to Onvia, and Greenberg
Traurig, P.A., counsel to DemandStar, will deliver opinions to Onvia and
DemandStar, respectively, that the merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. These tax opinions will neither bind the Internal
Revenue Service nor preclude the Internal Revenue Service from adopting a
contrary position. In addition, the tax opinions are subject to certain
assumptions and qualifications and are based on the truth and accuracy of
certain representations and covenants made by Onvia and DemandStar,
respectively, in certificates to be delivered to counsel by the management of
Onvia and DemandStar prior to the effective time.
Provided that the merger qualifies as a reorganization, the following
federal income tax consequences will result:
. DemandStar shareholders will not receive any gain or loss on the exchange
of DemandStar capital stock for Onvia common stock pursuant to the
merger, except with respect to cash they receive in lieu of fractional
shares of Onvia common stock.
. The aggregate basis of the Onvia common stock that DemandStar
shareholders receive pursuant to the merger (including any fractional
share not actually received) will equal the aggregate tax basis of the
DemandStar capital stock they surrender in exchange therefor.
. The holding period of Onvia common stock that DemandStar shareholders
receive pursuant to the merger will include the holding period of the
DemandStar capital stock they exchanges therefor, provided they hold the
DemandStar capital stock as a capital asset at the time of the merger.
. Cash received in lieu of a fractional share will be treated as if Onvia
issued the fractional share and then redeemed it. DemandStar shareholders
receiving cash in lieu of a fractional share generally will recognize
gain or loss equal to the difference, if any, between the shareholder's
tax basis in the fractional share and the amount of cash they receive for
it. That gain or loss will be capital gain or loss if, at the time of the
merger, they hold the DemandStar capital stock as a capital asset, and
will be long-term capital gain or loss if the holding period for the
fractional share exceeds one year.
. DemandStar shareholders who exercise dissenters' rights with respect to
all of their shares of DemandStar capital stock generally will recognize
gain or loss for federal income tax purpose, measured by the difference
between the holder's basis in those shares and the amount of cash they
receive, provided the payment is neither essentially equivalent to a
dividend within the meaning of Section 302 of the Internal Revenue Code
nor has the effect of a distribution of a dividend within the meaning of
Section 356(a)(2) of the Internal Revenue Code. That gain or loss will be
capital gain or loss, provided that the DemandStar capital stock is held
as a capital asset at the time of the merger and will be long-term
capital gain or loss if the holding period for the DemandStar capital
stock exceeds one year.
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A successful Internal Revenue Service challenge to the "reorganization"
status of the merger would result in all DemandStar shareholders being treated
as if they sold their DemandStar capital stock in a fully taxable transaction.
In that event, each DemandStar shareholder would recognize gain or loss with
respect to each share of DemandStar capital stock surrendered in the merger
equal to the difference between the shareholder's adjusted tax basis in that
share and the fair market value, as of the effective time of the merger, of the
Onvia's common stock received in exchange therefor (and any cash received in
lieu of a fractional share). In that event, a DemandStar shareholder's
aggregate basis in the Onvia's common stock so received would equal its fair
market value as of the effective time and the shareholder's holding period for
that Onvia common stock would begin the day after the merger.
Irrespective of the merger's status as a reorganization, a DemandStar
shareholder will recognize income or gain if and to the extent any shares of
Onvia's common stock received in the merger are treated as received in exchange
for services or property other than solely DemandStar capital stock. All or a
portion of any such income or gain could be taxable as ordinary income. Gain
also will be recognized if and to the extent a DemandStar shareholder is
treated as receiving (directly or indirectly) consideration other than Onvia's
common stock in exchange for DemandStar capital stock or if and to the extent
the DemandStar capital stock surrendered in the merger is not equal in value to
the Onvia's common stock and cash received in exchange therefor. The opinions
of counsel to Onvia and DemandStar that the merger is a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code will be based on
representations, among others, that Onvia common stock is the sole
consideration being paid for the DemandStar capital stock pursuant to the
merger and that the fair market value of the Onvia common stock issued pursuant
to the merger is approximately equal to the fair market value of the DemandStar
stock exchanged therefor pursuant to the merger.
Accounting treatment
The merger will be accounted for under the purchase method of accounting.
This means that after the merger, Onvia will be required to record as
intangible assets the excess of the consideration given over the estimated fair
value of net assets acquired and will subsequently amortize this cost against
earnings.
Regulatory approvals
Onvia and DemandStar have determined that, as of the date of this proxy
statement/prospectus, no filings are required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. However, at any time before or after the
consummation of the merger, the Federal Trade Commission, the Department of
Justice or any state could take such action under applicable antitrust laws as
it deems necessary or desirable. Such action could include seeking to enjoin
the consummation of the merger or seeking divestiture of particular assets or
businesses of Onvia or DemandStar. Private parties may also initiate legal
actions under the antitrust laws under certain circumstances.
Restrictions on affiliate resales
All shares of Onvia's common stock received by DemandStar shareholders in
the merger will be freely transferable under the Federal securities laws,
except for shares received by persons who are deemed to be "affiliates" of
DemandStar prior to the closing of the merger. The shares received by persons
deemed "affiliates" may be resold by them only in transactions permitted by the
resale provisions of Rule 145 under the Securities Act (or Rule 144 in the case
of persons who become affiliates of Onvia) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of Onvia or
DemandStar generally include individuals or entities that control, are
controlled by, or are under common control with those parties and individuals
who serve as officers or directors of Onvia or DemandStar. Each of DemandStar's
affiliates has also entered into a lock-up agreement which imposes restrictions
on resale of shares of Onvia's common stock for a period of 18 months after the
closing of the merger.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this proxy
statement/prospectus and incorporated herein by reference. This summary is
qualified in its entirety by reference to the merger agreement. DemandStar
shareholders are urged to read the merger agreement in its entirety for a more
complete description of the merger. In the case of any discrepancy between the
terms of the merger agreement and the following summary, the merger agreement
will control.
The merger
Following the approval and adoption of the merger agreement by the
shareholders of DemandStar and the satisfaction or waiver of the other
conditions to the merger, Dragon Acquisition Corporation, a wholly-owned
subsidiary of Onvia, will be merged with and into DemandStar, with DemandStar
continuing as the surviving corporation and becoming a wholly-owned subsidiary
of Onvia.
Effective time
As soon as practicable on or after the closing of the merger, the parties
will cause the merger to be effective by filing articles of merger with the
Secretary of State of the State of Florida. The parties anticipate that this
will occur either in the first quarter of 2001 or possibly early in the second
quarter of 2001.
Directors and officers
The initial directors of DemandStar following the merger will be the
directors of Dragon Acquisition Corporation immediately prior to the effective
time. The initial corporate officers of DemandStar following the merger will be
the corporate officers of Dragon Acquisition Corporation immediately prior to
the effective time.
Conversion of shares in the merger
Upon consummation of the merger, each outstanding share of DemandStar's
common stock and each share of DemandStar Series A preferred stock, which will
be participating on an as converted basis pursuant to DemandStar's articles of
incorporation, will be cancelled and converted into the right to receive a
portion of a share of Onvia's common stock equal to the exchange ratio. The
exchange ratio equals a fraction:
. having a numerator equal to 6 million; and
. having a denominator equal to the aggregate number of shares of capital
stock of DemandStar immediately prior to the effective time of the merger
(8,388,480 shares as of December 20, 2000) plus all vested options to
purchase shares of DemandStar's common stock outstanding immediately
prior to the effective time of the merger (which DemandStar currently
estimates to be 1,730,650 shares).
The denominator includes all DemandStar options that become vested as a
result of the merger and the transactions contemplated thereby and excludes
DemandStar options that would otherwise become vested upon consummation of the
merger but that will not become vested as a result of the amended option
agreements entered into with Messrs. Ramos, North and Jordan.
The exchange ratio will be further adjusted to reflect the effect of any
stock split, stock dividend, reorganization, recapitalization, reclassification
or other like change with respect to Onvia's common stock or DemandStar's
common stock occurring on or after the date of this proxy statement/prospectus.
DemandStar stock option plan
At the effective time, each outstanding option to purchase shares of
DemandStar's common stock outstanding under DemandStar's 1999 Employee
Incentive Compensation Plan, whether or not exercisable, will be assumed by
Onvia. Each DemandStar stock option so assumed by Onvia will continue to have,
and be subject to, the same terms and conditions set forth in DemandStar's
stock option plan immediately prior to the effective time, except that:
. each DemandStar stock option will be exercisable or will become
exercisable for that number of whole shares of Onvia's common stock equal
to the product of the number of shares of DemandStar's common
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stock that were subject to the DemandStar stock option immediately prior
to the effective time multiplied by the exchange ratio, rounded down to
the nearest whole number of shares of Onvia's common stock; and
. the per share exercise price for the shares of Onvia's common stock
issuable upon exercise of such assumed DemandStar stock options will be
equal to the quotient determined by dividing the exercise price per share
of DemandStar's common stock at which such DemandStar stock option was
exercisable immediately prior to the effective time by the exchange
ratio, rounded up to the nearest whole cent.
The parties intend the DemandStar stock options assumed by Onvia to qualify
as incentive stock options as defined in Section 422 of the Internal Revenue
Code to the extent such stock options qualified as incentive stock options
immediately prior to the effective time.
Onvia has agreed to file a registration statement on Form S-8 for the shares
of Onvia's common stock issuable with respect to assumed DemandStar stock
options within 45 days after the effective time of the merger and intends to
maintain the effectiveness of such registration statement for so long as any of
such options or other rights remain outstanding.
DemandStar warrants
At the effective time, each outstanding warrant to purchase shares of
DemandStar's common stock that by its terms survives the merger will be assumed
by Onvia. Each DemandStar warrant so assumed by Onvia will continue to have,
and be subject to, the same terms and conditions set forth in the applicable
warrant agreement immediately prior to the effective time, except that:
. each DemandStar warrant will be exercisable or will become exercisable
for that number of whole shares of Onvia's common stock equal to the
product of the number of shares of DemandStar's common stock that were
subject to the DemandStar warrant immediately prior to the effective time
multiplied by the exchange ratio; and
. the per share exercise price for the shares of Onvia's common stock
issuable upon exercise of the assumed DemandStar warrant will be equal to
the quotient determined by dividing the exercise price per share of
DemandStar's common stock at which the DemandStar warrant was exercisable
immediately prior to the effective time by the exchange ratio, rounded to
the nearest whole cent.
Exchange agent
Promptly after the effective time of the merger, Onvia is required to
deposit with a bank or trust company designated by Onvia and reasonably
acceptable to DemandStar, certificates representing the shares of Onvia's
common stock to be exchanged for shares of DemandStar capital stock, and cash
in an amount sufficient for payment for fractional shares and any dividends or
distributions to which holders of shares of DemandStar capital stock may be
entitled pursuant to the merger agreement.
Exchange procedures
Promptly after the effective time, Onvia will cause the exchange agent to
mail to the holders of record of DemandStar:
. a letter of transmittal specifying that delivery will be effected, and
risk of loss and title to the certificates will pass, only upon delivery
of the certificates to the exchange agent; and
. instructions on how to surrender DemandStar certificates in exchange for
certificates representing shares of Onvia's common stock, cash for
fractional shares and any dividends or other distributions pursuant to
the merger agreement.
Holders of DemandStar capital stock should not surrender their DemandStar
stock certificates until they receive the letter of transmittal from the
exchange agent.
Upon surrendering their DemandStar stock certificates for cancellation to
the exchange agent, together with the letter of transmittal and any other
documents required by the exchange agent, the holders of such
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DemandStar stock certificates will be entitled to receive a certificate
representing the number of whole shares of Onvia's common stock which the
holder has the right to receive pursuant to the merger agreement, cash for
fractional shares of Onvia's common stock and any dividends or other
distributions to which the holder is entitled. Until surrendered, outstanding
DemandStar stock certificates will be deemed from and after the effective time
to evidence only the ownership of the number of full shares of Onvia's common
stock into which such shares of DemandStar capital stock have converted into
and the right to receive cash for any fractional shares and any dividends or
distributions payable pursuant to the merger agreement.
If any certificate for shares of Onvia's common stock are to be issued to a
person other than the person to whom the certificates are registered, the
surrendered certificates must be properly endorsed or in proper form for
transfer and the person requesting the exchange must pay Onvia or its agent any
transfer or other taxes required by reason of the issuance of certificates
representing shares of Onvia's common stock in any name other than that of the
registered holder of the certificates surrendered, or establish to the
satisfaction of Onvia or its agent that such tax has been paid or is not
payable.
Distributions with respect to unexchanged shares
No dividends or other distributions declared or made after the effective
time with respect to Onvia's common stock with a record date after the
effective time will be paid to the holders of any unsurrendered certificates
with respect to the shares of Onvia's common stock until the holders of record
surrender such certificates. Following surrender of any such certificates, the
exchange agent shall deliver to the record holders thereof, without interest,
certificates representing whole shares of Onvia's common stock along with
payment for fractional shares and the amount of any such dividends or other
distributions with a record date after the effective time payable with respect
to such shares of Onvia's common stock.
No fractional shares
No fractional shares of Onvia's common stock will be issued by virtue of the
merger. Instead, each holder of shares of DemandStar capital stock who would
otherwise be entitled to a fractional share of Onvia's common stock shall
receive an amount of cash equal to the product of such fraction multiplied by
the average closing sale price of one share of Onvia's common stock over the
five trading days immediately prior to the effective time.
Representations and warranties
The merger agreement includes a number of representations and warranties
made by DemandStar to Onvia and Dragon Acquisition Corporation relating to a
number of matters, including:
. due organization and good standing;
. capital structure and rights or obligations relating to capital stock,
including stock options;
. authorization, execution, delivery, and enforceability of the merger
agreement;
. absence of conflict with or violation of any agreement, law, or charter
or bylaw provision and the absence of the need for filings, consents,
approvals or actions;
. documents filed with the SEC;
. accuracy of information supplied by DemandStar;
. absence of certain material changes, events, litigation or
investigations;
. filing of tax returns and payment of taxes;
. title to, or valid leasehold interests in, material properties and
assets;
. disclosure of material contracts;
. litigation;
. environmental matters;
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. compliance with laws;
. employee benefit plans and labor relations;
. change of control payments to officers and directors;
. ownership of or right to use, and non-infringement of others' rights to
intellectual property;
. application of state anti-takeover provisions;
. board approval;
. broker's or advisor's fees;
. receipt of a fairness opinion of Janney Montgomery Scott LLC; and
. no violations of the Foreign Corrupt Practices Act of 1977 and no other
improper payments or contributions to government officials or agencies.
The merger agreement also includes representations and warranties by Onvia
and Dragon Acquisition Corporation in favor of DemandStar relating to a number
of matters, including the following:
. organization and good standing;
. capital structure;
. authorization, execution, delivery, and enforceability of the merger
agreement;
. absence of conflict with or violation of any agreement, law, or charter
or bylaw provision and the absence of the need for filings, consents,
approvals or actions;
. documents filed with the SEC;
. accuracy of information supplied by Onvia or Dragon Acquisition
Corporation;
. absence of material changes or events;
. absence of material litigation or investigations; and
. valid issuance of Onvia's common stock in the merger.
The representations and warranties of DemandStar, Onvia and Dragon
Acquisition Corporation terminate at the effective time of the merger.
Conduct of business of DemandStar pending the merger
DemandStar has agreed that, during the period from the date of the merger
agreement until the earlier of the termination of the merger agreement or the
effective time, it will carry on its business in the usual, regular and
ordinary course, consistent with prior conduct and in compliance with all
applicable laws and regulations. DemandStar is required to preserve intact its
current business organization, keep available the services of its present
officers and employers and preserve its relationships with customers,
suppliers, licensors, licensees, and others having business dealings with it.
DemandStar has also agreed that, prior to the effective time or the termination
of the merger agreement, without Onvia's consent, it will not, among other
things:
. waive any stock repurchase rights, accelerate, amend or change the period
of exercisability of options or restricted stock, reprice options or
authorize cash payments in exchange for options, or permit the payment of
the exercise price of any options by any means other than cash, check or
wire transfer;
. grant severance or termination pay, except pursuant to written agreements
in effect, or policies existing, on the date of the merger agreement, or
adopt any new severance plan;
. transfer, license, extend, amend or modify in any material respect any
rights to its intellectual property, other than non-exclusive licenses in
the ordinary course of business and consistent with past practice;
. declare, set aside or pay any dividends on or make any other
distributions in respect of any capital stock or split, combine or
reclassify any capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for any
capital stock;
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. purchase, redeem or otherwise acquire any shares of capital stock of
DemandStar or its subsidiaries, except repurchases of an employee's
unvested shares in connection with such employee's termination of
employment;
. issue, deliver, sell, authorize, pledge or otherwise encumber any shares
of capital stock or any securities convertible into shares of capital
stock, other than pursuant to the exercise of stock options outstanding
on the date of the merger agreement or pursuant to the issuance of
options to purchase no more than 200,000 shares of DemandStar's common
stock, with no more that 25,000 of such shares to be granted to any one
person, under DemandStar's 1999 Employee Incentive Compensation Plan;
. cause, permit or propose any amendments to its articles of incorporation,
bylaws or other charter documents (or similar governing instruments of
any of its subsidiaries);
. acquire, merge or consolidate with any business or corporation, or
otherwise acquire any material assets or enter into any material joint
ventures, strategic partnerships or alliances;
. sell, lease, license, encumber or otherwise dispose of any material
properties or assets, other than accepting an assignment of a lease from
H.T.E., Inc. related to DemandStar's office located in Orange County,
Florida;
. incur any indebtedness or guarantee any such indebtedness of another
person, issue or sell any debt securities or options, warrants, calls or
other rights to acquire any debt securities of DemandStar;
. adopt or amend any employee benefit plan or enter into any employment
contract or collective bargaining agreement other than offer letters and
agreements entered into in the ordinary course of business consistent
with past practice with employees who are terminable "at will;"
. pay any special bonus or special remuneration to any director or
employee, or increase the salaries or wage rates or fringe benefits of
its directors, officers, employees or consultants other than in the
ordinary course of business, consistent with past practice;
. modify, amend or terminate any material contract or agreement or waive,
release or assign any material rights or claims thereunder;
. enter into any licensing, distribution, sponsorship, advertising,
merchant program or other similar contracts which may not be canceled
without penalty by DemandStar or which include over $25,000 in payments
by or to DemandStar;
. revalue any of its assets or make any change in accounting methods,
principles or practices;
. fail to make timely filings with the SEC; or
. engage in any action with the intent to adversely impact any of the
transactions contemplated by the merger agreement.
Conduct of business of Onvia pending the merger
Onvia has agreed that, during the period from the date of the merger
agreement until the earlier of the termination of the merger agreement or the
effective time, it will not cause, permit or propose any amendments to its
certificate of incorporation or bylaws or other charter documents in a manner
that would have an adverse impact on DemandStar's shareholders.
All of DemandStar's and Onvia's covenants will terminate at the effective
time, except those that, by their terms, survive the effective time.
No other negotiations
The merger agreement provides that DemandStar will not authorize or permit
any of its officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by it to:
. solicit or induce the making or announcement of any acquisition proposal;
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. participate in any discussions regarding, or furnish to any person any
non-public information with respect to, or make any proposal that
constitutes or may reasonably be expected to lead to, any acquisition
proposal;
. engage in discussions with any person with respect to any acquisition
proposal;
. approve or recommend any acquisition proposal; or
. enter into any letter of intent or similar document or any contract
relating to any acquisition proposal.
However, prior to the approval of the merger agreement by the required
DemandStar shareholder vote, the merger agreement does not prohibit DemandStar
from furnishing nonpublic information to, entering into a confidentiality
agreement with or entering into discussions with, any person or group in
response to a more favorable acquisition proposal submitted by such person or
group if:
. DemandStar has not violated any of the restrictions set forth above;
. DemandStar's board concludes that such action is required to comply with
its fiduciary obligations to DemandStar's shareholders;
. prior to furnishing any such nonpublic information to, or entering into
discussions with, such person or group, DemandStar gives Onvia written
notice of the identity of such person or group and of DemandStar's
intention to furnish nonpublic information to, or enter into discussions
with, such person or group and DemandStar receives from such person or
group an executed confidentiality agreement containing customary
limitations on the use and disclosure of all nonpublic written and oral
information furnished to such person or group by or on behalf of
DemandStar; and
. contemporaneously with furnishing any such nonpublic information to such
person or group, DemandStar furnishes such nonpublic information to
Onvia.
In addition, DemandStar has agreed to provide Onvia with prior written notice
of any meeting of DemandStar's board of directors at which the board is
expected to recommend a more favorable offer to its shareholders.
The merger agreement defines an "acquisition proposal" as any bona fide
offer or proposal (other than an offer or proposal by Onvia) relating to any
transaction other than the transactions contemplated by the merger agreement
involving:
. any acquisition to purchase from DemandStar of more than a 30% interest
in the total outstanding voting securities of DemandStar or any tender
offer or exchange offer that, if consummated, would result in any person
or group beneficially owning 30% or more of the total outstanding voting
securities of DemandStar or any merger, consolidation, business
combination or similar transaction involving DemandStar;
. any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of more than 50% of the assets of
DemandStar; or
. any liquidation or dissolution of DemandStar.
DemandStar has agreed to promptly advise Onvia of any request for non-public
information or any inquiry which DemandStar believes would lead to an
acquisition proposal, the material terms and conditions of such acquisition
proposal, and the identity of the person or group making any such request,
acquisition proposal or inquiry.
Director and officer indemnification
From and after the effective time of the merger, Onvia will cause the
surviving corporation to fulfill and honor DemandStar's obligations pursuant to
any indemnification agreements with its directors and officers that existed as
of the effective time of the merger and any indemnification provisions under
DemandStar's organizational documents as in effect on the date of the merger
agreement.
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<PAGE>
DemandStar's articles of incorporation and bylaws following the merger will
contain provisions with respect to exculpation and indemnification that are at
least as favorable to the indemnified directors and officers as those contained
in DemandStar's articles of incorporation or bylaws as in effect on the date of
the merger agreement. These indemnification provisions will not be amended,
repealed or otherwise modified for a period of six years from the effective
time of the merger in any manner that would adversely affect the rights of
individuals who were directors, officers, employees or agents of DemandStar
immediately prior to the effective time of the merger, unless such modification
is required by law.
For a period of three years after the effective time of the merger, Onvia
will cause the surviving corporation to use commercially reasonable efforts to
maintain in effect, if available, directors' and officers' liability insurance
covering those persons who are currently covered by DemandStar's directors' and
officers' liability insurance policy, on comparable terms to such policy;
provided, however, neither Onvia nor the surviving corporation shall be
required to expend more than 125% of the annual premium currently paid by
DemandStar for such coverage.
Bridge financing
Under the merger agreement, Onvia is obligated to lend DemandStar funds on
the dates and in the amounts listed in the following table:
<TABLE>
<CAPTION>
Funding Aggregate Funding Fully-Diluted
Funding Date Amount Amount Percentage
------------ ------- ----------------- -------------
<S> <C> <C> <C>
December 1, 2000 $2,000,000 $2,000,000 15%
January 1, 2001 $1,000,000 $3,000,000 4%
February 1, 2001 $1,000,000 $4,000,000 4%
March 1, 2001 $1,000,000 $5,000,000 2%
</TABLE>
Each loan is made pursuant to a form of convertible promissory note with the
blanks in the form of note completed using the information from the table
above. The notes bear interest at a rate of 9% per year and mature on November
1, 2003. However, if the merger agreement is terminated under circumstances
that require DemandStar to pay Onvia the termination fee and expenses described
below, each note matures and becomes due and payable 30 days after that
termination. If the merger agreement is terminated under circumstances that
require Onvia to pay DemandStar the termination fee and expenses described
below, each note matures and becomes due and payable 12 months after that
termination.
If any note becomes due and payable under the terms outlined above, Onvia,
at its option, may convert each note into a number of shares of DemandStar's
Series C preferred stock an amount equal to the percentage of DemandStar's
outstanding capital stock on a fully-diluted basis (determined in accordance
with accounting principles generally accepted in the United States of America)
indicated in the table above under the caption "Fully-Diluted Percentage."
Board observer
For 18 months after the effective time of the merger, O.F. Ramos,
DemandStar's current Chief Executive Officer, will have the right to attend
meetings of Onvia's board of directors and to participate in those meetings.
However, Mr. Ramos will not have the right to vote at those meetings or to
attend meetings or portions of meetings of Onvia's board of directors from
which directors who are also employees of Onvia have been excluded. He will be
entitled to the same notice of meetings and other information as is given to
members of Onvia's board of directors. If Mr. Ramos declines or is unable to
serve as DemandStar's observer, then Bernard B. Markey will be designated as
DemandStar's observer.
Conditions to completion of the merger
The obligations of Onvia and DemandStar to effect the merger are subject to
the satisfaction, at or prior to the closing date of the merger, of the
following conditions:
. DemandStar's shareholders adopt and approve the merger agreement and the
merger;
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<PAGE>
. the SEC declares the registration statement effective and no stop order
suspending the effectiveness of the registration statement having been
issued and no proceeding for that purpose, and no similar proceeding in
respect of this proxy statement/prospectus, shall have been initiated or
threatened in writing by the SEC;
. no governmental entity enacts, issues, promulgates, enforces or enters
any statute, rule, regulation, executive order, decree, injunction or
other order which is in effect and which makes the merger illegal or
otherwise prohibits consummation of the merger;
. all waiting periods, if any, under the Hart-Scott-Rodino Act relating to
the merger expire or terminate early and all material foreign antitrust
approvals required to be obtained prior to the merger are obtained; and
. Onvia and DemandStar receiving written opinions from tax counsel to the
effect that the merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and such opinions
shall not have been withdrawn.
In addition, the obligation of DemandStar to consummate and effect the
merger shall be subject to the satisfaction, at or prior to the closing date,
of the following conditions, any of which may be waived by DemandStar:
. DemandStar's receipt of a certificate signed on behalf of Onvia by a duly
authorized officer of Onvia certifying that the representations and
warranties of Onvia and Dragon Acquisition Corporation contained in the
merger agreement were true and correct in all material respects as of the
date of the merger agreement and are true and correct on and as of the
closing date of the merger as if made on such date except:
. in each case, or in the aggregate, as does not constitute a material
adverse effect on Onvia and Dragon Acquisition Corporation;
. those representations and warranties which address matters only as of a
particular date, which representations were true and correct as of such
particular date or which do not constitute a material adverse effect on
Onvia and Dragon Acquisition Corporation;
. for changes contemplated by the merger agreement;
. the shares of Onvia's common stock to be issued in the merger are
eligible for trading on the Nasdaq National Market; and
. Onvia's and Dragon Acquisition Corporation's performance or compliance in
all material respects with all agreements and covenants required by the
merger agreement to be performed or complied with by them on or prior to
the closing of the merger and DemandStar's receipt of a certificate to
that effect signed on behalf of Onvia by the Chief Executive Officer and
the Chief Financial Officer of Onvia.
Further, the obligations of Onvia and Dragon Acquisition Corporation to
consummate and effect the merger shall be subject to the satisfaction at or
prior to the closing date of the following conditions, any of which may be
waived by Onvia:
. Onvia's receipt of a certificate signed on behalf of DemandStar by a duly
authorized officer of DemandStar certifying that the representations and
warranties of DemandStar contained in the merger agreement were true and
correct in all material respects as of the date of the merger agreement,
and are true and correct on and as of the closing date as if made on and
as of the closing date except:
. in each case, or in the aggregate, as does not constitute a material
adverse effect on DemandStar;
. for changes contemplated by the merger agreement;
. for those representations and warranties which address matters only as
of a particular date, which representations were true and correct as of
such particular date or which do not constitute a material adverse
effect on DemandStar;
57
<PAGE>
. DemandStar's performance or compliance in all material respects with all
agreements and covenants required by the merger agreement to be performed
or complied with by it, and Onvia's receipt of a certificate to such
effect signed on behalf of DemandStar by the Chief Executive Officer and
Chief Financial Officer of DemandStar;
. DemandStar delivering Onvia a certificate of its Secretary and Chief
Financial Officer setting forth the number of options to purchase
DemandStar capital stock vested as of the effective time of the merger;
. O.F. Ramos, Edward S. Jordan and William Knox North having entered into
amended employment and option agreements with DemandStar in the forms
attached as exhibits to the merger agreement;
. Bernard B. Markey, L.A. Gornto, Jr. and Edward Moses having amended their
existing employment and consulting with DemandStar so that each of them
agree to provide transition consulting services for 180 days after the
effective time of the merger and so that their options to purchase shares
of DemandStar's common stock will be exercisable for 90 days after the
conclusion of their employment or consulting relationship;
. H.T.E., Inc. and DemandStar having terminated the registration rights
agreement related to H.T.E.'s shares of DemandStar capital stock;
. H.T.E. having terminated its right to receive securities as a result of
the transactions contemplated by the merger agreement pursuant to its
$1.75 million promissory note, as amended, executed by DemandStar;
. H.T.E. and each affiliate of DemandStar, including each of DemandStar's
directors and officers, entering into lockup agreements with Onvia;
. holders of not more than 5% of DemandStar's outstanding capital stock
having elected to, or retaining the right to, exercise dissenters' rights
under Florida law;
. DemandStar having received a fairness opinion from Janney Montgomery
Scott;
. DemandStar having provided Onvia with satisfactory evidence of the
termination of all employment, consulting and option agreements with
Ronald Brown; and
. DemandStar having obtained all material consents, waivers and approvals
required under DemandStar's agreements, contracts, licenses or leases.
The merger agreement defines "material adverse effect" when used in
connection with a party to the merger agreement as any change, event,
circumstance or effect that is materially adverse to the business, assets
(including intangible assets), capitalization, financial condition or results
of operations of such party and its subsidiaries taken as a whole, except any
continued or increased operating losses (as long as DemandStar's obligations
related to conduct of its business are complied with) or to the extent that any
such change, event or effect is attributable to or results from changes in
general economic conditions or changes affecting the industry generally in
which such party operates, or changes in trading prices for such party's
capital stock.
Termination of the merger agreement
The merger agreement may be terminated at any time prior to the effective
time of the merger, whether before or after the requisite approval of the
shareholders of DemandStar has been obtained:
. by mutual written consent of Onvia and DemandStar, which consent cannot
be unreasonably withheld:
. in the case of Onvia, if DemandStar would not reasonably be expected to
be able to deliver the certificates related to its representations,
warranties, agreements and covenants prior to June 30, 2001 through the
exercise of its commercially reasonable efforts;
. in the case of DemandStar, if Onvia would not reasonably be expected to
be able to deliver the certificates related to its representations,
warranties, agreements and covenants prior to June 30, 2001 through the
exercise of its commercially reasonable efforts;
58
<PAGE>
. by either DemandStar or Onvia if the merger is not consummated by June
30, 2001; provided, however, such right to terminate the merger agreement
shall not be available to any party whose action or failure to act has
been the cause of or resulted in the failure of the merger to occur on or
before June 30, 2001;
. by either DemandStar or Onvia if a governmental entity shall have issued
an order, decree or ruling or taken any other action which permanently
restrains, enjoins or otherwise prohibits the merger, which order, decree
or ruling is final and nonappealable;
. by either DemandStar or Onvia if the required approval of DemandStar's
stockholders is not obtained at the special meeting or at any
adjournment, provided that the right to terminate the merger agreement is
not available to DemandStar if the failure to obtain stockholder approval
has been caused by DemandStar's action or failure to act and such action
or failure to act constitutes a breach by DemandStar of the merger
agreement;
. by Onvia if any triggering event occurs;
. by DemandStar, upon a breach of any representation, warranty, covenant or
agreement on the part of Onvia set forth in the merger agreement, or if
any representation or warranty of Onvia becomes untrue, provided that
Onvia is entitled to a 20 day cure period, if that 20 day period does not
extend beyond June 30, 2001, although DemandStar may not terminate the
merger agreement if it has materially breached the merger agreement; or
. by Onvia, upon a breach of any representation, warranty, covenant or
agreement on the part of DemandStar set forth in the merger agreement, or
if any representation or warranty of DemandStar becomes untrue, provided
that DemandStar is entitled to a 20 day cure period, if that 20 day cure
period does not extend beyond June 30, 2001, although Onvia may not
terminate the merger agreement if it materially breaches the merger
agreement.
A "triggering event" occurs if:
. the board of directors of DemandStar or any committee thereof having
authority to bind the board of directors of DemandStar has for any reason
withheld or withdrawn or has amended or modified in a manner adverse to
Onvia its recommendation in favor of the adoption and approval of the
merger agreement or the approval of the merger;
. DemandStar having failed to include in the proxy statement/prospectus its
recommendation in favor of the adoption and approval of the merger
agreement and the approval of the merger;
. DemandStar's board of directors having failed to reaffirm its
recommendation in favor of the adoption and approval of the merger
agreement and the approval of the merger within five business days after
Onvia requests in writing that such recommendation be reaffirmed at any
time following the public announcement of an acquisition proposal or
following the time at which DemandStar becomes aware of the existence of
an acquisition proposal;
. DemandStar's board of directors or any committee thereof having authority
to bind the board of directors of DemandStar having approved or publicly
recommended any acquisition proposal;
. DemandStar having entered into any letter of intent or similar document
or any agreement, contract or commitment relating to any acquisition
proposal;
. a tender or exchange offer relating to securities of DemandStar in excess
of 15% of its outstanding voting securities having been commenced by a
person unaffiliated with Onvia and DemandStar not having been sent to its
shareholders pursuant to Rule 14e-2 promulgated under the Exchange Act,
within 10 business days after such tender or exchange offer is first
published sent or given, a statement disclosing that DemandStar's board
of directors recommends rejection of such tender or exchange offer; or
. DemandStar having intentionally breached its obligations to not solicit
other transactions.
59
<PAGE>
Termination fee and expenses
Except as set forth below, all fees and expenses incurred in connection with
the merger agreement and the merger shall be paid by the party incurring such
expenses, whether or not the merger is consummated. However, Onvia and
DemandStar have agreed to equally share all fees and expenses, other than
attorneys' and accountants fees and expenses, incurred in relation to the
printing and filing with the SEC of the proxy statement/prospectus and the
registration statement and any amendments or supplements to such documents and
any fees incurred in relation to the filing of materials required under the
Hart-Scott-Rodino Act.
Within one business day after termination of the merger agreement,
DemandStar must pay Onvia an amount equal to Onvia's documented expenses
incurred in connection with the transactions contemplated by the merger
agreement and a fee equal to $600,000 in immediately available funds upon
termination of the merger agreement:
. by Onvia as a result of a triggering event occurring;
. by either Onvia or DemandStar because the required DemandStar shareholder
vote was not obtained at a shareholder meeting or any adjournment
thereof, or
. by Onvia if DemandStar breaches any representation, warranty, covenant or
agreement in the merger agreement, or if any representation or warranty
of DemandStar becomes untrue, so that DemandStar would be unable to
deliver the certificates related to its representations, warranties,
agreements and covenants following a 20 day cure period.
If the merger agreement is terminated by Onvia or DemandStar because the
merger has not been consummated by June 30, 2001 and an acquisition proposal
has been announced or communicated to DemandStar's board of directors, then
DemandStar must pay Onvia an amount equal to Onvia's documented expenses
incurred in connection with the transactions contemplated by the merger
agreement. If the merger does not occur by June 30, 2001 and on or before June
30, 2002 DemandStar enters into a definitive agreement with a third party with
respect to an acquisition transaction, or consummates an acquisition
transaction with a third party, then DemandStar must pay Onvia an amount equal
to $600,000 in immediately available funds contemporaneous with any such
execution or consummation.
If DemandStar terminates the merger agreement because Onvia breaches any
representation, warranty, covenant or agreement in the merger agreement, or if
any representation or warranty of DemandStar becomes untrue, so that Onvia
would be unable to deliver the certificates related to its representations,
warranties, agreements and covenants following a 20 day cure period, then Onvia
must pay DemandStar an amount equal to DemandStar's documented expenses
incurred in connection with the transactions contemplated by the merger
agreement and a fee equal to $600,000 in immediately available funds upon
termination of the merger agreement.
Payment of the fees described above shall not be in lieu of damages incurred
in the event of a willful or intentional breach of the merger agreement.
Amendment and waiver
Subject to applicable law, the merger agreement may be amended by the
parties to the merger agreement at any time by execution of an instrument in
writing signed on behalf of Onvia, Dragon Acquisition Corporation and
DemandStar. At any time prior to the effective time of the merger, any party to
the merger agreement may, to the extent legally allowed:
. extend the time for the performance of any of the obligations or other
acts of the other parties to the merger agreement;
. waive any inaccuracies in the representations and warranties made to such
party contained in the merger agreement or in any document delivered
pursuant to the merger agreement; and
. waive compliance with any of the agreements or conditions for the benefit
of such party contained in the merger agreement.
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VOTING AGREEMENTS
Concurrently with the execution of the merger agreement, H.T.E.,
DemandStar's largest shareholder, and L.A. Gornto, Jr., Edward S. Jordan,
Bernard B. Markey, D. Van Morris, Edward A. Moses, William Knox North, O.F.
Ramos and Trudy Sulzer, who are all officers or directors of DemandStar,
entered into voting agreements with Onvia whereby they agreed to vote all of
the shares of DemandStar common and preferred stock owned, controlled or
subsequently acquired by, those shareholders in favor of the merger, merger
agreement and the transactions contemplated by the merger agreement.
As of December 15, 2000, H.T.E. owned approximately 23.8% of DemandStar's
capital stock (representing 100% of DemandStar's outstanding Series A preferred
stock and approximately 16.4% of DemandStar's outstanding common stock),
although as a result of DemandStar's articles of incorporation, H.T.E.'s voting
power in the aggregate represented approximately 19.9% of DemandStar's common
and preferred stock voting together. The other parties to voting agreements in
the aggregate own 17.8% of the outstanding voting power of DemandStar (37.7%
when combined with H.T.E.) and 19.4% of DemandStar's outstanding common stock
(35.8% when combined with H.T.E.).
In addition, with respect to all shares owned of record or all shares
acquired by those shareholders at any time prior to the effective time of the
merger, each shareholder who is a party to a voting agreement has appointed
Onvia as its irrevocable proxy and lawful attorney to vote its shares as its
proxy in favor of the merger, merger agreement and the transactions
contemplated by the merger agreement. The voting agreements terminate upon the
earlier of the six months after the termination of the merger agreement, June
30, 2001 or the effective time of the merger.
The voting agreements also prohibit those shareholders from selling,
pledging or otherwise transferring or encumbering such shareholder's shares.
This prohibition continues for so long as the voting agreements remain
effective.
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ONVIA SELECTED FINANCIAL INFORMATION
The selected financial data set forth below of Onvia for the period from
March 25, 1997 through December 31, 1997 and for the years ended December 31,
1998 and 1999 and as of December 31, 1998 and 1999, is derived from, and
qualified by reference to, Onvia's audited consolidated financial statements
included elsewhere in this proxy statement/prospectus. The selected financial
data set forth below for the nine months ended September 30, 1999 and as of
December 31, 1997 and September 30, 1999 is derived from, and qualified by
reference to, Onvia's audited consolidated financial statements not included in
this proxy statement/prospectus.
The statements of operations data for the nine months ended September 30,
2000 and the balance sheet data as of September 30, 2000 have been derived from
Onvia's unaudited condensed consolidated financial statements that have been
prepared on the same basis as the audited consolidated financial statements
and, in the opinion of Onvia's management, include all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
financial data for the periods presented. The financial data for the interim
periods are not necessarily indicative of results that may be expected for any
other interim period or for the year as a whole.
Onvia is providing the following selected financial information to aid you
in your analysis of the financial aspects of the merger. The information is
only a summary. You should carefully review Onvia's consolidated financial
statements included elsewhere in this proxy statement/prospectus and the
information provided in "Onvia Unaudited Pro Forma Financial Information," and
"Onvia's Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
March 25,
1997
(inception) Year Ended Nine Months Ended
to December 31, September 30,
December 31, ---------------- ------------------
1997 1998 1999 1999 2000
------------ ------ -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues............. $ 62 $1,037 $ 27,177 $ 13,169 $ 96,094
Gross margin............... 15 (45) (4,397) (2,540) (7,448)
Total operating expenses... 146 623 38,428 13,337 91,098
Loss from operations....... (130) (669) (42,825) (15,877) (98,546)
Net loss................... $ (130) $ (672) $(43,366) $(16,202) $(91,363)
====== ====== ======== ======== ========
Net loss attributable to
common stockholders....... $ (130) $ (672) $(57,373) $(16,202) $(91,076)
====== ====== ======== ======== ========
Basic and diluted net loss
per common share.......... $(0.02) $(0.08) $ (4.59) $ (1.42) $ (1.48)
====== ====== ======== ======== ========
Basic and diluted weighted
average shares
outstanding............... 8,001 8,001 12,508 11,390 61,663
====== ====== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
--------------------- ----------------
1997 1998 1999 1999 2000
----- ----- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments........................... $ 6 $ 45 $38,518 $26,037 $191,593
Total assets........................... 12 180 50,279 38,199 276,792
Long-term debt, including current
portion............................... -- -- 9,653 9,231 7,690
Total stockholders' equity (deficit)... (120) (792) 26,613 22,878 220,027
</TABLE>
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ONVIA SELECTED QUARTERLY FINANCIAL INFORMATION
The selected quarterly financial data set forth below of Onvia for the
quarters in the years ended December 31, 1998, and 1999 and in the nine months
ended September 30, 2000, have been derived from Onvia's unaudited consolidated
financial statements that have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of Onvia's management,
include all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of the financial data for the periods
presented. The financial data for the interim periods are not necessarily
indicative of results that may be expected for any other interim period or for
the year as a whole.
Onvia is providing the following selected financial information to aid you
in your analysis of the financial aspects of the merger. The information is
only a summary. You should carefully review Onvia's consolidated financial
statements included elsewhere in this proxy statement/prospectus and the
information provided in "Onvia Unaudited Pro Forma Financial Information," and
"Onvia's Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
March June 30, September 30,
31, 2000 2000 2000
-------- -------- -------------
(in thousands, except per share
amounts)
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Total revenues.............................. $ 21,509 $ 29,253 $ 45,332
Gross margin................................ (2,846) (2,924) (1,678)
Total operating expenses.................... 24,099 35,209 31,790
Loss from operations........................ (26,945) (38,133) (33,468)
Net loss.................................... $(26,160) $(34,683) $(30,520)
======== ======== ========
Net loss attributable to common
stockholders............................... $(25,873) $(34,683) $(30,520)
======== ======== ========
Basic and diluted net loss per common
share...................................... $ (0.71) $ (0.48) $ (0.39)
======== ======== ========
Basic and diluted weighted average shares
outstanding................................ 36,377 72,301 77,832
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
June
March 31, 30, September 30, December 31,
1999 1999 1999 1999
--------- ------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues.................. $ 1,476 $ 3,565 $ 8,128 $ 14,008
Gross margin.................... (350) (661) (1,529) (1,857)
Total operating expenses........ 1,175 3,240 8,922 25,091
Loss from operations............ (1,525) (3,901) (10,451) (26,948)
Net loss........................ $(1,600) $(3,777) $(10,825) $(27,164)
======= ======= ======== ========
Net loss attributable to common
stockholders................... $(1,600) $(3,777) $(10,825) $(41,171)
======= ======= ======== ========
Basic and diluted net loss per
common share................... $ (0.17) $ (0.33) $ (0.83) $ (2.58)
======= ======= ======== ========
Basic and diluted weighted
average shares outstanding..... 9,635 11,427 12,982 15,927
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues.................. $ 148 $ 171 $ 334 $ 384
Gross margin.................... 10 (4) 38 (90)
Total operating expenses........ 58 71 194 300
Loss from operations............ (48) (75) (156) (390)
Net loss........................ $ (48) $ (76) $ (157) $ (391)
====== ====== ====== ======
Net loss attributable to common
stockholders................... $ (48) $ (76) $ (157) $ (391)
====== ====== ====== ======
Basic and diluted net loss per
common share................... $(0.01) $(0.01) $(0.02) $(0.05)
====== ====== ====== ======
Basic and diluted weighted
average shares outstanding..... 8,001 8,001 8,001 8,001
====== ====== ====== ======
</TABLE>
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DEMANDSTAR SELECTED FINANCIAL INFORMATION
The selected financial data set forth below of DemandStar's predecessor for
the period from January 1 through June 17, 1999 and for the year ended December
31, 1998 and as of December 31, 1998 and of DemandStar for the period from June
18, 1999 through December 31, 1999 and as of the year ended December 31, 1999,
is derived from, and qualified by reference to, DemandStar's audited financial
statements included elsewhere in this prospectus.
The statements of operations data for the period from June 18, 1999 through
September 30, 1999 and for the nine months ended September 30, 2000 and the
balance sheet data as of September 30, 1999 and 2000 have been derived from
DemandStar's unaudited financial statements that have been prepared on the same
basis as the audited financial statements and, in the opinion of DemandStar's
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the financial data for the
periods presented. The financial data for the interim periods are not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
DemandStar is providing the following selected financial information to aid
you in your analysis of the financial aspects of the merger. The information is
only a summary. You should carefully review DemandStar's financial statements
included elsewhere in this proxy statement/prospectus and the information
provided in "DemandStar Unaudited Pro Forma Financial Information," and
"DemandStar's Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Information On Demand, Inc.
(Predecessor)
---------------------------- DemandStar.com, Inc.
For the Year --------------------------------------------------------
Ended January 1, 1999 June 18, 1999 June 18, 1999 For the Nine Months
December 31, to to to Ended
1998 June 17, 1999 December 31, 1999 September 30, 1999 September 30, 2000
------------ --------------- ----------------- ------------------ -------------------
(in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 34 $ 132 $ 197 $ 93 $ 435
Total operating
expenses............... 314 402 1,308 452 6,788
Operating loss.......... (281) (270) (1,112) (359) (6,352)
Net loss................ $(281) $(270) $(1,139) $ (370) $(6,359)
===== ===== ======= ====== =======
Basic and diluted net
loss per common share.. $ (0.91) $(0.30) $ (1.31)
======= ====== =======
Basic and diluted
weighted average shares
outstanding............ 1,250 1,250 4,845
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Information On DemandStar.com, Inc.
Demand, Inc. ---------------------------
(Predecessor) September 30,
----------------- December 31, --------------
December 31, 1998 1999 1999 2000
----------------- ------------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash............................ $ 18 $ 128 $ 4 $1,899
Working capital (deficit)....... (209) (302) (605) 601
Total assets.................... 19 1,311 1,168 3,835
Note payable to H.T.E. ......... -- 1,307 -- 1,750
Total shareholders' equity
(deficit)...................... (209) (326) (430) 599
</TABLE>
64
<PAGE>
DEMANDSTAR SELECTED QUARTERLY FINANCIAL INFORMATION
The selected quarterly financial data set forth below of DemandStar's
predecessor for the three months ended March 31, 1999 and for the period from
April 1 through June 17, 1999, and of DemandStar for the period from June 18 to
June 30, 1999 and for the quarters in the six months ended December 31, 1999
and the nine months ended September 30, 2000 have been derived from
DemandStar's unaudited financial statements that have been prepared on the same
basis as the audited financial statements and, in the opinion of DemandStar's
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the financial data for the
periods presented. The financial data for the interim periods are not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
DemandStar is providing the following selected financial information to aid
you in your analysis of the financial aspects of the merger. The information is
only a summary. You should carefully review DemandStar's financial statements
included elsewhere in this proxy statement/prospectus and the information
provided in "DemandStar's Unaudited Pro Forma Financial Information," and
"DemandStar's Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The supplementary information under Item 302(a) of Regulation S-K has not
been provided for DemandStar's predecessor for the quarters in the year ended
December 31, 1998 as the information is not readily available.
<TABLE>
<CAPTION>
DemandStar.com, Inc.
----------------------------------
March 31, June 30, September 30,
2000 2000 2000
--------- -------- -------------
(in thousands, except per share
amounts)
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Total revenues............................. $ 83 $ 146 $ 207
Gross margin............................... 83 146 207
Total operating expenses................... 1,538 2,324 2,925
Loss from operations....................... (1,455) (2,179) (2,718)
Net loss................................... $ (1,485) $ (2,199) $ (2,674)
======== ======== ========
Basic and diluted net loss per common
share..................................... $ (1.18) $ (0.40) $ (0.35)
======== ======== ========
Basic and diluted weighted average shares
outstanding............................... 1,259 5,537 7,638
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Information On
Demand, Inc.
(Predecessor) DemandStar.com, Inc.
------------------ -----------------------------------
April 1 June 18
to to
March 31, June 17, June 30, September 30, December 31,
1999 1999 1999 1999 1999
--------- -------- -------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenues.......... $ 62 $ 70 $ -- $ 93 $ 104
Gross margin............ 62 70 -- 93 104
Total operating
expenses............... 227 176 25 427 856
Loss from operations.... (165) (106) (25) (334) (752)
Net loss................ $(165) $(106) $ (25) $ (345) $ (769)
===== ===== ====== ====== ======
Basic and diluted net
loss per common share.. $(0.02) $(0.28) $(0.62)
====== ====== ======
Basic and diluted
weighted average shares
outstanding............ 1,250 1,250 1,250
====== ====== ======
</TABLE>
65
<PAGE>
ONVIA'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this information together with Onvia's consolidated
financial statements and related notes and other financial information included
in this document. This management's discussion and analysis contains forward-
looking statements that involve risks and uncertainties. Onvia's actual results
may differ materially from those indicated in the forward-looking statements.
This management's discussion and analysis contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements relate to expectations
concerning matters that are not historical facts. Words such as "projects,"
"believes," "anticipates," "plans," "expects," "intends," and similar words and
expressions are intended to identify forward-looking statements. Although Onvia
believes that such forward-looking statements are reasonable, it cannot assure
you that such expectations will prove to be correct. Important language
regarding factors that could cause actual results to differ materially from
such expectations are disclosed herein including, without limitation, in the
"Risk Factors" beginning on page 12. All forward-looking statements
attributable to Onvia are expressly qualified in their entirety by such
language. Onvia does not undertake any obligation to update any forward-looking
statements.
Results Of Operations
Overview
Onvia is a leading business-to-business exchange for small business buyers
and sellers. Onvia provides an exchange where small businesses can access
exchange services, buy products, obtain valuable news, product and service
information and access business forms and productivity tools. Onvia's exchange
services include web hosting, a "request for quote" service, and a proprietary
government-to-business exchange that allows small business users the
opportunity to participate in government procurement contracts.
In view of the rapidly changing nature of Onvia's business and limited
operating history, Onvia believes that a historical comparison of revenue and
operating results is not necessarily meaningful and should not be relied on as
an indication of future performance. This is particularly true of companies
such as Onvia that operate in new and rapidly evolving markets. As a result,
our prospects must be considered in light of the risks, expenses and
difficulties encountered by companies in their early state of development,
particularly companies in new and rapidly evolving markets. See "Risk Factors"
for a more complete description of the many risks Onvia faces.
Recent Developments
Purchase Now strategic agreement
In December 2000, Onvia entered into a strategic agreement with firstsource
corp., whereby firstsource will, through a private label solution, provide
product purchasing and fulfillment services for Onvia's web site. As part of
the agreement, Onvia's customers interested in making a product purchase are
linked to a private label web site owned and operated by firstsource.
firstsource is responsible for order fulfillment, customer care and billing
processes related to these business product transactions. New customer account
data entered during the transaction process on the private label web site will
be owned solely by Onvia.
Onvia's decision to partner with firstsource is aimed at reducing costs and
focusing on other growth strategies such as development of Onvia's government
solutions and hosting businesses. As a result of the agreement, Onvia has
reduced its workforce by approximately 180 employees primarily through
elimination of positions previously related to the Purchase Now business unit.
In conjunction with this transaction, Onvia will record a restructuring charge
of approximately $4.0 million, which consists primarily of employee severance
costs and the write off of capitalized software used by the Purchase Now
business unit.
Auctions
On December 15, 2000, in connection with the focus on the small business
exchange and government-to-business bid matching, Onvia discontinued the
auctions functionality on its website.
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Acquisitions
On July 11, 2000, August 10, 2000 and September 15, 2000, Onvia acquired
Zanova, Inc., Globe-1, Incorporated and Hardware.com, Inc., respectively,
primarily for their product and exchange offerings and their technology and
development teams. Onvia accounted for these acquisitions as purchase business
combinations. Accordingly, Zanova's, Globe-1's and Hardware.com's results of
operations are included in Onvia's combined results from the date of the
acquisitions. Please see Note 5 in the notes to the condensed consolidated
financial statements for the nine months ended September 30, 2000 for more
detailed information.
Partnership Agreements
Visa USA Inc.
In July 2000, Onvia entered into a custom co-branded site agreement with
Visa USA Inc. to create VisaBusiness.com, a site specifically designed to help
Visa's small business cardholders earn incremental revenue through the use of
Onvia's exchange services. As part of the agreement, Visa will also promote the
co-branded solution to its member banks. Please see Note 6 in the notes to the
condensed consolidated financial statements for the nine months ended September
30, 2000 for more detailed information.
America Online
On February 4, 2000, Onvia entered into a strategic relationship with AOL to
provide AOL's customers with access to Onvia's services and products through an
interactive co-branded web site. As part of this relationship, Onvia provides
to AOL a web-based buying directory that supports AOL's business-to-business
ecommerce platform. In addition, AOL promotes the co-branded site and Onvia's
RFQ services.
On November 14, 2000, Onvia and AOL entered into a second agreement which
amended and restated the previous agreement between the parties. As a result of
the new agreement, Onvia and AOL will continue with an abbreviated form of
their relationship through May 14, 2001, after which neither party will have
any contractual commitment to the other.
Nine Months Ended September 30, 1999 and 2000
Onvia had a net loss of $91.4 million for the nine-month period ended
September 30, 2000, or a loss of $1.48 per share, compared with a loss of $16.2
million, or a loss of $1.42 per share, in the comparable period of 1999.
Revenue. Revenue increased to $96.1 million for the nine months ended
September 30, 2000 from $13.2 million for the comparable period in 1999. The
increase in revenue is primarily due to the growth of Onvia's customer base and
the continued increase in repeat orders from existing customers. Through
September 30, 2000, substantially all of Onvia's revenue was derived from
product sales.
International revenues were $10.2 million, or approximately 11% of total
revenue, for the nine months ended September 30, 2000 compared with $3.3
million, or approximately 25% of total revenue, in the comparable period of
1999. The increase in total international revenues was due to the growth in
Onvia's Canadian operations.
Gross Margin. Gross margin improved to negative 7.8% for the nine months
ended September 30, 2000 from negative 19.3% for the comparable period of 1999.
The improvement in gross margin is attributable to increases in product
pricing, lower product costs and an increase in advertising revenues and
transaction fees.
Sales and Marketing. Sales and marketing expenses were approximately $53.6
million for the nine months ended September 30, 2000, compared to $6.5 million
for the comparable period of 1999. The increase in sales and marketing expenses
is due to personnel and payroll related expenses resulting from the growth in
sales and the increase in marketing personnel and higher advertising and
marketing expenses associated with Onvia's advertising and marketing campaigns
initiated during fiscal 2000.
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<PAGE>
Technology and Development. Technology and development expenses were $18.7
million for the nine months ended September 30, 2000 compared to $2.7 million
for the comparable period of 1999. The increase is attributable to contract
engineering expenses related to contractors and consultants and personnel and
payroll related expenses resulting from significant increases in technology and
development personnel.
General and Administrative. General and administrative expenses were $9.4
million for the nine months ended September 30, 2000, compared to $2.4 million
for the comparable period of 1999. The increase in general and administrative
expenses is primarily attributable to personnel and payroll related expenses
resulting from increases in administrative personnel and in legal, professional
and recruiting fees.
Interest Income (Expense), Net. Interest income (expense), net, was $7.2
million for the nine months ended September 30, 2000, compared to $(325,000)
for the comparable period of 1999. This increase is due to interest income
earned on proceeds from Onvia's initial public offering held in money market
funds and other short-term investments.
Noncash Stock-based Compensation. Onvia records unearned stock compensation
in connection with the grant of stock option and other equity instruments. For
employees, unearned stock compensation is the difference between the fair
market value of its common stock and the exercise price of the options. For
non-employees, unearned stock compensation is the fair market value of the
options using the Black Scholes option-pricing model. These amounts are
amortized on an accelerated basis over the vesting period of the option,
typically four years. At September 30, 2000, unearned stock compensation was
$8.4 million. Onvia has recorded $6.7 million of noncash stock-based
compensation expense for the nine months ended September 30, 2000 compared to
$1.7 million in the comparable period of 1999 due to an increased number of
employees.
Amortization of Goodwill. Amortization of goodwill was $2.7 million for the
nine months ended September 30, 2000. Onvia acquired Zanova, Globe-1 and
Hardware.com in the three months ended September 30, 2000 and accounted for the
acquisitions as purchase business combinations. As a result of these
transactions, Onvia recorded goodwill of $44.3 million, which Onvia will
amortize on a straight-line basis over the next three years. See Note 5 in the
notes to the condensed consolidated financial statements for the nine months
ended September 30, 2000 for a more detailed discussion of Onvia's goodwill
relating to these acquisitions.
Provision for Income Taxes. Onvia incurred net operating losses from March
25, 1997 (inception) through September 30, 2000. Therefore, Onvia has not
recorded a provision for income taxes. Onvia has recorded a valuation allowance
for the full amount of the net deferred tax assets.
Years Ended December 31, 1998 and 1999
Revenue. Revenue increased from $1.0 million for the year ended December 31,
1998 to $27.2 million for the year ended December 31, 1999. Growth in revenue
was attributable to increased product sales to new and existing customers.
Gross Margin. Gross margin declined from negative 4.4% to negative 16.2% in
the years ended December 31, 1998 and 1999, respectively. The decrease in gross
margin was attributable to price discounts and promotions offered by Onvia to
acquire customers into its small business exchange.
Sales and Marketing. Sales and marketing expenses increased from $206,000
for the year ended December 31, 1998 to $16.3 million for the year ended
December 31, 1999, due to higher advertising expenses associated with the
launch of a major advertising campaign, the initiation of numerous co-branding
relationships and increases in advertising and marketing personnel.
Technology and Development. Technology and development expenses increased
from $192,000 for the year ended December 31, 1998 to $7.4 million for the year
ended December 31, 1999. This increase was due to consulting expenses
associated with the implementation of several engineering projects and to
increases in technology and development personnel.
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<PAGE>
General and Administrative. General and administrative expenses increased
from $225,000 for the year ended December 31, 1998 to $4.2 million for the year
ended December 31, 1999. This increase in general and administrative expenses
was attributable to the increase in administrative personnel and higher office
occupancy expenses related to the relocation of its corporate offices.
Noncash Stock-based Compensation. Onvia had no amortization of noncash
stock-based compensation for the year ended December 31, 1998 and amortization
of noncash stock-based compensation of $10.5 million for the year ended
December 31, 1999. This increase was due to the issuance of options and non-
vested common stock to Onvia's employees and non-employee advisors, and to the
acceleration of vesting of options and nonvested common stock of Onvia's non-
employee advisors.
Other Income (Expense), Net. Other income (expense), net, increased from
$(4,000) for the year ended December 31, 1998 to $(541,000) for the year ended
December 31, 1999. This net increase was attributable to higher outstanding
amounts on convertible notes, subordinated debt and equipment loans.
Provision for Income Taxes. Onvia incurred net operating losses from
inception through December 31, 1999, and therefore has not recorded a provision
for income taxes. Onvia has recorded a valuation allowance for the full amount
of its net deferred tax assets, as the future realization of the tax benefit is
not currently likely. As of December 31, 1999, Onvia had net operating loss
carryforwards of $33.4 million. These loss carryforwards are available to
reduce future taxable income and expire at various dates beginning in 2017
through 2019. Under the provisions of the Internal Revenue Code, certain
substantial changes in Onvia's ownership may limit the amount of net operating
loss carryforwards that could be utilized annually in the future to offset
taxable income.
Net Loss. Onvia's net loss increased from $672,000 in 1998 to $43.4 million
in 1999. In addition to incurring a 1999 gross margin loss of $4.4 million,
operating expenses increased to $38.4 million in 1999, including $10.5 million
in noncash stock-based compensation. Onvia's operating expenses increased in
1999 as Onvia hired its staff, built its brand, expanded its customer base and
improved its operations and technological infrastructure.
Inception to December 31, 1997 and Year Ended December 31, 1998
Revenue. Revenue increased from $62,000 in 1997 to $1.0 million in 1998.
Growth in revenue was attributable to increased product sales to new and
existing customers.
Gross Margin. Gross margin declined from a positive 24.6% in 1997 to a
negative 4.4% in 1998. The decrease was attributable to price discounts and
promotions offered by Onvia to acquire customers into its small business
exchange.
Sales and Marketing. Sales and marketing expenses increased from $41,000 in
1997 to $206,000 in 1998. This increase was due to the hiring of additional
sales and marketing personnel.
Technology and Development. Technology and development expenses increased
from $13,000 in 1997 to $192,000 in 1998. This increase was attributable to the
hiring of technology and development personnel.
General and Administrative. General and administrative expenses increased
from $92,000 in 1997 to $225,000 in 1998. This increase in general and
administrative expenses was attributable to the increase in administrative
personnel and general corporate expenses.
Other Income (Expense), Net. Onvia had no other income (expense), net, in
1997 and other income (expense), net of $(4,000) in 1998. The increase was due
to the issuance of convertible notes in 1998.
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<PAGE>
Liquidity And Capital Resources
Since its inception, Onvia has financed its operations primarily through the
issuance of equity and debt securities. Through December 31, 1999, SunCommerce
Corporation, a web-hosting company co-owned by Glenn Ballman, Onvia's founder,
Chief Executive Officer and Chairman of the board of directors, advanced
approximately $221,000 in various payments and services to Onvia, including
wages, benefits, management fees, office expenses and other miscellaneous
expenses which they incurred on Onvia's behalf. Through December 31, 1999,
equity issuances yielded gross proceeds of $60.9 million and net proceeds of
$59.8 million. Additionally, Onvia has issued subordinated notes and has
entered into capital equipment term loans to finance its operations. As of
December 31, 1999, Onvia had $38.5 million of cash and cash equivalents and
short-term investments on hand and $9.7 million outstanding under subordinated
debt and equipment loans. See Note 4 of the notes to Onvia's consolidated
financial statements for the year ended December 31, 1999 for more information
on outstanding long-term debt.
In March 2000, Onvia completed its initial public offering and issued
9,200,000 shares of its common stock to the public at a price of $21.00 per
share, raising net proceeds of $177.9 million. Also, in March 2000, Onvia sold
to Internet Capital Group, or ICG, 2,666,666 shares of its common stock at the
initial public offering price of $21.00 per share in a private placement
transaction, which generated net proceeds of $56.0 million.
Onvia's combined cash, cash equivalents and short-term investments were
$191.6 million at September 30, 2000 compared to $38.5 million at December 31,
1999. The increase is due to proceeds received upon completion of Onvia's
initial public offering and private placement in March 2000, less the net loss
incurred for the nine months ended September 30, 2000. The short-term
investment portfolio is invested in money market funds, commercial paper and
corporate debt securities with maturities of one year or less. The portfolio is
diversified among security types and issuers and does not include any
derivative products. At September 30, 2000, Onvia's working capital was $154.3
million compared to $23.3 million at December 31, 1999.
In February 2000, Onvia signed an amended lease agreement for its corporate
office facilities. Monthly lease payments range from $218,000 to $257,000 over
the ten-year term of the lease. Total obligations over the ten-year term of the
agreement are $28.2 million. Minimum lease payments on all of Onvia's non-
cancelable operating leases range from $2.6 million to $3.3 million over the
next five years.
In February 2000, Onvia signed an agreement with America Online, or AOL,
that required Onvia to make fixed payments totaling $18.2 million to AOL. Onvia
was also required to make additional payments to AOL if the number of new
customers that it acquired from AOL exceeds a specified level. Approximately
$3.1 million of this amount was paid immediately following the execution of the
agreement.
On November 14, 2000, Onvia and AOL entered into a restructuring agreement,
which waives any current or past due contractual payments due to AOL and
requires Onvia to pay licensing fees to AOL on a performance basis. As a result
of the restructuring agreement, Onvia reversed sales and marketing expense of
$2.3 million during the fourth quarter of 2000.
In July 2000, Onvia entered into a custom co-branded site agreement with
Visa USA Inc. to create VisaBusiness.com, a site specifically designed to help
Visa's small business cardholders earn incremental revenue through the use of
Onvia's exchange services. Visa has agreed to make annual fixed payments
totaling approximately $7.3 million to Onvia over the three year term of the
agreement. As of September 30, 2000, Onvia has recorded approximately $4.2
million in deferred revenue related to this agreement and has recognized
approximately $235,000 in revenue during the three months ended September 30,
2000.
Operating Activities
Net cash used in operating activities was $59.2 million for the nine months
ended September 30, 2000 and $10.7 million for the comparable period in 1999.
The increase is primarily attributable to increases in net
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operating losses, accounts receivable, prepaid expenses and other current
assets, offset by increases in depreciation and amortization, noncash stock-
based compensation, accounts payable and accrued expenses and other.
Net cash used in operating activities totaled $23.4 million for the year
ended December 31, 1999 and approximately $276,000 for the year ended December
31, 1998. Net cash provided by operating activities totaled approximately
$6,000 in 1997. Net cash used in operating activities for the year ended
December 31, 1999 was attributable to net operating losses, increases in
inventory, prepaid expenses and other current assets, offset by noncash charges
and increases in accounts payable and accrued expenses. Net cash used in
operating activities in 1998 was attributable to net operating losses partially
offset by increases in accounts payable and accrued expenses. Net cash provided
by operating activities in 1997 was attributable to net operating losses offset
by increases in accrued expenses.
Investing Activities
Net cash used in investing activities was $88.8 million for the nine months
ended September 30, 2000 and $4.1 million for the comparable period in 1999.
The increase is primarily attributable to increases in purchases of short-term
investments, purchases of property and equipment and increases in capitalized
internally developed software costs. These cash flows used were partially
offset by cash acquired net of the direct costs of the purchase transactions.
Net cash used in investing activities totaled $6.5 million for the year
ended December 31, 1999 and approximately $23,000 for the year ended December
31, 1998. We did not use or generate any funds from investing activities in
1997. Net cash used in investment activities for the year ended December 31,
1999 and 1998 related to the acquisition of computer hardware and software and
other equipment.
Financing Activities
Net cash provided by financing activities was $229.7 million for the nine
months ended September 30, 2000 and $40.9 million for the comparable period in
1999. The increase is primarily attributable to the sale of equity securities
in Onvia's initial public offering offset by repayments on long-term debt.
Net cash provided by financing activities totaled $68.3 million for the year
ended December 31, 1999 and approximately $344,000 for the year ended December
31, 1998. Net cash provided by financing activities for the year ended December
31, 1999 was attributable to the sale of equity securities and proceeds from
long-term borrowings. Net cash provided by financing activities in 1998 was
attributable to proceeds from the issuance of convertible debt. We generated
insignificant cash in 1997 from the sale of common stock.
Onvia's future liquidity and capital requirements will depend on numerous
factors. For example, Onvia's pace of expansion will affect its future capital
requirements, as will Onvia's decision to acquire or invest in complementary
businesses and technologies. However, Onvia believes that the net proceeds from
issuances of its common stock, and additional debt financing together with
existing cash, cash equivalents and short-term investments, will be sufficient
to satisfy its cash requirements under existing operating plans for the
foreseeable future. In addition, Onvia expects its gross margins to improve and
its operating expenses to be reduced as a result of its strategic relationship
with firstsource, which will further reduce Onvia's cash requirements. If Onvia
acquires additional entities or its overall operating plans change, Onvia may
require additional equity or debt financing to meet future working capital
needs, which may have a dilutive effect on existing stockholders. Onvia cannot
make assurances that if additional financing is required, it will be available
or, that such financing can be obtained on satisfactory terms.
Quantitative and Qualitative Disclosures About Market Risk
Due to the operations of Onvia's wholly-owned subsidiary in Canada, Onvia's
results of operations, financial position and cash flows can be materially
affected by changes in the relative values of the Canadian dollar to the U.S.
dollar. However, due to the relative stability of these two currencies in
relation to one
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another, Onvia's past results of operations have not been materially affected
by fluctuations in exchange rates. Onvia does not use derivative financial
instruments to limit its foreign currency risk exposure.
Onvia classifies financial instruments with original maturities of three
months or less as cash and cash equivalents. As of September 30, 2000, Onvia
considers the reported amounts of its cash and cash equivalents and short-term
investments to be reasonable approximations of their fair values. Therefore,
changes in the market interest rates will not have a material impact on Onvia's
financial position. Through September 30, 2000 Onvia's interest expense was not
sensitive to the general level of U.S. interest rates because all of its debt
arrangements were based on fixed interest rates.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
No. 138, which establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, which will be effective for
Onvia for the fiscal quarter beginning January 1, 2001, requires Onvia to
recognize all derivatives as either assets or liabilities in Onvia's balance
sheet and measure those instruments at fair value. Onvia does not expect the
effect of adopting the provisions of this standard, as amended, to have a
significant impact on its balance sheet, results of operations or cash flows.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB Opinion No. 25" (Interpretation No. 44).
Interpretation No. 44 became effective July 1, 2000. The interpretation
clarifies the application of APB Opinion No. 25 for certain issues,
specifically,
. the definition of an employee;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a business
combination.
The adoption of Interpretation No. 44 did not have a significant impact on
Onvia's financial position or results of operations.
In May 2000, the Emerging Issues Task Force, or EITF, reached a consensus on
EITF Issue 00-14, "Accounting for Certain Sales Incentives." This consensus
provides guidance on the recognition, measurement and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or that are exercisable by a customer
as a result of, a single exchange transaction. This consensus must be adopted
no later than October 1, 2000. Onvia does not expect the adoption of this
consensus to have a material impact on its financial position or results of
operations.
In July 2000, the EITF reached a consensus on EITF Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs." This consensus requires that all
amounts billed to a customer in a sales transaction related to shipping and
handling, if any, represent revenue and should be classified as revenue. Onvia
already classifies shipping charges to customers as revenue. The EITF did not
reach a consensus with respect to the classification of costs related to
shipping and handling. Onvia classifies fulfillment costs such as outbound
shipping to customers and credit card fees as cost of sales.
In December 1999, Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements, was issued. SAB No. 101 summarizes the
SEC's views in applying accounting standards generally accepted in the United
States of America to revenue recognition in financial statements. Onvia
implemented SAB No. 101 in the fourth quarter of 1999. The adoption of SAB
No. 101 did not have a material impact on Onvia's revenue recognition.
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DEMANDSTAR'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this information together with DemandStar's financial
statements and related notes and other financial information included in this
document. This management's discussion and analysis contains forward-looking
statements that involve risks and uncertainties. DemandStar's actual results
may differ materially from those indicated in the forward-looking statements.
This management's discussion and analysis contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements relate to expectations
concerning matters that are not historical facts. Words such as "projects,"
"believes," "anticipates," "plans," "expects," "intends," and similar words and
expressions are intended to identify forward-looking statements. Although each
of Onvia and DemandStar believes that such forward-looking statements are
reasonable, it cannot assure you that such expectations will prove to be
correct. Important language regarding factors that could cause actual results
to differ materially from such expectations are disclosed herein including,
without limitation, in the "Risk Factors" beginning on page 12. All forward-
looking statements attributable to DemandStar are expressly qualified in their
entirety by such language. DemandStar does not undertake any obligation to
update any forward-looking statements.
Results of Operations
Comparison of the nine months ended September 30, 2000 and 1999
Revenues
Revenues include amounts received from vendors for registration fees and bid
document mailings. Total revenues increased by 94% to $435,000 for the nine
months ended September 30, 2000, from $225,000 for the nine months ended
September 30, 1999. The increase in revenues is due primarily to the increased
marketing effort in 2000.
Operating Expenses
Marketing and advertising. Marketing and advertising expenses increased
2,532% to $3.3 million for the nine months ended September 30, 2000, from
$124,000 for the nine months ended September 30, 1999. The increase in
marketing and advertising expenses primarily resulted from an increased
marketing strategy to promote DemandStar.
Research and development. Research and development expenses increased 134%
to $449,000 for the nine months ended September 30, 2000, from $192,000 for the
nine months ended September 30, 1999. During 1999, DemandStar was focused on
product development. During the nine months ended September 30, 2000, the focus
was on expanding the products' features and improving the stability and
scalability of DemandStar's systems to support its growth.
General and administrative. General and administrative expenses, which
include the costs of corporate operations, finance and accounting, human
resources and other general operations, increased 536% to $2.7 million for the
nine months ended September 30, 2000, from $428,000 for the nine months ended
September 30, 1999. The increase in general and administrative expenses is
necessary to support the growth in operations and infrastructure of DemandStar.
Depreciation and amortization. Depreciation and amortization increased 225%
to $360,000 for the nine months ended September 30, 2000 from $111,000 for the
nine months ended September 30, 1999. The increase resulted from the purchase
of equipment and leasehold improvements necessary to support the growth in
operations and infrastructure of DemandStar.
Net interest income/(expense). Net interest income/(expense) for the nine
months ended September 30, 2000 consisted of interest income of $102,000 which
resulted primarily from the investment of the net proceeds
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from the rights offering and interest expense of $108,000 which relates to the
loan with H.T.E. Net interest income/(expense) for the nine months ended
September 30, 1999 consisted of interest expense of $11,000.
Comparison of the years ended December 31, 1999 and 1998
Revenue. Revenue includes amounts received from vendors for registration
fees and bid document mailings. Total revenues increased by 876% to $329,000
for the year ended December 31, 1999, from $34,000 for the year ended December
31, 1998. The increase in revenues is due primarily to the increased marketing
effort in 1999 compared to the 1998 focus on research and development.
Operating Expenses
Marketing and Advertising. Marketing and advertising expenses increased
2,496% to $321,000 for the year ended December 31, 1999, from $12,000 for the
year ended December 31, 1998. The increase in marketing and advertising
expenses is directly related to the increase in revenues and primarily resulted
from an increased marketing strategy to promote DemandStar.
Research and Development. Research and development expenses increased 118%
to $272,000 for the year ended December 31, 1999, from $125,000 for the year
ended December 31, 1998. In 1998, research and development was focused on
product development. During the year ended December 31, 1999, the focus was on
expanding DemandStar's products' features and functionality and improving the
stability and scalability of DemandStar's systems to support the growth that is
anticipated.
General and Administrative. General and administrative expenses, which
include the costs of corporate operations, finance and accounting, human
resources and other general operations, increased 409% to $902,000 for the year
ended December 31, 1999, from $177,000 for the year ended December 31, 1998.
The increase in general and administrative expenses is directly related to the
growth in the volume of revenues and expenses. This growth was necessary to
support the general operations and infrastructure of DemandStar.
Depreciation and Amortization. Depreciation and amortization of $216,000
resulted from the acquisition of the predecessor by DemandStar and the purchase
of miscellaneous equipment and leasehold improvements during the year ended
December 31, 1999. There were no comparable expenses in 1998.
Liquidity and Capital Resources
Net cash used in operating activities totaled $923,000 and $55,000 for the
years ended December 31, 1999 and 1998, respectively. The increase in the net
cash used primarily resulted from the increased operations and loss experienced
in 1999.
Net cash used in investing activities, comprised of capital expenditures and
cash paid for acquisitions, totaled $1.1 million in the year ended December 31,
1999. There were no comparable cash flows for the year ended December 31, 1998.
The cash used in 1999 was primarily related to the acquisition of the
predecessor by DemandStar.
Net cash provided by financing activities totaled $2.2 million and $72,000
for the year ended December 31, 1999 and 1998, respectively. The cash provided
during 1998 reflects the capital contributed by the sole shareholder of the
predecessor. The cash provided during 1999 includes contributions of the sole
shareholder of the predecessor, along with the purchase of common stock by
H.T.E. and funding under the note payable to H.T.E.
Prior to its purchase by DemandStar in June 1999, DemandStar's predecessor's
operations were funded primarily through cash generated from operations and
capital contributed from its sole shareholder.
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In conjunction with the purchase of DemandStar's predecessor, H.T.E.
purchased 1,250,000 shares of DemandStar's common stock for $800,000. In the
first quarter of 2000, H.T.E. purchased 750,000 shares of Series A preferred
stock for $1.5 million. In addition to the stock purchases, H.T.E. also loaned
DemandStar $200,000 to purchase the business and specified net assets of
DemandStar's predecessor and $1.6 million to fund operations, the terms of
which loan were evidenced by a five-year term promissory note payable to H.T.E.
and dated October 31, 1999. As of September 30, 2000, the balance under the
note was $1.75 million.
Pursuant to the merger agreement, Onvia committed to advance DemandStar up
to $5 million in four monthly installments beginning December 1, 2000. Upon
DemandStar's draw down of an initial advance of $2 million DemandStar had
sufficient funds to continue operations for the remainder of the year 2000.
Net cash used in operating activities totaled $5.1 million or the nine
months ended September 30, 2000, compared to net cash provided by operating
activities of $283,000 for the period June 1, 1999 to September 30, 1999. The
increase in net cash used in the 2000 period primarily resulted from the
increased operating expenses and net loss.
Net cash used in investing activities, comprised of cash paid for
acquisition and capital expenditures, totaled $826,000 for the nine months
ended September 30, 2000 and $1.1 million for the period June 1, 1999 to
September 30, 1999. The net cash used in the 2000 period resulted from
purchases of equipment needed to expand DemandStar's infrastructure and support
its growth.
Net cash provided by financing activities totaled $7.7 million for the nine
months ended September 30, 2000 and $800,000 for the period June 1, 1999 to
September 30, 1999. The cash provided during 2000 reflects the sale of common
stock through the DemandStar rights offering, the sale of Series A preferred
stock to H.T.E. and amounts borrowed under the loan with H.T.E.
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BUSINESS OF ONVIA
Overview
Onvia.com, Inc., headquartered in Seattle, Washington, is a leading online
exchange helping small businesses secure additional revenue through buying and
selling products and services to other businesses and government entities.
Onvia is valued by buyers and sellers as a matchmaker, helping almost one
million small businesses find what they need through an online exchange.
Onvia's comprehensive solution is designed to help small businesses achieve
incremental revenue growth through new business opportunities and utilization
of available Internet-based tools and resources. Through Onvia's web site,
small businesses sell services and products to other businesses and federal,
state and local government agencies. Onvia's common stock trades on the Nasdaq
National Market under the symbol "ONVI."
Since its initial Internet site was launched in July 1997, Onvia has greatly
expanded its customer base and established a growing brand presence among small
businesses. For instance, Onvia's exchange platform, which allows customers to
submit requests for quotes from a network of service suppliers, had over 54,000
service suppliers as of October 31, 2000. Onvia accumulated more than 585,000
customer accounts and over 771,000 registered users by October 31, 2000 and is
focused on establishing additional relationships with government agencies as it
expands its services and products into the government sector.
Key components of Onvia's strategy are to build brand awareness and increase
its customer base through strategic relationships with small business trade
associations and partnerships or alliances with other market leading companies.
To date, Onvia has successfully established relationships with more than 45
small business associations such as the Small Business Association of Texas and
the Forum of Women Entrepreneurs and numerous Chambers of Commerce including
Seattle, Washington, Austin, Texas and the State of Florida. Onvia has also
signed strategic relationships with companies including Visa USA Inc.
Industry background
The Internet is fundamentally changing the way businesses, government
agencies and individuals communicate and do business with each other. The rapid
growth rate of worldwide Internet usage is also providing organizations of all
sizes with new operating tools and business opportunities. According to
International Data Corporation, or IDC, by 2003, the number of business,
school, government and home Internet users worldwide will reach 623 million, up
from 350 million forecasted by the end of 2000. IDC also estimates that by the
end of 2000, approximately 34% of worldwide Internet users, or 119 million,
will live in the United States.
In addition to usage, leading research companies are also forecasting
continued rapid growth in Internet-based ecommerce transactions. IDC estimates
that total business-to-business ecommerce trading volume will be $2.2 trillion
in 2004. Forrester Research estimates that the annual U.S.-based business-to-
business ecommerce market will grow from $406 billion in 2000 to $2.7 trillion
in 2004. Business-to-business ecommerce is defined by Forrester as intercompany
trade in which the final order is placed over the Internet.
In addition to new commerce opportunities on the Internet, many
organizations are adopting various Internet-focused strategies aimed at
improving operating efficiencies and communications with trading partners and
customers.
Two market segments that can greatly benefit from the Internet are small
business and government agencies. The Internet can improve profitability for
both buyers and sellers with the appropriate choice of various Internet
products and services. Businesses of all sizes, including small businesses, can
explore new sales opportunities and establish closer relationships with
government purchasers through the Internet.
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The cross-section of these two market segments is one of significant
potential, given the substantial purchasing power existing between these
markets, as well as their relationships with large businesses. The market
potential of these segments is of particular interest to the investment and
financial community because companies that provide solutions to assist small
businesses and government agencies in leveraging the Internet will play a key
role in the evolving Internet economy.
The small business market opportunity
The small business market, which the Small Business Administration, or SBA,
and Onvia define as businesses with fewer than 500 employees, is large and
growing. According to the SBA, more than 20 million small businesses in the
U.S. at the end of 1998, accounting for over 98% of total U.S. based
businesses. Small businesses are increasingly relying on the Internet to access
information, communicate and do business. For example, IDC projects that 61% of
U.S. small businesses will be connected to the Internet at the end of 2000 and
that they will account for approximately $106.8 billion in ecommerce in 2002,
up from $6.2 billion in 1998.
Currently, small businesses have difficulty in cost-effectively reaching a
large percentage of their potential customers through traditional marketing
channels, since most small businesses are located outside of major metropolitan
areas and possess limited resources. As a result, small businesses are using
the Internet to significantly expand their market reach, procure services and
products and become more competitive. Small businesses often have limited time,
resources and access to expertise. The Internet addresses these constraints by
allowing small businesses to access and exchange information quickly and
inexpensively among trading partners.
Despite the significant growth of small business Internet use, existing
Internet-based and software-based offerings targeting this market have not
provided a comprehensive solution that addresses the unique ecommerce and
informational needs of small businesses. Web sites that provide small business
news and information, for example, often have limited ecommerce service and
product offerings. Similarly, companies with web sites that focus on ecommerce
often have limited or inconsistent content offerings. As a result, small
businesses are forced to use multiple, distinct web sites to conduct commerce,
interact with other businesses and suppliers and obtain targeted, business-
specific news and content.
The government procurement market opportunity
Procurement between businesses and government agencies, known as business-
to-government, or B2G, commerce, is a substantial market and is highly
fragmented. The complexity in this market is due in part to the large number of
government agencies and suppliers, the differing processes among agencies, and
agencies' often challenging obstacles to adopt advanced technologies and
communication tools. According to the U.S. Census Bureau there were 87,453
local government agencies in the United States in 1997. The total local
government agency figure is comprised of 3,043 counties, 19,372 municipalities,
16,629 townships, 13,726 school districts and 34,683 "special districts" which
include focused agencies such as power districts and housing authorities.
State and local government organizations spent over $375 billion on products
and services in 1998, according to the SBA. One interesting trend at the
federal level is the increase in contracts for services. According to the U.S.
General Accounting Office, in 1999, services represented the largest single
contract category with a 43% share and total contract value of $78 billion,
overshadowing both supply and equipment purchases.
Businesses looking to respond to government contract opportunities must
follow specific processes that can be time consuming and may not be consistent
between different agencies. Process requirements may vary by agency type, level
and location. As a result, some businesses, particularly small businesses that
may have limited operational resources, find it difficult to identify
attractive contract opportunities with agencies outside their local area. As
for government agencies, their challenge is to make contract opportunities
available to
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existing and potential new vendors to attract additional bidders with the goal
of driving down their costs. Historically, this process has taken place through
costly and slow mailings to approved vendors, newspaper listings, posting in
agency buildings or more recently with online and offline bid aggregation
companies. The paperwork required for these processes can make government
contracting frustrating for both the agency and its potential vendors.
The Internet and other technological advancements in hardware and software
can ease many of these challenges. Some of the problems associated with labor
intensive government procurement processes are slowly being improved by the
agencies themselves. However, despite signs of improvement, many agencies have
been slow in gaining awareness of available solutions and committing both
financial and personnel resources to Internet-based initiatives. Ultimately,
the benefits will lead many agencies to adopt Internet-based procurement
solutions. Some government agencies are moving more procurement transactions
online and improving their overall IT infrastructures in compliance with
legislation such as the 1994 Federal Acquisition Streamlining Act and the 1996
Clinger-Cohen Act. Onvia understands many of the challenges associated with
bringing government contracting online and is attracted to the significant
opportunity inherent in providing the needed solutions for efficient and cost-
effective B2G procurement.
Onvia's business solution
Onvia's solution is designed to meet the needs of small businesses,
including their commerce relationships with government agencies, larger
companies and other small businesses. Through Onvia, small businesses buy and
sell services and products to other businesses and to federal, state and local
government agencies. Small businesses can also obtain web hosting services that
enable them to access new business opportunities and valuable news,
information, and productivity tools to help them succeed in the Onvia exchange.
Onvia offers small businesses the services and products they need to
succeed, including:
. Request for Quote (RFQ) service. Provides small businesses with access to
an interactive network of more than 54,000 different service suppliers.
Business buyers can research and obtain services from providers across
118 different service categories.
. Government procurement. Onvia's targeted solutions facilitate and enhance
the relationship between small businesses and their government agency
customers.
. Web site design and hosting. Small businesses can design and build
commerce enabled web sites in minutes using Onvia's online solution.
Onvia hosts the web site for the small business and makes available
additional marketing services and tools.
. News and Tools. Onvia's in-house experts provide original content as well
as innovative tools and information from third parties to help small
businesses operate more effectively.
. Products. Through its partnership with firstsource corp., Onvia offers
small businesses a marketplace containing over 240,000 different computer
hardware, software and other products. firstsource ensures the range of
products and fulfillment processes are catered to the small business
purchaser.
As a recognized early leader in serving small businesses online, Onvia has
been able to develop a unique set of proprietary tools and resources that
provide small businesses with many benefits, including:
. Growth opportunities for small businesses. Small businesses looking for
new sales opportunities are able to leverage the Onvia solution to cost-
effectively reach their target customers, without incurring the
significant sales and marketing costs typically associated with
traditional efforts.
. Solutions tailored to the needs of small businesses. Onvia's solution is
designed specifically to meet the needs of small businesses. In
particular, small businesses are able to utilize the Onvia site and
solutions to build and enhance important trading relationships and gain
access to valuable tools and information.
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. Broad suite of services and products. Because Onvia's valuable solutions
are centralized into one online location, their small business customers
are able to operate much more efficiently.
. Comprehensive customer service and support. Onvia designed its services
and products to be utilized in an efficient and effective manner. If
questions or issues do arise, Onvia ensures that support is available.
. Access point to government agency contracts. Onvia offers the primary
means to assist small business vendors in identifying and responding to
bid opportunities with government agencies.
. Efficient small business seller channel. Onvia's tailored solution
provides an efficient distribution channel to help sellers to small
businesses reach a highly targeted audience. In addition to selling
existing services or products through this channel, sellers can use
Onvia's solution to test market new services and products targeted to
small business.
. Original content and solutions. The Onvia solution includes proprietary
value-added information and business tools originating through both in-
house expertise and leading third-party content providers. Onvia offers
innovative content including original articles and newsletters from both
internal writers and third parties including Reuters News Service. Onvia
also offers how-to advice and business tools designed to help small
businesses enhance their operations.
Strategy
Onvia intends to continue to enhance its position as a leading provider of
solutions for small businesses. Key elements of Onvia's strategy, which
collectively aim to strengthen Onvia's competitive market position and
financial performance, include:
. Securing relationships with government agencies and businesses that
procure products and services from small businesses. Onvia seeks to
attract and secure relationships with government agencies and businesses
by utilizing its focused direct sales force. Through a suite of web-based
and off-line products, Onvia assists government and business buyers
increase their operating efficiency and lower their cost of procuring
products and services from small business sellers. Onvia intends to use
its broad seller base to help buying agencies decrease the cost of
procurement through increased competitive efficiency and by raising the
level of transparency in the marketplace. Onvia and its government agency
customers enter into contractual agreements typically ranging from 1 to 3
years. Some agency customers may terminate their agreements with Onvia by
giving proper notice, and in all instances the agreements are subject to
re-negotiation upon completion.
. Creating a liquid channel in which small businesses can efficiently
access opportunities that generate incremental revenue. Onvia plans to
achieve this by aggregating multiple buying entities within each target
geographical region. This will provide small business sellers with the
ability to receive local and regional bids from different government and
business buyers. Onvia intends to leverage its existing small business
customers, Chamber of Commerce partners and established contracts with
government agencies such as the U.S. Department of Commerce to establish
a regional presence and provide sellers a multitude of selling
opportunities. Onvia believes these expanded offerings will attract more
small businesses, further building what already is one of the largest
small business customer bases among online companies. The aggregation of
these small businesses improves their collective attractiveness to other
companies and government agencies.
. Enhancing solutions for small businesses and government agencies. Through
continuous enhancement of core product offerings and web site
functionality, Onvia intends to emerge as the clear leader in providing
online solutions to small businesses. Onvia plans to introduce additional
methods of conducting ecommerce transactions and develop additional tools
that will allow small businesses to become more competitive, improve
operating efficiencies and achieve gains in incremental revenue through
new customer relationships. These products include tools that help small
businesses create
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ecommerce web sites, allow sellers to access government and larger
business bids, and establish sales relationships with other small
businesses by utilizing Onvia's Request For Quote platform.
. Understanding customer needs. Onvia is committed to intimately
understanding the needs of its small business customers and their trading
partners. Through direct customer interaction, tracking of industry
trends, and development of flexible products and solutions Onvia will be
able to meet the needs of its customer base and make the strategic
adjustments necessary to compete effectively in its highly competitive
and dynamic industry.
. Increasing brand awareness. Onvia believes that it is a clearly
established leader in providing exchange services to small businesses.
Onvia is committed to becoming one of the most recognizable and trusted
brands for small businesses on the Internet. To accomplish this goal,
Onvia intends to continue to establish strategic alliances with other
leading companies and leverage efficient viral marketing techniques that
result in high word of mouth and ultimately broad market penetration at
reasonable cost.
. Aggressively pursuing cost effective customer acquisition and retention
strategies. Onvia seeks to drive customer acquisition through a
combination of marketing initiatives, direct sales to customers,
continued focus on customer service and the provision of services and
information that meet its customers' business needs. For example, Onvia
intends to continue working with its procurement clients to co-market to
their established seller lists, with the goal of migrating their vendors
to the Onvia solution. In addition, Onvia intends to increase its
customer base through direct advertising campaigns, co-branding
initiatives with leading web sites that cater to small businesses and
viral-marketing programs.
. Pursuing strategic alliances and acquisitions. Onvia intends to
aggressively pursue strategic alliances and acquisitions that strengthen
its financial performance, increase its customer base, broaden its
product offering and expand its technology platform.
. Maintaining commitment to customer service. Onvia will continue to
maintain a strong commitment to providing the highest level of customer
service to its customers. Onvia believes that investments in exchange
functionality and customer support are rewarded with outstanding customer
satisfaction and therefore higher retention rates and improved brand
image.
. Enabling more effective direct marketing geared to reach small
businesses. By tracking the demographic and purchasing data on its small
business customers, Onvia intends to further strengthen its position as
an intelligent electronic-marketing channel to help companies cost-
effectively reach small businesses. For example, Onvia already
facilitates targeted marketing to its customer base through
advertisements and promotions in email newsletters sent to the Onvia
small business customers. Onvia does not currently, nor does it intend
to, share attributed customer information with third parties absent the
explicit permission of its small business customers.
Recent developments
Purchase Now strategic partnership
In December 2000, Onvia entered into a strategic agreement with firstsource
corp., whereby firstsource will, through a private label solution, provide
product purchasing and fulfillment services for Onvia's web site. As part of
the agreement, Onvia's customers interested in making a product purchase are
linked to a private label web site owned and operated by firstsource.
firstsource is responsible for order fulfillment, customer care and billing
processes related to these business product transactions. New customer account
data entered during the transaction process on the private label web site will
be owned solely by Onvia.
Onvia's decision to partner with firstsource is aimed at reducing costs and
focusing on other growth strategies such as development of Onvia's government
solutions and hosting businesses. As a result of its strategic relationship
with firstsource, Onvia has reduced its workforce primarily through elimination
of positions previously related to the Purchase Now business unit.
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Auctions
On December 15, 2000, in connection with the focus on the small business
exchange and government-to-business bid matching, Onvia discontinued the
auctions functionality on its website.
America Online
On February 4, 2000, Onvia entered into a strategic relationship with AOL to
provide AOL's customers with access to Onvia's services and products through an
interactive co-branded web site. As part of this relationship, Onvia provides
to AOL a web-based buying directory that supports AOL's business-to-business
ecommerce platform. In addition, AOL promotes the co-branded site and Onvia's
RFQ services.
On November 14, 2000, Onvia and AOL entered into a second agreement which
amended and restated the previous agreement between the parties. As a result of
the new agreement, Onvia and AOL will continue with an abbreviated form of
their relationship through May 14, 2001, after which neither party will have
any contractual commitment to the other.
Services and products
The Onvia exchange provides a single online channel that helps small
businesses succeed in buying, selling and government contracting. Through
Onvia's web site, small businesses buy and sell services and products to
government agencies and other businesses and obtain web hosting services that
enable them to access a network of other useful sites and business
opportunities. Small businesses can also obtain valuable news, information, and
productivity tools quickly and easily. Onvia's revenue mix associated with
these services and products incorporates the following components:
. licensing fees charged to government agency or business buyers;
. subscription fees, hosting subscriptions and RFQ transaction fees charged
to vendors;
. advertising revenues;
. revenue sharing on product transactions; and
. licensing revenues associated with developing and hosting sites for
strategic partners.
Onvia's services and products include request for quote, government
exchange, web hosting, news, tools, Purchase Now products and services.
Request for Quote
The Onvia Request for Quote, or RFQ, service is an online exchange that
connects small business buyers and sellers across a wide variety of business
services; from marketing and tech support to web design and health insurance.
Request for Quote enables small business buyers to connect to more than 54,000
sellers in the U.S. and Canada covering 118 services.
Request for Quote benefits buyers and sellers by providing an efficient way
to find business partners and customers. Small business sellers can quickly and
cost-effectively reach new customers, locally or nationally. Sellers benefit
through substantially increased lead generation at a lower sales cost, and the
ability to reach new customers 24 hours a day. Buyers are able to shorten the
buying process by obtaining access to local and national service providers;
comparing sellers online; and making more informed purchasing decisions.
Government exchange
In August 2000, Onvia completed its acquisition of Globe-1 Incorporated, an
electronic commerce exchange that helps small businesses bid on state and local
government agency projects. The Onvia bid
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matching service leverages the Globe-1 solution to gather, match and deliver
bids from government agencies to small business vendors.
Vendors that participate in Onvia's bid matching service are able to view
all of the Onvia government leads that have been matched to their company in
one place. Vendors receive notifications of bidding opportunities via email or
fax and can then view these opportunities online through a standard web
browser. The bid matching service enables small business vendors to operate
more efficiently by reducing marketing costs and streamlining the bid
notification process.
Government agencies use Onvia's bid matching service by submitting bid
solicitations to Onvia and viewing the list of vendors online once the bids
have been matched with qualifying small business vendors. Onvia also manages
and maintains the agency's vendor database and streamlines agencies'
communications with their vendors, enabling government agencies to operate more
efficiently and effectively.
Web hosting
In July 2000, Onvia completed its acquisition of Zanova, Inc., a web hosting
company. The acquisition enables Onvia to help small businesses develop and
operate effective web sites. Unlike other web hosting businesses that aggregate
large numbers of sites for free, the Zanova solution, differentiated by its
instant access to Onvia's marketplace and services, is a fee-based subscription
model that drives monthly recurring revenue.
In December 2000 Onvia launched web hosting functionality on its web site.
This suite of Internet-based applications allows small businesses to build
professional commerce-enabled web sites within minutes and start selling
online. It also provides small businesses with dynamic, powerful tools to
create customized businesses. More significantly, it gives small businesses
immediate access to Onvia's marketplaces.
News
The Onvia News section showcases the issues and breaking news relevant to
entrepreneurs. Onvia publishes daily nuts and bolts advice, product reviews,
critiques of small business web sites and money-saving tips, all to help the
small business owner run a more efficient and profitable enterprise. The Onvia
coverage is supplemented with columns from industry experts and news from
Reuters wire service.
Tools
The Onvia Tools section offers hundreds of free business tools, downloadable
forms, worksheets, checklists and how-to advice, all designed to help
businesses grow and manage their business. Also exclusively available is the
Successful Entrepreneur's Interactive Roadmap and Toolkit, a step-by-step guide
to starting, growing, marketing, and selling a small business.
Purchase Now products and services
The Onvia Purchase Now marketplace has offered thousands of business
products including computer hardware, software, office supplies, office
business machines, telephone systems and nine services. Although Purchase Now
has been a very effective tool for Onvia to drive traffic to its web site and
establish a substantial customer base, it was never intended to position Onvia
as an online office products retailer, nor was it intended to be the engine to
drive the company to profitability.
In January 2001, Onvia will begin offering products through a strategic
relationship with firstsource corp. This agreement allows Onvia to improve its
gross profit margins and focus its business model and growth strategy.
firstsource will provide over 240,000 products to Onvia's exchange buyers
through a private label solution. As part of the agreement firstsource is also
responsible for, among other things, product fulfillment,
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customer care and billing for transactions occurring on the private label web
site. Onvia will continue to benefit from these exchange customers through a
revenue sharing arrangement.
Strategic relationships
Onvia pursues strategic relationships to increase its reach to small
businesses and government agencies, increase traffic to its web site, improve
the content and functionality of its exchange, and establish incremental
revenue streams. These partner relationships may vary materially in contract or
agreement terms and strategic importance.
Small business trade associations: Onvia has successfully established
relationships with more than 45 small business associations including:
. National Small Business United;
. Small Business Association of Texas;
. Networking and Systems Professionals Association;
. Forum of Women Entrepreneurs; and
. Chambers of Commerce including Seattle, Washington, Detroit, Michigan,
the State of Florida, Chicago, Illinois, Buffalo, New York, Providence,
Rhode Island, Austin, Texas and Orlando, Florida.
These relationships are a key component of Onvia's brand-building and
customer acquisition strategies. Although they may take different forms, these
strategic relationships are intended to:
. Provide Onvia with grassroots marketing access to large, targeted small
business audiences;
. Give Onvia a "seal of approval" through its relationships with them that
helps Onvia market its services, products and information and business
tools to the associations' members in a trusted manner and establish
long-term customer loyalty;
. Provide Onvia with new resources by leveraging marketing dollars spent by
the association; and
. Allow Onvia to penetrate and market to specific industries and market
niches.
Working closely with these associations, Onvia develops marketing campaigns
targeted to association members, which may include the following elements:
. Direct mail, telemarketing, newsletters, conferences, email, broadcast
fax, advertisements, editorial placement, speaking opportunities and
additional communications vehicles; and
. Placement on the associations' web sites, which may include links to a
co-branded site or Onvia's welcoming page.
Onvia has established a strategic relationship with the Service Corps of
Retired Executives, or SCORE, which is funded by the U.S. Small Business
Administration and provides more than 300,000 individuals with business advice,
counseling, mentoring and workshop annually. Onvia has been featured in
numerous SCORE publications and press releases.
Co-branding relationships: Onvia hosts co-branded web site pages with
different Internet sites targeted toward entrepreneurs and small business
owners. These co-branded pages look and operate similar to Onvia.com web pages
except they may have a banner advertisement at the top of each screen featuring
the logos of both companies.
Media and content relationships: Onvia syndicates its proprietary content to
businesses, such as Bloomberg, that desire to offer their users a broader
content offering. The arrangements generally provide that Onvia has the non-
exclusive right to use and display the content provided.
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Strategic alliances. Onvia has also signed numerous strategic relationships
with companies including Visa USA. On July 31, 2000, Onvia announced an
agreement with Visa USA, the world's leading payment partner, to create
VisaBusiness.com. Powered by Onvia, the VisaBusiness.com site is designed
specifically to help companies use the web more effectively for buying and
selling products and services. The site, which went live on September 13, 2000,
offers unique content for small businesses and leverages Onvia's comprehensive
exchange of business products and services, web hosting, breaking news and
expert advice. As part of the agreement, Visa and Onvia will build and deliver
additional value-added online offers exclusively for Visa Business cardholders
as well as solutions to Visa's member banks. The agreement also includes
cooperation on new marketplaces, enabling payment technologies, and marketing
programs to reach small businesses using the Visa Business Card and
preferential presentation of the Visa payment solution on the Onvia.com web
site.
Customers
Onvia serves two primary and distinct customer groups: the government
procurement officer and small businesses. Onvia's government exchange service
helps the government procurement officer distribute bidding announcements to a
variety of vendors quickly and easily. These procurement officers work for
federal, state, provincial, county and city agencies, ports, and other
jurisdictions in the United States and Canada. Although many government
agencies maintain long-term supplier relationships, the agencies still must
publicize contract opportunities to both existing and non-existing suppliers.
Through utilization of Onvia's solution, government agencies may save time and
money through the increased exposure of their product and service requests.
Onvia also helps the small business owner who wants to increase revenue
opportunities through its online Request for Quote exchange, having a hosted
public web site, access government contracts and request for proposals and who
want to purchase products and services online. These customers own and manage
businesses with fewer than 500 employees in a variety of industries throughout
the United States and Canada. As of October 31, 2000, Onvia had more than
54,000 service providers in its Request for Quote marketplace, more than
585,000 customer accounts and over 771,000 registered users.
Sales strategy
The primary objective of Onvia's sales strategy is to increase sales and
market penetration in the business-to-government procurement arena at primarily
the local and state government agency levels. Onvia will accomplish this by
leveraging its existing government agency relationships and securing new ones
through its expanding field sales staff.
Leverage existing relationships. Currently, Onvia has relationships with 10
government agencies which represent 25 buying marketplaces including the U.S.
Departments of Commerce and Defense and jurisdictions in major metropolitan
regions such as Los Angeles and San Francisco, California, New York, New York,
Detroit, Michigan, Chicago, Illinois and Atlanta, Georgia. Onvia will deepen
its relationships with these key agencies through cross-selling and enhanced
product integration. In addition, Onvia has partnerships with 45 chambers of
commerce and national and small business associations. Onvia will also utilize
its presence and relationships in these large markets as an entree to enable
new marketplaces in adjacent townships, cities, counties and special districts.
Secure new exchanges. Onvia is focused on aggressively pursuing and securing
new relationships with government agencies. Onvia is currently building a
regionally based sales staff, which will be comprised of individuals who have
substantive government sales experience to expedite Onvia's entry into new
markets.
Marketing strategy
To attract small business buyers and sellers to its online marketplace,
Onvia uses direct marketing strategies including email, direct mail, and
telephone sales. Onvia also advertises on targeted sites and a limited
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amount of radio and off-line advertising in regional markets. Onvia has more
than 250,000 subscribers to its weekly Flash newsletter as well as numerous co-
branded web sites and newsletters for small business associations and chambers
of commerce across the United States and Canada.
To sign up vendors for government procurement opportunities, Onvia plans to
use direct marketing methods such as fax, email, direct mail and telephone
sales as well as trade shows, conferences and earned media. These vendors will
subscribe to an annual service that will allow them to receive and respond to
government bids from agencies in their region. Onvia's future marketing
strategy will be to up-sell these vendors into additional marketplaces through
its web hosting and Request for Quote services.
Customer service
Onvia believes strongly that a high level of customer service is critical to
retaining and expanding its customer base. Accordingly, Onvia has developed a
well-trained customer service organization to assist and support customers, via
phone or email, for its government exchange and web hosting product offerings.
Customer care for product sales through Onvia's outsourcing partner firstsource
will be handled by firstsource.
Technology and operations
Technology
Onvia supports its operations and online solution using an advanced
technology platform designed to serve a large and rapidly increasing volume of
web traffic in a reliable and efficient manner without critical failures. Onvia
designed its own proprietary core systems for customer interaction, web site
design and hosting and back-end systems. Onvia's systems have been designed to:
. Provide fast, secure and uninterrupted visitor access to its web site;
. Validate and process customer requests promptly and accurately;
. Store large amounts of historical data;
. Provide timely, comprehensive and accurate management-reporting
capabilities;
. Accommodate upgrades to tools and features on its web site;
. Scale to accommodate growth in its operations; and
. Provide redundancy in case of component system failures.
Onvia's systems use a combination of proprietary technologies and
commercially available licensed technologies. The backbone of Onvia's
technology infrastructure consists of database servers running on an Oracle
database with Sun hardware. The front end consists of multiple redundant web
servers that are expandable as operations grow. Onvia designed the system to
scale easily to support rapid growth, as well as to sustain multiple failures
by various components without downtime.
Onvia's web servers, database servers, transaction-processing servers and
other core systems that conduct its essential business operations are housed at
Exodus Communications in Seattle, Washington. Exodus provides professional
housing and hosting services along with 24-hour monitoring and engineering
support in a climate-controlled and physically secure environment. Exodus
provides redundant communications lines from multiple Internet connectivity
providers and has its own generator and other emergency backup systems. Onvia
has a redundant system in place to ensure web site functionality in the event
of facility crisis at the Onvia headquarters building or at Exodus. Onvia
houses all non-critical systems such as development servers, quality assurance
servers and internal network servers at its headquarters in Seattle. Onvia may
begin to maintain its web and database servers internally.
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In addition to maintaining responsibility for the technical architecture,
security and up-time of its online solutions, Onvia's technology department
works closely with their sales and marketing department to ensure that customer
feedback for new technology features is incorporated into new products and
services.
Operations
Onvia helps small businesses succeed by aggregating demand and providing an
exchange where they can:
. Buy and sell services and products;
. Get access to government procurement contract opportunities;
. Create, build and host commerce-enabled web sites;
. Exchange valuable news, product and service information; and
. Download free business forms, worksheets, and productivity tools.
In order to provide such an array of valuable solutions Onvia must develop
and maintain stable and secure operational processes. Onvia believes that by
providing additional solution functionality, transactional processing
capabilities and outstanding customer experience it will significantly grow its
trading community. Onvia's operational infrastructure is designed to support
its desired and anticipated growth.
Onvia's products and services provide new revenue opportunities for small
business by providing them with access to potential new government and small
and large business customers. Additionally, small businesses using the Onvia
web site may elect to obtain various services to help their businesses operate
more effectively, such as through Onvia's Request For Quote platform. In these
instances, Onvia acts as an enabler but not the financial institution or
clearinghouse for the actual transaction. Transactions occurring through a
commerce enabled web site hosted by Onvia are between the two parties actually
involved in the transaction; so that Onvia simply acts as an independent third
party facilitator and has no ownership or fulfillment responsibilities.
Onvia's online solution enables government agencies to specify their needs
to Onvia for any product or service the agency may require. Onvia formulates
this need into a lead that is then filtered and routed to qualified suppliers
of the needed product or service. Suppliers within Onvia's marketplace can
evaluate the lead, respond with a quote or request more information. A stronger
and deeper relationship with all levels of government agencies is established
for the small business as part of this process.
Sales of goods
Onvia has established a strategic relationship with firstsource, a full-
service third-party provider, for sales of business products, such as computer
hardware, software and office supplies to Onvia's customers. Prior to January
2001, these product sales were handled directly through the Onvia site by
Onvia's Purchase Now business unit.
Overall, this full-service relationship with firstsource improves Onvia's
distribution functionality by providing alternate supplier sourcing, express
shipping options, extended product warranty availability and on-line returns
management, while maintaining and expanding the supplier base, which improves
product availability. firstsource continues to use the same drop ship model
that Onvia previously utilized, whereby the supplier drop-ships the product
with Onvia packaging directly to the customer via UPS, FedEx or other common
carrier.
Onvia's full-service strategic partner utilizes several of the largest
suppliers in the computer hardware, telecommunications, software and business
products industries, providing Onvia with a catalog offering of over 240,000
products from more than 200 points of distribution.
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Orders are initiated directly from Onvia customers through the Onvia web
site, which is connected to firstsource's catalog engine. firstsource handles
all product transactions and firstsource invoices the customer's credit card
once a supplier has fulfilled the order. In turn, firstsource is invoiced by
its suppliers under negotiated payment terms.
Onvia's commission is a pre-negotiated percentage of revenue derived from
sales originating on the Onvia web site that are ultimately processed by
firstsource, with certain revenue guarantees in 2000. Hence, Onvia does not
book product revenue, nor take title to products or maintain any physical
inventory.
Competition
The market for Internet-based products and services is rapidly evolving and
intensely competitive. Numerous companies provide Internet-based products and
services to small businesses and government agencies, two primary target
markets for Onvia. Competitors include both Internet-based as well as
traditional providers of business products and services.
Although dynamic, complex and highly competitive, the ecommerce industry
provides considerable new business opportunities to those companies with
superior business models. Business models evident in the industry vary
dramatically depending on many factors, including target market, legacy
products and services, available capital and primary strategic objectives.
Traditional off-line companies are establishing an increasing presence on the
Internet as well as companies providing targeted solutions for specific
industries and customer groups.
Onvia's current and potential competitors include, but are not limited to
the following:
. Companies such as Ariba, CommerceOne and PurchasePro.com that offer
business-to-business exchange services;
. Companies such as America Online, Microsoft, NBCi and Yahoo! that offer
a broad array of Internet-related services and either offer business-to-
business ecommerce services presently or have announced plans to
introduce such services in the future;
. Companies such as AMS, Digital Commerce, NIC Commerce, ProcureNet and
other companies focused on providing services to government agencies;
. Internet sites that provide customized computing solutions through the
direct marketing of computer products including hardware, software,
peripherals, networking and accessories;
. Companies such as Bigstep.com, eCongo, InfoSpace and Network Commerce
that enable the creation and hosting capability of customized
ebusinesses; and
. Companies such as Oracle, PeopleSoft and SAP that offer enterprise
software platforms targeted at the business-to-business market.
Onvia may face additional competition in the future as well-funded companies
look to develop new Internet-based product and service offerings to small
businesses and government agencies. The markets Onvia competes in have
relatively low barriers of entry, providing other companies with opportunities
to quickly become more formidable competitors to Onvia. In order to compete
successfully, Onvia must continually enhance its web site and product and
service offerings. In addition, Onvia must increase its small business and
government agency customer bases, as well as the volume of transactions
initiated through its web site and bid matching products. Onvia's failure to
achieve these objectives could cause its revenue to decline and limit its
ability to achieve profitability.
Onvia believes that the principal competitive factors affecting its market
include, but are not limited to, product quality and features, base of existing
customers, established brand recognition, customer service, strategic alliances
and partnerships and access to capital. In order to excel at a these principal
competitive factors more so than other competitors in its industry, Onvia
intends on maintaining a superior understanding of its target customers,
offering superior value in its service and products offerings and sustaining a
more efficient
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operating model. Onvia believes that its current product and service offerings
compare favorably to similar product and service offerings available in the
market today. Onvia's business model is however new and evolving and may face
unforeseen pressures. The success of Onvia's business model hinges on key
market assumptions, any one of which may not prove to be true, including the
following:
. A significant number of small businesses will be willing to purchase
their business services and products online;
. A significant number of small businesses and small business service
providers will use Onvia's solutions to buy and sell services and
products;
. A significant number of government agencies will be willing to utilize
the Internet for bid-matching and other ecommerce services; and
. Small business customers will provide Onvia with data about themselves.
Onvia may not compete successfully against current or future competitors,
many of which have more capital, longer operating histories, greater brand
recognition, larger customer bases and significantly greater financial,
technical and marketing resources. These competitors may also be more
successful than Onvia at engaging in extensive development of their
technologies, adopting more aggressive pricing policies and establishing more
comprehensive marketing and advertising campaigns. Competitive pressures could
negatively impact Onvia's market share, limit Onvia's growth projections or
require Onvia to reduce the price of its services or products, any of which
could harm its business and financial performance.
Intellectual Property Rights
Onvia's future success depends in part on its proprietary rights and
technology. Onvia relies on a combination of copyright, trademark and trade
secret laws, employee and third-party nondisclosure agreements and other
methods to protect its proprietary rights. Onvia seeks to protect its
internally developed products, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection. Onvia
cannot ensure that any of its proprietary rights with respect to its e-
marketplace will be viable or of value in the future since the validity,
enforceability and type of protection of proprietary rights in Internet-related
industries are uncertain and still evolving.
Onvia licenses and will continue to license certain products integral to its
services and products from third parties, including products which are
integrated with internally developed products and used jointly to provide key
content and services. These third-party product licenses may not continue to be
available to Onvia on commercially reasonable terms and Onvia may not be able
to successfully integrate such third-party products into its solutions.
Onvia presently has no issued U.S. patents or U.S. patent applications
pending. Onvia has no current intention to file any U.S. patent applications.
It is possible that Onvia may not develop proprietary products or technologies
that are patentable and that the patents of others will seriously harm Onvia's
ability to do business.
Onvia has filed trademark applications in the United States for Onvia,
Onvia.com, the Onvia checkmark logo, and Work. Wisely. In addition, Onvia has
filed trademarks applications for Onvia and Onvia.com in one or more foreign
countries. The trademark applications mentioned above are subject to review by
the applicable governmental authority, may be opposed by private parties, and
may not issue.
Employees
On December 15, 2000, Onvia had 377 full-time employees. In connection with
Onvia's strategic partnership with firstsource, Onvia announced that it intends
to reduce the number of full-time employees by 182. Following completion of
this workforce reduction Onvia anticipates it will have 195 employees working
in the following departments: 62 in sales and marketing, 11 in customer
support, 94 in technology and development and 28 in finance and administration.
Of the total, 16 will be employees of Onvia's Canadian subsidiary, including 14
in sales and marketing and 2 in finance and administration.
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The workforce reductions will include 82 in sales and marketing and 40 in
customer support, 54 in technology and development and 6 in finance and
administration.
None of Onvia's employees are represented by a union or collective
bargaining agreement. Onvia has never had a work stoppage. Onvia considers
relations with its employees to be good.
Facilities
Onvia's headquarters are located in Seattle, Washington, where it leases
approximately 140,000 square feet, net of space available for sublease, in one
location in a recently completed four story office complex. The lease expires
in 2010. Onvia believes its current facilities provide sufficient room for
growth currently planned for the business.
Onvia's Canadian subsidiary company in Vancouver, British Columbia, leases
approximately 10,531 square feet of office space, net of space subleased. This
lease expires in 2001. Onvia's web hosting business, located in Scottsdale,
Arizona, leases approximately 6,000 square feet of office space.
Legal Proceedings
In February 2000, a claimant filed a lawsuit in the Supreme Court of British
Columbia, Canada against Onvia and Onvia's chief executive officer for 50% of
Onvia's assets and 50% of the executive's equity interest in Onvia. The lawsuit
is based upon the allegation that the claimant and Onvia's chief executive
officer planned to form a company similar to Onvia.com. Based upon
investigations to date, Onvia believes that the allegations are without merit
and that the outcome of this action will not harm Onvia's business. Onvia
believes that it has valid defenses to this claim and intends to vigorously
defend the action.
In July 2000, the British Columbia Securities Commission notified Onvia that
its directed share program offered to certain stockholders as part of its
initial public offering did not meet Canadian disclosure requirements. In
October 2000, Onvia tendered rescission rights to selected stockholders as a
remedy to this violation. Onvia believes that its obligations under these
rescission rights will be approximately $850,000.
In addition, from time to time Onvia is subjected to various other legal
proceedings that arise in the ordinary course of business. Although Onvia
cannot predict the outcomes of these proceedings with certainty, Onvia believes
that the disposition of these matters will not have a material adverse effect
on its financial position, results of operations or cash flow.
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MANAGEMENT OF ONVIA
Executive Officers and Directors
Onvia's executive officers and directors and their ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Glenn S. Ballman........ 29 Chief Executive Officer and Chairman of the Board of Directors
Michael D. Pickett...... 53 President, Chief Operating Officer and Director
Mark T. Calvert......... 42 Chief Financial Officer
Kristen M. McLaughlin... 30 Chief Strategy Officer
Michael A. Jacobsen..... 42 Vice President of Finance
Jeffrey C. Ballowe...... 45 Director
William W. Ericson...... 42 Director
Kenneth A. Fox.......... 30 Director
Nancy J. Schoendorf..... 46 Director
Steven D. Smith......... 42 Director
</TABLE>
Glenn S. Ballman founded Onvia and has served as Chief Executive Officer
since February 1997. Mr. Ballman has also served as a director of Onvia since
February 1999, was President of Onvia from August 1997 to August 2000 and
became Chairman of Onvia's board of directors in August 2000. Prior to founding
Onvia, Mr. Ballman was founder and president of SunCommerce Corporation, a
Canadian business consulting firm specializing in ecommerce. Mr. Ballman also
served as a project director for ecommerce applications deployment at Axion
Internet Communications, an electronic commerce solutions provider. Mr. Ballman
holds a Bachelor of Arts in Business Administration from the University of
Western Ontario.
Michael D. Pickett has served as a director of Onvia since February 1999. He
also served as Chairman of the Board from February 1999 to August 2000. Since
August 2000, he has served as President and Chief Operating Officer of Onvia.
Mr. Pickett served as Chief Executive Officer of Hardware.com, Inc., an online
source for total home improvement solutions, which was acquired by Onvia in
August 2000. From July 1997 to March 1999, Mr. Pickett was Chairman and Chief
Executive Officer of Technology Solutions Network, LLC, a provider of turnkey
technology solutions for small businesses. From October 1983 to February 1996,
Mr. Pickett served in a variety of positions and most recently as Chairman,
Chief Executive Officer and President of Merisel, Inc., a wholesale distributor
of computer hardware and software products and a provider of logistics
services. Mr. Pickett holds a Bachelor of Arts in Business Administration from
the University of Southern California.
Mark T. Calvert has served as Chief Financial Officer of Onvia since
February 1999. Prior to joining Onvia, Mr. Calvert was Executive Vice
President, Chief Financial Officer, Secretary and Treasurer at Treasure Bay
Gaming and Resorts, Inc., an emerging market gaming corporation, from 1994 to
1997. From 1990 to 1994, Mr. Calvert served as managing director at Alexander
Hutton Advisors Inc. Prior to his work at Alexander Hutton, Mr. Calvert was
employed by Ernest & Young in the Entrepreneurial Division from 1982 to 1990.
Mr. Calvert holds a Bachelor of Arts in Business Administration from the
University of Washington. Mr. Calvert resigned from Onvia effective December
31, 2000.
Kristen M. McLaughlin has served as Chief Strategy Officer since December
1999. From June 1998 to December 1999, Ms. McLaughlin served as Vice President
of Business Development. Prior to joining Onvia, Ms. McLaughlin was co-founder
of Technology Solutions Network, LLC, a provider of turnkey technology
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solutions for small businesses, from July 1997 to May 1998. Prior to working at
Technology Solutions, Ms. McLaughlin was director of consulting at MSI
Consulting Group, a technology marketing consulting firm, from August 1994 to
June 1997. Ms. McLaughlin holds a Bachelor of Arts in Business Administration
from the University of Western Ontario.
Michael A. Jacobsen has served as Vice President of Finance since September
2000. From December 1999 to September 2000, Mr. Jacobsen served as Controller.
Prior to joining Onvia, Mr. Jacobsen was Vice President, Chief Accounting
Officer and Controller at Mosaix, Inc. from August 1997 to December 1999. From
April 1995 to August 1997, Mr. Jacobsen was Vice President and Chief Financial
Officer at Fourgen Software, Inc., a software company. Prior to his work at
Fourgen Software, Mr. Jacobsen was Controller at Aldus Corporation. Mr.
Jacobsen holds a Bachelor of Arts in Business Administration from Idaho State
University.
Jeffrey C. Ballowe has served as a director of Onvia since December 1999. In
August 1999, Mr. Ballowe became Chairman of deja.com, Inc. where he had been a
member of the board of directors since March 1998. Before leaving Ziff Davis at
the end of 1998, Mr. Ballowe led the launches of five magazines, ZDNet on the
Web, ZDTV, and the initial ZD/Softbank investments in Yahoo!, USWeb, GameSpot
and Herring Communications. From 1986 until 1998, Mr. Ballowe held various
management positions at Ziff-Davis, including President of the Interactive
Media and Development Group. Mr. Ballowe also serves as a director of Jupiter
Communications, VerticalNet and NBCi and on the advisory board of Internet
Capital Group. Mr. Ballowe holds a Bachelor of Arts in Economics and French
from Lawrence University, a Master of Arts in French from the University of
Wisconsin and a Master of Business Administration from the University of
Chicago.
William W. Ericson has served as a director of Onvia since September 1999.
Since March 2000, Mr. Ericson has been a partner at Mohr, Davidow Ventures, a
venture capital firm. From August 1995 to March 2000, Mr. Ericson was an
attorney at Venture Law Group, a law firm specializing in the representation of
technology companies. Prior to joining Venture Law Group, Mr. Ericson was an
associate in the Palo Alto, California office of the law firm of Brobeck,
Phleger and Harrison, LLP from October 1992 through August 1995. Mr. Ericson
holds a Bachelor of Science in Foreign Service from Georgetown University and a
Juris Doctor from the Northwestern University School of Law.
Kenneth A. Fox has served as a director of Onvia since February 1999. In
March 1996, Mr. Fox co-founded Internet Capital Group, an Internet company
primarily engaged in managing and operating a network of business-to-business
ecommerce companies. Mr. Fox has served as one of Internet Capital Group's
Managing Directors since its inception. Mr. Fox has also served as a director
of Internet Capital Group since February 1999. Prior to forming Internet
Capital Group, Mr. Fox was the Director of West Coast Operations for Safeguard
Scientifics, Inc., a leader in incubating, operating and developing technology
companies in the Internet infrastructure market, and was Director of West Coast
operations for Technology Leaders II, LP, a venture capital partnership, from
1994 to 1996. Mr. Fox serves as a director of AUTOVIA Corporation, Commerx,
Inc., Deja.com, Inc., Entegrity Solutions Corporation, Internet Commerce
Systems, Inc., and Vivant! Corporation. Mr. Fox holds a Bachelor of Science in
Economics from Pennsylvania State University.
Nancy J. Schoendorf has served as a director of Onvia since February 1999.
Ms. Schoendorf has been a general partner of Mohr, Davidow Ventures, a venture
capital firm, since 1993, and Managing Partner since 1997. Prior to joining
Mohr, Davidow, Ms. Schoendorf spent 17 years in the computer industry,
including holding management positions with Hewlett-Packard, Software
Publishing Corporation, and Sun Microsystems, Inc. Ms. Schoendorf currently
serves as director of Agile Software Corporation, Broadbase Software, Inc., and
several privately held companies. Ms. Schoendorf holds a Bachelor of Science in
Computer Science from Iowa State University and a Master of Business
Administration from Santa Clara University.
Steven D. Smith has served as a director of Onvia since January 2000. Since
March 1997, Mr. Smith has served as Managing Director of GE Equity, a
subsidiary of GE Capital. From August 1990 to February 1997, Mr. Smith served
in a variety of positions at GE Capital, most recently as Managing Director,
Ventures.
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Mr. Smith holds a Bachelor of Business Administration from Southern Methodist
University and a Master of Business Administration from The Wharton School of
Business at the University of Pennsylvania.
Board Composition
Onvia's bylaws provide for a classified board of directors consisting of
three classes of directors, each serving staggered three-year terms. As a
result, a portion of the board of directors will be elected each year. Mr. Fox
and Mr. Smith have been designated Class I directors whose term expires at the
2001 annual meeting of stockholders. Mr. Pickett and Ms. Schoendorf have been
designated Class II directors whose term expires at the 2002 annual meeting of
stockholders. Mr. Ballman, Mr. Ballowe and Mr. Ericson have been designated
Class III directors whose term expires at the 2003 annual meeting of
stockholders.
Executive officers are appointed by Onvia's board of directors and serve
until their successors have been duly elected and qualified. There are no
family relationships among any of company's directors, officers or key
employees.
Board Compensation
Onvia does not currently provide cash compensation to its directors, but
they are reimbursed for out-of-pocket expenses incurred in connection with
activities as directors, including attendance at meetings of the board of
directors or its committees. The directors are generally eligible to
participate in Onvia's 1999 stock option plan and, if a director is an employee
of Onvia, in Onvia's 2000 employee stock purchase plan. Directors who are not
employees will also receive periodic stock option grants under Onvia's 2000
directors' stock option plan.
The 2000 directors' stock option plan provides for an initial grant of an
option to purchase 40,000 shares of common stock to each non-employee director.
These options become exercisable in four equal installments on the first,
second, third, and fourth anniversaries of the grant, assuming continuing
service as a director. On the date of each annual stockholders' meeting, each
non-employee director who has served on the board of directors for at least six
months will be granted an additional option to purchase 10,000 shares of common
stock, which will become exercisable in full on the day before the first
anniversary of the date of grant. The exercise price of all stock options
granted under the directors' stock option plan will be equal to the fair market
value of a share of Onvia's common stock on the date of grant of an option.
Board Committees
The compensation committee currently consists of Mr. Ballowe, Mr. Fox, Ms.
Schoendorf and Mr. Smith. The compensation committee:
. reviews and makes recommendations to the board regarding all forms of
compensation and benefits provided to Onvia's officers; and
. establishes and reviews general policies relating to the compensation
and benefits of all of Onvia's employees.
The audit committee currently consists of Mr. Ballowe, Ms. Schoendorf and
Mr. Smith. The audit committee:
. reviews and monitors Onvia's internal accounting procedures, corporate
financial reporting, external and internal audits, the results and scope
of the annual audit and other services provided by the independent
accountants; and
. makes recommendations to the board of directors regarding the selection
of independent auditors.
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Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of Onvia's board of directors are
currently Mr. Ballowe, Mr. Fox, Ms. Schoendorf and Mr. Smith. Mr. Pickett
served on the compensation committee until December 1999. None of Mr. Ballowe,
Mr. Fox and Ms. Schoendorf has at any time been an officer or employee of
Onvia. No executive officer of Onvia serves as a member of the board of
directors or compensation committee of an entity that has one or more executive
officers serving on Onvia's board of directors or compensation committee.
Executive Compensation
Summary Compensation. The following table sets forth the compensation
received for the years ended December 31, 1999 and ending December 31, 2000 (on
an annualized basis) by Onvia's Chief Executive Officer and the four other
highest-paid executive officers, who are collectively referred to as the named
executive officers. The named executive officers were determined based on
compensation paid to Onvia executive officers as of December 15, 2000. In
addition, the compensation of two other executive officers who departed during
the fiscal year ended December 31, 2000, is included.
Onvia Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual ------------
Compensation Securities
---------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
--------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Glenn S. Ballman(1)............. 2000 $ 98,125 $ -- -- $ --
Chairman and Chief Executive 1999 75,117 20,000 600,000 13,000
Officer
Michael D. Pickett(2)........... 2000 76,538 -- -- 26,200
President and Chief Operating 1999 -- -- -- --
Officer
Mark T. Calvert(3).............. 2000 158,750 -- -- --
Chief Financial Officer 1999 150,000 -- 971,120 --
Kristen M. McLaughlin(4)........ 2000 118,333 45,000 -- --
Chief Strategy Officer 1999 80,000 -- 1,600,000 1,850
Michael A. Jacobsen(5).......... 2000 132,700 -- 80,000 --
Vice President of Finance 1999 -- -- 80,000 --
Mark A. Pawlosky(6)............. 2000 160,833 -- 150,000 --
Vice President, Editor-in-Chief 1999 130,000 -- 240,000 12,500
Douglas H. Kellam(7)............ 2000 145,429 -- -- 243,726
Chief Marketing Officer 1999 86,070 -- 500,000 53,950
</TABLE>
--------
(1) Mr. Ballman's salary in 1999 includes $18,407 paid to Mr. Ballman by
Onvia's Canadian subsidiary prior to the purchase of its outstanding
shares by Onvia from Mr. Ballman. This amount assumes an average exchange
rate of one U.S. dollar for each 0.68 Canadian dollar over the period this
Canadian income was earned. Mr. Ballman's other compensation in 1999
consisted of $13,000, representing the fair market value of common stock
issued in exchange for services. Mr. Ballman's salary in 2000 reflects
gross salary to be paid to him by Onvia through December 31, 2000. Mr.
Ballman's annual salary rate in 2000 as of December 15, 2000 is $225,000.
(2) Mr. Pickett commenced his employment with Onvia as President and Chief
Operating Officer in August 2000. Mr. Pickett's salary in 2000 reflects
gross salary to be paid to him by Onvia through December 31, 2000. Mr.
Pickett's annual salary rate as of December 15, 2000 is $200,000. Mr.
Pickett's other compensation consists of housing expenses of $14,000 and
of $12,200 paid by Onvia on Mr. Pickett's behalf in connection with the
negotiation of his employment agreement with Onvia.
93
<PAGE>
(3) Mr. Calvert's salary in 2000 reflects gross salary to be paid to him
through December 31, 2000. Mr. Calvert's annual salary rate as of December
15, 2000 is $180,000. Mr. Calvert will be leaving Onvia on December 31,
2000.
(4) Ms. McLaughlin commenced her employment with Onvia in June 1998 as Vice
President of Business Development. In December 1999, Ms. McLaughlin became
Chief Strategy Officer. Ms. McLaughlin's other compensation in 1999
consisted of $1,850 representing the fair market value of common stock
issued in exchange for services. Ms. McLaughlin's salary in 2000 reflects
gross salary to be paid to her by Onvia through December 31, 2000. Ms.
McLaughlin's annual salary rate as of December 15, 2000 is $200,000.
(5) Mr. Jacobsen commenced his employment with Onvia in December 1999. Mr.
Jacobsen's salary in 2000 reflects gross salary to be paid to him by Onvia
through December 31, 2000. His salary rate as of December 15, 2000 is
$146,000.
(6) Mr. Pawlosky commenced his employment with Onvia in August 1999 and left
Onvia in November 2000. Mr. Pawlosky's salary reflects gross salary paid
to him by Onvia through November 30, 2000. Mr. Pawlosky's annual salary
rate at the time of his departure was $200,000.
(7) Mr. Kellam commenced his employment with Onvia in August 1999 and left
Onvia in September 2000. Mr. Kellam's salary in 2000 is compensation paid
to him through September 30, 2000. Mr. Kellam's other compensation
consisted of $50,000 in relocation expenses and $3,950 in transportation
expenses related to his relocation in 1999. His other compensation
consists of $243,726 in severance payments in 2000.
Option Grants in Last Fiscal Year
The following table describes certain information regarding stock options
granted to each of the named executive officers in the fiscal year ending
December 31, 2000, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 5% and
10%, compounded annually from the fair market value on the date of grant
determined by Onvia for accounting purposes. These assumed rates of
appreciation comply with the rules of the SEC and do not represent estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of Onvia's common stock. In addition, the
deemed value for the date of grant was determined after the date of grant
solely for financial accounting purposes. No stock appreciation rights were
granted to these individuals during the year.
In the fiscal year ending December 31, 2000, Onvia granted options to
purchase up to an aggregate of 5,732,909 shares to employees, directors and
consultants. This amount is based on option grants made as of December 20,
2000. All options were granted under Onvia's 1999 stock option plan and 2000
director's stock option plan at exercise prices at the fair market value of the
common stock on the date of grant, as determined in good faith by the board of
directors. All options have a term of ten years. Optionees may pay the exercise
price by cash, check, promissory note or delivery of already-owned shares of
the common stock. All options are exercisable as determined by the plan
administrator.
<TABLE>
<CAPTION>
Potential
Realizable Value at
% of Total Assumed Annual Rate
Number of Options of Stock Price
Securities Granted to Exercise Appreciation for
Underlying Employees Price Option Term
Options in Last Per Expiration -------------------
Name Granted Fiscal Year Share Date 5% 10%
---- ---------- ----------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Glenn S. Ballman........ -- -- $ -- -- $ -- $ --
Michael D. Pickett(1)... 40,000 * 21.00 2/28/10 528,271 1,338,744
Mark T. Calvert......... -- -- -- -- -- --
Kristen M. McLaughlin... -- -- -- -- -- --
Michael A. Jacobsen..... 80,000 * 1.4375 11/30/10 72,323 183,280
Douglas H. Kellam....... -- -- -- -- -- --
Mark A. Pawlosky........ 150,000 * 2.9375 10/26/10 277,107 702,243
</TABLE>
--------
(1) Mr. Pickett was granted these options as a director of Onvia.
* Less than 1%.
94
<PAGE>
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table describes for the named executive officers their option
exercises for the fiscal year ending December 31, 2000 and exercisable and
unexercisable options held by them as of December 11, 2000.
The value of unexercised in-the-money options at fiscal year end set forth
below is based on the closing market stock price as of December 11, 2000 of
$1.71875, less the per share exercise price, multiplied by the number of shares
issued upon exercise of the option. All options were granted under Onvia's 1999
stock option plan.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at Fiscal Year In-The-Money Options at
Acquired End Fiscal Year End
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Glenn S. Ballman(1)..... -- -- -- 600,000 -- $ 0.00
Michael D. Pickett...... -- -- -- 40,000 -- $ 0.00
Mark T. Calvert......... -- -- -- -- -- --
Kristen M. McLaughlin... -- -- -- -- -- --
Michael A. Jacobsen(2).. -- -- -- 160,000 -- $22,500
Douglas H. Kellam....... -- -- -- -- -- --
Mark A. Pawlosky(1)..... -- -- 3,125 186,875 $0.00 $ 0.00
</TABLE>
--------
(1) The exercise price of the options is higher than the closing market stock
price as of December 11, 2000.
(2) Mr. Jacobsen's exercise price for one of his options to purchase 80,000
shares of Onvia common stock is higher than the closing market stock price
as of December 11, 2000.
Benefit Plans
1999 Stock Option Plan
Onvia's 1999 stock option plan provides for the grant of incentive stock
options to employees and non-statutory stock options to employees, directors
and consultants to acquire shares of the common stock. The purposes of the 1999
stock option plan are to attract and retain the best available personnel,
provide additional incentives to employees and consultants and promote the
success of the company's business. Onvia's board of directors originally
adopted the 1999 stock option plan in February 1999 and its stockholders
approved the plan in August 1999. Onvia has reserved a total of 18,000,000
shares of common stock under its 1999 stock option plan. Onvia's 1999 stock
option plan was amended in December 1999 to provide for an automatic annual
increase on the first day of each of the fiscal years beginning in 2001 and
ending in 2009 equal to the lesser of 3,200,000 shares, 4% of the outstanding
common stock on the last day of the immediately preceding fiscal year or a
lesser number of shares as the board of directors determines. The 1999 stock
option plan will terminate in February 2009 unless the board of directors
terminates it earlier. As of December 11, 2000, options to purchase 7,247,314
shares of common stock were outstanding at a weighted average exercise price of
$4.25444 per share, 6,378,863 shares had been issued upon exercise of
outstanding options or pursuant to stock purchase agreements and 3,502,599
shares remained available for future grant.
2000 Directors' Stock Option Plan
Onvia has reserved a total of 600,000 shares of common stock for issuance
under its 2000 directors' stock option plan. The directors' plan provides for
the grant of non-statutory stock options to non-employee directors of Onvia.
The directors' plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by the
board of directors. To the extent that conflicts of interest arise, it is
expected that conflicts will be addressed by having any interested director
abstain from both deliberations and voting regarding matters in which the
director has a personal interest. Unless terminated earlier, the directors'
plan will terminate ten years after effectiveness of this offering.
95
<PAGE>
The directors' plan provides that each person who is or becomes a non-
employee director of Onvia will be granted a non-statutory stock option to
purchase 40,000 shares of common stock on the date on which he or she becomes a
non-employee director of Onvia. On the date of the company's annual
stockholders' meeting each year, each non-employee director of Onvia will be
granted an additional option to purchase 10,000 shares of common stock if, on
that date, he or she has served on the board of directors for at least six
months. The initial option grant under the directors' plan becomes exercisable
in installments of 25% of the total number of shares subject to the option on
the first, second, third and fourth anniversaries of the date of grant. The
annual grants become exercisable in full on the day before the first
anniversary of the date of grant. The annual grants become exercisable in full
on the day before the first anniversary of the date of grant. No option granted
under the directors' plan is transferable by the option holder other than by
will or the laws of descent or distribution or under a domestic relations
order, and each option will be exercisable during the lifetime of the option
holder only by that option holder. The exercise price of all stock options
granted under the directors' plan is set equal to the fair market value of a
share of Onvia common stock on the date of grant of the option. Options granted
under the directors' plan have a term of ten years. However, unvested options
terminate when the optionee ceases to serve as a director and vested options
terminate if they are not exercised within 12 months after the director's death
or disability or within 90 days after the director ceases to serve as a
director for any other reason.
In the event of a merger or acquisition of Onvia in which there is not
greater than 50% change in ownership, each option outstanding under the
directors' plan will be assumed or equivalent options will be substituted by
Onvia's acquiror, unless the acquiror does not agree to such assumption or
substitution, in which case the options will terminate to the extent not
previously exercised. In the event of a merger or acquisition of Onvia in which
there is greater than 50% change in ownership, each director holding options
under the directors' plan will have the right to exercise his or her options
immediately before the consummation of the merger or acquisition as to all
shares underlying the options. Including previously unvested shares. Onvia's
board of directors will be able to amend or terminate the 2000 directors'
options plan as long as the amendment does not adversely affect any outstanding
option and Onvia obtains stockholder approval to the extent required by law.
2000 Employee Stock Purchase Plan
Onvia has reserved a total of 600,000 shares of common stock for issuance
under its 2000 employee stock purchase plan. The number of shares reserved for
issuance under the 2000 employee stock purchase plan is subject to an automatic
annual increase on the first day of each of the fiscal years beginning in 2001
and ending in 2010 equal to the lesser of 600,000 shares, 1% of the outstanding
common stock on the last day of the immediately preceding fiscal year or such
lesser number of shares as the board of directors determines. The employee
stock purchase plan became effective on February 2000. Unless terminated
earlier by the board of directors, the 2000 employee stock purchase plan will
terminate in February 2010.
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, is implemented by a series of
overlapping offering periods of approximately 24 months' duration, with new
offering periods commencing on May 1 and November 1 of each year. Each offering
period generally consists of four consecutive purchase periods of six months'
duration, at the end of which an automatic purchase will be made for
participants. The 2000 employee stock purchase plan is administered by the
board of directors or by a committee appointed by the board. The employees,
including officers and employee directors, or of a subsidiary designated by the
board, are eligible to participate in the 2000 employee stock purchase plan if
they are employed by Onvia or the designated subsidiary for at least 20 hours
per week and more than five months per year. The 2000 employee stock purchase
plan permits eligible employees to purchase common stock through payroll
deductions, which may not exceed 15% of an employee's base salary. The purchase
price is equal to the lower of 85% of the fair market value of the common stock
at the beginning of each offering period or at the end of each purchase period,
subject to adjustments as provided in the plan. Employees are able to end their
participation in the 2000 employee stock purchase plan at any time during an
offering period, and participation will end automatically on termination of
employment.
96
<PAGE>
An employee will not be granted an option under the 2000 employee stock
purchase plan if immediately after the grant the employee would own stock
and/or hold outstanding options to purchase stock equaling 5% or more of the
total voting power or value of all classes of Onvia stock or stock of Onvia's
subsidiaries, or if the option would permit an employee's rights to purchase
stock under the 2000 employee stock purchase plan at the rate that exceeds
$25,000 of fair market value of such stock for each calendar year in which the
option is outstanding. In addition, no employee is allowed to purchase more
than 2,000 shares of common stock under the 2000 employee stock purchase plan
in any one purchase period. If the fair market value of the common stock on a
purchase date is less than the fair market value at the beginning of the
offering period, each participant in that offering period will automatically be
withdrawn from the offering period as of the end of the purchase date and re-
enrolled in the new 24-month offering period beginning on the first business
day following the purchase date.
If Onvia merges or consolidates with or into another corporation or sells
all or substantially all of its assets, each right to purchase stock under the
2000 employee stock purchase plan will be assumed or an equivalent right
substituted by Onvia's acquiror. If the acquiror does not assume or substitute
stock purchase rights, any offering period and purchase period then in progress
will be shortened and a new exercise date occurring prior to the closing of the
transaction will be set. Onvia's board of directors will have the power to
amend or terminate the 2000 employee stock purchase plan and to change or
terminate offering periods as long as this action does not adversely affect any
outstanding rights to purchase stock under the plan. However, the board of
directors will be able to amend or terminate the 2000 employee stock purchase
plan or an offering period even if it would adversely affect outstanding
options to avoid incurring adverse accounting charges.
97
<PAGE>
PRINCIPAL STOCKHOLDERS OF ONVIA
The following table sets forth information regarding the beneficial
ownership of Onvia's common stock as of December 20, 2000 and as adjusted to
reflect the issuance of Onvia's common stock in connection with the merger as
to:
. Each person or entity (or group of affiliated persons or entities) known
by Onvia to own beneficially more than 5% of Onvia's common stock;
. Each of Onvia's directors;
. The executive officers named in the summary compensation table; and
. All of Onvia's directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table is
c/o Onvia, 1260 Mercer Street, Seattle, WA 98109. The table includes all shares
of common stock issuable within 60 days of December 21, 2000 upon the exercise
of options and other rights beneficially owned by the indicated stockholders on
that date. Beneficial ownership is determined in accordance with the rules of
the SEC and includes voting and investment power with respect to shares. To
Onvia's knowledge, except under applicable community property laws or as
otherwise indicated, the persons named in the table have sole voting and sole
investment control with respect to all shares beneficially owned. The
applicable percentage of ownership for each stockholder is based on 86,832,032
shares of common stock outstanding as of December 20, 2000, together with
applicable options for that stockholder. Shares of common stock issuable upon
exercise of options and other rights beneficially owned were deemed outstanding
for the purpose of computing the percentage ownership of the person holding
these options and other rights, but are not deemed outstanding for computing
the percentage ownership of any other person.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Merger Owned After Merger
------------------------------------------------
Name and Address of Beneficial
Owner Number Percent Number Percent
------------------------------ ------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Entities affiliated with Mohr,
Davidow Ventures(1)........... 14,518,144 16.72% 14,518,144 15.64%
2775 Sand Hill Road, Suite 240
Menlo Park, California 94025
Internet Capital Group,
Inc.(2)....................... 17,184,810 19.79% 17,184,810 18.51%
44 Montgomery Street, Suite
3705
San Francisco, California
94014
GE Capital Equity
Investments(3)................ 4,289,000 4.94% 4,289,000 4.62%
c/o Capital Equity
Investments, Inc.
120 Long Ridge Road
Stamford, Connecticut 06927
Glenn S. Ballman(4)............ 10,184,566 11.71% 10,184,566 10.96%
Robert D. Ayer(5).............. 5,840,000 6.73% 5,840,000 6.29%
Kristen M. McLaughlin(6)....... 3,080,000 3.55% 3,080,000 3.32%
Mark T. Calvert(7)............. 755,819 * 755,819 *
Douglas H. Kellam(8)........... 110,617 * 110,617 *
Nancy J. Schoendorf(1)......... 14,518,144 16.72% 14,518,144 15.64%
c/o Mohr, Davidow Ventures
2775 Sand Hill Road, Suite 240
Menlo Park, California 94025
Kenneth A. Fox(2).............. 17,184,810 19.79% 17,184,810 18.51%
c/o Internet Capital Group,
Inc.
44 Montgomery Street, Suite
3705
San Francisco, California
94014
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Merger Owned After Merger
------------------------------------------------
Name and Address of Beneficial
Owner Number Percent Number Percent
------------------------------ ------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Steven D. Smith(3)............. 4,289,000 4.94% 4,289,000 4.62%
c/o Capital Equity
Investments, Inc.
120 Long Ridge Road
Stamford, Connecticut 06927
Michael D. Pickett............. 1,045,090 1.20% 1,045,090 1.13%
William W. Ericson(9).......... 14,722,456 16.96% 14,722,456 15.86%
c/o Mohr, Davidow Ventures
2775 Sand Hill Road, Suite 240
Menlo Park, California 94025
Jeffrey C. Ballowe............. 120,000 * 120,000 *
85 Estrada Calabasa
Santa Fe, New Mexico 87501
Michael A. Jacobsen(10)........ 28,665 * 28,665 *
Mark A. Pawlosky(11)........... 371,250 * 371,250 *
All directors and executive
officers as a group (10
persons)(12).................. 66,474,311 76.38% 66,474,311 71.45%
</TABLE>
--------
* Less than 1%
(1) Consists of 10,022,970 shares held by Mohr, Davidow Ventures V, L.P.,
3,781,480 shares held by Mohr, Davidow Ventures V-L, L.P. and 713,694
shares held by Mohr, Davidow Ventures V, L.P. as nominee for Mohr,
Davidow Ventures Entrepreneurs' Network Fund II (A), L.P. and Mohr
Davidow Ventures Entrepreneurs' Network Fund II (B), L.P. Ms. Schoendorf
is a director of Onvia and a member of Mohr, Davidow Ventures, the
general partner of Mohr, Davidow Ventures, V, L.P. Ms. Schoendorf
disclaims beneficial ownership of shares held by these entities except to
the extent of her pecuniary interest in them.
(2) Mr. Fox is a director of Onvia and managing director of Internet Capital
Group, Inc. Mr. Fox disclaims beneficial ownership of those shares except
to the extent of his pecuniary interest in them.
(3) Mr. Smith is a Managing Director of GE Equity, a subsidiary of GE
Capital. Mr. Smith disclaims beneficial ownership of those shares except
to the extent of his pecuniary interest in them.
(4) Includes 175,000 shares issuable upon exercise of options which will be
vested within 60 days of December 21, 2000.
(5) Consists of 5,600,000 shares held by Mr. Ayer and 240,000 shares held by
his spouse Wendy Ayer.
(6) Includes 30,000 shares held by Christian McLaughlin, as trustee of the
McLaughlin Family Trust dated 11/22/99 and 24,000 shares held by
Christian McLaughlin, as trustee of the Kristen McLaughlin Trust dated
12/17/99.
(7) Includes 14,586 shares held by Mark and Norma Calvert, the parents of Mr.
Calvert, and an aggregate of 60,000 shares held for the benefit of
various family members. Mr. Calvert disclaims beneficial ownership of
those shares except to the extent of his pecuniary interest in them. Mr.
Calvert resigned from Onvia effective December 31, 2000.
(8) Mr. Kellam left Onvia in September 2000.
(9) Consists of 204,312 shares held by Mr. Ericson and 14,518,144 shares held
by entities affiliated with Mohr, Davidow Ventures. Mr. Ericson is a
director of Onvia and a member of Mohr Davidow Ventures. Mr. Ericson
disclaims beneficial ownership of the shares held by the entities
affiliated with Mohr, Davidow Ventures except to the extent of his
pecuniary interest in them.
(10) Includes 26,665 shares issuable upon exercise of options which will be
vested within 60 days of December 21, 2000.
(11) Mr. Pawlosky left Onvia on November 30, 2000.
(12) Includes an aggregate of 201,665 shares subject to options which will be
vested within 60 days of December 21, 2000. Also includes shares of which
the applicable executive officers or directors may disclaim beneficial
ownership.
99
<PAGE>
ONVIA CERTAIN TRANSACTIONS
Benefits to related parties in private placement transactions
Since Onvia's inception in March 1997, Onvia issued and sold shares of its
capital stock and warrants to purchase Onvia's capital stock, not including
warrants issued to its creditors, in private placement transactions as follows:
. 22,958,136 shares of restricted common stock at a price of $0.00125 per
share in January 1999;
. 1,026,224 shares of restricted common stock at a price of $0.0125 per
share in April 1999;
. 120,000 shares of restricted common stock at a price of $1.25 per share
in December 1999;
. 20,219,496 shares of Series A preferred stock at a price of $0.58 per
share in February 1999;
. warrants to purchase up to 833,352 shares of common stock at an exercise
price of $0.0025 per share in connection with the sale of notes
convertible into shares of Series A preferred stock from September 1998
through February 1999;
. 14,544,170 shares of Series B preferred stock at a price of $1.72 per
share in September 1999;
. 3,379,402 shares of Series C preferred stock at a price of $6.86 per
share in December 1999; and
. 2,666,666 shares of common stock at the initial public offering price of
$21.00 in March 2000.
Each share of Onvia's preferred stock converted into common stock on a one-
for-one basis upon the closing of Onvia's initial public offering in March
2000. The following table summarizes the shares of capital stock purchased by
executive officers, directors and 5% stockholders and their affiliates in these
private placement transactions, although this table does not necessarily
reflect the currently outstanding or currently held securities:
<TABLE>
<CAPTION>
Series A Series B Series C
Investor Common Stock Preferred Stock Preferred Stock Preferred Stock
-------- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Entities Affiliated with
Mohr, Davidow
Ventures............... -- 9,322,956 4,654,128 541,060
Internet Capital Group,
Inc. .................. -- 8,552,972 5,235,966 729,266
GE Capital Equity
Investments............ -- -- 4,072,370 216,630
Glenn S. Ballman........ 10,000,000 9,568 -- --
Robert D. Ayer.......... 5,600,000 -- -- --
Kristen M. McLaughlin... 1,480,000 -- -- --
Michael D. Pickett...... 1,026,224 85,532 -- --
Wendy L. Ayer........... 240,000 -- -- --
William W. Ericson...... 187,204 17,108 -- 3,646
Mark T. Calvert......... 64,104 42,764 -- 14,586
Jeffrey C. Ballowe...... 120,000 -- -- --
</TABLE>
Affiliate relationships
Ms. Schoendorf and Mr. Ericson, who are directors of Onvia, are members of
Mohr, Davidow Ventures. Mr. Fox, one of Onvia's directors, is a Managing
Director of Internet Capital Group, Inc. Mr. Ballowe, one of Onvia's directors,
is on the advisory board of Internet Capital Group, Inc. Wendy L. Ayer is
married to Robert D. Ayer, Onvia's Vice President of Strategic Development. The
shares of Series C preferred stock attributed to Mark T. Calvert in the above
table are held of record by Mark and Norma Calvert, the parents of Mr. Calvert.
100
<PAGE>
Debt financing
Between October 1998 and February 1999, Onvia issued and sold convertible
promissory notes to the following executive officers, directors and 5%
stockholders and persons and entities associated with them, in the amounts set
forth opposite each of these parties' names. The promissory notes were
cancelled and converted into shares of Onvia's Series A preferred stock at
$0.58 per share on February 25, 1999.
<TABLE>
<CAPTION>
Annual Amount of
Stockholder Interest Rate Promissory Note Date Issued
----------- ------------- --------------- -----------------
<S> <C> <C> <C>
Mark T. Calvert.............. 8% $25,000 October 26, 1998
Michael D. Pickett........... 6% $50,000 February 12, 1999
William W. Ericson........... 6% $10,000 February 17, 1999
Glenn S. Ballman............. 6% $ 5,593 February 17, 1999
</TABLE>
Onvia issued Mark T. Calvert, along with other investors who bought
convertible notes in 1998, a warrant to purchase 64,104 shares of common stock
at an exercise price of $0.0025 per share. Mr. Calvert exercised his warrant to
purchase 64,104 shares of common stock in October 1999.
Loans to officers
Between October 1999 and March 2000, Onvia issued loans to the following
executive officers in the amounts set forth opposite each of the executives
names. Each of these notes is secured by shares of Onvia common stock and is
due on the earlier of the following:
. five years after issuance;
. after a public offering of Onvia's common stock in which the officer is
a selling stockholder; and
. the expiration of any lock-up period imposed by contract or securities
laws following an acquisition of Onvia.
<TABLE>
<CAPTION>
Annual Amount of
Stockholder Interest Rate Promissory Note Date Issued
----------- ------------- --------------- -----------------
<S> <C> <C> <C>
Glenn S. Ballman............. 6% $350,000 October 8, 1999
Douglas H. Kellam............ 6% $150,000 December 19, 1999
Douglas H. Kellam............ 6% $ 50,000 February 8, 2000
Kristen M. McLaughlin........ 6% $100,000 February 8, 2000
Glenn S. Ballman............. 6% $ 75,000 February 8, 2000
Kristen M. McLaughlin........ 6% $350,000 April 10, 2000
Mark T. Calvert.............. 6% $150,000 April 10, 2000
Mark A. Pawlosky............. 6% $ 70,000 April 10, 2000
</TABLE>
Option plan acceleration for executive officers upon a change of control
Onvia's 1999 stock option plan provides that each outstanding option held by
an executive officer will be accelerated completely so that 100% of the
unvested shares covered by the option are fully vested if, within 12 months of
a change of control, the employment of the executive officer is terminated
other than for cause or by the executive officer for good reason.
Indemnification agreements
Onvia has entered into indemnification agreements with some of its officers
and directors containing provisions requiring it to indemnify them against
liabilities that may arise by reason of their status or service as officers or
directors, and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. These indemnification
agreements do not cover liabilities arising from willful misconduct of a
culpable nature.
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Other related party transactions
Onvia has paid Avolo.com, Inc. (formerly SunCommerce Corporation)
approximately $221,000 from March 1997 through December 2000 for various
payments and services, including wages, benefits, management fees, office
expenses and other miscellaneous expenses which were incurred on Onvia's
behalf. In addition, Onvia entered into a lease agreement with Avolo.com in
July 1999 under which Onvia subleases office space in Seattle, Washington to
Avolo.com. The lease calls for monthly payments that range between $2,212 and
$2,279 and expires in May 2001. Onvia is a guarantor of the primary lease and
will be liable if Avolo.com fails to meet its obligations under the sublease.
Mr. Ballman is a principal stockholder of Avolo.com.
Onvia's Canadian subsidiary was incorporated as M-Depot Internet Superstore,
Inc. in British Columbia, Canada in June 1997 and was wholly owned by Glenn
Ballman, Onvia's founder, Chief Executive Officer and Chairman. In January
1999, Onvia issued 800 shares of its common stock to Mr. Ballman in exchange
for all of the outstanding shares of M-Depot Internet Superstore, Inc, which
subsequently changed its name to Onvia.com, Inc.
Onvia entered into a marketing agreement with ZDNet in March 1999. Onvia has
incurred costs of approximately $208,000 under this agreement as of December
15, 2000. Mr. Ballowe, one of Onvia's directors, served as the President,
Interactive Media and Development Group, of Ziff-Davis until December 1997 and
is a director of ZDTV. Ziff-Davis and ZDTV are affiliates of ZDNet.
Onvia entered into an agreement with Broadbase Software, Inc. in September
1999, pursuant to which Onvia purchased software for its management information
system. Onvia has paid Broadbase Software, Inc. approximately $697,000 under
this agreement through September 2000. Mohr, Davidow Ventures, one of Onvia's
principal stockholders, is an investor in Broadbase Software, Inc. Ms.
Schoendorf and Mr. Ericson, two of Onvia's directors, are partners in Mohr,
Davidow Ventures.
Onvia has granted options to purchase common stock to its executive
officers, and, in December 1999, Onvia allowed these officers to exercise the
previously unvested portion of these options, subject to a repurchase option by
Onvia which lapses as the shares vest. The aggregate number of these previously
unvested options was 2,671,554.
Mr. Ballowe, one of Onvia's directors, is on the advisory board of Internet
Capital Group, Inc. Mr. Fox, also one of Onvia's directors, has served as a
Managing Director of Internet Capital Group, Inc. since March 1996. In February
2000, Onvia agreed to sell Internet Capital Group, Inc. shares of its common
stock in a private placement immediately following and conditioned upon Onvia's
initial public offering.
In September 2000, Onvia completed its acquisition of Hardware.com, Inc.
Michael D. Pickett, Onvia's President, Chief Operating Officer and director
since February 1999, was also Hardware.com's Chairman and Chief Executive
Officer. Mr. Pickett received no payment of consideration as a result of the
acquisition. However, Mr. Pickett became Onvia's President and Chief Operating
Officer in connection with the acquisition.
In September 2000, Onvia entered into a separation agreement with Douglas H.
Kellam. Pursuant to the terms of the separation agreement, Mr. Kellam will
receive an amount equal to approximately $85,000, equivalent to six months of
his base salary, payable semimonthly over the six-month period beginning
October 1, 2000. In addition, on Mr. Kellam's termination date, Onvia
accelerated vesting of certain shares of common stock held by Mr. Kellam so
that, as of the date of the separation agreement, Mr. Kellam held
197,917 shares. Onvia repurchased the remaining 202,083 shares of common stock
held by Mr. Kellam at a price of $0.375 per share.
In November 2000, Onvia entered into a separation agreement with Mark A.
Pawlosky. Pursuant to the terms of his separation, Onvia repurchased 18,750
shares of common stock held by Mr. Pawlosky at a weighted average price of
$0.375. On the date of his separation, Mr. Pawlosky held 371,250 shares of
Onvia common stock after giving effect to the repurchase described above.
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Onvia was required by securities regulators in British Columbia, Canada to
extend a rescission offer to stockholders in British Columbia who purchased
shares in its initial public offering. Glenn Ballman's brother received
approximately $105,000 from Onvia upon his acceptance of this rescission offer.
On December 8, 2000, Glenn Ballman, Onvia's Chief Executive Officer and
Chairman, signed a promissory note for $4,200,000 to Imperial Bank. Onvia
assigned and granted Imperial Bank a $4,200,000 security interest in a
certificate of deposit held by Onvia to guarantee Mr. Ballman's loan. Onvia
anticipates that Mr. Ballman will pledge to Onvia 4,000,000 of his shares of
Onvia's common stock as security for Onvia's guarantee of his loan.
Mark Calvert, Onvia's Chief Financial Officer, who has resigned effective
December 31, 2000, had an offer letter with Onvia dated March 25, 1999, as
amended, providing for a payment of $180,000 annual salary, options to purchase
545,120 shares of common stock and 12 months severance pay and benefits upon
termination for any reason.
In December 2000, Onvia entered into a separation agreement with Mark
Calvert pursuant to which Mr. Calvert will receive $180,000 annual base salary
and healthcare benefits through June 30, 2002. Mr. Calvert may also receive a
bonus of up to 25% of his 2000 base salary for completion of certain tasks
following his departure from Onvia. Mr. Calvert agreed to pay principal and
interest due on his April 16, 2000 $150,000 promissory note on a quarterly
basis until repaid on or prior to March 31, 2002.
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BUSINESS OF DEMANDSTAR
Overview
DemandStar provides its services in the $460 billion state and local
government B2G market. DemandStar's procurement systems enable government
agencies to purchase goods and services more efficiently and at lower
administrative costs while at the same time providing valuable services to
businesses selling to such government agencies. DemandStar distributes various
bid requests and associated documents to vendors for government agencies in an
effort to reduce administrative costs and increases the operational efficiency
of its member agencies. DemandStar's services are provided at no cost to
government agencies .The vendors pay an annual membership fee and get the
benefit of "real time" notification of new bid opportunities. Real time
notification occurs through either email or fax broadcast, depending on the
vendor's choice. Typically, government agencies use a mandatory bid process for
procurement of all goods and services above an agency-specific dollar amount
that are not an emergency or sole-source procurement item or service, which
amount is typically around $10,000, but varies from agency to agency.
DemandStar's system handles all goods and services that its member agencies
acquire through a mandatory bid process.
Over 200 local governments, representing more than $3 billion in annual
spending across 27 states, have joined the DemandStar network to use its
BidwireSM formal bid e-procurement network. These government agencies include
the cities of Orlando, Florida; Fort Worth, Texas; San Jose, California;
Cincinnati, Ohio; the School Board of Broward County, Florida and the Milwaukee
Transit Authority. DemandStar presently adds approximately 30 government
agencies each month to its network. These government agencies use DemandStar's
network for a total of over $2 billion in formal bid purchases annually.
DemandStar believes that its penetration of local governments is more than five
times that of its closest competitor.
Over 13,000 vendors have joined DemandStar's network resulting in a
significant and rapidly growing high margin, recurring revenue stream. In fact,
DemandStar's sequential quarterly revenue growth rate for the first two
quarters of 2000 was approximately 66%. The number of governments signed up to
use DemandStar's network has increased from 46 at the end of the first quarter
of 2000 to 88 at the end of the second quarter of 2000, representing 91%
growth. At the end of the third quarter, there were 154 governments signed up
to use DemandStar's system, representing 75% growth from the second quarter.
DemandStar's strategy is to obtain contracts with governments across the
United States to use the BidWire eprocurement network, insure maximum customer
satisfaction and introduce additional e-procurement products to its government
customers. DemandStar's objective is to increase its leadership position in the
industry and become the standard network through which local governments
conduct e-procurement. In the future, DemandStar plans to leverage its
significant vendor customer base into a high margin B2B revenue stream.
DemandStar's History
DemandStar was founded in 1997 as Information on Demand, Inc., or IDI. IDI
spent its first six months developing a prototype version of the BidWire
eprocurement network and began offering the network to other Florida agencies
at the end of 1997. H.T.E., Inc. (NASDAQ: HTEI), a local government enterprise
resource platform software company, acquired the assets of IDI in June 1999 and
changed business' name to DemandStar.com in order to better reflect its
positioning in the ecommerce market.
In the fall of 1999, H.T.E.'s board of directors recognized the speed at
which the Internet ecommerce market was developing and realized DemandStar
would require significantly more capital and management talent than H.T.E.
could provide. H.T.E.'s board of directors decided to spin DemandStar off to
H.T.E.'s shareholders in a rights offering. The offering, which closed in May
2000, raised approximately $6.4 million for DemandStar, including over $1
million from management and the board of directors. H.T.E. invested a total of
approximately $3.0 million in DemandStar from its founding through the time of
the rights offering. DemandStar is traded on the OTC Bulletin Board under the
symbol "DMND."
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DemandStar has a limited operating history and has a history of significant
losses, with a net loss of $1.1 million for the period from June 18, 1999 to
December 31, 1999, and $6.4 million for the nine month ended September 30,
2000. DemandStar anticipates that it will continue to incur significant losses
into the foreseeable future. As of September 30, 2000, the first year of
operation, DemandStar's accumulated deficit was $7.5 million. DemandStar's
auditors delivered a "going concern" opinion in the 1999 year-end audit.
Industry Background
The Government procurement market
DemandStar's primary market focuses are local and state government
procurement agencies. According to the U.S. Census Bureau as cited by VAR
Business, a trade magazine, there are approximately 85,000 local government
"business units" consisting of approximately 3,043 counties, 19,279
municipalities, 16,656 townships and towns, 14,422 school districts and 31,555
special districts. Government procurement practices are highly regulated and
have not changed substantially in the past twenty years. Because government
agencies are spending public dollars to procure goods and services, the process
requires several steps and restrictions that do not apply to the private
procurement industry. It is these extra steps that can lead to inefficiencies
and additional expense. Although electronic procurement systems are available,
they are typically legacy systems which are viewed as expensive to obtain and
maintain and do not connect different procurement agencies. The inability to
connect with other agencies leads to the duplication of efforts which is time
consuming and costly. DemandStar was developed in cooperation with several
forward-thinking procurement agencies in order to address the deficiencies in
their current practices.
Traditional government procurement practices
Historically, vendors who wish to sell goods or services to a particular
governmental agency must apply to that agency to be added to the agency's
vendor list. Vendors usually describe what goods or services they provide or
wish to provide to the agency by means of commodity codes. Although there are
several national coding systems, (e.g., National Institute of Government
Purchasing and Standard Industry Code) many agencies have adopted their own
proprietary coding systems. This has sometimes developed from past practices or
may be dictated by their existing or previous legacy accounting and general
finance computer systems. This has led to frustration on the part of the vendor
because there is no universally accepted form or coding system. Many smaller
businesses simply do not have the time or resources to apply to agencies
outside their immediate geographic areas, thereby limiting their potential
sales reach. To date, very few agencies have charged vendors to be on their
vendor list. Because of resource limitations, most agencies rarely attempt to
update their vendor databases. Historically, vendors rarely notify agencies
when they go out of business or change location. This leads to a large amount
of inaccurate data in the agency's system.
When an agency determines it has a need for a particular good or service in
excess of the agency's "bid threshold," which is the dollar threshold over
which the agency must ask for bids, it develops a written bid or request for
proposal. The agency then advertises the bid/request for proposal opportunity
in several ways:
. Notifying vendors on its vendor list by sending them a postcard or
letter or in some cases sending the entire bid package;
. Advertising in the legal section of local newspapers, usually at an
average cost of $100-$200 per ad per day;
. Posting bid requests on bulletin boards in the agency's building; or
. Selectively distributing the bid request to other bid reporting services
such as the Dodge Report.
Vendors who are interested in reviewing the bid/request for proposal
opportunity and who have not received the entire package with the first
notification are then required to request a copy of the bid package from the
agency. Most agencies have provided the duplication and mailing of the package
to the vendor at no
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cost. Many agencies preprint the packages and sometimes experience substantial
waste if demand is less than anticipated.
Vendors wishing to submit a bid must fill out the forms included in the bid
package and return them, usually with multiple copies, to the agency by a
predetermined date and time. The bids are opened publicly and the results are
tabulated and posted for public inspection. After appropriate review of the
vendor by agency staff, awards are made. During the interval between
announcement of the bid and the award, agencies may field multiple requests for
information from vendors and other sources for a listing of vendors requesting
bid packages as well as award information. Since this is public information in
most states, this places an additional clerical burden on procurement staffs.
Regulations permit governmental agencies to use other agencies' contracts
instead of writing their own. Traditionally, there has not been a good way for
agency personnel to learn of other existing contracts for similar goods and
services. Regional purchasing cooperatives and other initiatives have proven to
be limited in scope and geographic reach. Many agencies rely on simply calling
their peers in neighboring agencies, a time-consuming and often inefficient
practice.
Needs for goods and services below the bid thresholds are typically
solicited by telephone or fax in what is called a phone or fax quote. Because
of staffing limitations, agencies typically are only required to solicit three
phone or fax quotes for any given item.
The limits of traditional government transaction methods
Traditionally, government agencies have transacted, and in many cases
continue to transact business with businesses and citizens using processes that
are inconvenient and labor-intensive, require extensive paperwork and use large
amounts of scarce staff resources. Transactions and information requests are
often made in person or by mail and are processed manually, increasing the
potential for errors and the need for numerous revisions and follow-up. Even
newer methods, including telephone response systems, tape exchanges and dial-up
computer networks, rely on multiple systems and potentially incompatible data
formats, and require significant expertise and expenditures to introduce and
maintain. As a result, businesses and citizens often have no choice but to face
costly delays to complete essential tasks. These delays include waiting in line
at a government agency, waiting for answers by telephone or waiting for
responses by mail. Businesses and citizens encounter further inconvenience and
delay because they usually can work with government agencies only during normal
business hours. Even when electronic alternatives are available, they often
require a cumbersome process of multiple contacts with different government
agencies. Increases in the level of economic activity and in the population
have exacerbated these problems and increased the demand for new services.
Growth of the internet and electronic commerce
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business
electronically. Some of the reasons why the Internet has emerged are:
. continued future growth in Internet usage is expected to be driven by
the large and growing number of personal computers installed in homes
and offices
. the decreasing cost of personal computers;
. easier, faster and cheaper access to the Internet;
. improvements in network infrastructure;
. the proliferation of Internet content; and
. the increasing familiarity with and acceptance of the Internet by
governments, businesses and consumers.
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In addition, the volume of electronic commerce has grown in parallel with
the Internet itself. Forrester Research, a market research firm, estimates that
business-to-business electronic commerce will reach $1.3 trillion by 2003, and
The Yankee Group, a Boston-based Internet research firm, estimates that
business-to-business electronic commerce will reach $541 billion in 2003.
Emergence of the internet as a medium for electronic government
The growing acceptance of the Internet and electronic commerce presents a
significant opportunity for the development of electronic government, in which
government agencies conduct transactions and distribute information over the
Internet. By using the Internet, government agencies can increase the number
and efficiency of interactions with constituents without increasing
expenditures or demands on current personnel. In addition, regardless of
physical distance, businesses and citizens can obtain government information
quickly and easily over the Internet. This Internet-based interaction reduces
costs for both government and users and decreases response times compared to
providing the same data by mail or special purpose dial-up computer
connections.
Challenges to the implementation of electronic government services
Despite the potential benefits of electronic government, barriers to
creating successful Internet-based services often preclude governments from
implementing them. Some of these barriers are similar to those the private
sector encounters, including:
. the high cost of implementing and maintaining Internet technology in a
budget-constrained environment;
. the financial, operational and technology risks of moving from older,
established technologies to rapidly evolving Internet technologies;
. the need to quickly assess the requirements of potential customers and
cost-effectively design and implement electronic government services that
are tailored to meet these requirements; and
. the intense competition for qualified technical personnel.
Governments also face some unique challenges that exacerbate the difficulty
of advancing to Internet-based services, including:
. lengthy and political appropriations processes that make it difficult for
governments to acquire resources and to develop Internet services
quickly;
. a diverse and substantially autonomous group of government agencies that
have adopted varying and fragmented approaches to providing information
and transactions over the Internet;
. a lack of a marketing function that assures that services are designed to
meet the needs of businesses and citizens and that they are aware of
their availability; and
. security and privacy concerns that are amplified by the confidential
nature of the information and transactions available from and conducted
with governments and the view that government information is part of the
public trust.
Market
State and local governments spend over $460 billion annually, making this
market one of the largest ecommerce opportunities. There are over 85,000 local
government business units in the United States. DemandStar estimates these
government agencies purchase goods and services from over five million
businesses. Governments purchase goods and services from a wide range of
industries, resulting in DemandStar's vendor members spanning much of the
economy and providing DemandStar with a wide horizontal membership that is
quite deep in a number of vertical markets. DemandStar believes that such
breadth provides it with a competitive edge as B2G products are introduced to
the vendor customer base.
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DemandStar's services
Governments are required by law to make large purchases (typically greater
than $10,000) through a complex formal bid process. Medium sized purchases
(typically greater than $1,000) are made through a simple informal bid process
and small purchases are typically made through catalogs. Many of these catalog
purchases are the result of earlier formal bids, sometimes called "annual
buys." A government can use DemandStar's BidWire e-procurement network to
establish competitive pricing for the catalog items.
DemandStar's initial service, the BidWire e-procurement network, automates
the formal bid process by simplifying the complex bid creation procedure for
government agencies, automating the creation and maintenance of the government
agency's vendor database, automatically notifying vendors of bids appropriate
for their business, and distributing bid documents to vendors either through
the Internet, by fax, or by regular or express mail. The BidWire e-procurement
network also brings more bidders to each formal bid resulting in lower costs
for governments and their taxpayers.
DemandStar does not charge member agencies a fee to use its BidWire e-
procurement network. Member agencies generally sign exclusive contracts with
DemandStar granting DemandStar the right to be the sole automatic bid
notification service used by the government agency. All government agencies
using the DemandStar network agree to put 100% of their formal bids on the
Bidwire e-procurement network. Vendors pay a $30-per-county-per-year
subscription fee for access to the BidWire e-procurement network. State and
national discounts are available and many vendors sign up for multiple counties
or statewide subscriptions.
DemandStar's second service, the QuotewireSM e-procurement network,
automates the informal bid process for local governments' medium sized
purchases. QuoteWire allows government agencies to easily create a request for
quotes and broadcasts the request through DemandStar to appropriate vendors.
The vendors respond through DemandStar's network. QuoteWire was rolled out in
the fourth quarter of 2000 and is currently free to DemandStar's member agency
base and vendors that subscribe to DemandStar's network. DemandStar plans to
charge a service fee for QuoteWire beginning in the first half of 2001, on
either a subscription and/or a transaction fee basis. Market research indicates
that there are at least as many vendors involved in the informal bid process as
there are in the formal bid process.
DemandStar plans to develop, acquire, or enter into a joint venture for
additional network offerings for catalog purchases, disposal of used equipment
and B2B opportunities.
Business model
DemandStar's BidWire eprocurement network's subscription model provides
DemandStar with a prepaid revenue stream. Vendors typically pay DemandStar for
additional county or statewide subscriptions as DemandStar expands the
government members in a vendor's targeted geography. DemandStar believes that
vendors will be reluctant to change from DemandStar as its services provide the
sole source of automatic bid notification for most of DemandStar's government
members.
DemandStar believes that governments face high costs to change from
DemandStar's services because DemandStar offers one of the largest database of
vendors selling to local governments. This large vendor database results in
lower prices for the government agencies. The DemandStar eprocurement network
generates a very high margin revenue stream. DemandStar must maintain a core
server capacity and research and development group. Virtually all revenue in
excess of these fixed costs flows to the bottom line. Having built an initial
core server capacity with a redundant backup system in another location,
DemandStar believes that it should incur relatively low capital expenditures in
the future. In addition, the sales cycle for DemandStar products is relatively
short, 60 to 180 days, due to the lack of cash expenditure on the part of the
government.
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Government sales
DemandStar believes it has one of the largest sales forces of any company in
the local government ecommerce market. DemandStar has over 30 field sales
representatives including three regional sales managers. This organization is a
dramatic increase from the two sales representatives DemandStar had at the
beginning of 2000. The sales organization's efforts are focused on signing
larger government agencies defined as cities with populations in excess of
100,000 and counties with populations in excess of 200,000. Agencies of all
sizes are welcome to use the BidWire and QuoteWire eprocurement networks.
DemandStar's sales organization has successfully increased the number of new
governments using the BidWire eprocurement network from 2-3 per month at the
beginning of 2000 to over 30 in the month of October. DemandStar started 2000
with governments in two states signed to use the BidWire e-procurement network.
There are presently governments in 27 states signed up to use the BidWire
network.
Vendor sales
Over the past three years, DemandStar has developed a sophisticated low-cost
vendor acquisition strategy. DemandStar's vendor acquisition strategy employs
direct mail, Internet marketing, and telephone solicitations to maximize the
number of vendors subscribing to the BidWire eprocurement network. These same
strategies will be used and enhanced as QuoteWire and B2B products are
introduced to DemandStar's customers. DemandStar believes it has a significant
lead over its competitors in its sales process to vendors, the size of its
paying vendor database (currently approximating 13,000), its capacity to add
200 new vendors a day, and its momentum in signing up new vendors. All of
DemandStar's software, hardware, and operations have been designed for
scalability to accommodate this rapid growth.
Vendor solicitation
When DemandStar signs a contract for services with a participating public
procurement agency, the governmental agency provides DemandStar with its vendor
lists from which DemandStar solicits vendors for purposes of receiving
automatic announcement of future bid opportunities. Vendors who choose not to
join DemandStar's network may still request bid packages and may still submit
bids to the agency, but they will not receive automatic notification via the
Internet. Vendors pay a subscription fee to receive information from all
participating agencies within a geographic area.
To date, approximately 55% of DemandStar's member vendors elect to subscribe
to multiple counties or entire states. As the number of participating
government agencies grows, DemandStar believes the number of vendors
subscribing to multiple counties and states will grow significantly because for
a relatively small additional cost vendors can greatly expand their market
reach. This is significant in that as the total vendor database grows,
DemandStar becomes more attractive to agencies that have small vendor
databases. Agencies generally desire to have a large vendor database because
they believe the greater number of vendors notified, the more competitive bids
they will receive. Cost savings to an agency vary depending on the size of the
agency and the number of vendors.
Current contracts
DemandStar had initially focused on the Florida market but now has contracts
with over 200 government agencies in 27 states, including cities, counties,
school districts, airport authorities, transportation districts and utilities.
Each of these agencies operates under a separate contract, which provides,
among other things, that DemandStar will be responsible for notifying vendors
of the agency's solicitation of bids, and that DemandStar will charge vendors
for the notification service. Most contracts continue indefinitely but are
cancelable by either party upon 30 days' notice. DemandStar's contracts with
agencies do not grant DemandStar exclusive rights to information provided by
the agencies.
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Sales and marketing
DemandStar's overall marketing strategy is to offer a procurement systems
network that both vendors and governmental procurement agencies will consider
an outstanding value. Contracting with a greater number of agencies not only
serves to attract more vendors and hence more revenue, but it also increases
the size of the bid library available to the agencies through the connectivity
of DemandStar's network.
To date, DemandStar's marketing efforts have focused primarily on
individualized presentations to agencies and presentations at regional and
state meetings of governmental purchasing agencies and procurement departments.
DemandStar plans to hire additional sales and marketing personnel in 2001 to
expand sales to governmental agencies throughout the United States. Further,
DemandStar plans to expand its product presentations to additional trade shows
and other meeting venues of governmental procurement departments and purchasing
agencies, in addition to continuing to make individualized agency
presentations.
Competition
DemandStar faces competition from more than 20 companies, each pursuing a
wide range of strategies. Many are focused on the school market and others are
offering only a catalog solution to government customers. DemandStar believes
that only a few of its competitors have over 10 governments using its system.
The field of competitors is generally not well financed, as only a few
competitors are believed to have received significant funding to date.
DemandStar believes that the principal factors upon which it competes are:
. understanding of government needs;
. the quality, reliability and fit of electronic government services;
. the speed and responsiveness to the needs of businesses and citizens; and
. cost-effectiveness.
Although the market for online information services is rapidly evolving and
intensely competitive, DemandStar believes it competes more favorably with
respect to the above-listed factors. In order to be successful in the future,
DemandStar must continue to respond promptly and effectively to the challenges
of technological change and DemandStar's competitors' innovations. In most
cases, the principal substitute for DemandStar's services is a government-
designed and managed service that integrates other vendors' technologies,
products and services. Companies that have expertise in marketing and providing
technical electronic services to government entities may begin to compete, or
may intensify their current competition, with DemandStar by further developing
their services and increasing their focus on this piece of their business and
market share. In addition, companies specializing in business-to-business
purchasing services may enter the government market and companies providing
general Internet business services to businesses may also target governments in
order to enable such governments to eliminate or reduce the need to outsource
their purchasing requirements.
Examples of DemandStar's current and potential competitors are as follows:
. System integrators and enterprise resource planning companies, including
American Management Systems, SAP, Oracle and PeopleSoft;
. Traditional government enterprise software providers, who also compete
with H.T.E., including J.D. Edwards, SCT and Tyler;
. Companies that publish catalogs and bids, including Thomas Publishing,
Ziff-Davis and F.W. Dodge Division of McGraw-Hill;
. Traditional and Internet consulting companies, including Andersen
Consulting, IBM, USWeb, Razorfish, eForce, Viant, AppNet and Sapient;
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. Internet companies specializing in maintenance, repair and operations and
catalog purchasing, including Trilogy, Procurenet, Agentics, MRO.com,
Concur, Commerce One, PurchasePro, Ariba and Buysense.com, which is a
joint venture of Ariba and AMS, Inc.;
. Companies that set up Internet community sites and exchanges, including
VerticalNet, Tradex and fastxchange;
. Companies that set up specialized and generalized government and request
for proposal/request for quote sites, including InternetRFP,
Governmentbids.com, RapidRegistration, Govcon.com, BidSite, Bidnet,
Compnet, Worldbid, RFQdata, Epylon, EschoolMall, Way2Bid.com, Simplexis,
Procurenet, Globe-1.com, Wiznet, Powersourcing and Vsource; and
. Smaller and regional software and/or consulting companies that may have
existing relationships with local governments.
It is difficult to determine the number of competitors in each of the above
categories because of the proliferation of software companies and Internet-
based ecommerce companies. However, DemandStar estimates that there are at
least 12 large or national competitors in each of the first five categories
listed above and many other companies of varying sizes competing in each of the
last three listed above.
Many of DemandStar's existing and potential competitors are national or
international in scope, may have greater resources, and may devote a
significantly greater amount of resources to development of their products and
services than DemandStar does. These resources could enable DemandStar's
competitors to initiate severe price cuts or take other measures in an effort
to gain market share. Additionally, in some geographic areas, DemandStar may
face competition from smaller consulting firms with established reputations and
political relationships with potential government clients. There can be no
assurances that DemandStar will be able to successfully compete with new or
existing competitors. If DemandStar does not compete effectively, or if
DemandStar experiences any pricing pressures, reduced margins or loss of market
share resulting from increased competition, DemandStar's business and financial
condition may be materially adversely affected.
Intellectual property and proprietary rights
DemandStar relies on a combination of nondisclosure and other contractual
arrangements with governments, DemandStar's employees and third parties, and
privacy and trade secret laws to protect and limit the distribution of the
proprietary software, documentation and processes DemandStar has developed in
connection with the electronic government products and services DemandStar
offers. If DemandStar fails to adequately protect its intellectual property
rights and proprietary information or if DemandStar become involved in
litigation relating to its intellectual property rights and proprietary
technology, DemandStar's business could be harmed. Any actions DemandStar takes
may not be adequate to protect its proprietary rights and other companies may
develop technologies that are similar or superior to DemandStar's proprietary
technology.
Although DemandStar believes that its products and services do not infringe
on the intellectual property rights of others and that DemandStar has all
rights needed to use the intellectual property employed in DemandStar's
business, it is possible that DemandStar could in the future become subject to
claims alleging infringement of third party intellectual property rights. Any
claims could subject DemandStar to costly litigation, and may require
DemandStar to pay damages and develop non-infringing intellectual property or
acquire licenses to the intellectual property that is the subject of the
alleged infringement.
Technology and operations
DemandStar operates a combination of fax-on-demand and Internet services.
While DemandStar anticipates having to maintain some fax-on-demand services for
the foreseeable future, the primary emphasis of development will be on
Internet-related products and services. All applications are proprietary and
are
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developed and reside on redundant servers located on DemandStar's site. Other
than an Internet connection, there are no other local hardware or software
requirements for DemandStar's client agencies and vendors. Agencies and vendors
access the system via any standard web browser using a DemandStar-issued user
name and password. Having all software centrally located eliminates the need
for on-site installation and/or service.
DemandStar uses enterprise application servers that have redundant hard
drives and processors and the information is backed up to tape daily and the
tapes stored off site. The system is scaleable and DemandStar does not
anticipate any significant hardware capacity issues. Additional servers and
hard disc storage space can be added without significant disruption of service.
Multiple T1 telephone lines serve the telephone and web servers.
Multiple layers of security including secure socket layers and firewalls are
used to protect against unauthorized access to either the data or system
hardware. The servers are locked in an access-controlled room. Access to
varying levels of data is restricted by multiple levels of user access codes.
All servers and local machines are protected by anti-virus software.
A fundamental requirement to conduct business via the Internet is the secure
transmission of information over public networks. If DemandStar's agency and
vendor clients are not confident in the security of ecommerce, they may not
renew their contracts or registrations which would severely harm DemandStar's
business. DemandStar cannot assure you that advances in computer capabilities,
new discoveries in the field of cryptography, or other developments will not
result in the compromise or breach of the algorithms DemandStar uses to protect
content and transactions on DemandStar's websites or proprietary information in
DemandStar's databases. Anyone who is able to circumvent DemandStar's security
measures could misappropriate proprietary, confidential information or cause
interruptions in DemandStar's operations. DemandStar may be required to incur
significant costs to protect against security breaches or to alleviate problems
caused by breaches. Further, a well-publicized compromise of security could
deter people from using the Internet to conduct transactions that involve
transmitting confidential information. DemandStar's failure to prevent security
breaches, or well-publicized security breaches affecting the Internet in
general could adversely affect DemandStar's business.
Facilities
DemandStar's main operations are housed in approximately 21,650 square feet
of office space located at 1200 S. Pine Island Road, Plantation, Florida,
pursuant to a sublease that expires on July 31, 2002. DemandStar pays a base
monthly rental fee of $19.00 per square foot for the first 12 months of the
lease term, later increasing in the 13th month to $19.57 for the remainder of
the lease term. DemandStar maintains a second office of approximately 5,200
square feet. This office is located at 1551 Sandspur Road, Suite B, Maitland,
Florida. The monthly fee is approximately $8,700 and the lease expires August
2001. The outside sales force works from their homes in a variety of locations.
DemandStar believes that these facilities are adequate for all of its long-term
needs.
Employees
As of November 30, 2000, DemandStar had 95 full-time and 2 part-time
employees. Of these, 14 are in development, 27 are in operations, 41 are in
sales and marketing, and 11 are in administration. None are represented by
labor unions and DemandStar consider relationships with DemandStar's employees
to be excellent. DemandStar envisions hiring additional staff in all areas as
DemandStar's service area grows. Contracting with agencies in different time
zones will necessitate extending DemandStar's current hours of operation.
Sources of revenue
Currently, DemandStar has two sources of revenue. Approximately 85% of
revenues come from vendor subscriptions. Member suppliers pay an annual fee
that depends on the number of counties or states they wish
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to register for and the mode of notification, i.e., fax versus e-mail. The
average annual fee of DemandStar vendors is $85. The other sources of revenue
are from document fulfillment services where DemandStar provides hard copies of
the bid documents instead of a download. Both members and non-members can use
document fulfillment services. DemandStar intends to expand its sources of
revenue to include business-to-business commerce fees, advertising, and other
transactional fees associated with electronic catalog orders placed by agencies
or vendors. Vendors typically prepay DemandStar for one-year BidWire
subscriptions. These prepaid revenues are then recognized at the rate of one-
twelfth per month over the following twelve months. Thus, cash is received well
in advance of revenues being recognized. DemandStar reported total recognized
revenue of $207,000 and $435,000 for the three and nine months ended September
30, 2000. Deferred revenue as of September 30, 2000 was $523,000; an increase
of $384,000 for the nine months ended September 30, 2000.
Legal proceedings
DemandStar may from time to time become a party to various legal proceedings
arising in the ordinary course of DemandStar's business. However, DemandStar is
not currently subject to any material legal proceedings.
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MANAGEMENT OF DEMANDSTAR
Executive officers and directors
The executive officers and directors of DemandStar are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
O.F. Ramos.............. 42 Chief Executive Officer, President and Director
Bernard B. Markey....... 36 Chairman of the Board and Director
L. A. Gornto, Jr. ...... 58 Executive Vice President, General Counsel, Secretary and Director
Edward S. Jordan........ 39 Chief Operating Officer and Vice President
William Knox North...... 43 Chief Technology Officer, Vice President and Assistant Secretary
Gertrude J. Sulzer...... 40 Controller, Chief Accounting Officer and Assistant Treasurer
Edward A. Moses......... 58 Director
David Van R. Morris..... 45 Director
</TABLE>
O.F. Ramos was appointed as Chief Executive Officer, President and a
director of DemandStar in November 1999. Mr. Ramos joined H.T.E., Inc., a
company producing enterprise-wide software applications designed specifically
for public sector organizations, in June 1998 and was appointed to H.T.E.'s
board of directors in August 1998. He served as Executive Vice President of
H.T.E. and President of H.T.E.-UCS, Inc., a wholly-owned subsidiary of H.T.E.,
from June 1998 through November 1999. From 1986 to 1998, Mr. Ramos served as
the President and Chief Executive Officer of UCS, Inc., a privately-held
company specializing in field data collection and consulting. As the co-founder
of UCS, Inc., he was responsible for the corporate direction and financial
development of that company and for overseeing operations. Prior to 1986, Mr.
Ramos served in various engineering and management capacities at Motorola,
Inc., a publicly-held communications and semi-conductor company, where he was
responsible for the development and manufacturing of diverse software and
hardware products.
Bernard B. Markey was appointed as Chairman of DemandStar's board of
directors in November 1999 and, pursuant to his part-time employment agreement,
is only committed to devote up to 200 hours annually to his DemandStar duties.
Mr. Markey has been a director of H.T.E. since 1995. Mr. Markey is a Managing
Partner of Advest New Century Capital, a private equity firm which he joined in
September 1999. Mr. Markey served in several capacities for Meridian Venture
Partners, a privately-held venture capital fund, from 1988 through September
1999. Specifically, he was an Associate for the fund from 1988 through 1993. He
then served as a Vice President of the fund from 1993 through 1995, and as a
General Partner of the fund from 1995 through September 1999.
L. A. Gornto, Jr. was appointed as Chief Financial Officer, Secretary and a
director of DemandStar in November 1999 and has served as DemandStar's
Executive Vice President and General Counsel since its inception in June 1999.
Mr. Gornto resigned from his position as Chief Financial Officer in June 2000.
Mr. Gornto is only committed to devote up to 200 hours annually to his
DemandStar duties pursuant to the terms of his part-time employment agreement
with DemandStar. Mr. Gornto joined H.T.E. in January 1997 and serves as a
director of H.T.E. and as H.T.E.'s Executive Vice President, Secretary and
General Counsel. From January 1997 until November 1997, he served as H.T.E.'s
Chief Financial Officer. Since 1988, Mr. Gornto has been engaged in the private
practice of law in Central Florida and provides legal services to H.T.E. as
General Counsel. From 1985 to 1987, Mr. Gornto served as Senior Vice President,
Finance, and Chief Financial Officer of Jerrico, Inc., formerly a publicly-
traded company and holding company of Long John Silvers, a seafood restaurant
chain. From 1977 to 1985, he was engaged in the private practice of law and
also served as a management consultant. From 1968 to 1977, he served as
Executive Vice President and Chief Financial Officer and a director of Red
Lobster Restaurants, a seafood restaurant chain and formerly a subsidiary of
General Mills, Inc.
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Edward S. Jordan was appointed Chief Operating Officer and a Vice President
of DemandStar in December 1999. From November 1995 to December 1999, Mr. Jordan
served as Chief Executive Officer (Americas) of Mosaic Software, Inc., a
software company. There, his responsibilities included establishing corporate
offices in the United States, establishing strategic corporate partnerships,
creating direct and re-seller channels in North America, Latin America and the
Caribbean, and introducing a new software product for electronic funds transfer
into North and South America. From February 1994 to October 1995, he served as
Group Manager and Engineering Manager for UCS, Inc., and was responsible for
three divisions developing distributed applications.
William Knox North was appointed Chief Technology Officer and a Vice
President of DemandStar in December 1999. From 1986 to 1999, Mr. North served
as the Vice President of Engineering of UCS, Inc., a privately held Florida
corporation that was acquired by H.T.E. in June 1998. As the co-founder of UCS,
Inc., he was responsible for the technical direction and oversaw project
management of that company. Prior to 1986, Mr. North served in various
engineering and management capacities at Motorola, Inc., where he was
responsible for the various software and hardware projects for several portable
radios and paging terminals.
Gertrude J. Sulzer was appointed Controller and Chief Accounting Officer of
DemandStar in May 2000. From 1990 to 2000, Ms. Sulzer served as Corporate
Controller for various publicly held corporations and was responsible for all
internal and external financial reporting. Prior to 1990, Ms. Sulzer worked for
the public accounting firm of PricewaterhouseCoopers.
Edward A. Moses was appointed as a director of DemandStar in November 1999
and serves as a part-time consultant to DemandStar. Mr. Moses was appointed as
a member of H.T.E.'s board of directors in December 1998. Mr. Moses has served
as dean of the Roy E. Crummer Graduate School of Business at Rollins College
since 1994, and as a professor and NationsBank professor of finance since 1989.
From 1985 to 1989, he served as dean and professor of finance at the University
of North Florida. He has also served in academic and administrative positions
at the University of Tulsa, Georgia State University and the University of
Central Florida, and currently serves as a faculty member in the Graduate
School of Banking of the South. Mr. Moses also serves as a director of CNL
Health Care Properties, Inc., a publicly-held real estate holding company.
David Van Morris was appointed as a director of DemandStar in August of
2000. Mr. Morris currently serves as Chief Executive Officer, President and as
a director of Infonautics, Inc., an information services company and developer
of Internet based consumer products, positions which he has held since March
1998. Mr. Morris joined Infonautics as President and Chief Operating Officer in
September 1995. From 1992 until he joined Infonautics, Mr. Morris held various
vice president and general management positions at Legent Corporation, a
systems management software company. From 1987 to 1992, Mr. Morris was employed
by Goal Systems International, initially as Director of Marketing, later as
Vice President of Marketing. Goal was purchased by Legent in 1992.
Staggered board of directors
DemandStar's articles of incorporation and bylaws provide that its board of
directors is divided into three classes of directors, with the classes to be as
nearly equal in number as possible. Mr. Markey and Mr. Ramos serve as Class I
directors, whose terms expire at the 2003 annual shareholders' meeting. Mr.
Moses serves as a Class II director, whose term expires at the 2001 annual
shareholders' meeting. Mr. Gornto serves as a Class III director, whose term
expires at the 2002 annual shareholders' meeting.
Board committees
DemandStar's Compensation Committee consists of two independent directors,
Messrs. Morris and Moses, and meets periodically to review and set salaries and
incentive compensation for employees, consultants and executives of DemandStar.
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DemandStar's Audit Committee consists of two independent directors, Messrs.
Morris and Moses and meets periodically with management to review the results
and scope of the audit and other services provided by DemandStar's independent
auditors, DemandStar's accounting procedures and the adequacy of DemandStar's
internal controls.
Compensation of directors
DemandStar reimburses all directors for the expenses incurred in attending
meetings of the board of directors. Directors who are not full-time employees
receive $1,000 per board or committee meeting attended and directors who are
officers and full-time employees of DemandStar receive no additional
compensation for service as directors. All directors are eligible for option
grants under DemandStar's 1999 Employee Incentive Compensation Plan. During
fiscal year 1999, DemandStar granted each of the four directors an option to
acquire 10,000 shares of DemandStar common stock. The option has an exercise
price of $1.00 per share and vests in equal thirds over a three-year period.
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PRINCIPAL SHAREHOLDERS OF DEMANDSTAR
The following table sets forth information known to DemandStar regarding
beneficial ownership of DemandStar capital stock as of December 20, 2000, by:
. each executive officer and director of DemandStar who beneficially owns
shares;
. each shareholder known to DemandStar to beneficially own 5% or more of
DemandStar's outstanding securities; and
. all executive officers and directors as a group.
The applicable percentage of ownership for each shareholder is based on
8,388,480 shares of capital stock outstanding as of December 20, 2000, together
with applicable options for that shareholder. Shares of common stock issuable
upon exercise of options and other rights beneficially owned were deemed
outstanding for the purpose of computing the percentage ownership of the person
holding these options and other rights, but are not deemed outstanding for
computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
Number of Shares Percentage of Shares
Name and address of Beneficial Beneficially Owned Beneficially Owned
Owner(1) Before Merger Before Merger
------------------------------ ------------------ --------------------
<S> <C> <C>
H.T.E., Inc. ...................... 2,500,000(2) 24.3%
1000 Business Center Drive
Lake Mary, FL 32746
L.A. Gornto, Jr. .................. 519,433(3) 5.0%
149-F South Ridgewood Avenue
Daytona Beach, FL 32114
O.F. Ramos......................... 734,757(4) 7.1%
Edward A. Moses.................... 189,166(5) 1.8%
1000 Holt Avenue - 2722
Winter Park, FL 32789
Bernard B. Markey.................. 288,433(5) 2.8%
Long Hill Road
New Vernon, New Jersey 07976
Edward S. Jordan................... 285,000(6) 2.8%
William Knox North................. 500,506(7) 4.9%
David Van Riper Morris............. 101,000 1.0%
590 N. Gulph Road
King of Prussia, PA 19406
Gertrude J. Sulzer................. 3,000 *
All officers and directors as a
group (8 persons)................. 2,621,295(8) 25.5%
</TABLE>
--------
* Less than 1%.
(1) Unless otherwise specified, the address for each officer and director is
1200 S. Pine Island Road, Suite 600, Plantation, Florida 33324.
(2) Includes 750,000 shares of common stock issuable upon conversion of Series
A preferred stock, and 500,000 shares of common stock issuable pursuant to
currently exercisable common stock purchase warrants.
(3) Includes 69,000 shares of common stock held by a limited partnership for
which Mr. Gornto is the general partner, approximately 48,331 shares of
common stock subject to options that are exercisable within the next 60
days, and 125,000 shares of common stock issuable pursuant to currently
exercisable common stock purchase warrants.
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(4) Includes 332,333 shares of common stock subject to options that are
exercisable within the next 60 days, and 125,000 shares of common stock
issuable pursuant to currently exercisable common stock purchase warrants.
(5) Includes 48,331 shares of common stock subject to options that are
exercisable within the next 60 days, and 125,000 shares of common stock
issuable pursuant to currently exercisable common stock purchase warrants.
(6) Includes 35,000 shares of common stock subject to options that are
exercisable within the next 60 days.
(7) Includes 43,333 shares of common stock subject to options that are
exercisable within the next 60 days.
(8) Includes 555,659 shares of common stock subject to options that are
exercisable within the next 60 days, and 500,000 shares of common stock
issuable pursuant to currently exercisable common stock purchase warrants.
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DEMANDSTAR CERTAIN TRANSACTIONS
Conditional purchase of Series B preferred stock
On December 21, 1999, H.T.E. and Messrs. Gornto, Markey, Moses and Ramos,
officers and directors of DemandStar, agreed, pursuant to the terms of a
Conditional Series B Stock Purchase Agreement, to purchase in the aggregate
2,000,000 shares of DemandStar's Series B preferred stock for an aggregate
purchase price of $2 million but only if less than $5 million in rights were
exercised in DemandStar's rights offering. In conjunction with, and as an
inducement to H.T.E. and the individuals to commit to this conditional purchase
of Series B preferred stock, in January 2000 DemandStar issued H.T.E. warrants
to purchase 500,000 shares of DemandStar's common stock and issued each of the
foregoing individuals warrants to purchase 125,000 shares of DemandStar common
stock at an exercise price of $2.00 per share. Such warrants are currently
exercisable and will expire January 1, 2002. Under the terms of the merger
agreement, Onvia will assume responsibility for the warrants which will be
converted as described in the summary of the merger agreement.
Agreement of commitment to exercise rights
Messrs. Ramos, Markey, Gornto, North and Moses, and other executive officers
and/or directors of DemandStar, entered into an agreement with DemandStar on
December 21, 1999, as amended on February 7, 2000 and March 7, 2000, to
subscribe for an aggregate of 656,821 restricted shares of common stock
pursuant to DemandStar's March 27, 2000 rights offering. Pursuant to the same
agreement, Messrs. Markey, North, Ramos and Jordan, and other officers and
directors of DemandStar, agreed to purchase additional shares in the rights
offering in an amount representing the lesser of an aggregate of 718,568
restricted shares of common stock or the number of shares of unsubscribed
common stock available on the closing date of the rights offering. These
individuals purchased an aggregate of 656,821 of DemandStar common stock in the
rights offering.
Employment and consulting agreements with officers and directors
Amended and Restated Employment Agreements and Option Agreements with O. F.
Ramos. On November 20, 2000, DemandStar entered into an amended and restated
employment agreement with Mr. O.F. Ramos, which agreement will be effective
upon the closing of the proposed merger. If the merger does not close, the
executive's prior employment agreement, described under "Management of
DemandStar--Employment Agreements," will remain in effect. Generally, under the
original employment agreement and option agreements, Mr. Ramos would be
entitled to receive, in specified cases of termination of employment without
cause, salary payments, incentive compensation and benefits for up to 12 months
after the date of termination. Among other modifications, the severance terms
have been abbreviated under the amended agreement. The amended option
agreements provide for accelerated vesting. Further, under the original option
agreements, vested options were exercisable for a period of 12 months after
termination without cause, while the amended option agreements provide for an
exercise period of three months after termination without cause.
Under Mr. Ramos' amended employment agreement, he will become the Vice
President, General Manager of Governmental Operations of Onvia upon closing of
the merger. His term of employment will expire December 31, 2002, subject to
automatic renewal for successive one year terms, until terminated by Mr. Ramos
or DemandStar as provided for in the agreement. Mr. Ramos' annual base salary
will be $160,000 and, during his term of employment, he will be eligible to
receive quarterly incentive bonuses based on performance of up to 25% of his
then current quarterly base salary. Under the amended employment agreement, Mr.
Ramos retains the options to purchase up to 1,000,000 shares of DemandStar's
common stock, which options will be converted, upon closing of the merger, into
options to purchase Onvia common stock pursuant to the conversion formula set
forth in the merger agreement. Similarly, the exercise price will be adjusted
to reflect the merger exchange ratio. The conversion options will be qualified
options to the extent permissible under applicable law, with the remainder
being non-qualified options.
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The agreement also provides that, upon the termination of Mr. Ramos'
employment as a result of his death or disability, DemandStar will pay him any
unpaid base salary, any accrued but unpaid incentive compensation through the
date of termination, and a pro rata portion of incentive compensation for the
bonus period within which termination of employment occurs. Neither Mr. Ramos
nor DemandStar may terminate his employment for six months after the closing of
the merger. Thereafter, either Mr. Ramos or DemandStar may terminate his
employment without cause, as defined in the employment agreement. In the event
of termination of his employment without cause by either Mr. Ramos or
DemandStar, he is entitled to receive the same payments as if his employment
were terminated as a result of his death or disability, plus a lump sum payment
equal to six months of his then annual base salary. If Mr. Ramos' employment is
terminated for cause, he is entitled to receive only his base salary through
the date of termination. The agreement contains confidentiality provisions and
prohibitions on competition by Mr. Ramos during the term of the agreement and
for two years thereafter.
Concurrently with entering into the amended and restated employment
agreement, and subject to the closing of the merger, Mr. Ramos and DemandStar
entered into two amended and restated option agreements for the options granted
to him for a total of 1,000,000 shares of DemandStar common stock, at an
exercise price of $1.00 per share. The first amended option agreement
references options to purchase 400,000 shares, which option vests as to 200,000
shares on the closing date of the merger, as to 30,000 shares on the sixth
month anniversary of the closing date of the merger, and thereafter, 4,048 of
the then unvested options shall vest monthly thereafter for a period of 41
months, and 4,032 shares vest on the 42nd month. The second amended option
agreement references options to purchase 600,000 shares, which option vests as
to 300,000 shares on the closing date of the merger, as to 45,000 shares on the
six month anniversary of the closing date of the merger, as to 6,071 shares
monthly thereafter for 41 months, and 6,089 shares in the 42nd month. The
options have a term of 10 years. Unexercised portions of the options will
terminate:
. three months after the date of termination of Mr. Ramos' employment with
DemandStar without cause;
. immediately upon termination of his employment for cause; and
. 12 months after termination due to death or disability.
Both option agreements contain change of control provisions wherein upon a
change of control of Onvia or DemandStar after the merger, 25% of the unvested
options shall immediately vest and be fully exercisable at the time of the
change of control, with the remainder continuing to vest on a pro rata basis in
accordance with the option agreement's vesting schedule. Upon termination of
Mr. Ramos' employment after a change of control has occurred, the options vest
100% at the time of termination.
Employment Agreement with O. F. Ramos. Until the merger closes, Mr. Ramos'
original employment agreement remains in effect. Under his original employment
agreement, Mr. Ramos serves as DemandStar's chief executive officer for an
initial period ending on December 31, 2002. The agreement provides for an
annual salary of $160,000 and incentive compensation payments based on
performance. The agreement also provides that, upon the termination of the
executive's employment or death, DemandStar will pay to the executive's estate
any unpaid base salary and any accrued but unpaid incentive compensation
through the date of termination. In the event Mr. Ramos is terminated without
"Cause," as defined in the agreement, DemandStar will pay to such executive any
unpaid base salary, any accrued but unpaid incentive compensation through the
date of termination, and in specified cases, additional payment of salary,
incentive compensation and benefits for up to twelve months after the date of
termination.
Pursuant to his employment agreement, Mr. Ramos has been granted qualified
and non-qualified options under DemandStar's 1999 Employee Incentive
Compensation Plan to purchase an aggregate of 1,000,000 shares of DemandStar
common stock at $1.00 per share, comprising:
. 400,000 qualified options which vest in equal amounts of 100,000 on
December 1, 1999 and on November 1 of each of the next three years
thereafter;
. 90,000 non-qualified options which vest in equal amounts of 22,500 on
December 1, 1999 and on November 1 of each of the next three years
thereafter;
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. 250,000 non-qualified options which vest in nearly equal amounts on each
of the first three anniversaries of the agreement based upon and subject
to the trading price of DemandStar's common stock achieving specified
levels ranging from $10 to $30 per share; however, in any event, all such
options which have not vested in accordance with such vesting schedule
will vest nine and one-half years from the date of grant, subject to the
optionee being employed by DemandStar at that time;
. 250,000 non-qualified options which vest in nearly equal amounts at the
end of consecutive six-month periods based upon DemandStar achieving
performance criteria determined by the board for each such period;
however, in any event, all such options which have not vested in
accordance with such vesting schedule will vest nine and one-half years
from the date of grant, subject to the optionee being employed by
DemandStar at that time; and
. 10,000 non-qualified options which vest annually in equal amounts of one-
third for the three years commencing December 1, 1999. The first one-
third vested on December 1, 2000.
Mr. Ramos' options expire ten years from the date of grant, provided,
however, that if Mr. Ramos' employment is terminated during the initial term
without cause, he can exercise all vested non-qualified options within one year
from the date of such termination. In the event of a change of control as
defined in the agreement, the agreement provides that some of his options will
vest based upon the value of the transaction causing the change of control and
some of his options will convert to a more favorable vesting schedule. The
agreement contains confidentiality provisions and also prohibits the executive
from competing with DemandStar during the term of the agreement and for two
years thereafter. Upon resignation, DemandStar must pay Mr. Ramos any unpaid
base salary and any accrued but unpaid incentive compensation through the date
of resignation.
Part-Time Employment Agreements with Messrs. Markey And Gornto. Effective
December 15, 1999, DemandStar entered into part-time employment agreements with
Bernard B. Markey and L. A. Gornto, Jr. with initial periods ending on December
31, 2002, under which Mr. Markey serves as a financial assistant to
DemandStar's principal executive officers and Mr. Gornto serves as Chief
Financial Officer, Executive Vice President, Secretary and General Counsel.
Each agreement provides for an annual salary of $12,000 for up to 200 hours of
each such executive's time per year. If either executive is required to devote
more than 16 hours of time in any particular month, then he will be paid $1,000
per day in addition to his base salary. Further, Mr. Gornto's agreement
provides for a mutually agreed higher compensation amount if he devotes more
than 40 hours in any calendar month. Pursuant to the employment agreements,
each executive has been granted, pursuant to DemandStar's 1999 Employee
Incentive Compensation Plan, qualified options to purchase an aggregate of
90,000 shares of DemandStar common stock at $1.00 per share, with 22,500
vesting on December 15, 1999 and the remaining 67,500 vesting in equal thirds
on November 1, 2000, November 1, 2001 and November 1, 2002. The agreements
contain confidentiality provisions and also prohibit the executives from
competing with DemandStar during the term of the agreement and for two years
thereafter.
In connection with the merger, the foregoing agreements will be amended and
restated to provide that Messrs. Markey and Gornto will provide transition
consulting services as requested by Onvia for a period of 180 after the merger
closing date, for which they will be compensated at the rate of $1,000 per
month for a specified number of hours and at the rate of $100 per hour for each
hour thereafter. Further, their DemandStar options that are exercisable at the
effective time of the merger shall be converted in respect of the merger
agreement, but shall be exercisable until the 270th day after the merger
closing date. The employment agreements will be of no further force and effect
as of the effective time of the merger, except as amended above.
Amended and Restated Employment Agreements and Option Agreements with
Messrs. Jordan and North. On November 20, 2000, DemandStar entered into amended
and restated employment agreements with Edward Jordan, who will serve as the
Vice President, Government Sales, of Onvia, and with William Knox North, who
will serve as the Vice President, Government Exchange Technology, of Onvia,
upon the closing of the merger. If the merger does not close, Mr. Jordan's and
Mr. North's prior employment agreements, described under "Management of
DemandStar--Employment Agreements," will remain in effect.
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Mr. Jordan's and Mr. North's amended employment agreements expire December
31, 2002, subject to automatic renewal for successive one year terms, until
terminated by the executive or DemandStar as provided for in their respective
agreements. The base salary of each executive is $150,000, representing an
increase of $30,000 from the original agreement. During the term of employment,
the executives will be eligible to receive quarterly incentive bonuses based on
performance of up to 25% of their then current quarterly base salary.
Under the amended employment agreements, Mr. Jordan and Mr. North each
retain their respective options to purchase up to 150,000 shares of
DemandStar's common stock, which options will be converted, upon closing of the
merger, into options to purchase Onvia common stock pursuant to the conversion
formula set forth in the merger agreement. The exercise price will be changed
in accordance with the exchange ratio specified in the merger agreement. The
conversion options will be qualified options to the extent permissible under
applicable law, with the remainder being non-qualified options. In addition,
immediately following the closing of the merger, Mr. Jordan and Mr. North shall
each receive options to purchase Onvia common stock in an amount equal to
100,000 shares less the number of previously converted unvested options held by
the executive upon closing of the merger. Those options will have the same
vesting, change of control and other terms as normally provided by Onvia to its
executives, provided, however, that the exercise price shall be as determined
by Onvia's board of directors at fair market value on the closing date of the
merger.
Upon the termination of Mr. Jordan's or Mr. North's employment as a result
of his death, DemandStar will pay him any unpaid base salary, any accrued but
unpaid incentive compensation through the date of termination, and a pro rata
portion of incentive compensation for the bonus period within which termination
of employment occurs. Neither the executive nor DemandStar may terminate his
employment for six months after the closing of the merger. Thereafter, either
the executive or DemandStar may terminate his employment without cause (as
defined in the amended employment agreement). In the event of termination of
his employment without cause by either executive or DemandStar, the executive
is entitled to receive the same payments as if his employment were terminated
as a result of his death, plus a lump sum payment equal to six months of his
then annual base salary. If the executive's employment is terminated for cause,
he is entitled to receive only his base salary through the date of termination.
The amended agreements contain confidentiality provisions and prohibitions on
competition by the executive during the term of the agreement and for two years
thereafter.
Messrs. Jordan and North each entered into an amended and restated stock
option agreement with DemandStar, subject to the closing of the merger, with
respect to the options granted to each executive for 150,000 shares of
DemandStar common stock, at an exercise price of $1.00 per share. The options
have an accelerated vesting schedule compared to the vesting schedule of the
original option agreement. The option for 100,000 shares vests as to 50,000
shares on the closing date of the merger, 7,500 shares on the sixth month
anniversary of the closing date of the merger, 1,012 shares in each of 41
months, and 1,008 in the 42nd month. The option for 50,000 shares vests as to
25,000 shares on the merger closing date, as to 3,750 on the six month
anniversary of the merger closing date, as to 506 shares monthly thereafter for
41 months, and as to 504 shares in the 42nd month. The options have a term of
10 years. Unexercised portions of the options will terminate:
. three months after the date of termination of the executive's employment
with DemandStar without cause;
. immediately upon termination of his employment for cause; and
. 12 months after termination due to death or disability.
The option agreements contain change of control provisions wherein upon a
change of control of Onvia or DemandStar after the merger, 25% of the unvested
options shall immediately vest and be fully exercisable at the time of the
change of control, with the remainder continuing to vest on a pro rata basis in
accordance with the option agreement's vesting schedule. Upon termination of
executive's employment after a change of control has occurred, the options vest
100% at the time of termination.
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Under the terms of the merger agreement, Onvia is obligated to file a
registration statement on Form S-8 within 45 days after the effective time of
the merger, registering the shares of Onvia common stock issuable with respect
to the assumed options under DemandStar's executive incentive compensation
plan. Those shares are not subject to the lock-up agreement to be entered into
between Onvia and certain affiliates of DemandStar.
Employment Agreements with Messrs. Jordan and North. The original employment
agreements of Edward Jordan, who serves as Chief Operating Officer and a Vice
President, and William Knox North, who serves as Chief Technology Officer and a
Vice President, govern their employment with DemandStar until the merger
closes. Each agreement provides for an annual salary of $120,000 and incentive
compensation payments based on performance. Mr. Jordan's agreement provides for
the grant of qualified options under DemandStar's 1999 Employee Incentive
Compensation Plan to purchase an aggregate of 100,000 shares of DemandStar
common stock for $1.00 per share, which options vest in equal amounts of 25,000
over four years. Mr. North's agreement provides for the grant of qualified
options to purchase an aggregate of 100,000 shares of DemandStar common stock
at $1.00 per share, which options vest in equal thirds over three years. Each
of Messrs. North's and Jordan's employment agreements were amended on November
20, 2000. Under the terms of the amended and restated employment agreement for
each gentleman, each will become an officer in Onvia upon completion of the
merger, and their respective stock option agreements to purchase DemandStar
common stock will automatically convert into the right to purchase Onvia's
common stock.
Consulting Agreement with Edward Moses. On December 15, 1999, DemandStar
entered into a three-year consulting Agreement with Edward Moses, a director of
DemandStar, pursuant to which Mr. Moses provides consulting services with
respect to strategic planning, operations matters, growth and development
matters and other areas as requested by DemandStar. In exchange for these
services, DemandStar granted Mr. Moses options to purchase an aggregate of
90,000 shares of DemandStar common stock at $1.00 per share, with 22,500
vesting upon the execution of the agreement and the remaining 67,500 vesting in
equal thirds on each anniversary of the effective date of the consulting
agreement.
In connection with the merger, the foregoing agreement will be amended and
restated to provide that Mr. Moses will provide transition consulting services
as requested by Onvia for a period of 180 after the merger closing date, for
which he will be compensated at the rate of $100 per hour for each hour of
rendered services. Further, his DemandStar options that are exercisable at the
effective time of the merger shall be converted in respect of the merger
agreement and will be exercisable until the 90th day after the termination of
this agreement in accordance with DemandStar's stock option plan.
1999 Employee Incentive Compensation Plan
Under the terms of the merger agreement, Onvia is obligated to file a
registration statement on Form S-8 within 45 days after the effective time of
the merger, registering the shares of Onvia common stock issuable with respect
to the assumed options under DemandStar's 1999 Employee Incentive Compensation
Plan. Those shares are not subject to the lock-up agreement to be entered into
between Onvia and certain affiliates of DemandStar.
Legal Services
L. A. Gornto, Jr., DemandStar's General Counsel, has performed legal
services for DemandStar through his law firm, L. A. Gornto, Jr., P.A., for
which DemandStar paid approximately $92,554 from DemandStar's inception through
October 2000.
Transactions involving H.T.E.
H.T.E. has provided DemandStar with administrative and management services,
including payroll, consulting and legal. In addition, H.T.E. and DemandStar
have entered into a number of agreements for the purpose of defining their
continuing relationship. These agreements are summarized below. Each of these
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agreements was negotiated in the context of a parent-subsidiary relationship
and, therefore, was not the result of negotiations between independent parties
with separate representation.
Investment and distribution agreement
Under the investment and distribution agreement executed by H.T.E. and
DemandStar, H.T.E. was obligated to contribute to DemandStar $1 million in cash
in exchange for 500,000 shares of Series A preferred stock, with an option to
purchase an additional 250,000 shares for $500,000 to expire on June 30, 2000.
H.T.E. contributed the $1 million for 500,000 shares of Series A preferred
stock in January 2000. In February 2000, H.T.E. exercised its option to
purchase the additional 250,000 shares of Series A preferred stock for $500,000
in cash. The investment and distribution agreement provides that H.T.E. and
DemandStar will indemnify each other with respect to any future losses that
might arise from the rights offering as a result of any untrue statement or
alleged untrue statement in any rights offering or the omission or alleged
omission to state a material fact in any rights offering in DemandStar's case,
except to the extent the statement was based on information provided by H.T.E.
and in H.T.E.'s case, only to the extent the loss relates to information
supplied by H.T.E.
Services agreement
H.T.E. provided DemandStar with management and administrative services
pursuant to the terms of a services agreement. H.T.E. provides administrative
services, such as financial reporting, accounting, auditing, tax, office
services, payroll and human resources as well as management consulting
services. DemandStar is obligated to pay H.T.E. for these services the
estimated cost of providing such services. H.T.E. charges DemandStar a monthly
service fee equal to 5% of DemandStar's operating expenses for general
administrative matters, plus expenses incurred by H.T.E. for use of its
employees for specific projects such as sales, consulting services, and similar
expenses. The fee for these charges was approximately $74,500 for the nine-
month period ending September 30, 2000. As of September 30, 2000, DemandStar
owed H.T.E. $10,401. The services agreement may be terminated by either party
upon 120 days' notice. H.T.E. and DemandStar have terminated this agreement.
Tax sharing and indemnity agreement
The tax sharing and indemnity agreement, which is conditioned upon H.T.E.
and DemandStar being deemed part of a consolidated tax group, defines the
parties' rights and obligations with respect to the filing of returns,
payments, deficiencies and refunds of federal, state and other income,
franchise or other taxes relating to DemandStar's business for periods prior to
and including the date on which DemandStar ceases to be a member of H.T.E.'s
consolidated tax group and with respect to tax attributes of DemandStar after
it is no longer a member of H.T.E.'s consolidated tax group. For periods ending
on or before the last day of the taxable year in which DemandStar ceases to be
a part of H.T.E.'s consolidated tax group, H.T.E. is responsible for:
. Filing both consolidated federal tax returns for the H.T.E. affiliated
group and combined or consolidated state tax returns for any group that
includes a member of the H.T.E. affiliated group, including, in each
case, DemandStar for the relevant periods of time that DemandStar was a
member of the applicable group.
. Paying the taxes relating to those returns, including any subsequent
adjustments resulting from the redetermination of those tax liabilities
by the applicable taxing authorities. DemandStar is responsible for
reimbursing H.T.E. for its share of those taxes, if any. DemandStar is
also responsible for filing returns and paying taxes relating to it for
periods that begin before and end after DemandStar ceases to be a part
of H.T.E.'s consolidated tax group. This agreement is intended to
allocate the tax liability between H.T.E. and DemandStar as if they were
separate taxable entities. H.T.E. and DemandStar have also agreed to
cooperate with each other and to share information in preparing those
tax returns and in dealing with other tax matters.
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Registration rights agreement
The registration rights agreement that DemandStar and H.T.E. have entered
into provides for DemandStar's grant of rights to H.T.E. with respect to the
registration under the Securities Act of the shares of DemandStar capital stock
owned by H.T.E. at the closing of the rights offering. The registration rights
agreement entitles H.T.E. to demand DemandStar, not more than once in any 365-
day period commencing on the first anniversary of the closing of the rights
offering and on not more than three occasions after H.T.E. no longer owns a
majority of the voting power of the outstanding capital stock of DemandStar, to
file a registration statement under the Securities Act covering the
registration of DemandStar capital stock held by H.T.E. H.T.E.'s demand
registration rights contain various limitations, including that the
registration cover a number of shares of DemandStar capital stock held by
H.T.E. having a fair market value of at least $3 million at the time of the
request for registration and that DemandStar may be able to defer temporarily a
demand registration to the extent it conflicts with another public offering of
securities by DemandStar or would require DemandStar to disclose material non-
public information. H.T.E. is also able to require DemandStar to include
DemandStar capital stock held by H.T.E. in a registration by DemandStar of its
securities so long as specified conditions are satisfied. The underwriters for
the offering, however, may limit or exclude from the offering DemandStar
capital stock held by H.T.E.
DemandStar and H.T.E. will each pay their equal share of any fees and
expenses associated with a demand registration and H.T.E. will pay its pro rata
share of underwriting discounts, commissions and related selling expenses.
DemandStar will pay all expenses associated with a piggyback registration,
except that H.T.E. will pay its pro rata share of the selling expenses. The
registration rights agreement contains indemnification and contribution
provisions:
. by H.T.E. for the benefit of DemandStar and related persons, as well as
any potential underwriter; and
. by DemandStar for the benefit of H.T.E. and related persons, as well as
any potential underwriter.
H.T.E.'s demand registration rights will terminate on the date that H.T.E.
owns, on a fully converted or exercised basis with respect to the securities
held by H.T.E., common stock representing less than 10% of the then issued and
outstanding voting stock of DemandStar. H.T.E.'s piggyback registration rights
will terminate when it is able to sell all of its DemandStar common stock,
including all common stock available upon exercise of all conversion and
subscription privileges, under Rule 144 within a three month period. H.T.E. may
transfer its registration rights to any transferee of common stock that
represents, on a fully converted or exercised basis, at least 20% of the then
issued and outstanding voting stock of DemandStar at the time of transfer;
provided, however, that the transferee will be limited to:
. two demand registrations if the transfer conveys less than a majority
but more than 30%, and
. one demand registration if the transfer conveys 30% or less of the then
issued and outstanding voting stock of DemandStar.
It is a condition to the closing of the merger that this agreement be
terminated.
H.T.E. loan
From DemandStar's inception through December 31, 1999, H.T.E. advanced
DemandStar an aggregate of $1.3 million which was used primarily to acquire the
business and certain specified assets from DemandStar's predecessor company and
to finance DemandStar's operating losses. DemandStar's obligation to repay such
advances are evidenced by a five-year unsecured term note, effective as of
October 31, 1999, bearing interest at a rate of 8% per annum. The total
principal amount of the note is $1.75 million, all of which was drawn down as
of February 29, 2000. Because the entire amount available under this facility
has been drawn down, principal and accrued interest thereon shall be due and
payable annually for the term in principal installments of $200,000 at the end
of the first year, $250,000 at the end of the second year, $350,000 at the end
of the third year, $450,000 at the end of the fourth year and the balance of
$500,000 at maturity of the note.
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Notwithstanding the foregoing, at the earlier of the maturity date of the note,
or the date of effectiveness of a public offering of DemandStar common stock
yielding gross proceeds of at least $10 million, the entire outstanding balance
of the note becomes due.
On October 31, 2000, H.T.E. and DemandStar executed a modification agreement
amending the terms of the $1.75 million unsecured note whereby:
. the interest rate was increased from eight percent to ten percent;
. the October 31, 2000 payment of principal and interest was deferred to
October 31, 2001; and
. DemandStar agreed to pay H.T.E. a one -time modification fee of $10,000
on January 15, 2001.
In addition, in the event that, prior to October 31, 2001, DemandStar were to
issue a new equity security in a third-party transaction in which equity
capital in excess of $3 million is raised, DemandStar will issue H.T.E., within
thirty days of such third-party financing, in full and complete satisfaction of
the deferred October 31, 2002 note payment, that amount of such new equity
security which is equivalent in fair market value to the amounts due on the
deferred October 31, 2002 note payment.
The merger agreement obligates DemandStar to modify its arrangement with
H.T.E. to terminate H.T.E.'s right to receive any DemandStar securities as a
result of the merger agreement or any of the transactions contemplated by the
merger agreement. Modification of the H.T.E. loan transaction is a condition
precedent to the consummation of the merger.
Earn-out obligations
On June 18, 1999, DemandStar acquired the business and specified net assets
from its predecessor company for $1 million in cash. DemandStar agreed to pay
up to an additional $2 million in cash over a three-year period beginning June
18, 1999, if DemandStar meets its predecessor's following operating profit
targets: $477,000 for year ended June 30, 2000; $5.7 million for year ended
June 30, 2001; and $10.1 million for year ended June 30, 2002.
Lease assignment
Pursuant to the requirements of the merger agreement, by assignment dated
effective August 6, 2000, H.T.E. assigned to DemandStar, and DemandStar
assumed, all of H.T.E.'s interest as lessee in that certain office lease
agreement entered into between the landlord and H.T.E. pertaining to 21,650
square feet of office space located in Maitland, Florida, and occupied by
DemandStar. Under the assignment, DemandStar agreed to indemnify and hold
harmless H.T.E. from any and all losses and damages of nay kind whatsoever
arising under the lease as a result of any matter occurring on or after August
6, 2000.
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DESCRIPTION OF ONVIA CAPITAL STOCK
As of the date of this document, the authorized capital stock of Onvia
consists of 250,000,000 shares of common stock, $0.0001 par value and
15,000,000 shares of preferred stock, $0.0001 par value. The following
description of Onvia's capital stock is subject to and qualified in its
entirety by Onvia's certificate of incorporation and bylaws and by the
provisions of applicable Delaware law.
Common stock
As of December 20, 2000, there were 86,830,032 shares of Onvia's common
stock outstanding and held of record by 474 stockholders.
The holders of Onvia's common stock are entitled to one vote per share on
all matters to be voted on by the stockholders. There are no cumulative voting
rights. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive dividends,
if any, as may be declared by Onvia's board of directors of directors out of
funds legally available for dividends. In the event of a liquidation,
dissolution or winding up of Onvia, the holders of Onvia's common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior rights of preferred stock, if any, then outstanding. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and non-
assessable.
Preferred stock
Upon the closing of the initial public offering, Onvia's board of directors
of directors was authorized, without further stockholder approval, to issue
from time to time up to an aggregate of 15,000,000 shares of preferred stock in
one or more series and to fix or alter the designations, preferences, rights
and any qualifications, limitations or restrictions of the shares of each such
series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. Onvia has not issued
any shares of preferred stock.
Warrants
As of December 20, 2000, warrants were outstanding to purchase an aggregate
of 1,278,860 shares of Onvia's common stock with exercise prices between $0.125
and $21.31 per share.
Registration rights
As of December 20, 2000, the holders of 66.6 million shares of Onvia's
common stock, including shares of common stock issuable upon exercise of
warrants, are entitled to certain rights with respect to registration of these
shares under the Securities Act. These shares are referred to as the
"registrable securities," although some of these shares that are held by
holders of shares of Onvia common stock are only considered to be registrable
securities for purposes of participation in registrations undertaken by Onvia.
These rights are provided under the terms of an agreement between Onvia and the
holders of these securities. Under these registration rights, beginning on
August 29, 2000, holders of at least a majority of the then-outstanding
registrable securities may require by a written request that Onvia register
their shares for public resale provided that the value of the securities to be
registered is at least $10 million, net of underwriting discounts and
commissions. Onvia is obligated to effect no more than two of these
registrations requested by the holders of registrable securities. In addition,
any holder or holders of then-outstanding registrable securities may require
that Onvia register their shares for public resale on Form S-3 or similar
short-form registration, provided Onvia is eligible to use Form S-3 or similar
short-form registration statement and that the value of the securities to be
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registered is at least $5 million. In the event Onvia elects to register any of
its shares of common stock in a public offering, the holders of registrable
securities are entitled to include their shares of common stock in the
registration, subject to the right of the underwriters of the offering to
reduce the number of shares proposed to be registered in view of market
conditions. Onvia is required to pay all expenses in connection with any of
these registrations other than underwriting discounts and commissions. All
registration rights will terminate in March 2003 or, with respect to each
holder of registrable securities, at the time as the holder is entitled to sell
all of its shares in any three-month period under Rule 144 of the Securities
Act.
In connection with Onvia's acquisition of Zanova in July 2000, Onvia granted
the holders of 2,470,520 shares of Onvia's common stock issued in that
acquisition certain rights with respect to registration of these shares under
the Securities Act. These shares are referred to as the "Zanova registrable
securities." These rights are provided under the terms of an agreement between
Onvia and the holders of these securities. Under these registration rights,
beginning on July 11, 2001, holders of Zanova registrable securities may
require by a written request that Onvia register their shares for public
resale. In the event Onvia elects to register any of its shares of common stock
in a public offering prior to July 2001, the holders of Zanova registrable
securities are entitled to include their shares of common stock in the
registration, subject to the right of the underwriters of the offering to
reduce the number of shares proposed to be registered in view of market
conditions. Onvia is required to pay all expenses in connection with any of
these registrations other than underwriting discounts and commissions. All
registration rights will terminate July 2003 or, with respect to each holder of
Zanova registrable securities, at the time as the holder is entitled to sell
all of its shares in any three-month period under Rule 144 of the Securities
Act.
In connection with Onvia's acquisition of Globe-1 in September 2000, Onvia
granted the holders of 2,351,705 shares of Onvia's common stock issued in that
acquisition certain rights with respect to registration of these shares under
the Securities Act. These shares are referred to as the "Globe-1 registrable
securities." These rights are provided under the terms of an agreement between
Onvia and the holders of these securities. Under these registration rights,
beginning May 1, 2001, holders of Globe-1 registrable securities may require by
a written request that Onvia register their shares for public resale. In the
event Onvia elects to register any of its shares of common stock in a public
offering prior to September 2003, the holders of Globe-1 registrable securities
are entitled to include their shares of common stock in the registration,
subject to the right of the underwriters of the offering to reduce the number
of shares proposed to be registered in view of market conditions. Onvia is
required to pay all expenses in connection with any of these registrations
other than underwriting discounts and commissions. All registration rights will
terminate three years after the date of this offering or, with respect to each
holder of Globe-1 registrable securities, at the time as the holder is entitled
to sell all of its shares in any three-month period under Rule 144 of the
Securities Act.
In connection with Onvia's acquisition of Hardware.com in September 2000,
Onvia granted the holders of 149,250 shares of Onvia's common stock issued in
that acquisition certain rights with respect to registration of these shares
under the Securities Act. These shares are referred to as the "Hardware.com
registrable securities." These rights are provided under the terms of an
agreement between Onvia and the holders of these securities. Under these
registration rights, beginning on September 15, 2001, holders of Hardware.com
registrable securities may require by a written request that Onvia register
their shares for public resale. In the event Onvia elects to register any of
its shares of common stock in a public offering prior to September 2001, the
holders of Hardware.com registrable securities are entitled to include their
shares of common stock in the registration, subject to the right of the
underwriters of the offering to reduce the number of shares proposed to be
registered in view of market conditions. Onvia is required to pay all expenses
in connection with any of these registrations other than underwriting discounts
and commissions. All registration rights will terminate September 2003 or, with
respect to each holder of Hardware.com registrable securities, at the time as
the holder is entitled to sell all of its shares in any three-month period
under Rule 144 of the Securities Act.
Anti-takeover provisions
Onvia is subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an
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"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless, with some exceptions, the
business combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale or other
transaction resulting in a financial benefit to the stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's outstanding voting stock. This provision may have the effect of
delaying, deferring or preventing a change in control of Onvia without further
action by the stockholders.
In addition, Onvia is subject to Washington laws that could have the effect
of delaying, deferring or preventing the change of control of Onvia. Chapter
23B. 19 of the Washington Business Corporation Act prohibits, with some
exceptions, a 10% or greater stockholder from engaging in any of the following
transactions, among others, without approval of our board of directors for five
years after date on which the individual or entity became a 10% stockholder:
. a merger or consolidation with Onvia;
. the sale or lease of Onvia's assets to the 10% stockholder with a value
greater than the fair market value of 5% of Onvia's total assets or 5%
of Onvia's total outstanding capital stock; and
. the receipt by the 10% stockholder of a disproportionate benefit as a
stockholder.
After the five-year period, the transactions above may take place as long as
they comply with fair price provisions of Washington law. Chapter 23B. 19 will
apply to Onvia for so long as Onvia maintains its principal offices in
Washington, it is a reporting company under the Securities Exchange Act of 1934
and specified percentages or numbers of its employees, stockholders and assets
are located in Washington. Onvia is not able to opt out of this statute.
Onvia has in place the following provisions which may have the effect of
delaying or preventing changes in control of Onvia:
. Onvia has a classified board of directors where only approximately one-
third of its directors will be up for election by the stockholders each
year;
. Onvia has provisions in its charter documents that limits the ability of
its stockholders to call meetings of the stockholders;
. Onvia eliminated the ability of its stockholders to take action by
written consent; and
. Onvia authorized 15,000,000 shares of preferred stock that, without
further vote or action by the stockholders, may be issued by the board
of directors to impede the success of any attempt to change control of
Onvia.
Onvia's stock option plan, employee stock purchase plan and directors' stock
option plan generally provide for assumption of these plans or substitution of
an equivalent option of a successor corporation or, alternatively, at the
discretion of the Board of Directors, exercise of some or all of the options
stock, including non-vested shares, or acceleration of vesting of shares issued
pursuant to stock grants, upon a change of control or similar event.
Listing
Onvia's common stock is listed on the Nasdaq National Market under the
symbol "ONVI."
Transfer agent and registrar
The transfer agent and registrar for Onvia common stock is U.S. Stock
Transfer Corporation.
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COMPARISON OF RIGHTS BETWEEN DEMANDSTAR
SHAREHOLDERS AND STOCKHOLDERS OF ONVIA
This section of the proxy statement/prospectus describes the material
differences between the rights of Onvia's stockholders and DemandStar's
shareholders. This section includes a brief description of the material rights
that the DemandStar shareholders are expected to have upon completion of the
merger, although in some cases the Onvia board of directors retains the right
and discretion to modify or alter such rights without the stockholder's
consent. This section does not include a complete description of all
differences among the rights of these stockholders, nor does it include a
complete description of specific rights of the stockholders. In addition, the
identification of some of the differences in the rights of these shareholders
as material is not intended to indicate that other differences that are equally
important do not exist. All DemandStar shareholders are urged to read carefully
the relevant provisions of Florida law as well as the articles of
incorporation, as amended, by-laws and other governing documents of Onvia and
DemandStar which are either attached to the registration statement filed with
the SEC and of which this proxy statement/prospectus is a part, or which can be
delivered to you upon request.
Cumulative voting
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number
of directors to be elected. A stockholder may then cast all such votes for a
single candidate or may allocate them among as many candidates as the
stockholder may choose (up to the number of directors to be elected). Without
cumulative voting, the holders of a majority of the shares present at an annual
meeting or any special meeting held to elect directors would have the power to
elect all the directors to be elected at that meeting, and no person could be
elected without the support of holders of a majority of the shares voting at
such meeting.
Under Delaware law, cumulative voting in the election of directors is not
mandatory. Onvia's certificate of incorporation does not allow cumulative
voting. Under Florida law, cumulative voting in the election of directors is
not mandatory. DemandStar's articles of incorporation do not provide for
cumulative voting.
Shareholder power to call special shareholders meeting
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or any other person authorized to do so in the corporation's
certificate of incorporation or bylaws. Onvia's bylaws provide that only the
chairman of the board of directors, the president, or the board of directors
may call special meetings of the stockholders.
Under Florida law, a special meeting of shareholders may be called by its
board of directors, by the persons authorized to do so in its articles of
incorporation or bylaws or by the holders of not less than 10% of all votes
entitled to be cast on any issue proposed to be considered at the special
meeting, unless a greater percentage, not to exceed 50%, is required by the
articles of incorporation. DemandStar's articles provide that a special meeting
of shareholders can be called only by the chairman of the board of directors, a
majority of the members of the board of directors, or the holders of not less
than 50% of all votes entitled to be cast on any issue proposed to be
considered at such meeting. So long as H.T.E. continues to hold 50% or more of
the voting power of all classes of outstanding capital stock of DemandStar, a
special meeting of shareholders may be called by H.T.E., the chairman of the
board, the chief executive officer, the president or a majority of the members
of the board.
Power to call special meeting of directors
Onvia's bylaws provide that the chairman of the board of directors, the
president, any vice president, the secretary or any two directors may call a
special meeting of the board of directors. The bylaws require that
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notice of the time, date and place of the meeting be given at least four days
before the meeting if the notice is mailed, or at least 48 hours before the
meeting if the notice is given personally or by telephone or telegram.
DemandStar's bylaws provide that special meetings of DemandStar's board of
directors may be called by DemandStar's chairman or the board of directors by
means of a prior adopted board resolution adopted by a majority of DemandStar's
directors.
Dissolution, liquidation, or winding up
Under Delaware law, a dissolution must be approved by stockholders holding
100% of the total voting power or the dissolution must be initiated by the
board of directors and approved by the holders of a majority of the outstanding
voting shares of the corporation.
Under Florida law, if dissolution is initiated by the board of directors, it
must be approved by the holders of a majority of the outstanding voting shares
of a corporation. For a dissolution that is not initiated by the board of
directors, action to dissolve the corporation may be taken by written consent
of by the holders of not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Neither DemandStar's articles
of incorporation nor its bylaws alter such provisions, however, DemandStar's
articles of incorporation provide a preference with respect to the distribution
of assets, after payment to DemandStar's creditors, to holders of its Series A
and Series C preferred stock.
Size of board of directors
Delaware law permits the board of directors of a Delaware corporation to
change the authorized number of directors by amendment to the corporation's
bylaws or in the manner provided in the bylaws unless the number of directors
is fixed in the corporation's certificate of incorporation, in which case a
change in the number of directors may be made only by amendment to the
certificate of incorporation.
Onvia bylaws provide that the board of directors will consist of seven
directors until changed by amendment to the bylaws adopted by the board of
directors or the stockholders.
Under Florida law, the number of directors on a board of directors shall be
specified in or fixed in accordance with the articles of incorporation or the
bylaws. DemandStar's articles of incorporation provide that DemandStar shall
have at least three but not more than nine directors; the exact number of
directors is to be fixed or changed by DemandStar's board of directors. In
addition, DemandStar's bylaws require that at least one director be a resident
of the State of Florida.
Classified board of directors
A classified board is one with respect to which a certain number of the
directors, but not necessarily all, are elected on a rotating basis each year.
Delaware law permits, but does not require, a Delaware corporation to provide
in its certificate of incorporation for a classified board of directors,
pursuant to which the directors can be divided into up to three classes of
directors with staggered terms of office, with only one class of directors to
be elected each year for a maximum term of three years.
Onvia's certificate of incorporation and bylaws currently provide for a
classified board of directors consisting of three classes of directors, each
serving staggered three-year terms. As a result, a portion of Onvia's board of
directors will be elected each year. Mr. Fox and Mr. Smith have been designated
Class I directors whose terms expire at the 2001 annual meeting of
stockholders. Mr. Pickett and Ms. Schoendorf have been designated Class II
directors whose terms expire at the 2002 annual meeting of stockholders. Mr.
Ballman, Mr. Ballowe and Mr. Ericson have been designated Class III directors
whose terms expire at the 2003 annual meeting of stockholders.
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Under Florida law, a corporation's articles of incorporation or bylaws may
provide that the board of directors be divided into not more than three
classes, four classes if the corporation was in existence before July 1, 1990,
of classified terms. DemandStar's articles of incorporation provide for a
classified board of directors consisting of three classes.
Removal of directors
Under Delaware law, any director or the entire board of directors of a
Delaware corporation with a classified board of directors may only be removed
with cause unless the certificate of incorporation provides otherwise. Onvia's
certificate of incorporation provides:
. Any director or the entire board of directors may be removed with cause
by the holders of a majority of the shares then entitled to vote at an
election of directors of Onvia; and
. Any director or the entire board of directors may be removed without
cause by the holders of two-thirds of the shares then entitled to vote
at an election of directors of Onvia.
Under Florida law, shareholders may remove one or more directors with or
without cause, unless the articles of incorporation provide that directors may
be removed only for cause. Under Florida law, a director generally may be
removed only if the number of votes cast to remove him exceed the number of
votes cast not to remove him. DemandStar's articles of incorporation requires a
vote of at least two-thirds of the voting power of all voting capital stock
voting together as a single class then entitled to vote at an election of
directors to remove a director from office.
Actions by written consent of shareholders
Under Delaware law, shareholders may execute an action by written consent in
lieu of a meeting of the shareholders, but only if such written consent is
signed by shareholders representing such number of voting shares outstanding as
would have been required to approve such action at an actual meeting of the
shareholders. Delaware law permits a corporation to eliminate such actions by
written consent in its certificate of incorporation. Onvia's certificate of
incorporation provides that has eliminated stockholders' right to act by
written consent.
Under Florida law, unless otherwise provided in the articles of
incorporation, actions which would be required or permitted to be taken at an
annual or special meeting of shareholders may be taken by the written consent
of the holders of shares constituting not less than the minimum number of
shares that would be necessary to take such action at a meeting of shareholders
at which all shares entitled to vote thereon were present and voted. Prior
notice is not required for such action. DemandStar's articles or incorporation
do not permit DemandStar's shareholders to take action without a meeting.
Advance notice requirement for shareholder proposals and director nominations
Onvia's bylaws require Onvia's bylaws require that timely notice in writing
be provided by stockholders seeking to nominate candidates for election to the
board of directors or propose other business at the annual meeting of
stockholders. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of Onvia not less than
90 days nor more than 120 days prior to the anniversary date of the prior
year's meeting; provided, however, that in the event that:
. the date of the annual meeting is more than 30 days prior to or more
than 60 days after such anniversary date; and
. less than 60 days notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to
be timely must be so received not later than the close of business on
the 10th day following the day on which the notice of the date of the
meeting was given to stockholders or the public.
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The notice shall include, as to each person whom the stockholder proposes to
nominate for election or re-election as a director:
. the name, age, business address and residence address of such person;
. the principal occupation or employment of such person;
. the class and number of shares of the Corporation which are beneficially
owned by such person; and
. any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is
otherwise required, under the Securities Exchange Act of 1934
(including, without limitation, such person's written consent to being
name in the proxy statement as a nominee and to serving as a director if
elected).
In the case of a notice of any other business that the stockholder proposes to
bring before the meeting, the notice shall include
. a brief description of such business;
. the reasons for conducting such business at the meeting; and
. any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made.
DemandStar's articles require that timely notice in writing be provided by
shareholders seeking to bring business before, or to nominate candidates for
election as directors at, the annual meeting of shareholders. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of DemandStar not less than 120 days nor more than
180 days prior to the first anniversary of the date of DemandStar's notice of
annual meeting provided with respect to the previous year's annual meeting of
shareholders. If no annual meeting of shareholders was held in the previous
year or the date of the annual meeting of shareholders has been changed to be
more than 30 days earlier than the date contemplated by the previous year's
notice of annual meeting, such notice by the shareholder must be delivered or
received not later than the close of business on the 5th day following the date
on which notice of the date of the annual meeting is given to shareholders or
made public, whichever first occurs. To be timely with respect to a special
meeting, a shareholder's notice must be delivered to or mailed and received at
DemandStar's principal office not later than the close of business on the fifth
day following the date on which notice of a special meeting is given to
shareholders or the public, whichever occurs first. DemandStar's articles also
specify requirements as to the form and content of a shareholder's notice.
These provisions may preclude shareholders from timely bringing matters before,
or from nominations for directors at, an annual meeting of shareholders.
Voting requirements
Unless otherwise specified in a Delaware corporation's certificate of
incorporation, an amendment to the certificate of incorporation requires the
affirmative vote of a majority of the outstanding stock entitled to vote
thereon. Furthermore, under Delaware law, the holders of the outstanding shares
of a class are entitled to vote as a class upon any proposed amendment to the
certificate of incorporation, whether or not entitled to vote thereon by the
provisions of the corporation's certificate of incorporation, if the amendment
would increase or decrease the aggregate number of authorized shares of such
class, increase or decrease the par value of the shares of such class, or alter
or change the powers, preferences or specific rights of the shares of such
class so as to adversely affect them. Onvia's certificate of incorporation does
not alter these voting requirements of Delaware law.
An amendment to a Florida corporation's articles of incorporation must be
approved by the corporation's shareholders, except that certain immaterial
amendments specified in Section 607.1002 may be made by the board of directors.
Unless a specific section of the Florida law, articles of incorporation or the
board of directors require a greater vote, an amendment to a Florida
corporation's articles of incorporation generally
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must be approved by a majority of the votes entitled to be cast on the
amendment. DemandStar's articles of incorporation provide that the affirmative
vote of the holders of at least 66 2/3% of its voting stock, voting together as
a single class, is required to amend provisions of the articles of
incorporation relating to shareholder action without a meeting; the calling of
special meetings; the number, election and term of DemandStar directors; the
filling of vacancies; and the removal of directors. In addition, the articles
cannot be amended in any manner that would adversely affect the powers,
preferences or special rights of the holders of Series A or Series C preferred
stock without the approval of at least 66 2/3% of such preferred shareholders
voting within their respective classes.
Under Delaware law, with certain exceptions, any merger, consolidation or
sale of all or substantially all of a corporation's assets must be approved by
the corporation's board of directors and a majority of the outstanding shares
entitled to vote. Onvia's certificate of incorporation does not alter these
voting requirements of Delaware law.
With respect to plans of merger, Florida law requires approval by the
holders of a majority of the shares entitled to vote on such action. Under the
Florida law, abstentions have no impact on the outcome of a vote. DemandStar's
articles of incorporation and bylaws require that a plan of merger be approved
by
. a majority of the outstanding shares of DemandStar's common stock,
voting separately as a class;
. a majority of the outstanding shares of DemandStar's Series A preferred
stock, voting separately as a class; and
. a majority of the outstanding shares of DemandStar's common stock and
Series A preferred, voting together as a class.
Under Delaware law, directors are generally elected by a plurality of the
votes cast by the shareholders entitled to vote at a shareholders' meeting at
which a quorum is present either in person or by proxy, unless a greater number
of affirmative votes is required by the certificate of incorporation. Onvia's
certificate of incorporation does not alter these voting requirements.
Under Florida law, directors are generally elected by a plurality of the
votes cast by the shareholders entitled to vote at a shareholders' meeting at
which a quorum is present either in person or by proxy, unless a greater number
of affirmative votes is required by the articles of incorporation. DemandStar's
articles of incorporation provide that directors are to be elected by a
plurality of the votes cast by DemandStar's shareholders entitled to vote at a
shareholders' meeting at which a quorum is present either in person or by
proxy.
Rights of dissenting shareholders
Generally, shareholders of a Delaware corporation who dissent from a merger
or consolidation of the corporation for which a stockholders' vote is required
are entitled to appraisal rights, requiring the surviving corporation to
purchase the dissenting shares at fair value. There are, however, generally no
statutory rights of appraisal with respect to shareholders of a Delaware
corporation whose shares of stock are either:
. listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc.; or
. held of record by more than 2,000 shareholders where such shareholders
receive only shares of stock of the corporation surviving or resulting
from the merger or consolidation (or cash in lieu of fractional
interests therein).
Generally, shareholders of a Florida corporation who dissent from a merger
or consolidation of the corporation are entitled to appraisal rights.
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Inspection of shareholders list
Delaware law allows any stockholder to inspect the stockholders' list for a
purpose reasonably related to such person's interest as a stockholder. Under
Florida law, any shareholder can inspect the shareholders' list for any proper
purpose reasonably related to such shareholder's interest.
Dividends
Subject to any restrictions contained in a corporation's certificate of
incorporation, Delaware law generally provides that a corporation may declare
and pay dividends out of surplus (defined as net assets minus stated capital)
or, when no surplus exists, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year. Dividends may not be
paid out of net profits if the capital of the corporation is less than the
amount of capital represented by the issued and outstanding stock of all
classes having a preference upon the distribution of assets. Onvia's
certificate of incorporation contains no restrictions on the declaration or
payment of dividends.
Under the Florida law, a corporation may make distributions to shareholders
as long as, after giving effect to such distribution, the corporation would be
able to pay its debts as they become due in the usual course of business and,
subject to the articles of incorporation, the corporation's total assets would
not be less than the sum of its total liabilities plus the amount that would be
needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. Under Florida law, a corporation's redemption of its own capital
stock is deemed to be a distribution. DemandStar's articles of incorporation
and bylaws provide that dividends may be declared by the board of directors
except when it is insolvent or when payment of the dividends would render it
insolvent.
Bylaws
Under Delaware law, the authority to adopt, amend, or repeal the bylaws of a
Delaware corporation is held exclusively by the stockholders unless such
authority is conferred upon the board of directors in the corporation's
certificate of incorporation. Onvia's certificate of incorporation provides
that the board of directors may adopt, amend or repeal the bylaws.
Under the Florida law, a corporation's board of directors may amend or
repeal the corporation's bylaws unless the articles of incorporation or another
section of the Florida law reserves the power to amend the bylaws exclusively
to the shareholders, or the shareholders, in amending or repealing the bylaws
provide expressly that the board of directors may not amend or repeal the
bylaws or a specific bylaw provision. Also, under the Florida law, a
corporation's shareholders may amend or repeal the corporation's bylaws even
though the bylaws may also be amended or repealed by its board of directors.
DemandStar's articles provide that the by-laws, including the shareholder
notice procedure, may be amended only by the DemandStar board or by the
affirmative vote of the holders of at least 66 2/3% of the voting power of the
outstanding shares of voting stock, voting together as a single class.
Preemptive rights
Stockholders of a Delaware corporation have only such preemptive rights as
may be provided in its certificate of incorporation. Onvia's certificate of
incorporation does not provide for preemptive rights.
Under Florida law, shareholders have only such preemptive rights as may be
provided in the articles of incorporation. DemandStar's articles of
incorporation do not provide for preemptive rights.
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Transactions involving officers or directors
A Delaware corporation may lend money to, or guarantee any obligation
incurred by, its officers or directors if, in the judgment of the board of
directors, such loan or guarantee may reasonably be expected to benefit the
corporation. With respect to any other contract or transaction between the
corporation and one or more of its directors or officers, such transactions are
neither void nor voidable if either:
. the director's or officer's interest is made known to the disinterested
directors or the stockholders of the corporation, who thereafter approve
the transaction in good faith, or
. the contract or transaction is fair to the corporation as of the time it
is approved or ratified by either the board of directors, a committee
thereof, or the stockholders.
Under Florida law, a corporation can engage in the same transactions with
directors under the same circumstances as provided under the Delaware law.
Filling vacancies on the board of directors
Under Delaware law, vacancies on the board of directors and newly created
directorships may be filled by a majority of the directors then in office (even
though less than a quorum) unless
. otherwise provided in the certificate of incorporation or bylaws of the
corporation; or
. the certificate of incorporation directs that a particular class is to
elect such director, in which case any other directors elected by such
class, or a sole remaining director, shall fill such vacancy.
Onvia's certificate of incorporation provides that vacancies resulting from
death arising from death, resignation, disqualification, removal or other
causes shall be filled by the affirmative vote of either:
. The holders of a majority of the voting power of the then-outstanding
shares of voting stock of Onvia entitled to vote generally in the
election of directors voting together as a single class; or
. a majority of the remaining directors then in office (even though less
than a quorum).
Florida law provides that a vacancy on the board of directors and newly
created directorships shall be filled by the affirmative vote of a majority of
the remaining directors, or by the shareholders, unless the articles of
incorporation provide otherwise. DemandStar's bylaws provide that only the
remaining board of directors can fill vacancies and newly created
directorships.
Limitation of liability of directors
Under Delaware law, a corporation may include in its certificate of
incorporation a provision which would, subject to the limitations described
below, eliminate or limit directors' liability for monetary damages for
breaches of their fiduciary duty of care. Under Delaware law, a director's
liability cannot be eliminated or limited:
. for breaches of the duty of loyalty;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for the payment of unlawful dividends or expenditure of funds for
unlawful stock purchases or redemptions; or
. for transactions from which such director derived an improper personal
benefit.
Onvia's certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Onvia's bylaws provide that Onvia
shall indemnify its directors and permit Onvia to obtain
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insurance on behalf of any director for any liability arising out of his or her
actions in his or her capacity, regardless of whether the bylaws would permit
indemnification.
Under Florida law, a director is not personally liable for monetary damages
to the corporation or any other person for any act or omission as a director,
unless the director breached or failed to perform his statutory duties as a
director and such breach or failure:
. constitutes a violation of criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful;
. constitutes a transaction from which the director derived an improper
personal benefit;
. results in an unlawful distribution pursuant to Section 607.0834;
. in a derivative action or an action by a shareholder, constitutes a
conscious disregard for the best interests of the corporation or willful
misconduct; or
. in a proceeding other than a derivative action or an action by a
shareholder, constitutes recklessness or an act or omission which was
committed in bad faith or with a malicious purpose or in a manner
exhibiting wanton and willful disregard of human rights, safety or
property.
DemandStar's articles of incorporation and bylaws limit director liability to
the fullest extent permitted by law.
Interested stockholder transactions
A provision of Delaware law prohibits certain transactions between a
Delaware corporation and an "interested stockholder." An "interested
stockholder" for purposes of this Delaware law provision is a stockholder that
is directly or indirectly a beneficial owner of 15% or more of the voting power
of the outstanding voting stock of a Delaware corporation or its affiliate or
associate. This provision prohibits certain business combinations between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder acquired its stock unless:
. the business combination is approved by the corporation's board of
directors prior to the stock acquisition date;
. the interested stockholder acquired at least 85% of the voting stock of
the corporation in the transaction in which such stockholder became an
interested stockholder; or
. the business combination is approved by a majority of the board of
directors and the affirmative vote of two-thirds of disinterested
stockholders.
In addition, since Onvia is based in Seattle, Washington, Onvia is subject
to Washington laws that could have the effect of delaying, deferring or
preventing the change of control of Onvia. Chapter 23B.19 of the Washington
Business Corporation Act prohibits, with some exceptions, a 10% or greater
stockholder from engaging in any of the following transactions, among others,
without approval of our board of directors for five years after the date on
which the individual or entity became a 10% stockholder:
. a merger or consolidation with Onvia;
. the sale or lease of Onvia's assets to the 10% stockholder with a value
greater than the fair market value of 5% of Onvia's total assets or 5%
of Onvia's total outstanding capital stock; and
. the receipt by the 10% stockholder of a disproportionate benefit as a
stockholder.
After five-year period, the transactions above may take place as long as they
comply with fair price provisions of Washington law.
Florida law contains an "affiliated transactions" statute which provides
that certain transactions involving a corporation and a shareholder owning 10%
or more of the corporation's outstanding voting shares, an
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"interested shareholder", must generally be approved by the affirmative vote of
the holders of 66 2/3% of the disinterested shareholders. The transactions
covered by the statute include, with certain exceptions, mergers and
consolidations to which the corporation and the interested shareholder are
parties. Under the Florida law, a 66 2/3% vote is not required in any of the
following circumstances:
. the transaction was approved by a majority of the corporation's
disinterested directors;
. the corporation did not have more than 300 shareholders of record at any
time during the preceding three years;
. the interested shareholder has been the beneficial owner of at least 80%
of the corporation's outstanding voting shares for the past five years;
. the interested shareholder is the beneficial owner of at least 90% of
the corporation's outstanding voting shares, exclusive of those acquired
in a transaction not approved by a majority of disinterested directors;
and
. the consideration received by each shareholder in connection with the
transaction satisfies the "fair price" provisions of the statute.
This statute applies to any Florida corporation unless the original articles of
incorporation or an amendment to the articles of incorporation or bylaws
contain a provision expressly electing not to be governed by this statute, or
an amendment to the articles of incorporation expressly electing not to be
governed by the "affiliated transactions" statute or bylaws is approved by the
affirmative vote of a majority of disinterested shareholders, but is not
effective until 18 months after approval. Neither DemandStar's articles of
incorporation nor its bylaws contain such a provision.
Control share acquisitions
Florida law contains a "control share acquisition" statute which provides
that a person who acquires shares in an issuing public corporation in excess of
certain specified thresholds, pursuant to Section 607.0902, will generally not
have any voting rights with respect to such shares, unless the voting rights
are approved by a majority of the disinterested shareholders. This statute does
not apply to acquisitions of shares of a corporation if, prior to the pertinent
acquisition of shares, the corporation's articles of incorporation or bylaws
provide that the corporation shall not be governed by the statute. Under the
Florida law, a corporation is permitted to adopt a provision in its articles of
incorporation or bylaws providing for the redemption by the corporation of such
acquired shares in certain circumstances. Unless otherwise provided in the
corporation's articles of incorporation or bylaws prior to the pertinent
acquisition of shares, and in the event that such shares are accorded full
voting rights by the shareholders of the corporation and the acquiring
shareholder acquires a majority of the voting power of the corporation, all
shareholders who did not vote in favor of according voting rights to such
acquired shares are entitled to dissenters' rights to receive fair value of
their shares. For a more detailed description of dissenters' rights, see
"Dissenters' Rights of DemandStar Shareholders."
Delaware does not have any provision comparable to Florida's control share
acquisition statute.
Shareholder derivative suits
Under Delaware law, a stockholder may only bring a derivative action on
behalf of the corporation if the stockholder was a stockholder of the
corporation at the time of the transaction in question or his or her stock
thereafter devolved upon him or her by operation of law.
Under Florida law, a person may not bring a derivative action unless the
person was a shareholder of the corporation at the time the challenged
transaction occurred or unless the person acquired the shares by operation of
law from a person who was a shareholder at such time. Florida law also provides
that a shareholder must allege and verify in a complaint that a demand was made
to the board of directors to obtain
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court action and that the demand was refused or ignored. Under Florida law, a
derivative proceeding may be settled or discontinued only with court approval,
and the court may dismiss a derivative proceeding if the court finds that a
determination has been made in good faith that the maintenance of the action is
not in the best interests of the corporation. Florida law further provides that
if an action was brought without reasonable cause the court may require the
plaintiff to pay the corporation's reasonable expenses, including reasonable
attorney's fees, incurred in defending the proceeding.
Preferred stock
Onvia's certificate of incorporation and DemandStar's articles of
incorporation authorize their respective boards of directors to issue shares of
preferred stock in one or more series and to fix the designations, preferences,
powers and rights of the shares to be included in each series. Onvia's
certificate of incorporation authorizes the issuance of 15,000,000 shares of
preferred stock. DemandStar's articles of incorporation authorize the issuance
of 10,000,000 shares of preferred stock.
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DISSENTERS' RIGHTS OF DEMANDSTAR SHAREHOLDERS
Dissenters' rights of appraisal
Under Sections 607.1301 through 607.1320 of the Florida Business Corporation
Act, or the FBCA, any holder of DemandStar's common stock who does not wish to
accept the merger consideration may dissent from the merger and elect to have
the fair value of such shareholder's shares of common stock,exclusive of any
element of value arising from the accomplishment or expectation of the merger,
judicially determined and paid to such shareholder in cash, together with a
fair rate of interest, if any, provided that such shareholder complies with the
provisions of Sections 607.1301 through 607.1320.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the FBCA, and is qualified in its entirety by the
full text of sections 607.1302 through 607.1320, a copy of which is attached
hereto as Appendix D. This discussion and sections 607.1302 through 607.1320 of
the FBCA should be reviewed carefully by any holder who wishes to exercise
statutory dissenters' rights or wishes to preserve the right to do so, since
failure to comply with the required procedures will result in the loss of such
rights.
Only a holder of record of shares of common stock issued and outstanding
immediately prior to the effective time of the merger is entitled to assert
appraisal rights for the shares of common stock registered in that holder's
name. A demand for appraisal should be executed by or on behalf of the
shareholder of record, fully and correctly, as such shareholder's name appears
on such stock certificates, should specify the shareholder's name and mailing
address, the number of shares of common stock owned and that such shareholder
intends thereby to demand appraisal of such shareholder's common stock. If the
shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that capacity.
If the shares are owned of record by more than one person as in a joint tenancy
or tenancy in common, the demand should be executed by or on behalf of all
owners. An authorized agent, including one or more joint owners, may execute a
demand for appraisal on behalf of a shareholder; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is acting as agent for such owner or owners.
A record holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the shares held
for one or more beneficial owners while not exercising such rights with respect
to the shares held for one or more beneficial owners; in such case, the written
demand should set forth the number of shares as to which appraisal is sought,
and where no number of shares is expressly mentioned the demand will be
presumed to cover all shares held in the name of the record owner. Shareholders
who hold their shares in brokerage accounts or other nominee forms and who wish
to exercise appraisal rights are urged to consult with their brokers to
determine the appropriate procedures for the making of a demand for appraisal
by such nominee. A person having a beneficial interest in shares of common
stock held of record in the name of another person, such as a broker or
nominee, must act promptly to cause the record holder to follow properly the
steps summarized below and in timely manner to perfect appraisal rights.
The shares of common stock with respect to which dissenting shareholders
exercise their dissenters' rights are referred to in this section as
"dissenting shares." Shares of DemandStar's common stock must satisfy each of
the following requirements to qualify as dissenting shares under the FBCA:
. the shares of common stock must have been outstanding on the record
date;
. the shares of common stock must not have been voted in favor of the
merger;
. the holder of such shares of common stock must make a written demand
that DemandStar repurchase such shares of common stock at fair value,
determined as of the close of business on the day prior to the
Shareholders' Authorization Date, as defined below, excluding any
appreciation or depreciation as a consequence of the proposed merger;
and
140
<PAGE>
. the holder of such shares of common stock must deposit certificates for
the certificated shares with DemandStar. Neither a vote by proxy or in
person against the merger nor an abstention constitutes a demand for or a
waiver of dissenters' rights under the FBCA.
Before the "Shareholders' Authorization Date," which is defined in Section
607.1301(3) as the date on which the shareholders' vote authorizing the merger
was taken, DemandStar must send to each shareholder a copy of Sections 607.1301
through 607.1320 of the FBCA. Shareholders who want to assert their dissenters'
rights must deliver notice of intent to demand payment to DemandStar before the
Shareholders' Authorization Date, and must not vote their shares in favor of
the merger.
Within 10 days following the Shareholders' Authorization Date, DemandStar
must mail to each of its shareholders who filed a notice to demand payment, a
written notice of the shareholders' approval of the merger. Within 20 days
after the date DemandStar sends notice of the merger approval, holders of
dissenting shares must file a written notice of their election to dissent and a
demand for payment of the fair value of their dissenting shares, and must
simultaneously deposit the certificates for these shares with DemandStar.
Shareholders who fail to file an election to dissent within the 20 day period
are bound by the terms of the merger.
Within 10 days after the expiration of the 20 day period, or within 10 days
after the merger is effectuated, whichever is later, but in no case later than
90 days after the Shareholders' Authorization Date, DemandStar must make a
written offer to holders of dissenting shares to pay fair value for each of the
dissenting shares, accompanied by a balance sheet and a profit and loss
statement. If the holders of dissenting shares accept DemandStar's offer within
30 days of the offer, payment of the agreed upon value shall be made within
90 days of DemandStar's offer or the consummation of the merger, whichever is
later. Upon payment of the agreed upon value, the holders of dissenting shares
shall cease to have any interest in the dissenting shares. The dissenting
shares may then be held by DemandStar as authorized but unissued shares, or may
be disposed of pursuant to the merger agreement.
However, if DemandStar fails to offer to pay fair value to a holder of
dissenting shares within the period specified above, or if it makes an offer
that any Dissenting Shareholder fails to accept within 30 days after the offer
is made, DemandStar:
. must, within 30 days after receipt of written demand for court action
from any holder of dissenting shares, provided such demand is given
within 60 days after the date on which the merger was effectuated; or
. may, if no written demand for court action is received by DemandStar
from a holder of dissenting shares within 60 days after the date on
which the merger is effectuated, file an action requesting that a
Circuit Court, for Broward County, Florida, determine the fair value of
the dissenting shares. If DemandStar fails to institute court action, a
holder of dissenting shares may do so in the name of DemandStar, and all
holders of dissenting shares who have not agreed upon fair value must be
made parties.
Within 10 days of a judicial determination of fair value, DemandStar must
pay each holder of dissenting shares the fair value as determined by the court.
Costs and expenses of a judicial determination of fair value are determined by
the court and shall be assessed against the corporation, but all or any part of
such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the holders of dissenting shares who are
parties to the proceeding, to whom DemandStar has made an offer to pay for the
dissenting shares, if the court finds the actions of such holders of dissenting
shares in failing to accept such offer arbitrary, vexatious or not in good
faith.
The merger agreement entitles all holders of dissenting shares to all rights
afforded to them under Florida law which are described above. If, however, a
holder of dissenting shares effectively withdraws its dissent or fails to
comply with the procedure to effectuate its consent, then such holder of
dissenting shares of DemandStar stock shall automatically convert into Onvia
stock as provided in the merger agreement and detailed elsewhere in this proxy
statement/prospectus.
141
<PAGE>
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be included in the proxy statement for the
next annual meeting of stockholders of Onvia should be sent to the Secretary of
Onvia at 1260 Mercer Street, Seattle, Washington 98109. Onvia's bylaws require
that timely notice in writing be provided by stockholders seeking to nominate
candidates for election to the board of directors or propose other business at
the annual meeting of stockholders. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of
Onvia not less than 90 days nor more than 120 days prior to the anniversary
date of the prior year's meeting; provided, however, that in the event that
. the date of the annual meeting is more than 30 days prior to or more than
60 days after such anniversary date, and
. less than 60 days notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the
10th day following the day on which the notice of the date of the meeting
was given to stockholders or the public.
A copy of Onvia's current bylaws may be obtained from the Secretary of Onvia.
If the merger is not consummated, proposals of DemandStar shareholders to be
presented at DemandStar's next annual meeting of shareholders must be received
by DemandStar at its principal executive offices not later than the close of
business on the fifth day following the date on which notice of the annual
meeting was given to shareholders or made public, whichever occurs first.
142
<PAGE>
LEGAL MATTERS
Certain tax consequences of the merger have been passed upon for Onvia by
Venture Law Group, A Professional Corporation and for DemandStar by Greenberg
Traurig, P.A.
EXPERTS
The consolidated financial statements of Onvia and subsidiaries as of
December 31, 1998 and 1999 and for the period from March 25, 1997 (inception)
through December 31, 1997, and for the years ended December 31, 1998 and 1999
and the financial statements of Globe-1, Incorporated as of and for the year
ended December 31, 1999 included in this proxy statement/prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Zanova, Inc. as of December 31, 1999 and for the
year ended December 31, 1999 included in this proxy statement/prospectus have
been audited by Ernst & Young LLP, independent auditors, as stated in their
reports appearing herein and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
The DemandStar.com, Inc. financial statements and schedules included in this
proxy statement/prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent certified public accountants,
as indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
Reference is made to said report, which includes an explanatory paragraph with
respect to the uncertainty regarding DemandStar's ability to continue as a
going concern as discussed in Note 1 to the financial statements.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This proxy statement/prospectus contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to expectations
concerning matters that are not historical facts. Words such as "projects,"
"believes," "anticipates," "plans," "expects," "intends," and similar words and
expressions are intended to identify forward-looking statements. Although each
of Onvia and DemandStar believes that such forward-looking statements are
reasonable, neither can assure you that such expectations will prove to be
correct. Important language regarding factors that could cause actual results
to differ materially from such expectations are disclosed herein including,
without limitation, in the "Risk Factors" beginning on page 12. All forward-
looking statements attributable to Onvia or DemandStar are expressly qualified
in their entirety by such language. Neither Onvia nor DemandStar undertakes any
obligation to update any forward-looking statements.
143
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Onvia has filed a registration statement under the Securities Act with the
Securities and Exchange Commission with respect to Onvia common stock to be
issued to stockholders of DemandStar in the merger. This proxy
statement/prospectus is a part of that registration statement and constitutes a
prospectus of Onvia in addition to a proxy statement of DemandStar for its
special shareholders' meeting. This proxy statement/prospectus does not contain
all the information set forth in the registration statement because some parts
of the registration statement are omitted as allowed under the rules and
regulations of the Securities and Exchange Commission. Shareholders may inspect
and copy the registration statement at the public reference facilities
maintained by the Commission listed below.
Onvia and DemandStar file annual, quarterly and special reports, proxy
statements and other information with the Commission. Shareholders may read and
copy any reports, statements or other information the companies file, including
the registration statement, at the SEC's public reference rooms at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington D.C. 20549 Chicago, Illinois 60661
</TABLE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the Commission at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy statements and other
information regarding each company, including the registration statement. The
address of the SEC's website is http://www.sec.gov.
144
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Onvia financial statements
Independent Auditors' Report............................................. F-3
Consolidated Balance Sheets at December 31, 1998 and 1999................ F-4
Consolidated Statements of Operations for the period from March 25, 1997
(inception) through December 31, 1997 and for the years ended December
31, 1998 and 1999....................................................... F-5
Consolidated Statements of Changes in Stockholders' (Deficit) Equity for
the period from March 25, 1997 (inception) through December 31, 1997 and
for the years ended December 31, 1998 and 1999.......................... F-6
Consolidated Statements of Cash Flows for the period from March 25, 1997
(inception) through December 31, 1997 and for the years ended December
31, 1998 and 1999....................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Condensed Consolidated Balance Sheets at December 31, 1999 and September
30, 2000 (unaudited).................................................... F-25
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1999 and 2000 and for the nine months ended
September 30, 1999 and 2000 (unaudited)................................. F-26
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000 (unaudited)................................. F-27
Notes to Condensed Consolidated Financial Statements (unaudited)......... F-28
Globe-1 financial statements
Independent Auditors' Report............................................. F-34
Balance Sheets at December 31, 1999 (audited) and June 30, 2000
(unaudited)............................................................. F-35
Statements of Operations for the year ended December 31, 1999 (audited)
and the six months ended June 30, 1999 and 2000 (unaudited)............. F-36
Statements of Changes in Shareholders' Equity (Deficiency) for the year
ended December 31, 1999 (audited) and the six months ended June 30, 2000
(unaudited)............................................................. F-37
Statements of Cash Flows for the year ended December 31, 1999 (audited)
and the six months ended June 30, 1999 and 2000 (unaudited)............. F-38
Notes to Financial Statements............................................ F-39
Zanova financial statements
Report of Independent Auditors........................................... F-44
Balance Sheets at December 31, 1999 (audited) and June 30, 2000
(unaudited)............................................................. F-45
Statements of Operations for the year ended December 31, 1999 (audited)
and the six months ended June 30, 1999 and 2000 (unaudited)............. F-46
Statements of Changes in Stockholders' Equity for the year ended December
31, 1999 (audited) and for the six months ended June 30, 2000
(unaudited)............................................................. F-47
Statements of Cash Flows for the year ended December 31, 1999 (audited)
and the six months ended June 30, 1999 and 2000 (unaudited)............. F-48
Notes to Financial Statements............................................ F-49
DemandStar financial statements
Report of Independent Certified Public Accountants....................... F-55
Balance Sheets at December 31, 1998 and 1999............................. F-56
Statements of Operations for the years ended December 31, 1998 and 1999.. F-57
Statements of Shareholder's Deficit for the years ended December 31, 1998
and 1999................................................................ F-58
Statements of Cash Flows for the years ended December 31, 1998 and 1999.. F-59
Notes to Financial Statements............................................ F-60
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C>
Balance Sheets at December 31, 1999 and September 30, 2000
(unaudited)........................................................... F-69
Statements of Operations for the three and nine months ended September
30, 1999 and 2000 (unaudited)......................................... F-70
Statements of Cash Flows for the three and nine months ended September
30, 1999 and 2000 (unaudited)......................................... F-71
Notes to Financial Statements (unaudited).............................. F-72
Onvia unaudited pro forma financial information
Unaudited Pro Forma Statement of Operations for the nine months ended
September 30, 2000.................................................... F-75
Unaudited Pro Forma Statement of Operations for the year ended December
31, 1999.............................................................. F-76
Notes to Unaudited Pro Forma Financial Statements...................... F-77
DemandStar unaudited pro forma financial information
Introduction to Unaudited Pro Forma Combined Statement of Operations... F-78
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1999..................................................... F-79
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Onvia.com, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of Onvia.com,
Inc. and subsidiary (the Company) as of December 31, 1998 and 1999, and the
related consolidated statements of operations, changes in stockholders'
(deficit) equity, and cash flows for the period from March 25, 1997 (inception)
through December 31, 1997, and for the years ended December 31, 1998, and 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1999, and the results of their operations and their cash flows for the
period from March 25, 1997 (inception) through December 31, 1997, and for the
years ended December 31, 1998, and 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 4, 2000 (February 29, 2000, as to Note 13)
F-3
<PAGE>
ONVIA.COM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 44,659 $ 38,517,985
Accounts receivable.................................... 47,072 509,555
Inventory.............................................. 65,204 1,359,926
Prepaid expenses and other current assets.............. 2,212 1,064,097
Note receivable from related party..................... 350,000
--------- ------------
Total current assets................................ 159,147 41,801,563
Property and equipment, net.............................. 20,925 6,176,791
Other assets, net........................................ 2,300,478
--------- ------------
Total assets........................................ $ 180,072 $ 50,278,832
========= ============
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
------------------------------
Current liabilities:
Accounts payable....................................... $ 219,852 $ 6,719,074
Accrued expenses....................................... 365,820 6,633,430
Unearned revenue....................................... 42,425 659,665
Convertible notes...................................... 344,407
Current portion of long-term debt...................... 4,481,903
--------- ------------
Total current liabilities........................... 972,504 18,494,072
Long-term debt........................................... 5,171,417
--------- ------------
Total liabilities................................... 972,504 23,665,489
--------- ------------
Commitments and contingencies (Note 7)
Stockholders' (deficit) equity:
Convertible preferred stock; $.0001 par value:
Series A; 24,000,000 shares authorized; 20,219,496
shares issued and outstanding; ($11,819,991
liquidation preference).............................. 12,740,551
Series B; 16,000,000 shares authorized; 14,544,170
shares issued and outstanding; ($25,000,000
liquidation preference).............................. 24,969,851
Series C; 6,000,000 shares authorized; 3,379,402
shares issued and outstanding; ($23,165,801
liquidation preference).............................. 36,522,042
Common stock; $.0001 par value: 150,000,000 shares
authorized; 8,000,800 and 29,332,550 shares issued and
outstanding........................................... 800 2,933
Additional paid in capital............................. 9,270 24,904,116
Notes receivable from stockholders..................... (155,593)
Unearned stock compensation............................ (14,194,664)
Accumulated deficit.................................... (802,502) (58,175,893)
--------- ------------
Total stockholders' (deficit) equity................ (792,432) 26,613,343
--------- ------------
Total liabilities and stockholders' (deficit)
equity............................................. $ 180,072 $ 50,278,832
========= ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ONVIA.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from March 25, 1997 (inception) through December 31, 1997 and
Years Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
March 25, 1997
(inception) to Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Revenue............................. $ 62,174 $1,037,271 $ 27,177,082
Cost of goods sold.................. 46,894 1,082,448 31,574,214
--------- ---------- ------------
Gross margin........................ 15,280 (45,177) (4,397,132)
Operating expenses:
Sales and marketing............... 41,321 206,436 16,285,970
Technology and development........ 12,707 191,968 7,443,881
General and administrative........ 91,624 224,941 4,235,091
Noncash stock-based compensation.. 10,462,762
--------- ---------- ------------
Total operating expenses........ 145,652 623,345 38,427,704
--------- ---------- ------------
Loss from operations................ (130,372) (668,522) (42,824,836)
--------- ---------- ------------
Other income (expense):
Interest income................... 534,299
Interest expense.................. (3,608) (1,075,233)
--------- ---------- ------------
Net loss............................ (130,372) (672,130) (43,365,770)
Beneficial conversion feature on
convertible preferred stock........ (14,007,621)
--------- ---------- ------------
Net loss attributable to common
stockholders....................... $(130,372) $ (672,130) $(57,373,391)
========= ========== ============
Basic and diluted net loss per
common share....................... $ (0.02) $ (0.08) $ (4.59)
========= ========== ============
Pro forma net loss per common share
(unaudited)........................ $ (1.72)
============
Basic and diluted weighted average
shares outstanding................. 8,000,800 8,000,800 12,507,500
========= ========== ============
Pro forma weighted average shares
outstanding (unaudited)............ 33,420,375
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ONVIA.COM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
Period from March 25, 1997 (inception) through December 31, 1997 and
Years Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Additional
Series A preferred Series B preferred Series C preferred Onvia.com, Inc. paid in
stock stock stock common stock capital
---------------------- ---------------------- --------------------- ------------------ -----------
Shares Amount Shares Amount Shares Amount Shares Amount Amount
---------- ----------- ---------- ----------- --------- ----------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March
25, 1997
(inception)..... -- $ -- -- $ -- -- $ -- 8,000,000 $ 800 $ 9,200
Issuance of
common stock.... -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- --------- ----------- ---------- ------ -----------
BALANCE,
December 31,
1997............ -- -- -- -- -- -- 8,000,000 800 9,200
Exchange of
Onvia.com, Inc.
(Subsidiary)
common stock for
Onvia.com, Inc.
common stock.... -- -- -- -- -- -- 800 -- 70
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- --------- ----------- ---------- ------ -----------
BALANCE,
December 31,
1998............ -- -- -- -- -- -- 8,000,800 800 9,270
Cancellation of
inception
shares.......... -- -- -- -- -- -- (8,000,800) (800) 800
Issuance of
nonvested common
stock........... -- -- -- -- -- -- 24,104,360 2,410 2,015,159
Conversion of
notes payable
into Series A
preferred
stock........... 2,258,036 1,319,997 -- -- -- -- -- -- --
Issuance of
Series A
preferred stock,
net of offering
costs of
$232,580........ 17,961,460 10,267,411 -- -- -- -- -- -- --
Issuance of
Series B
preferred stock,
net of offering
costs of
$30,149......... -- -- 14,544,170 24,969,851 -- -- -- -- --
Issuance of
Series C
preferred stock,
net of offering
costs of
$651,380........ -- -- -- -- 3,379,402 22,514,421 -- -- --
Beneficial
conversion
feature related
to convertible
preferred
stock........... -- -- -- -- -- 14,007,621 -- -- --
Payment received
on subscription
receivable...... -- -- -- -- -- -- -- -- --
Issuance of
common stock
warrants........ -- -- -- -- -- -- -- -- 241,853
Issuance of
Series A
preferred
warrants........ -- 1,153,143 -- -- -- -- -- -- --
Exercise of
stock options
and warrants.... -- -- -- -- -- -- 5,428,190 543 725,732
Repurchase of
nonvested common
stock and
acceleration of
stock-based
compensation.... -- -- -- -- -- -- (200,000) (20) 905,020
Unearned
compensation
relating to
issuance of
stock options... -- -- -- -- -- -- -- -- 14,933,826
Change in
unearned
compensation for
non-employees... -- -- -- -- -- -- -- -- 6,072,456
Amortization of
unearned
compensation on
nonvested common
stock........... -- -- -- -- -- -- -- -- --
Amortization of
unearned
compensation on
stock options... -- -- -- -- -- -- -- -- --
Acceleration of
nonvested common
stock........... -- -- -- -- -- -- -- -- --
Acceleration on
stock options to
consultants..... -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- --------- ----------- ---------- ------ -----------
BALANCE,
December 31,
1999............ 20,219,496 $12,740,551 14,544,170 $24,969,851 3,379,402 $36,522,042 29,332,550 $2,933 $24,904,116
========== =========== ========== =========== ========= =========== ========== ====== ===========
<CAPTION>
Onvia.com,
Inc.
(Subsidiary) Notes
common stock receivable
------------- from Unearned Accumulated
Shares Amount stockholders compensation deficit Total
------ ------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March
25, 1997
(inception)..... -- $-- $ -- $ -- $ -- $ 10,000
Issuance of
common stock.... 800 70 -- -- -- 70
Net loss........ -- -- -- -- (130,372) (130,372)
------ ------ ------------ ------------- ------------- -------------
BALANCE,
December 31,
1997............ 800 70 -- -- (130,372) (120,302)
Exchange of
Onvia.com, Inc.
(Subsidiary)
common stock for
Onvia.com, Inc.
common stock.... (800) (70) -- -- -- --
Net loss........ -- -- -- -- (672,130) (672,130)
------ ------ ------------ ------------- ------------- -------------
BALANCE,
December 31,
1998............ -- -- -- -- (802,502) (792,432)
Cancellation of
inception
shares.......... -- -- -- -- -- --
Issuance of
nonvested common
stock........... -- -- -- (1,646,144) -- 371,425
Conversion of
notes payable
into Series A
preferred
stock........... -- -- -- -- -- 1,319,997
Issuance of
Series A
preferred stock,
net of offering
costs of
$232,580........ -- -- (15,593) -- -- 10,251,818
Issuance of
Series B
preferred stock,
net of offering
costs of
$30,149......... -- -- -- -- -- 24,969,851
Issuance of
Series C
preferred stock,
net of offering
costs of
$651,380........ -- -- -- -- -- 22,514,421
Beneficial
conversion
feature related
to convertible
preferred
stock........... -- -- -- -- (14,007,621) --
Payment received
on subscription
receivable...... -- -- 10,000 -- -- 10,000
Issuance of
common stock
warrants........ -- -- -- -- -- 241,853
Issuance of
Series A
preferred
warrants........ -- -- -- -- -- 1,153,143
Exercise of
stock options
and warrants.... -- -- (150,000) -- -- 576,275
Repurchase of
nonvested common
stock and
acceleration of
stock-based
compensation.... -- -- -- -- -- 905,000
Unearned
compensation
relating to
issuance of
stock options... -- -- -- (14,933,826) -- --
Change in
unearned
compensation for
non-employees... -- -- -- (6,072,456) -- --
Amortization of
unearned
compensation on
nonvested common
stock........... -- -- -- 654,689 -- 654,689
Amortization of
unearned
compensation on
stock options... -- -- -- 2,916,060 -- 2,916,060
Acceleration of
nonvested common
stock........... -- -- -- 1,503,136 -- 1,503,136
Acceleration on
stock options to
consultants..... -- -- -- 3,383,877 -- 3,383,877
Net loss........ -- -- -- -- (43,365,770) (43,365,770)
------ ------ ------------ ------------- ------------- -------------
BALANCE,
December 31,
1999............ -- $-- $(155,593) $(14,194,664) $(58,175,893) $ 26,613,343
====== ====== ============ ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ONVIA.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from March 25, 1997 (inception) through December 31, 1997 and
Years Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
March 25, 1997
(inception) to Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................... $(130,372) $(672,130) $(43,365,770)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization.... 10,000 2,158 1,154,388
Loss on disposal of assets....... 448,658
Noncash stock-based
compensation.................... 10,462,762
Amortization of debt discount.... 271,419
Noncash interest expense related
to issuance of common stock
warrants........................ 241,853
Change in certain assets and
liabilities:
Accounts receivable............ (48,268) (456,875)
Inventory...................... (2,873) (64,116) (1,289,496)
Prepaid expenses and other
current assets................ (3,631) 1,177 (1,008,782)
Other assets................... (2,299,748)
Accounts payable............... 9,130 216,784 6,471,237
Accrued expenses............... 121,871 246,798 5,360,331
Unearned revenue............... 2,148 41,644 613,557
--------- --------- ------------
Net cash provided (used) by
operating activities........ 6,273 (275,953) (23,396,466)
Cash flows from investing activities:
Additions to property and
equipment......................... (23,083) (6,495,931)
Cash flows from financing activities:
Proceeds from convertible debt..... 344,407 975,590
Proceeds from issuance of long-term
debt.............................. 9,939,177
Repayments on long-term debt....... (1,062,747)
Proceeds from issuance of nonvested
common stock...................... 70 162,828
Proceeds from exercise of stock
options and warrants.............. 576,275
Proceeds from issuance of Series A
preferred stock, net.............. 10,261,818
Proceeds from issuance of Series B
preferred stock, net.............. 24,969,851
Proceeds from issuance of Series C
preferred stock, net.............. 22,514,421
--------- --------- ------------
Net cash provided by
financing activities........ 70 344,407 68,337,213
Effect of exchange rate changes on
cash................................ (736) (6,319) 28,510
--------- --------- ------------
Net increase in cash and cash
equivalents......................... 5,607 39,052 38,473,326
Cash and cash equivalents, beginning
of year............................. 5,607 44,659
--------- --------- ------------
Cash and cash equivalents, end of
year................................ $ 5,607 $ 44,659 $ 38,517,985
========= ========= ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998 and Period From
March 25, 1997 (Inception) Through December 31, 1997
Note 1: Summary of Significant Accounting Policies
Description of business
Onvia.com, Inc., formerly known as MegaDepot.com, Inc., (the "Company") was
incorporated on March 25, 1997 as MegaDepot, Inc. in the State of Washington.
M-Depot Internet Superstore, Inc., a company owned by the majority stockholder
of the Company, was incorporated in British Columbia, Canada on June 6, 1997.
In June 1998, the Company moved its headquarters from Vancouver, B.C. to
Seattle, Washington. On December 28, 1998, MegaDepot, Inc. exchanged shares of
its common stock for all of the outstanding common stock of M-Depot Internet
Superstore, Inc. (the "Subsidiary"). In February 1999, the Company changed its
name from MegaDepot, Inc. to MegaDepot.com, Inc., and in May 1999, changed its
name from MegaDepot.com, Inc. to Onvia, Inc. In December 1999, the Subsidiary
changed its name to Onvia.com, Inc.
The Company is an online supplier of goods and services to the small
business market. Through its web site customers can order a wide variety of
products commonly used by small businesses, such as computer hardware and
software, office supplies, office machines, office furniture and phone systems.
In addition, customers can order a variety of services commonly used by small
businesses, such as long distance phone service, cellular phone service, credit
card processing and payroll service. The Company also provides an online
business exchange service which connects small business buyers and sellers.
Basis of consolidation
The financial statements include the accounts of the Company and its wholly
owned subsidiary. As the companies were under common control from inception of
the Company, the financial statements are presented on a consolidated or
combined basis for all periods presented. All significant intercompany accounts
and transactions have been eliminated.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, prepaid expenses, other assets, accounts payable, accrued
liabilities, convertible notes and long-term debt. Except for long-term debt
and convertible notes, the carrying amounts of financial instruments
approximate fair value due to their short maturities. The fair values of long-
term debt and convertible notes are not materially different from their
carrying amounts, based on interest rates available to the Company for similar
types of arrangements.
Significant vendors
Approximately 78% of inventory purchases were from one supplier for the year
ended December 31, 1999. Three suppliers comprised 41%, 29% and 25%,
respectively, of total inventory purchases for the year ended December 31,
1998. Two suppliers comprised 69% and 31%, respectively, of total inventory
purchases for the period from March 25, 1997 (inception) to December 31, 1997.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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
F-8
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Inventory represents
product shipped by the Company's suppliers, which has not been received by
customers. The Company does not stock its own inventory or maintain warehouse
locations, however, the Company does take ownership at the time of shipment
from the supplier until the product is received by the customer. In addition,
the Company assumes economic risk related to returned or damaged products.
Property and equipment
Equipment is stated at cost. Depreciation expense is recorded using the
straight-line method over estimated useful lives ranging from three to five
years. Leasehold improvements are depreciated over the lesser of the useful
lives or term of the lease.
Revenue recognition
Revenue from product sales is recognized upon receipt of product by the
customer. The Company acts as principal in those transactions, as orders are
initiated directly on the Company's web site, the Company takes title to the
goods during shipment, and has economic risk related to collection, customer
service and returns. Unearned revenue consists of payments received from
customers for product in transit to the customer. Revenue from exchange
services is recognized when the transaction occurs, ratably over the duration
of the placement, or over the term of the agreement, as applicable, and is
insignificant for all periods presented.
Income taxes
The Company accounts for income taxes using the asset and liability method
under which deferred tax assets, including the tax benefit from net operating
loss carryforwards and liabilities are determined based on temporary
differences between the book and tax bases of assets and liabilities. A
valuation allowance has been established for the full amount of the deferred
tax assets.
Valuation of long-lived assets
The Company periodically evaluates the carrying value of its long-lived
assets, including, but not limited to, property and equipment and other assets.
The carrying value of a long-lived asset is considered impaired when the
undiscounted net cash flow from such asset is estimated to be less than its
carrying value. Management does not believe that there were any long-lived
assets, which were subject to impairment at December 31, 1999.
Detachable stock purchase warrants
Proceeds from debt issued with detachable stock purchase warrants are
allocated between the debt and the warrants based on their relative fair
values. The value ascribed to the warrants is recorded as a debt discount and
amortized to interest expense over the term of the related debt using the
effective interest method.
F-9
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company's stock option plan is subject to the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under the provisions of this standard, employee and
director stock-based compensation expense is measured using either the
intrinsic-value method as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), or the fair value
method described in SFAS 123. Companies choosing the intrinsic-value method are
required to disclose the pro forma impact of the fair value method on net
income. The Company has elected to account for its employee and director stock-
based awards under the provisions of APB 25. Under APB 25, compensation cost
for stock options is measured as the excess, if any, of the fair value of the
underlying common stock on the date of grant over the exercise price of the
stock option. The Company is required to implement the provisions of SFAS 123
for stock-based awards to those other than employees and directors. Stock-based
compensation expense for all equity instruments is recognized on an accelerated
basis based on the related vesting periods.
Advertising costs and co-branding fees
The Company expenses advertising costs as incurred. Advertising expense,
excluding amounts for co-branding agreements, for the years ended December 31,
1999 and 1998 was $9,932,761 and $22,560, respectively. There was no
advertising expense for the period from March 25, 1997 (inception) to
December 31, 1997. Fees on co-branding agreements are recorded as services are
performed (see Note 7).
Comprehensive income
The Company has adopted the provisions of Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective
January 1, 1998. SFAS No. 130 requires the presentation of comprehensive income
and its components. Comprehensive income is the change in equity from
transactions and other events and circumstances other than those resulting from
investments by owners and distributions to owners. The only component of
comprehensive income for the Company is the foreign currency translation
adjustment. For the years ended December 31, 1999 and 1998, the foreign
currency translation adjustments were immaterial.
Foreign currency adjustment
The functional currency of the Subsidiary is the Canadian dollar. Realized
foreign currency transaction gains and losses are primarily related to the
purchase of products from U.S. suppliers and are included in cost of sales.
Assets and liabilities of the Subsidiary have been translated to U.S. dollars
at year-end exchange rates. Revenues and expenses have been translated at
average monthly exchange rates. During the years ended December 31, 1999 and
1998, foreign currency transaction losses were $0 and $82,426, respectively.
Commitments and contingencies
The Company is subject to various legal proceedings that arise in the
ordinary course of business. The Company provides for any anticipated losses at
the time an estimate can be made. While management believes that the
disposition of these matters will not have a material adverse effect on the
financial position, results of operations, or cash flows of the Company, the
ultimate outcome is inherently uncertain (see Note 13).
Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period, including
contingently issuable shares for which all necessary conditions
F-10
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
have been satisfied. Diluted net loss per share is computed by dividing net
loss by the weighted average number of common shares and dilutive potential
common shares outstanding during the period. For the years ended December 31,
1999 and 1998, 56,744,290 and 589,152 shares respectively, have been excluded
from the computation of diluted net loss per share as their effects would be
antidilutive. There were no dilutive common stock equivalents for the period
from March 25, 1997 (inception) through December 31, 1997.
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's convertible 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 on the date the shares were
originally issued (see Note 9).
Internally developed software
Effective for fiscal years beginning after December 15, 1998, the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. The Company adopted SOP 98-1 on
January 1, 1999 and capitalized $828,853 in internally developed software costs
during the year ended December 31, 1999. Capitalized software costs are
amortized on a straight-line basis over a useful life ranging from one to three
years. Amortization related to the capitalized software was $135,738 for the
year ended December 31, 1999.
Start-up costs
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities." This statement requires
companies to expense the costs of start-up activities and organization costs as
incurred. The Company adopted SOP 98-5 on January 1, 1999, and there was no
material impact on the accompanying financial statements.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133, which will be effective for the Company for the fiscal year and
quarters beginning after June 15, 2000, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not
expect the effect of adopting the provisions of SFAS No. 133 to have a
significant impact on the Company's financial position, results of operations
and cash flows.
Reclassifications
Certain reclassifications of balances have been made for consistent
presentation.
F-11
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2: Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Computer equipment................................ $17,921 $ 3,635,813
Software.......................................... 558 2,512,037
Furniture and fixtures............................ 4,604 797,013
Leasehold improvements............................ 373,961
------- -----------
23,083 7,318,824
Less: Accumulated depreciation.................... (2,158) (1,142,033)
------- -----------
$20,925 $ 6,176,791
======= ===========
</TABLE>
Note 3: Convertible Notes
During 1998, the Company issued convertible promissory notes in the amount
of $344,407, which accrued interest at 8% and matured one year from issuance.
In connection with these notes, the Company issued warrants to the noteholders
to purchase up to 833,352 shares of common stock at $0.0025 per share upon the
closing of the Company's Series A preferred financing on February 25, 1999.
Interest expense of $241,853 was recorded upon issuance of the warrants.
In February 1999, the Company issued additional convertible promissory notes
in the amount of $975,590 to new and existing noteholders. The notes bore
interest at 6% and matured one year from issuance.
On February 25, 1999, the outstanding principal on the convertible notes of
$1,319,997 was converted into 2,258,036 shares of the Company's Series A
preferred stock in conjunction with the Series A preferred financing described
in Note 9.
Note 4: Long-term Debt
In August 1999, the Company obtained financing for the purchase of software
and post-contract software support in the amount of $1,658,614. The debt bears
interest at 13.8% per annum and matures in September 2000. Payments of
$110,278, including principal and interest, are to be made monthly through
September 2000.
In August 1999, the Company also entered into a subordinated debt
arrangement with two lenders to provide financing in the amount of $7,000,000.
The obligation bears interest at a coupon interest rate of 13.2% with an
effective rate of 24.2% per annum and matures in February 2002. Monthly
principal payments of $259,259 are scheduled beginning December 1999 through
February 2002. The debt is collateralized by all assets of the Company. In
conjunction with the debt financing, the Company issued warrants to purchase
1,165,310 shares of Series A preferred stock at $0.90 per share. The exercise
price on these warrants may be reduced based upon certain future events. The
debt and warrants were recorded at their fair values of $5,905,770 and
$1,094,230, respectively.
In June 1999, the Company obtained an equipment loan financing in the
aggregate amount of up to $3,000,000 for the acquisition of capital equipment.
The Company received proceeds of $2,163,888 from its initial drawdown under
this line. The loan bears interest at an average rate of 8.5% with an effective
rate of 19.6% per annum and matures on August 1, 2002. The principal amount is
payable in 36 monthly payments; the first 35 payments of $68,514 and the last
payment of $393,097, which is due in August 2002. In December 1999, the Company
obtained an additional $775,289 on the equipment line which bears coupon
interest at an
F-12
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
average rate of 8.91% and an effective interest rate of 18.1% per annum. The
loan matures in December 2002. Principal and interest are payable in 36 monthly
payments; the first 35 payments of $24,667 and the last payment of $140,960.
The loans are secured by the equipment of the Company. In conjunction with the
original loan, the Company issued warrants to purchase 97,328 shares of Series
A preferred stock at $1.24 per share. The original debt and warrants were
recorded at their fair values of $2,106,045 and $57,843, respectively. As of
December 31, 1999, the Company has $274,300 available to borrow on the
equipment financing agreement.
Debt consists of the following at December 31, 1999:
<TABLE>
<S> <C>
Note payable.................................................... $ 920,625
Subordinated debt obligation.................................... 6,888,887
Equipment term loan............................................. 2,725,700
-----------
10,535,212
Less: Unamortized debt discount................................. (881,892)
-----------
$ 9,653,320
===========
</TABLE>
Maturities of long-term debt at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000............................................................ $ 5,094,152
2001............................................................ 4,109,690
2002............................................................ 1,331,370
-----------
10,535,212
Less: Unamortized debt discount................................. (881,892)
-----------
9,653,320
Less: Current portion, net of discount.......................... (4,481,903)
-----------
$ 5,171,417
===========
</TABLE>
Note 5: Income Taxes
At December 31, 1999 and 1998, the Company had net operating loss
carryforwards of $33,372,573 and $552,154, respectively, which may be used to
offset future taxable income. These carryforwards expire at various dates
beginning in 2017 through 2019. Should certain changes in the Company's
ownership occur, there could be a limitation on the utilization of its net
operating losses.
The effective rate differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
Period from
March 25, 1997
through Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Tax benefit at statutory rate..... (34.0)% (34.0)% (34.0)%
Stock-based compensation.......... 29.4 4.4 8.1
Other............................. 0.6 0.2 0.1
Change in valuation allowance..... 4.0 29.4 25.8
----- ----- -----
0.0 % 0.0 % 0.0 %
===== ===== =====
</TABLE>
F-13
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................ $ 187,732 $ 11,346,675
Prepaid expenses and other assets currently
deductible..................................... (488,777)
Accrued expenses not currently deductible....... 484 559,994
Depreciation different for tax purposes......... 14,920 (46,939)
--------- ------------
Net deferred tax assets......................... 203,136 11,370,953
Less: Valuation allowance....................... (203,136) (11,370,953)
--------- ------------
Net deferred tax asset.......................... $ -- $ --
========= ============
</TABLE>
The Company has recorded a 100% valuation allowance equal to the net
deferred tax asset balance based upon management's determination that the
recognition criteria for realization have not been met.
Note 6: Employee Retirement Plan
In December 1999, the Board of Directors approved the Onvia.com Savings and
Retirement Plan (the "Retirement Plan") which will cover all eligible
employees. The Retirement Plan, which will be effective on March 1, 2000, is a
qualified salary reduction plan in which all eligible employees may elect to
have a percentage of their pre-tax compensation contributed to the Retirement
Plan, subject to certain guidelines issued by the Internal Revenue Service.
Contributions by the Company are at the discretion of the Board of Directors.
Note 7: Commitments and Contingencies
Operating leases: The Company is committed under non-cancellable operating
leases for its current and former office space. During 1999, the Company
subleased certain office space for amounts equal to the rental obligation,
which expire in 2001. Future minimum sublease rental receipts are approximately
$65,000.
In December 1999, the Company signed a lease agreement for new corporate
office facilities. Monthly lease payments range from $61,625 to $173,188
through the expiration of the agreement in February 2008. Total lease
obligations under this agreement aggregate to $14,598,750 over the eight year
lease period.
Total rent expense was $294,307 and $20,330 for the years ended December 31,
1999 and 1998, respectively. Future minimum lease payments required on non-
cancelable operating leases are approximately as follows:
<TABLE>
<CAPTION>
For the years ending December 31,
---------------------------------
<S> <C>
2000............................................................ $ 1,970,928
2001............................................................ 2,263,491
2002............................................................ 2,302,894
2003............................................................ 2,479,269
2004............................................................ 2,519,475
Thereafter...................................................... 5,935,124
-----------
$17,471,181
===========
</TABLE>
Lease deposit: The Company's leasing arrangement for its existing corporate
facilities requires a letter of credit of $650,000 to be issued to the
landlord. This letter of credit is secured by a deposit of $650,000, which
F-14
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
is recorded in other assets. The letter of credit expires in May 2000; however,
the letter of credit is required to be renewed for consecutive one-year periods
for the term of the leasing arrangement.
The Company's leasing arrangement for its new corporate facilities requires
a letter of credit of $2,000,000 to be issued to the landlord through February
2008. This letter of credit was obtained in January 2000, is secured by a
deposit of $2,000,000 and expires in January 2001. This letter of credit is
automatically renewed for consecutive one-year periods through January 2003.
Upon the earlier of six months after the effective date of the lease or the
date the tenant delivers its notice to commence certain tenant improvements,
the $2,000,000 will be increased to $2,500,000.
Advertising agreement: In 1998, the Subsidiary entered into an agreement to
pay 4% of certain revenues to a third party in exchange for advertising
services performed in Canadian markets. The agreement is cancellable by either
party with 30 days notice. Advertising expenses of $259,500 and $22,560 were
incurred under this agreement for the years ended December 31, 1999 and 1998,
respectively.
In December 1999, the Company entered into an agreement with CNET for
certain advertising services under which the Company must make payments each
time a visitor clicks on a link from the web page of CNET to the web page of
the Company. The term of the agreement is for one year starting January 1, 2000
and is cancellable by either party after six months with 30 days notice.
Minimum guaranteed payments are $200,000 per month for the first six months and
$250,000 per month thereafter.
Co-branding agreements: During 1999, the Company entered into approximately
20 co-branding agreements. These agreements require monthly license fees, and
certain agreements require payments based on sales generated on the co-branded
site. These agreements typically lapse over a period of three to twelve months
or upon 30 days notice by either party to the agreement. The monthly license
fees are expensed as incurred and the related co-branding royalties are
expensed in the month the associated sales are generated. The Company recorded
$1,970,359 in co-branding fees for the year ended December 31, 1999.
Note 8: Stock Options
In February 1999, the Company adopted a combined stock option plan (the
"1999 Plan") which provides for the issuance of incentive and nonstatutory
common stock options to employees, directors and consultants of the Company.
The Board of Directors reserved 10,400,000 shares of common stock to be issued
in conjunction with the 1999 Plan. In conjunction with the Series B preferred
financing discussed in Note 9, the Board of Directors reserved an additional
2,908,830 shares of common stock for issuance under the 1999 Plan. In December
1999, the Board of Directors amended the 1999 Plan to increase the number of
shares reserved for issuance to a total of 18,000,000 shares. Pursuant to
common stock purchase agreements described in Note 9, 1,146,224 shares were
issued from the 1999 Plan option pool. There were 5,678,412 shares available
for issuance under the 1999 Plan as of December 31, 1999.
Stock options are granted at exercise prices and vesting schedules
determined by the Board of Directors. All options granted to employees have
been approved by the Board of Directors, generally with four year vesting
schedules. Options granted to consultants of the Company have been approved by
the Board of Directors with varying vesting schedules of up to four years.
Stock options expire ten years after the date of grant.
F-15
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option activity for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
Options Weighted-average
outstanding exercise price
----------- ----------------
<S> <C> <C>
Options granted................................ 11,466,032 $0.89
Options exercised.............................. (5,299,982) $0.14
Options forfeited.............................. (290,668) $0.35
----------
Outstanding at December 31, 1999............... 5,875,382 $1.60
==========
Options exercisable at December 31, 1999....... 271,874 $0.09
==========
</TABLE>
The weighted average fair value of options granted during 1999 was $1.52 per
share. During the year ended December 31, 1999, the Company recorded
compensation expense of $999,061 related to the issuance of stock options for
services provided by consultants, exclusive of the compensation expense from
the acceleration of vesting described below, and $1,928,208 on stock options
issued to employees. The Company did not issue any stock options during the
year ended December 31, 1998 or the period from March 25, 1997 (inception) to
December 31, 1997.
In December 1999, the Board of Directors approved the acceleration of
vesting on all outstanding unvested stock options issued to non-employees. The
stock options had vesting periods ranging from one to four years from the date
of issuance. The Company recognized $3,383,877 in compensation expense in
conjunction with this transaction. Further, options to purchase 2,396,554
shares of common stock issued to certain employees were converted to common
stock which are subject to a repurchase option at a purchase price equal to the
original exercise price of the underlying options upon termination of
employment. Individuals paid $324,569 in cash to exercise their options. The
repurchase options expire over the remaining vesting period of the original
stock option grants. No compensation expense was recognized in conjunction with
the conversion.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding
-------------------
Weighted-average
Number remaining Options
Range of exercise prices of options contractual life exercisable
------------------------ ---------- ------------------- -----------
<S> <C> <C> <C>
$ 0.06.......................... 726,668 8.84 160,000
$ 0.13.......................... 1,850,382 9.00 108,542
$ 0.25.......................... 63,332 9.45 3,332
$ 0.38.......................... 809,000 9.59 --
$ 0.50.......................... 212,000 9.70 --
$ 1.00.......................... 422,000 9.80 --
$ 1.25.......................... 567,000 9.86 --
$ 6.17.......................... 1,225,000 9.96 --
--------- -------
5,875,382 271,874
========= =======
</TABLE>
In accordance with SFAS 123, the fair value of each employee option grant is
estimated on the date of grant using the minimum value option-pricing model
assuming the following weighted average assumptions: average risk free interest
rate of 5.50%; volatility of 0%; dividends of $0; and an expected life of four
years.
F-16
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Had the Company determined compensation expense based on the fair value of the
option at the grant date for all stock options issued to employees, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended
December 31,
1999
------------
<S> <C>
Net loss:
As reported................................................. $(57,373,391)
Pro forma................................................... $(57,626,582)
Net loss per share:
As reported--basic and diluted.............................. $ (4.59)
Pro forma--basic and diluted................................ $ (4.61)
</TABLE>
In December 1999, the Board of Directors approved the 2000 Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan shall commence on the
effective date of the Company's initial public offering. The Directors' Plan
authorizes the grant of 600,000 shares of non-qualified stock options to non-
employee directors. Initially, 40,000 shares will be granted to all non-
employee directors upon the closing of an initial public offering and,
thereafter, to each eligible non-employee director on the date such person is
first elected or appointed as a non-employee director. Annually, each non-
employee director will be granted an additional option to purchase 10,000
shares of common stock, provided such person has been a non-employee director
of the Company for at least the prior six months. The initial option grant
under the Directors' Plan is exercisable 25% each year for four years on the
anniversary of the date of grant. The annual grants are exercisable in full on
the day before the first anniversary of the date of grant. The options have a
term of ten years and terminate when the non-employee director no longer
continues to serve as a director of the Company.
In December 1999, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the "ESPP"). The ESPP shall commence on the effective date of
the Company's initial public offering. The ESPP allows all full-time employees
to participate by purchasing the Company's common stock at a discount allowed
under guidelines issued by the Internal Revenue Service. A total of 600,000
shares of the Company's common stock has been reserved for issuance under the
ESPP. Each year, the number of shares reserved for issuance under the purchase
plan will automatically be increased by 1% of the total number of shares of
common stock then outstanding or, if less, by 600,000 shares or such lesser
number of shares as the Board of Directors determines.
Note 9: Stockholders' (Deficit) Equity
Authorized shares
On September 29, 1999, the Articles of Incorporation were amended to
increase the number of authorized shares of common stock from 100,000,000 to
124,000,000 and increase the number of authorized shares of preferred stock
from 24,000,000 to 40,000,000, of which 24,000,000 are designated as Series A
preferred stock and 16,000,000 are designated as Series B preferred stock. On
December 20, 1999, the Articles of Incorporation were amended to increase the
number of authorized shares of common stock to 150,000,000 and increase the
number of authorized shares of preferred stock to 46,000,000.
Common and preferred stock splits
On February 16, 1999, the Board of Directors amended the Company's Articles
of Incorporation and authorized a two-for-one common stock split. The number of
authorized shares of common stock was increased from 20,000,000 shares to
40,000,000 shares. On July 29, 1999, the Board of Directors approved an
additional
F-17
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
two-for-one common and preferred stock split. The stock splits were effected in
the form of a stock dividend. These stock splits have been presented
retroactively in the accompanying financial statements.
Convertible preferred stock
On February 25, 1999, the Company issued 17,961,460 shares of Series A
convertible voting preferred stock at $0.58 per share resulting in proceeds of
$10,251,818, net of issuance costs of $232,580 and stock subscription
receivables of $15,593. The Company received a $10,000 payment on this
receivable in October 1999. A consulting firm was issued 119,744 shares as a
part of this financing round in consideration for past services provided to the
Company. Expense of $70,050 was recorded in conjunction with this transaction.
The $344,407 of convertible promissory notes outstanding as of December 31,
1998 were converted into 589,152 shares of Series A preferred stock as part of
this transaction. In addition, convertible promissory notes for $975,590 issued
in February 1999 were converted into 1,668,884 shares of Series A preferred
stock.
On September 30, 1999, the Company issued 14,544,170 shares of its Series B
preferred stock at $1.72 per share resulting in proceeds of $24,969,851, net of
issuance costs of $30,149.
On December 20, 1999, the Company issued 3,379,402 shares of Series C
preferred stock at $6.86 per share resulting in proceeds of $22,514,421, net of
issuance costs of $651,380. The Company recorded, immediately upon issuance, a
preferred stock dividend of $14,007,621 representing the value of the
beneficial conversion feature on the issuance of Series C preferred stock in
December 1999. The beneficial conversion feature was calculated at the issuance
date of the Series C preferred stock based on the difference between the
conversion price of $6.86 per share and the estimated fair value of the common
stock at that date.
Each share of Series A, Series B and Series C preferred stock is convertible
on a one for one basis to common stock at the option of the holder or
automatically upon registration of the Company's common stock pursuant to a
public offering under the Securities Act of 1933 ("an Offering"). The Series A,
Series B and Series C preferred stock would be converted upon an Offering at a
price of not less than $10.28 per share with aggregate proceeds of not less
than $30,000,000, or by the written consent of the holders of eighty percent of
the outstanding shares of Series B preferred stock. The conversion price is
subject to adjustment in certain instances including stock splits and
dividends, reverse stock splits and issuances of additional capital stock below
the conversion price then in effect. In the event of the latter, the conversion
price in effect is decreased by a formula, which reduces the dilutive effect to
the preferred stockholders.
The holder of each share of preferred stock has the right to one vote for
each share of common stock into which such preferred stock can be converted.
Preferred stockholders have the same voting rights and powers as common
stockholders. Holders of the Company's preferred stock and warrants have
registration rights.
Dividends are based on a rate of $0.05, $0.16 and $0.62 per share per annum
on each outstanding share of Series A, Series B and Series C preferred stock,
respectively, or, if greater, an amount equal to any dividend paid on any other
outstanding shares of the Company. Dividends are not cumulative and are payable
when and if declared by the Board of Directors.
In the event of a liquidation of the Company, the holders of Series C
preferred stock will receive a liquidation preference of up to $6.86 per share
over the holders of Series A, Series B and common stock. Upon satisfaction of
Series C preferences, distributions will be made to Series B preferred
stockholders in an amount up to $1.72 per share. Upon satisfaction of Series B
preferences, distributions will be made to Series A preferred stockholders in
an amount up to $0.58 per share. Upon completion of preference distributions to
F-18
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Series A, Series B and Series C preferred stockholders, any remaining amounts
will be distributed among the common stockholders on a pro rata basis.
Dividend policy
The Company has never declared or paid dividends on its capital stock. The
Company's existing borrowing agreements prohibit the payment of dividends.
Issuance and cancellation of common stock
On March 25, 1997, the Company issued 8,000,000 shares of common stock to
the founder in exchange for certain assets with a fair value of $10,000.
On January 18, 1999, the Company cancelled all 8,000,800 outstanding shares
of the Company's common stock, pursuant to the issuance of 22,958,136 shares of
nonvested common stock to employees and other outside parties.
Nonvested common stock
Prior to December 31, 1998 the Company entered into agreements with certain
employees and other outside parties to perform services, which would be settled
in cash or equity securities, at the Company's discretion. The Company recorded
a liability for the cost of these agreements as of December 31, 1998.
In January 1999, the Company issued 22,958,136 shares of nonvested common
stock to employees and other outside parties for services performed. These
shares are subject to a repurchase option, which allows the Company the right
to repurchase the shares at the original purchase price upon termination of
employment. The repurchase option on the nonvested common stock expires ratably
over four years from date of hire or commencement of services on a monthly
basis. The expiration of the repurchase option may accelerate upon certain
change of control transactions. Noncash stock-based compensation expense of
$458,475, $86,084 and $122,673 was recognized for the issuance of these shares
during the years ended December 31, 1999 and 1998 and the period from March 25,
1997 (inception) through December 31, 1997, respectively.
In April 1999, the Company issued 1,026,224 shares of nonvested common stock
under the 1999 Plan to the chairman of the Board of Directors in exchange for
$12,828. The issued shares had a fair value of $0.40 per share as of the grant
date. These shares are subject to a repurchase option which allows the Company
the right to repurchase the shares at the original purchase price upon
termination of employment or consulting services provided. The repurchase
option expires over four years with a 25% cliff after the first year and
ratably thereafter on a monthly basis, and may accelerate upon certain change
of control transactions. Compensation expense in the amount of $196,213 was
recognized for these shares for the year ended December 31, 1999.
In October 1999, the Company exercised its option to repurchase 200,000
shares of nonvested common stock from a former employee and removed any
remaining restrictions on the 200,000 shares still held by the individual. In
conjunction with this transaction, the Company recognized $905,000 of
compensation expense.
In December 1999, the Company issued 120,000 shares of nonvested common
stock under the 1999 Plan to a member of the Board of Directors in exchange for
$150,000. The shares had a fair value of $11.00 per share as of the grant date.
These shares are subject to a repurchase option which allows the Company the
right to repurchase the shares at the original purchase price upon termination
of service as a member of the Board of Directors. The repurchase option expires
over four years with a 25% cliff after the first year and ratably
F-19
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
thereafter on a monthly basis, and may accelerate upon certain change of
control transactions. Unearned stock-based compensation in the amount of
$1,170,000 was recorded at the date of issue.
In December 1999, the Company waived its repurchase option on the nonvested
common shares issued to non-employees. The Company recognized an additional
$1,503,136 in compensation expense in connection with this transaction.
Warrants to purchase Series A preferred stock
During 1999, the Company issued warrants to purchase up to 1,165,310 shares
of its Series A preferred stock at $0.90 per share in conjunction with its
subordinated debt financing. These warrants are exercisable immediately upon
grant and expire through the later of ten years after date of grant or five
years after the closing of an Offering. The exercise price of the warrants is
subject to adjustment upon the occurrence of certain corporate events or the
Company meeting specified operating criteria. The Series A preferred stock
purchase warrants automatically convert into common stock purchase warrants
upon the effectiveness of an Offering.
The Company also issued warrants to purchase up to 97,328 shares of its
Series A preferred stock at $1.24 per share in conjunction with its equipment
loan financing. These warrants are exercisable immediately upon grant and
expire through the later of nine years after date of grant or four years after
the closing of an Offering.
The warrants automatically convert into common stock purchase warrants upon
the effectiveness of an Offering.
Warrants to purchase common stock
In February 1999, the Company issued warrants to purchase up to 833,352
shares of its common stock in conjunction with its convertible debt financing
in 1998. The warrants are exercisable at $0.0025 per share and vest immediately
upon issuance. The warrants expire on the earliest of five years from the date
of issuance; upon a change of control, as defined; or upon the closing of an
initial public offering. In 1999, warrant holders exercised their warrants to
purchase 128,208 shares of common stock.
Note 10: Related Party Transactions
The Company paid a company owned by the principal stockholder of the Company
$119,441, $83,761 and $17,497 for the years ended December 31, 1999 and 1998
and the period from March 25, 1997 (inception) through December 31, 1997,
respectively, for certain services, including wages, benefits, management fees,
office expenses and other miscellaneous expenses. As of December 31, 1999, 1998
and 1997, the Company owed $0, $10,880 and $17,497 to this affiliated entity
for services performed during the respective periods. For the years ended
December 31, 1999 and 1998 and the period from March 25, 1997 (inception)
through December 31, 1997, respectively, the Company had sales of $51,723, $0
and $15,132 to this affiliated entity. In February 1999, the Company entered
into an agreement with this affiliated entity to pay $3,300 per month for
certain shared costs. This agreement was terminated in August 1999. In August
1999, the Company sub-leased its former office space to this affiliated entity.
The lease expires in May 2001 with monthly payments that range between $2,212
and $2,279. The Company is a guarantor of the primary lease in the event that
the affiliated entity fails to meet its obligations under the sublease.
A director and stockholder provided legal and professional services to the
Company in the amount of $505,892 during the year ended December 31, 1999.
Additionally, as of December 31, 1998, the Company
F-20
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
owed certain employees $44,407 under convertible debt agreements. The Company
purchased software for approximately $347,000 from a vendor who has a common
stockholder with the Company.
In October 1999, the Company received a promissory note from a principal
stockholder in the amount of $350,000, collateralized by 350,000 shares of the
Company's common stock. The note bears interest at 6% per annum. The principal
and interest are payable upon demand at the earlier of October 2004 or the
expiration of any lock-up period after an Offering. The note becomes due if
certain change of control events take place.
In December 1999, the Board of Directors authorized the issuance of
promissory notes to senior executives in an aggregate amount of up to
$1,000,000, collateralized by shares of the Company's common stock held by
them. When issued, the notes will bear interest at 6% per annum. The principal
and interest are payable upon demand at the earlier of four years from the date
of issuance or the expiration of any lock-up period following a public
offering. The notes become due if certain change of control events takes place.
In December 1999, the Company received a promissory note from an employee in
the amount of $150,000, collateralized by 150,000 shares of the Company's
common stock. The note bears interest at 6% per annum. The principal and
interest are payable upon demand at the earlier of December 2004 or the
expiration of any lock-up period after an Offering in which the employee is a
selling stockholder. The note becomes due if certain change of control events
take place.
F-21
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11: Segment Information
Statement of Financial Accounting Standards No. 131 (SFAS No. 131)
"Disclosures about Segments of an Enterprise and Related Information"
establishes reporting and disclosure standards for an enterprise's operating
segments. The Company uses identical principles to account for segment
information as used in the accompanying financial statements. Operating
segments are defined as components of an enterprise for which separate
financial information is available and regularly reviewed by management.
Management operates its business based upon geographic area. Intercompany
transactions are insignificant and have been recorded at cost as part of the
parent's investment in its Subsidiary. Operating results by business segment
are as follows:
<TABLE>
<CAPTION>
US Canada Totals
------------ ----------- ------------
<S> <C> <C> <C>
Period from March 25, 1997
(inception) to December 31,
1997:
Net revenue...................... $ -- $ 62,174 $ 62,174
Net loss......................... (112,518) (17,854) (130,372)
Total assets..................... 193 11,717 11,910
Year ended December 31, 1998:
Net revenue...................... $ 153,356 $ 883,915 $ 1,037,271
Net loss......................... (406,795) (265,335) (672,130)
Total assets..................... 67,402 112,670 180,072
Property and equipment........... 17,319 3,606 20,925
Depreciation and amortization.... 1,288 870 2,158
Interest expense................. -- 3,608 3,608
Additions to property and
equipment....................... 19,477 3,606 23,083
Year ended December 31, 1999:
Net revenue...................... $ 21,994,442 $ 5,182,640 $ 27,177,082
Net loss......................... (41,141,420) (2,224,350) (43,365,770)
Total assets..................... 48,889,980 1,388,852 50,278,832
Property and equipment........... 5,914,305 262,486 6,176,791
Other assets..................... 2,274,386 26,092 2,300,478
Depreciation and amortization.... 1,097,997 56,391 1,154,388
Interest income.................. 534,299 -- 534,299
Interest expense................. 1,075,233 -- 1,075,233
Noncash compensation expense..... 10,281,324 181,438 10,462,762
Additions to property and
equipment....................... 7,443,642 307,800 7,751,442
Additions to other assets........ 2,274,386 26,092 2,300,478
</TABLE>
Note 12: Supplemental Cash Flow Information
Noncash investing and financing activities are as follows:
On March 25, 1997, the Company issued 8,000,000 shares of common stock to
the founder in exchange for certain assets with a fair value of $10,000.
On February 25, 1999, the Company issued warrants to purchase 833,352 shares
of its common stock at $.0025 per share. The noncash value allocated to these
warrants was $241,853.
On February 25, 1999, the outstanding convertible debt of the Company in the
amount of $1,319,997 was converted into shares of its Series A preferred stock.
F-22
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 15, 1999 and August 5, 1999, the Company issued warrants to
purchase its Preferred A stock in conjunction with its debt financings on
these dates. The value allocated to the warrants was $1,153,143.
On August 13, 1999, the Company purchased software of $1,255,511 and post-
contract support of $403,103 in exchange for a promissory note.
On December 20, 1999, a senior executive exercised stock options in
exchange for a note of $150,000.
Supplemental cash flow information:
Cash paid for interest during the year ended December 31, 1999 was
$736,605. The Company paid no cash for interest in the year ended December 31,
1998 or the period from March 25, 1997 (inception) to December 31, 1997.
Note 13: Subsequent Events
On January 27, 2000, the Board of Directors authorized the Company's
reincorporation in the State of Delaware and authorized an amendment to the
Delaware Certificate of Incorporation to issue 265,000,000 shares, each with a
par value of $0.0001 per share. 250,000,000 shares would be common stock and
15,000,000 shares would be undesignated preferred stock. The Company's
reincorporation in Delaware was effective on February 22, 2000 and included a
two-for-one split of the Company's outstanding shares of common stock and
preferred stock. Common and preferred stock issued and stock option
information in these financial statements have been restated to reflect this
split.
On February 4, 2000, the Company entered into a common stock purchase
agreement with Internet Capital Group, an existing investor, where Internet
Capital Group agrees to purchase at the closing of an initial public offering
the greater of $40,000,000 or one-third of the number of shares sold to the
public. The shares will be valued at the offering price.
In February 2000, the Company entered into a strategic relationship with
America Online (AOL), under which AOL will provide its customers with access
to the Company's services and products, through an interactive co-branded web
site. As part of this relationship, the Company will provide to AOL a web-
based buying directory to act as the engine for AOL's business-to-business
ecommerce platform. In addition, AOL will promote the co-branded site and will
pay a percentage of the advertising revenue earned from the co-branded web
site. The Company has agreed to make fixed payments of $18,160,804 to AOL
under this agreement, $3,087,340 of which was paid following the execution of
the agreement and $5,275,712 of which is due upon the closing of the Offering,
or any other debt or equity financing with proceeds to the Company of at least
$10,000,000. The remainder is payable in six equal quarterly payments
commencing in May 2000. The Company is also required to make additional
payments to AOL if the number of new customers that it acquires from AOL
exceeds a specified level.
In February 2000, the Company received promissory notes from four employees
totaling $325,000 collateralized by 325,000 shares of the Company's common
stock. The notes bear interest at 6% per annum. The principal and interest are
payable upon demand at the earlier of February 2005 or the expiration of any
lock-up period after an Offering in which the employees are selling
stockholders. The notes become due if certain change of control events take
place.
In February 2000, a former associate of the chief executive officer of the
Company filed an action against the Company and the chief executive officer of
the Company alleging a breach of a partnership arrangement. In this action,
the plaintiff asserts that he is entitled to 50% of the chief executive
officer's interest in the
F-23
<PAGE>
ONVIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company and 50% of the assets and business of the Company. Management is
currently investigating the claims and believes that the claims against the
Company are without merit. Nevertheless, litigation is inherently uncertain and
should litigation ensue, there can be no assurance that the Company would
prevail in such a suit. Any cash award or settlement paid to the plaintiff
could have a material negative impact on the Company's operating results and
financial condition. Any shares of common stock awarded or issued to the
plaintiff by the Company would be dilutive to the Company's stockholders.
On February 8, 2000, the Company amended its corporate office facilities
lease. This amendment extended the original lease term from eight to ten years
and increased the lease payments to amounts ranging from $217,917 to $257,000
per month. Total lease obligations under this agreement aggregate to
$28,185,250 over the ten year lease period. The letter of credit requirements
in the lease were also increased from $2,000,000 to $3,000,000 and from
$2,500,000 to $3,500,000.
Subsequent to December 31, 1999 and through February 29, 2000, the Company
granted 1,826,000 options to employees to purchase common stock at exercise
prices ranging from $9.50 to $21.00 per share.
F-24
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(in thousands)
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 120,386 $ 38,518
Short-term investments............................. 71,207 --
Accounts receivable, net........................... 4,405 510
Inventory.......................................... 3,856 1,360
Prepaid expenses and other current assets.......... 7,180 1,414
--------- --------
Total current assets............................. 207,034 41,802
Property and equipment, net.......................... 18,955 6,177
Other assets, net.................................... 9,234 2,300
Goodwill, net........................................ 41,569
--------- --------
Total assets..................................... $ 276,792 $ 50,279
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 17,259 $ 6,719
Accrued expenses and other......................... 31,816 7,294
Current portion of long-term debt.................. 3,663 4,482
--------- --------
Total current liabilities........................ 52,738 18,495
Long-term debt....................................... 4,027 5,171
--------- --------
Total liabilities................................ 56,765 23,666
--------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock and additional paid in capital........ 377,446 98,984
Unearned stock compensation........................ (8,364) (14,195)
Accumulated deficit................................ (149,055) (58,176)
--------- --------
Total stockholders' equity....................... 220,027 26,613
--------- --------
Total liabilities and stockholders' equity....... $ 276,792 $ 50,279
========= ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-25
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months
ended September Nine months ended
30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, (In thousands,
except per share except per share
data) (Unaudited) data) (Unaudited)
<S> <C> <C> <C> <C>
Revenue............................... $ 45,332 $ 8,128 $ 96,094 $ 13,169
Cost of goods sold.................... 47,010 9,657 103,542 15,709
-------- -------- -------- --------
Gross margin........................ (1,678) (1,529) (7,448) (2,540)
Operating expenses:
Sales and marketing................. 15,630 5,152 53,597 6,520
Technology and development.......... 8,046 2,227 18,685 2,681
General and administrative.......... 3,433 1,019 9,395 2,422
Noncash stock-based compensation.... 1,986 524 6,726 1,714
Amortization of goodwill............ 2,695 -- 2,695 --
-------- -------- -------- --------
Total operating expenses.......... 31,790 8,922 91,098 13,337
-------- -------- -------- --------
Loss from operations.................. (33,468) (10,451) (98,546) (15,877)
Interest income (expense), net........ 2,948 (374) 7,183 (325)
-------- -------- -------- --------
Net loss.............................. (30,520) (10,825) (91,363) (16,202)
Reduction of beneficial conversion of
convertible preferred stock.......... -- -- 287 --
-------- -------- -------- --------
Net loss attributable to common
stockholders......................... $(30,520) $(10,825) $(91,076) $(16,202)
======== ======== ======== ========
Basic and diluted net loss per common
share................................ $ (0.39) $ (0.83) $ (1.48) $ (1.42)
======== ======== ======== ========
Basic and diluted weighted average
shares outstanding................... 77,832 12,982 61,663 11,390
======== ======== ======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-26
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
2000 1999
-------- --------
(In thousands)
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(91,363) $(16,202)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 5,565 637
Noncash stock-based compensation....................... 6,726 1,714
Amortization of goodwill............................... 2,695 --
Amortization of debt discount.......................... 492 70
Noncash interest expense related to issuance of common
stock warrants........................................ -- 242
Change in certain assets and liabilities, net of
effects from purchase transactions:
Accounts receivable, net............................. (3,786) (142)
Inventory............................................ (2,496) (463)
Prepaid expenses and other current assets............ (5,691) (1,236)
Other assets......................................... (4,347) (1,019)
Accounts payable..................................... 7,547 2,902
Accrued expenses and other........................... 25,499 2,748
-------- --------
Net cash used in operating activities.............. (59,159) (10,749)
Cash flows from investing activities:
Purchase of short-term investments....................... (71,207) --
Cash acquired in purchase transactions................... 3,723 --
Direct costs of purchase transactions.................... (1,862) --
Additions to property and equipment...................... (15,671) (4,133)
Additions to capitalized internally developed software... (3,823) --
-------- --------
Net cash used in investing activities.............. (88,840) (4,133)
Cash flows from financing activities:
Proceeds from convertible debt........................... -- 975
Proceeds from issuance of long-term debt................. -- 9,164
Repayments on long-term debt............................. (3,729) (509)
Proceeds from exercise of stock options and warrants..... 114 --
Net proceeds from issuance of Series A preferred stock... -- 10,252
Net proceeds from issuance of Series B preferred stock... -- 20,970
Net proceeds from issuance of common stock............... 233,839 13
Repurchase of preferred stock............................ (476) --
-------- --------
Net cash provided by financing activities.......... 229,748 40,865
Effect of exchange rate changes on cash.................... 119 9
-------- --------
Net increase in cash and cash equivalents.................. 81,868 25,992
Cash and cash equivalents, beginning of period............. 38,518 45
-------- --------
Cash and cash equivalents, end of period................... $120,386 $ 26,037
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-27
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Onvia.com, Inc. and its wholly owned subsidiaries, collectively
referred to as the "Company". The unaudited interim condensed consolidated
financial statements and related notes thereto have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted pursuant
to such rules and regulations. The accompanying interim condensed consolidated
financial statements and related notes thereto should be read in conjunction
with the audited consolidated financial statements and notes thereto included
in the Company's Registration Statement on Form S-1 (No. 333-93273),
("Registration Statement"), including the related prospectus dated February 29,
2000.
The information furnished is unaudited, but reflects, in the opinion of
management, all adjustments, consisting of only normal recurring items,
necessary for a fair presentation of the results for the interim periods
presented. Interim results are not necessarily indicative of results for a full
year.
2. Net Loss Per Share
Historical basic and diluted earnings per share are calculated using the
weighted average shares of common stock outstanding, reduced for shares subject
to repurchase by the Company. For the nine months ended September 30, 2000 and
1999, stock options, warrants and nonvested common stock totaling 13,225,100
and 55,804,706 shares respectively, are excluded from the calculation of
diluted net loss per share as they would be anti-dilutive.
3. Stockholders' Equity
Initial Public Offering
In March 2000, the Company completed its initial public offering (the
"Offering") and issued 9,200,000 shares of its common stock to the public at a
price of $21.00 per share. The Company received net proceeds of $177.9 million.
Concurrent with this Offering, the Company issued an additional 2,666,666
shares of its Common Stock to Internet Capital Group at a price of $21.00 for
net proceeds of $56.0 million.
4. Segment Information
The operating business segments reported below are the segments of the
Company for which separate financial information is available and for which
operating profit and loss amounts are evaluated and used by the chief operating
decision maker for making operating decisions, assessing performance and
deciding on how to effectively allocate resources. The Company evaluates its
operations based on the geography of its two operations, the United States and
Canada. The operating segment information for 1999 and 2000 has been reported
in accordance with the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
F-28
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
U.S. Canada Totals
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
Three months ended September 30, 2000
Revenue.......................................... $ 41,450 $ 3,882 $ 45,332
Net loss......................................... (28,607) (1,913) (30,520)
Total assets..................................... 273,702 3,090 276,792
Property and equipment, net...................... 18,376 579 18,955
Other assets..................................... 9,192 42 9,234
Goodwill......................................... 41,569 41,569
Depreciation and amortization.................... 1,983 63 2,046
Amortization of goodwill......................... 2,695 2,695
Interest income, net............................. 2,939 9 2,948
Noncash compensation expense..................... 1,880 106 1,986
Three months ended September 30, 1999
Revenue.......................................... $ 6,576 $ 1,552 $ 8,128
Net loss......................................... (10,322) (503) (10,825)
Total assets..................................... 37,481 718 38,199
Property and equipment, net...................... 4,606 221 4,827
Other assets..................................... 946 25 971
Depreciation and amortization.................... 512 13 525
Interest expense, net............................ (374) (374)
Noncash compensation expense..................... 504 20 524
Nine months ended September 30, 2000
Revenue.......................................... $ 85,980 $10,186 $ 96,094
Net loss......................................... (86,008) (5,355) (91,363)
Total assets..................................... 273,702 3,090 276,792
Property and equipment, net...................... 18,276 579 18,955
Other assets..................................... 9,192 42 9,234
Goodwill......................................... 41,569 41,569
Depreciation and amortization.................... 5,411 154 5,565
Amortization of goodwill......................... 2,695 2,695
Interest income, net............................. 7,164 19 7,183
Noncash compensation expense..................... 6,401 325 6,726
Nine months ended September 30, 1999
Revenue.......................................... $ 9,917 $ 3,252 $ 13,169
Net loss......................................... (15,216) (986) (16,202)
Total assets..................................... 37,481 718 38,199
Property and equipment, net...................... 4,606 221 4,827
Other assets..................................... 946 25 971
Depreciation and amortization.................... 615 22 637
Interest expense, net............................ (322) (3) (325)
Noncash compensation expense..................... 1,628 86 1,714
</TABLE>
5. Acquisitions
Zanova, Inc.
On July 11, 2000, the Company completed its acquisition of Zanova, Inc.
("Zanova"). Zanova provides custom e-business solutions and web-based
applications that allow businesses to build commerce enabled web
F-29
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
sites. Pursuant to the terms of the Agreement and Plan of Merger and related
Certificate of Merger, collectively the "Merger Agreements", each share of
Zanova common stock was converted into the right to receive 0.211132 shares of
the Company's common stock. In addition, the Company assumed all issued and
outstanding options and warrants to purchase shares of Zanova common stock
using an exchange ratio of 0.211132.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 2,470,520 shares of the Company's common stock with a fair market value
of approximately $16.9 million and exchanged options and warrants to purchase
281,219 shares of the Company's common stock with a fair market value of
approximately $1.1 million. The Company incurred transaction costs consisting
primarily of professional fees of approximately $627,000, resulting in a total
purchase price of approximately $18.5 million. Under the terms of the Merger
Agreements, 247,057 shares of common stock issued are being held in an escrow
account to secure and collateralize the obligations of Zanova shareholders to
the Company. The results of operations of Zanova have been consolidated in the
Company's results of operations since July 11, 2000, the date of acquisition.
The total purchase price paid for the Zanova acquisition was allocated as
follows (in thousands):
<TABLE>
<CAPTION>
Zanova
-------
<S> <C>
Assets acquired at fair value....................................... $ 738
Liabilities acquired at fair value.................................. (322)
Goodwill............................................................ 18,118
-------
Total............................................................. $18,534
=======
</TABLE>
Globe-1, Incorporated
On August 10, 2000, the Company completed its acquisition of Globe-1,
Incorporated ("Globe-1"). Globe-1 provides electronic procurement services in a
proprietary government-to-business exchange. Pursuant to the terms of the
Agreement and Plan of Merger, "Merger Agreement", each share of Globe-1 common
stock was converted into the right to receive 0.15957 shares of the Company's
common stock. In addition, the Company assumed each issued and outstanding
warrant to purchase shares of Globe-1 common stock using an exchange ratio of
0.15957.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 2,351,705 shares of the Company's common stock with a fair market value
of approximately $21.6 million and exchanged warrants to purchase 531,054
shares of the Company's common stock with a fair market value of approximately
$3.0 million. The Company incurred transaction costs consisting primarily of
professional fees of approximately $204,000, resulting in a total purchase
price of approximately $24.8 million. Under the terms of the Merger Agreement,
285,000 shares of common stock issued are being held in an escrow account to
secure and collateralize the obligations of Globe-1 shareholders to the
Company. The results of operations of Globe-1 have been consolidated in the
Company's results of operations since August 10, 2000, the date of acquisition.
F-30
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
The total purchase price paid for the Globe-1 acquisition was allocated as
follows (in thousands):
<TABLE>
<CAPTION>
Globe-1
-------
<S> <C>
Cash................................................................ $ 3,563
Assets acquired at fair value....................................... 452
Liabilities acquired at fair value.................................. (669)
Goodwill............................................................ 21,422
-------
Total............................................................. $24,768
=======
</TABLE>
Hardware.com, Inc.
On September 15, 2000, the Company completed its acquisition of
Hardware.com, Inc. ("Hardware.com"). A total of 149,250 shares of the Company's
common stock with a fair market value of approximately $1.0 million were issued
to certain former holders preferred stock of Hardware.com. In connection with
the acquisition, the Company recorded net liabilities of approximately $4.5
million, resulting in a total purchase price of approximately $5.5 million. The
total consideration exceeded the fair value of the net assets acquired by
approximately $4.8 million, which has been recorded as goodwill. Under the
terms of the Agreement and Plan of Merger and related Certificate of Merger,
44,775 shares of common stock issued are being held in an escrow account to
secure and collateralize the obligations of Hardware.com stockholders to the
Company. The results of operations of Hardware.com have been consolidated in
the Company's results of operations since September 15, 2000, the date of
acquisition.
Michael D. Pickett, the Company's Chairman and director since February 1999,
was also Hardware.com's Chairman and Chief Executive Officer. Mr. Pickett
received no payment of consideration as a result of the acquisition. However,
Mr. Pickett became the Company's President and Chief Operating Officer in
connection with the acquisition.
All Acquisitions
The acquisitions were accounted for as purchase business combinations which
means that the purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair values on the date of
acquisition.
At September 30, 2000, total goodwill and the related accumulated
amortization in the Zanova, Globe-1 and Hardware.com acquisitions totaled $41.6
million and $2.7 million, respectively. Goodwill is amortized over the
estimated useful lives of three years.
The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated results of operations for the nine months ended
September 30, 2000 and 1999 assuming Zanova, Globe-1 and Hardware.com had been
acquired at the beginning of the periods presented (in thousands, except per
share data):
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Revenue................................................ $ 97,443 $ 13,616
Net loss............................................... (117,729) (28,835)
Basic and diluted net loss per share................... $ (1.77) $ (1.76)
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented and
are not intended to be a projection of future results.
6. Co-Branded Site Agreement with Visa USA Inc.
In July 2000, the Company entered into a custom co-branded site agreement
with Visa USA Inc. ("Visa") to create VisaBusiness.com, a site specifically
designed to help Visa's small business cardholders earn
F-31
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
incremental revenue through the use of the Company's exchange services. As part
of the agreement, Visa will also promote the co-branded site to its Member
Banks. Visa has agreed to make annual fixed payments totaling approximately
$7.3 million to the Company over the three year term of the agreement, not
including annual sponsorship fees or Member Bank fees. Due to the nature of the
service, the Company recognizes the license revenue on a straight-line basis
over the term of the agreement. The Company will pay Visa specified percentages
of transaction fees generated at the co-branded site and will record expense as
transactions occur. As of September 30, 2000, the Company has recorded
approximately $4.2 million in deferred revenue related to this agreement and
has recognized approximately $235,000 in revenue during the three months ended
September 30, 2000.
7. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133, which will be effective for the Company for
the fiscal quarter beginning January 1, 2001, requires the Company to recognize
all derivatives as either assets or liabilities in the Company's balance sheet
and measure those instruments at fair value. The Company does not expect the
effect of adopting the provisions of SFAS No. 133 to have a significant impact
on the balance sheet, results of operations or cash flows.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("Interpretation No.
44"). Interpretation No. 44 became effective July 1, 2000. The interpretation
clarifies the application of APB Opinion No. 25 for certain issues,
specifically, (a) the definition of an employee, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The adoption of Interpretation
No. 44 did not have a significant impact on its financial position or results
of operations.
In May 2000, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue 00-14, "Accounting for Certain Sales Incentives." This consensus
provides guidance on the recognition, measurement, and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or that are exercisable by a customer
as a result of, a single exchange transaction. This consensus must be adopted
no later than October 1, 2000. The Company does not expect the adoption of this
consensus to have a material impact on its financial position or results of
operations.
In July 2000, the EITF reached a consensus on EITF Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs." This consensus requires that all
amounts billed to a customer in a sale transaction related to shipping and
handling, if any, represent revenue and should be classified as revenue. The
Company already classifies shipping charges to customers as revenue. The EITF
did not reach a consensus with respect to the classification of costs related
to shipping and handling. The Company classifies fulfillment costs such as
outbound shipping to customers and credit card fees as cost of sales.
8. Commitments and Contingencies
In February 2000, the Company entered into a strategic relationship with
America Online ("AOL"), under which AOL will provide its customers with access
to the Company's services and products, through an interactive co-branded web
site. As part of this relationship, the Company will provide to AOL a web-based
buying directory to act as the engine for AOL's business-to-business e-commerce
platform. In addition, AOL will promote the co-branded site and will pay a
percentage of the advertising revenue earned from the co-branded web site. The
Company has agreed to make fixed payments of $18.2 million to AOL under this
F-32
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
agreement. The Company is also required to make additional payments to AOL if
the number of new customers that it acquires from AOL exceeds a specified
level. Approximately $3.1 million of this amount was paid following the
execution of the agreement. The Company believes that performance is below
anticipated levels, and accordingly the Company has not made certain
contractual payments under the agreement. As of September 30, 2000, the Company
owed AOL approximately $8.5 million, which is included in accrued expenses and
other. During the quarter ended September 30, 2000, the Company continued to
record the AOL contractual costs on a straight-line basis over 18 months
resulting in sales and marketing expense of $2.3 million and $6.1 million for
the three and nine months ended September 30, 2000, respectively.
On November 14, 2000, Onvia and AOL entered into a restructuring agreement,
which waives any current or past due contractual payments due to AOL. As a
result of the new agreement, Onvia and AOL will continue with an abbreviated
form of their relationship through May 14, 2001, after which neither party will
have any contractual commitment to the other. As a result of the restructuring
agreement, Onvia reversed sales and marketing expense of $2.3 million during
the fourth quarter of 2000.
In February 2000, a potential investor filed a lawsuit in the Supreme Court
of British Columbia, Canada against the Company and its chief executive officer
for 50% of the Company's assets and 50% of the executive's equity interest in
the Company. The lawsuit alleges that the potential investor and the Company's
chief executive officer planned to form a company similar to Onvia.com. Based
upon investigations to date, the Company believes that the allegations against
it are without merit and that the outcome will not harm its business. The
Company believes that it has valid defenses to this claim and intends to
vigorously defend the action. Any cash award or settlement paid by the Company
could have a material negative impact on the Company's operating results and
financial condition.
In July 2000, the British Columbia Securities Commission notified the
Company that its directed share program offered to certain shareholders at the
time of the Company's Offering did not meet Canadian disclosure requirements.
The Company has recorded an estimate of the settlements as of September 30,
2000. In October 2000, the Company tendered rescission rights to selected
shareholders as a remedy to this violation. The Company believes that its
obligation under these rescission rights will be approximately $850,000.
From time to time the Company is subject to various other legal proceedings
that arise in the ordinary course of its business. Although the Company cannot
predict the outcomes of these proceedings with certainty, the Company does not
believe that the disposition of these matters will have a material adverse
effect on its financial position, results of operations or cash flows.
9. Reorganization
In September 2000, the Company implemented a reorganization plan designed to
maximize operational efficiencies and reduce operating costs. As part of this
plan, the Company reduced its workforce by 87 employees, which represented
approximately 18 percent of the Company's employee base and included employees
from all areas of the Company. The Company recorded employee severance costs of
approximately $490,000, to be paid through December 31, 2000. These accrued
severance benefits are included in accrued expenses and other at September 30,
2000. In addition, the Company accelerated the vesting on 162,917 stock options
and shares of non-vested common stock, which resulted in an additional noncash
compensation charge of approximately $487,000.
In December 2000, Onvia entered into a strategic agreement with firstsource
corp., whereby firstsource will, through a private label solution, provide
product purchasing and fulfillment services for Onvia's web site. As a result
of the agreement, Onvia has reduced its workforce by approximately 180
employees. Onvia will record a restructuring charge of approximately $4.0
million during the fourth quarter of 2000, which consists primarily of employee
severance costs and the write off of related capitalized software.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Globe-1, Incorporated
Bellevue, Washington
We have audited the accompanying balance sheet of Globe-1, Incorporated (the
Company) as of December 31, 1999, and the related statement of operations,
changes in shareholders' equity (deficiency), and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Globe-1, Inc. as of December 31, 1999, and
the results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
Seattle, Washington
September 29, 2000
F-34
<PAGE>
GLOBE-1, INCORPORATED
BALANCE SHEETS
December 31, 1999, and June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 93,302 $ 3,324,181
Accounts receivable................................ 33,962 138,591
Other receivables.................................. -- 118,200
--------- -----------
Total current assets............................. 127,264 3,580,972
PROPERTY AND EQUIPMENT, net.......................... 175,621 652,453
OTHER ASSETS......................................... -- 7,124
--------- -----------
TOTAL............................................ $ 302,885 $ 4,240,549
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
CURRENT LIABILITIES:
Accounts payable................................... $ 29,690 $ 62,520
Accrued expenses and other......................... 39,472 133,473
Deferred stock-based compensation.................. 574,530 32,642
--------- -----------
Total current liabilities........................ 643,692 228,635
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value--Authorized, 20,000,000
and 40,000,000 shares; issued and outstanding,
10,058,962 shares................................. 254,812 1,889,829
Convertible Series A preferred stock, no par
value--Authorized, 10,000,000 shares; issued and
outstanding, 4,335,940 shares ($3,989,065
liquidation preference)........................... -- 3,742,360
Accumulated deficit................................ (595,619) (1,620,275)
--------- -----------
Total shareholders' equity (deficiency).......... (340,807) 4,011,914
--------- -----------
TOTAL............................................ $ 302,885 $ 4,240,549
========= ===========
</TABLE>
See notes to financial statements.
F-35
<PAGE>
GLOBE-1, INCORPORATED
STATEMENTS OF OPERATIONS
Year Ended December 31, 1999, and Six Months Ended June 30, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 2000
------------ -------- -----------
(Unaudited)
<S> <C> <C> <C>
REVENUE.................................... $ 360,248 $141,273 $ 338,545
COST OF REVENUE............................ 76,650 26,790 89,517
--------- -------- -----------
Gross profit........................... 283,598 114,483 249,028
OPERATING EXPENSES:
General and administrative............... 239,441 114,636 962,095
Sales and marketing...................... 153,908 82,137 314,465
Product development...................... 2,230 -- 38,456
--------- -------- -----------
Total operating expenses............... 395,579 196,773 1,315,016
--------- -------- -----------
Operating loss......................... (111,981) (82,290) (1,065,988)
OTHER INCOME (EXPENSE)..................... (2,680) -- 41,332
--------- -------- -----------
NET LOSS............................... $(114,661) $(82,290) $(1,024,656)
========= ======== ===========
</TABLE>
See notes to financial statements.
F-36
<PAGE>
GLOBE-1, INCORPORATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
Year Ended December 31, 1999, and Six Months Ended June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Series A preferred
Common stock stock
--------------------- -------------------- Accumulated
Shares Amount Shares Amount deficit Total
---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1999................... 10,058,962 $ 254,812 -- $ -- $ (480,958) $ (226,146)
Net loss................ -- -- -- -- (114,661) (114,661)
---------- ---------- --------- ---------- ----------- -----------
BALANCE, December 31,
1999................... 10,058,962 254,812 -- -- (595,619) (340,807)
Issuance of common stock
warrants for services.. -- 1,419,088 -- -- -- 1,419,088
Issuance of Series A
preferred stock, net... -- -- 4,335,940 3,742,360 -- 3,742,360
Issuance of common stock
warrants to Series A
preferred
shareholders........... -- 215,929 -- -- -- 215,929
Net loss................ -- -- -- -- (1,024,656) (1,024,656)
---------- ---------- --------- ---------- ----------- -----------
BALANCE, June 30, 2000
(unaudited)............ 10,058,962 $1,889,829 4,335,940 $3,742,360 $(1,620,275) $ 4,011,914
========== ========== ========= ========== =========== ===========
</TABLE>
See notes to financial statements.
F-37
<PAGE>
GLOBE-1, INCORPORATED
STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999, and Six Months Ended June 30, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 2000
------------ -------- -----------
(Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................. $(114,661) $(82,290) $(1,024,656)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization.......... 8,521 3,145 9,946
Stock-based compensation............... 272,314 124,995 870,075
Cash provided (used) by changes in
operating assets and liabilities:
Accounts receivable.................. 50,188 26,497 (104,629)
Other receivables.................... -- -- (118,200)
Deferred revenue..................... (9,334) (6,667) --
Accounts payable..................... 23,440 11,643 32,830
Accrued expenses and other........... 18,909 11,322 94,001
--------- -------- -----------
Net cash provided (used) by
operating activities.............. 249,377 88,645 (240,633)
INVESTING ACTIVITIES:
Purchase of property and equipment....... (161,965) (69,563) (486,777)
FINANCING ACTIVITIES:
Borrowings under line of credit.......... 12,584 12,107 --
Repayments under line of credit.......... (12,584) (1,099) --
Issuance of Series A preferred stock,
net..................................... -- -- 3,742,360
Issuance of common stock warrants to
Series A preferred shareholders......... -- -- 215,929
--------- -------- -----------
Net cash provided by financing
activities........................ -- 11,008 3,958,289
--------- -------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.. 87,412 30,090 3,230,879
CASH AND CASH EQUIVALENTS:
Beginning of period...................... 5,890 5,890 93,302
--------- -------- -----------
End of period............................ $ 93,302 $ 35,980 $ 3,324,181
========= ======== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest................... $ 1,562 $ 628 $ 204
</TABLE>
See notes to financial statements.
F-38
<PAGE>
GLOBE-1, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1999, and Six Months Ended June 30, 1999 and 2000
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Description of business: Globe-1, Incorporated (the Company) was
incorporated March 27, 1996, in the state of Washington as a Subchapter S
corporation. On January 1, 1999, the Company revoked its Subchapter S status
and registered as a C corporation, also in the state of Washington.
The Company is a government to business exchange that provides procurement
services by electronically distributing government agency bid solicitations and
notices to targeted companies in its established vendor pool.
The Company is subject to certain business risks that could affect future
operations and financial performance. These risks include changes in technology
and increased competition.
Unaudited interim financial statements: The financial statements as of June
30, 2000, and for the six-month periods ended June 30, 1999 and 2000, are
unaudited and reflect all adjustments (consisting of normal, recurring
adjustments) which are, in the opinion of the Company's management, necessary
for a fair presentation of financial position, results of operations, and cash
flows. All financial statement disclosures related to the six-month periods
ended June 30, 1999 and 2000, are unaudited.
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents: The Company considers all highly liquid
instruments purchased with a maturity of three months or less to be cash
equivalents. The Company maintains its cash in interest-bearing and
noninterest-bearing cash accounts and money market funds. The Company's money
market accounts are carried at cost which approximates fair market value.
Internally developed software: The Company adopted Statement of Position
(SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use, on January 1, 1999. SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. The Company capitalized
$151,958 in internally developed software costs during the year ended December
31, 1999, and $6,065 and $29,874 during the six-month periods ended June 30,
1999 and 2000, respectively. Capitalized software costs are amortized on a
straight-line basis over useful lives ranging from three to five years.
Amortization related to capitalized software was $2,230 for the year ended
December 31, 1999, and $4,460 for the six-month period ended June 30, 2000,
respectively, and is recorded as a product development expense.
Property and equipment: Property and equipment are stated at cost.
Depreciation expense is recorded using the straight-line method for financial
statement purposes and accelerated methods for federal income tax purposes over
estimated useful lives of two to five years.
Stock-based compensation: The Company has elected to account for its
employee and director stock-based awards under the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Under APB Opinion No. 25, compensation cost for stock options and
warrants is measured as the excess, if any, of the fair value of the underlying
common stock on the date of grant over the
F-39
<PAGE>
GLOBE-1, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
exercise price of the stock option or warrant. The Company is required to
implement the provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, for stock-based awards to
nonemployees. The Company accounts for nonemployee stock-based awards under the
fair value method as prescribed by SFAS No. 123, using a Black-Scholes pricing
model with the following underlying assumption: risk-free interest rates of
6.29% in 1999 and 6.59% in 2000; expected lives of three to four years; and
stock price volatility of 70% in 1999 and 96% in 2000.
Revenue recognition: The Company generates revenue primarily through
delivery of procurement services. Such revenue is recognized as services are
performed.
Income taxes: Upon the election to revoke its Subchapter S corporation
status, the Company began accounting for income taxes under SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets, including
net operating losses and liabilities are determined based on temporary
differences between the book and tax bases of assets and liabilities based on
tax rates expected to be in effect when the temporary differences reverse. The
Company provides a valuation allowance for deferred tax assets that cannot be
currently recognized due to the Company's losses and uncertainty of future
profitability.
Note 2: Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Computers........................................... $ 22,055 $100,421
Furniture and fixtures.............................. 1,718 13,116
Office equipment.................................... 9,450 25,835
Software............................................ 155,998 532,167
-------- --------
189,221 671,539
Accumulated depreciation............................ (13,600) (19,086)
-------- --------
$175,621 $652,453
======== ========
</TABLE>
Note 3: Line of Credit
During 1998, the Company entered into a line-of-credit arrangement for
$30,000, with interest at prime plus 1%. There were no amounts outstanding
under the line of credit at December 31, 1999, or June 30, 2000.
On May 15, 2000, the Company entered into a line-of-credit arrangement for
$500,000 with a maturity date of November 25, 2000. Interest shall accrue on
advances at prime plus 1.25%. There were no amounts outstanding under the line
of credit at June 30, 2000. To facilitate this transaction, the Company issued
warrants to purchase 21,739 shares of common stock at $.92 per share.
F-40
<PAGE>
GLOBE-1, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4: Income Taxes
The tax effects of temporary differences and net operating loss
carryforwards that give rise to the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ -- $ 302,000
Stock-based compensation.......................... 93,000 170,000
-------- ---------
Gross deferred tax assets....................... 93,000 472,000
Deferred tax liabilities:
Depreciation...................................... (54,000) (76,000)
-------- ---------
Net deferred tax assets......................... 39,000 396,000
Valuation allowance................................. (39,000) (396,000)
-------- ---------
Deferred tax assets................................. $ -- $ --
======== =========
</TABLE>
The Company has not recorded any benefit from temporary differences and net
operating loss carryforwards, as realization of such benefits is not reasonably
assured. The Company's net operating loss carryforwards of $888,000 as of June
30, 2000, expire in 2020. The net change in the valuation allowance during the
year ended December 31, 1999, and the six months ended June 30, 2000, was
$39,000 and $357,000, respectively.
Note 5: Shareholders' Equity
Authorized shares: On March 16, 2000, the Board of Directors increased the
number of authorized shares of common stock from 20,000,000 to 40,000,000 and
authorized the issuance of 10,000,000 shares of preferred stock, of which
4,347,827 shares are designated as Series A preferred stock. On July 17, 2000,
the number of Series A preferred stock was increased to 4,891,305.
Preferred stock: In 2000, the Company issued 4,335,940 shares of Series A
preferred stock for $3,773,136, net of issuance costs of $30,776. These shares
are convertible at the option of the holder into common stock at the Series A
conversion price, initially $.92 per share, and are automatically convertible
at the option of the holders or upon an initial public offering. Dividends are
payable when and if declared by the Board of Directors. In the event of a
voluntary or involuntary liquidation, dissolution, or winding up of the
Company, the holders of Series A preferred stock will be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of the Company to the holders of common stock, the amount of $.92 per
share, plus an amount equal to all declared but unpaid dividends on the
preferred stock. Each share of Series A preferred stock has voting rights and
powers equivalent to each full share of common stock to which the respective
shares of preferred stock would be convertible on the record date for the vote.
Related to this issuance, the Company recorded a receivable of $118,200 for
amounts not collected as of June 30, 2000. These amounts have since been
received.
The Company also issued warrants to purchase shares of common stock to these
preferred stock shareholders at exercise prices ranging from $.08 to $.92 per
share. Proceeds from the respective preferred stock issuances were allocated
between the preferred stock and the common stock warrants based on their
relative fair values.
F-41
<PAGE>
GLOBE-1, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Common stock warrants: In 2000, the Company issued warrants to purchase
common stock to employees and nonemployees for services rendered in 2000 or
prior, to satisfy deferred stock-based compensation of $1,411,964. These
warrants vest immediately and have five-year terms from the date of grant. The
exercise prices range from $.02 to $.083 per share. Noncash stock-based
compensation of $272,315, $124,995, and $226,413 was recognized for the year
ended December 31, 1999, and the six-month periods ended June 30, 1999 and
2000, respectively. Of these amounts, $138,572, $61,795, and $56,178 were
capitalized for the year ended December 31, 1999, and the six-month periods
ended June 30, 1999 and 2000, respectively, as costs incurred for development
of internal software.
The Company recorded $32,642 of deferred stock-based compensation as of June
30, 2000, related to services performed by a nonemployee. In the third quarter
of 2000, the Company issued 25,000 warrants to purchase common stock at an
exercise price of $.10 per share to satisfy such obligation.
Stock option plan: In March 2000, the Board of Directors approved a stock
option plan with 3,000,000 shares of the Company's common stock to be reserved
for issuance to employees, directors, and nonemployees.
Note 6: Commitments and Contingencies
Operating leases: The Company has a month-to-month lease for its corporate
facilities which terminated April 15, 2000. Upon such termination, the Company
entered into a new lease agreement that terminates on March 31, 2005. Rent
expense under the Company's operating leases was $13,056 for the year ended
December 31, 1999, and $7,616 and $30,757 for the six-month periods ended June
30, 1999 and 2000, respectively.
Future minimum rental payments required under the noncancellable operating
leases are as follows for the years ending December 31:
<TABLE>
<S> <C>
2000................................................................ $ 93,080
2001................................................................ 135,972
2002................................................................ 139,812
2003................................................................ 143,643
2004................................................................ 147,480
Thereafter.......................................................... 37,110
--------
$697,097
========
</TABLE>
On September 22, 2000, the Company signed an agreement to sublease these
facilities starting October 1, 2000, to a third party at monthly payments of
$11,091 through April 15, 2001.
Litigation: In the normal course of business, various legal claims and other
contingent matters may arise. Management believes that any liability that may
arise from such matters would not have a material adverse effect on the
Company's results of operations, cash flows, or financial position.
Note 7: Related Party Transactions
Certain shareholders provided consulting services to the Company of $17,807
for the year ended December 31, 1999, and $7,585 and $51,613 for the six-month
periods ended June 30, 1999 and 2000, respectively. Of these amounts,
approximately $3,000 and $1,200 remained unpaid as of December 31, 1999, and
June 30, 2000, respectively.
F-42
<PAGE>
GLOBE-1, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The founder of the Company sold certain equipment to the Company since
inception. Amounts due to the founder for these sales were $26,955 and $6,245
as of December 31, 1999, and June 30, 2000, respectively, and are included in
accrued expenses and other on the balance sheets.
Note 8: Subsequent Events
On July 25, 2000, the Company entered into a merger agreement with
Onvia.com, Inc. to sell all the issued and outstanding shares of the Company in
exchange for approximately 2.85 million shares of Onvia.com, Inc. common stock.
The merger was approved by the Company's shareholders on July 23, 2000, and was
consummated on August 10, 2000.
Prior to the close of the merger, the Company repurchased 315,594 shares of
common stock from Robert E. Gilmore, founder, for $500,000.
In the third quarter of 2000, the Company granted 220,000 options to
purchase common stock to two employees under its stock option plan. These
options were fully vested and had an exercise price of $.10 per share. The
Company recognized $256,258 of expense at the date of grant. These options were
exercised immediately.
F-43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Zanova, Inc.
We have audited the accompanying balance sheet of Zanova, Inc. (formerly
iTool.com, Inc.) as of December 31, 1999, and the related statements of
operations, changes in stockholders' equity, and cash flows for the year ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Zanova, Inc. as of December
31, 1999, and the results of its operations and its cash flows for the year
ended December 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
Zanova, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred operating losses since its inception. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
March 5, 2000, except for Note 1 as
to which the date is March 23, 2000
F-44
<PAGE>
ZANOVA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash............................................... $ 2,066,803 $ 160,566
Accounts receivable, less allowance for doubtful
accounts of $22,614 and $-0- at December 31, 1999
and June 30, 2000, respectively................... 43,539 11,970
Prepaid expenses................................... 26,051 3,075
Accounts receivable--other......................... 7,500 --
----------- -----------
Total current assets............................. 2,143,893 175,611
Property and equipment:
Machinery and equipment............................ 351,487 498,967
Furniture and fixtures............................. 36,666 41,597
Leasehold improvements............................. 17,577 17,577
----------- -----------
405,730 558,141
Less accumulated depreciation...................... (56,308) (134,007)
----------- -----------
349,422 424,134
Other assets......................................... 147,573 138,058
----------- -----------
Total assets..................................... $ 2,640,888 $ 737,803
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 122,486 $ 18,665
Accrued compensation............................... 30,973 55,624
Deferred revenue................................... 125,000 247,917
----------- -----------
Total current liabilities........................ 278,459 322,206
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized, 11,581,630 and 11,701,630 shares
issued and outstanding at December 31, 1999 and
June 30, 2000, respectively....................... 11,582 11,702
Additional paid in capital........................... 4,752,608 5,195,303
Accumulated deficit.................................. (2,401,761) (4,791,408)
----------- -----------
Total stockholders' equity....................... 2,362,429 415,597
----------- -----------
Total liabilities and equity......................... $ 2,640,888 $ 737,803
=========== ===========
</TABLE>
See accompanying notes.
F-45
<PAGE>
ZANOVA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended June
Year ended 30,
December ----------------------
31, 1999 2000 1999
----------- ----------- ---------
(Unaudited)
<S> <C> <C> <C>
Revenues:
Website hosting and design.............. $ 164,842 $ 178,684 $ 12,111
License fees............................ 173,000 79,657 93,000
Other professional services............. -- 32,220 --
----------- ----------- ---------
Total revenue......................... 337,842 290,561 105,111
Operating Expenses:
General and administrative.............. 374,520 771,205 55,413
Selling and marketing................... 509,795 592,382 62,398
Product development..................... 1,361,444 1,353,460 288,250
----------- ----------- ---------
Total operating expenses.............. 2,245,759 2,717,047 406,061
Operating loss............................ (1,907,917) (2,426,486) (300,950)
Other (expense) income:
Interest income......................... 15,587 34,014 8
Interest expense........................ (16,398) (1,800) (7,475)
Other income............................ 274 4,625 --
----------- ----------- ---------
Total other (expense) income.............. (537) 36,839 (7,467)
----------- ----------- ---------
Loss before income taxes.................. (1,908,454) (2,389,647) (308,417)
Provision for income taxes................ -- -- --
----------- ----------- ---------
Net loss.................................. $(1,908,454) $(2,389,647) $(308,417)
=========== =========== =========
</TABLE>
See accompanying notes.
F-46
<PAGE>
ZANOVA, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
January 1, 1999 Through June 30, 2000
<TABLE>
<CAPTION>
Additional
Members' Common Paid-in Accumulated
Equity Stock Capital Deficit Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1999................... $ 414,500 $ -- $ -- $ (493,307) $ (78,807)
Contributed capital..... 3,774 -- -- -- 3,774
Conversion of member
equity to common
stock.................. (418,274) 10 418,264 -- --
Issuance of common stock
(pre-split)............ -- 7 1,027,997 -- 1,028,004
1000 to 1 stock split... -- 10,528 (10,528) -- --
Issuance of common stock
(post-split)........... -- 1,037 3,316,875 -- 3,317,912
Net loss for period..... -- -- -- (1,908,454) (1,908,454)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1999................... -- 11,582 4,752,608 (2,401,761) 2,362,429
Issuance of common stock
(unaudited)............ -- 123 453,942 -- 454,065
Repurchase and
cancellation of common
stock (unaudited)...... -- (3) (11,247) -- (11,250)
Net loss for period
(unaudited)............ -- -- -- (2,389,647) (2,389,647)
--------- ------- ---------- ----------- -----------
Balance at June 30, 2000
(unaudited)............ $ -- $11,702 $5,195,303 $(4,791,408) $ 415,597
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-47
<PAGE>
ZANOVA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June
30,
December ----------------------
31, 1999 2000 1999
----------- ----------- ---------
(Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................. $(1,908,454) $(2,389,647) $(308,417)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation.......................... 52,290 77,698 9,909
Bad debt expense...................... 22,614 -- --
Investments taken as payment for
license fees.........................
(25,000) -- --
Changes in operating assets and
liabilities:
Accounts receivable................. (62,216) 31,569 3,937
Prepaid expenses and other assets... (156,124) 39,991 --
Accounts payable and accrued
compensation.......................
85,100 (79,170) (66,628)
Deferred revenue.................... 125,000 122,917 --
----------- ----------- ---------
Net cash used in operating
activities....................... (1,866,790) (2,196,642) (361,199)
INVESTING ACTIVITIES
Purchases of property and equipment....... (362,864) (152,410) (26,645)
----------- ----------- ---------
Net cash used in investing activities..... (362,864) (152,410) (26,645)
FINANCING ACTIVITIES
Cash contributions from members........... 3,774 -- 3,774
Proceeds from issuance of common stock.... 4,345,916 454,065 --
Payment for repurchase of common stock.... -- (11,250) --
Proceeds from member loans................ -- -- 367,678
Repayment of member loans................. (73,900) -- --
----------- ----------- ---------
Net cash provided by financing
activities............................... 4,275,790 442,815 371,452
----------- ----------- ---------
Increase (decrease) in cash............... 2,046,136 (1,906,237) (16,392)
Cash, beginning of period................. 20,667 2,066,803 20,667
----------- ----------- ---------
Cash, end of period....................... $ 2,066,803 $ 160,566 $ 4,275
=========== =========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................. $ 16,398 $ 1,800 $ 7,475
</TABLE>
See accompanying notes.
F-48
<PAGE>
ZANOVA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(The information for the six months ended June 30, 2000 and June 30, 1999 is
unaudited)
1. The Business
Zanova, Inc. (formerly iTool.com) (the Company), a Delaware corporation, was
incorporated on May 26, 1999 and is the successor entity to iTOOL Technologies,
LLC, effective June 22, 1999. On March 23, 2000, the Company changed its name
from iTool.com to Zanova, Inc. The Company's main revenue source is the
licensing of its proprietary and/or licensed software (iTool product) and
providing the related Website hosting services to end users. The Company was
sold on July 11, 2000 (see Note 8).
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements of the Company include the historical
operating results of Zanova, Inc. and iTOOL Technologies, L.L.C. (iTOOL LLC),
the limited liability company it operated as prior to its reorganization into a
C Corp. form, for all periods presented. ITOOL LLC was merged into the Company
on June 18, 1999. Prior to the merger the Company had been an inactive
corporate entity which was formed exclusively to become the new ownership
entity for the business. The ownership structure of the Company at the time of
the merger was identical to that of iTOOL LLC, accordingly, the merger
represents a change in the ownership structure and had no impact on the
business. Accordingly, the accompanying financial statements have been
presented on an as if pooling basis to reflect the common control of Zanova,
Inc. and iTOOL LLC for all periods presented.
The combined financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred operating
losses since inception and to date, has been funded through debt and equity
infusions from certain principal stockholders and private placements of the
Company's common stock. The inability of the Company to attract additional
capital and ultimately, to achieve profitability, raises substantial doubt
about the Company's ability to continue as a going concern.
The Company's ultimate ability to continue as a going concern depends on the
market acceptance of products utilizing its propriety technology, and the
achievement of operating profits and positive cash flow. Management is in the
process of pursuing additional equity financing through a private placement of
the Company's common stock. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
Interim Financial Information
The information furnished for the six months ended June 30, 1999 and 2000 is
unaudited, but reflects, in the opinion of management, all adjustments,
consisting of only normal recurring items, necessary for a fair presentation of
the results for the interim periods presented. Interim results are not
necessarily indicative of the results expected for a full year or any future
period.
Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform with the 2000 presentation.
F-49
<PAGE>
ZANOVA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Use of Estimates
These financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The company considers all liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents and are
stated at cost, which approximates market.
Property and Equipment
Property and equipment is stated at historical cost and is depreciated using
the straight-line method over the estimated useful lives of the assets, ranging
from three to five years.
Fair Value of Financial Instruments
At December 31, 1999, the Company has the following financial instruments:
Cash and cash equivalents, accounts receivable, investments available for sale,
accounts payable and accrued expenses. The carrying value of these financial
instruments approximates their fair value based on their liquidity or short-
term nature.
Income Taxes
Zanova, Inc. was incorporated as a C corporation on May 26, 1999 and
accounts for income taxes according to Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Taxes." On June 22, 1999 iTOOL
LLC was merged with Zanova, Inc. and the merger was accounted for on an as if
pooling basis to reflect the common control of Zanova, Inc. and iTOOL LLC.
During the period the Company was a limited liability company from August 27,
1998 (inception) to June 22, 1999, any tax liability or tax benefits for
federal and state income taxes in the United States resulting from the
Company's operations during this period were passed through to the members of
iTOOL LLC. Given that the Company is accounting for income taxes under SFAS No.
109, deferred income taxes, net of valuation allowances, are recorded to
reflect the future tax consequences attributable to differences between the tax
basis of assets and liabilities and their financial reporting amounts. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which these temporary differences are
expected to be recovered or settled.
Long-Lived Assets
The Company accounts for its long-lived assets in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121) which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company has recorded no impairments during the periods presented in the
accompanying financial statements.
F-50
<PAGE>
ZANOVA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Employee Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to or greater than the fair value of the shares at
the date of grant. Management of the Company determines the fair value of the
underlying shares. The Company has adopted the disclosure-only provisions of
the Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation," accordingly recognizing no compensation expense for the
fixed term employee stock option grants.
The Company also granted options to certain employees based upon the
attainment of certain performance objectives. Given the variable nature of
these grants the Company will record compensation expense for the difference
between the exercise price and fair market value of the underlying common stock
during the performance period.
Revenue Recognition
The Company has adopted Statement of Position 97-2 "Software Revenue
Recognition" as amended by Statement of Position 98-4. Accordingly, revenue
allocable to software licenses is recognized upon delivery of the software
product to the end-user, unless the fee is not fixed or determinable or
collectability is not probable. In software arrangements that include more than
one element, the Company allocates the total arrangement fee among each
deliverable based on the relative fair value of each of the deliverables
determined based on vendor-specific objective evidence.
New Accounting Pronouncements
In December 1999, the Securities Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The effective
date of SAB 101 for the Company is no later than the fourth fiscal quarter of
the year ending December 31, 2000. The Company is currently evaluating the
effect of this SAB on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25 (Interpretation No. 44).
Interpretation No. 44 became effective July 1, 2000. The interpretation
clarifies the application of APB Opinion No. 25 for certain issues,
specifically, (a) the definition of an employee, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
compensation award in a business combination. The adoption of Interpretation
No. 44 is not expected to have a significant impact on the Company's financial
position or results of operations.
3. Related Party Transactions
The Company received, and was charged its proportionate share of, various
services from APPSware Holdings, Inc. (a majority owner of the Company),
including administrative, facilities, technical support and other services.
Such charges were approximately $114,185 and $288,200 for the six months ended
June 30, 2000 and 1999, respectively, and $555,000 for the year ended December
31, 1999. Of these charges approximately $11,455 and $27,000 remained unpaid as
of June 30, 2000 and December 31, 1999, respectively.
The Company recognized $12,747 in revenue for services provided to APPSware
Holding, Inc. for the six month period ended June 30, 2000. Of this revenue
$11,970 remained uncollected as of June 30, 2000.
F-51
<PAGE>
ZANOVA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Income Taxes
The Company accounts for income taxes under FASB Statement No.109
"Accounting for Income Taxes." Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. As
discussed in Note 1, on June 22, 1999 iTOOL LLC was merged into Zanova, Inc.,
at which time it became subject to federal and state income taxes. On the
merger date, Zanova, Inc. had deferred tax assets of $15,958 for the effect of
cumulative temporary differences of iTOOL LLC as of the merger date which were
fully reserved through a valuation allowance.
Components of the Company's net deferred tax assets and liabilities as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Current Noncurrent
--------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred revenue................................... $ 47,038 $ --
Write-down of investment........................... 22,578 --
Startup costs...................................... -- 13,980
Bad debt reserve................................... 8,510 --
Net operating loss carryforward.................. 537,260 --
--------- --------
615,386 13,980
Valuation allowance.................................. (615,386) (1,048)
--------- --------
-- 12,932
Deferred tax liabilities:
Book basis in excess of tax basis for property &
equipment......................................... -- (12,932)
--------- --------
-- (12,932)
--------- --------
Net deferred tax asset (liability)............... $ -- $ --
========= ========
</TABLE>
For financial reporting purposes, the majority of the assets have been
offset by a valuation allowance of $616,434. The valuation allowance is a
result of the Company's operating losses. The primary reason for the valuation
allowance in 1999 was current period losses and $42,408 of deferred start-up
costs existing at the date of the C-Corp election (resulted in recording of
$15,958 of deferred tax assets at election which were fully reserved). At
December 31, 1999, the Company has a net operating loss carryforward of
approximately $1,428,000 for federal and state income tax purposes that begins
to expire in the years 2019 and 2004 for federal and state purposes,
respectively.
5. Stockholder's Equity
iTOOL LLC was formed on August 27, 1998, at which time the members
contributed $414,500. The contribution consisted of cash, fixed assets and
contributed services. On May 26, 1999 iTool.com was incorporated with 10,000
shares of common stock, par value $.001 per share being authorized. Pursuant to
an Agreement and Plan of Merger dated June 18, 1999, a merger was consummated
between iTOOL LLC and Zanova, Inc. in which Zanova, Inc. issued 9,845 common
stock shares for 100 percent of the members interest in iTOOL LLC. On June 21,
1999 the stockholders of the Company approved an amendment to the Company's
certificate of incorporation to increase the authorized common shares from
10,000 to 20,000. On June 21, 1999 the Company's Board of Directors approved a
1,000 to 1 stock split to shareholders of record as of the close of business on
June 30, 1999, in the form of a stock dividend. The stock split resulted in the
issuance of 10,534,455 additional shares of common stock, and a transfer of
$10,534 from paid-in-capital. As a result of
F-52
<PAGE>
ZANOVA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the stock split, the shareholders approved a second amendment to the Company's
certificate of incorporation increasing the authorized common stock shares from
20,000 to 20,000,000. All references to per share amounts throughout this
report reflect this stock split.
During January 2000, the Company canceled 3,000 shares of common stock which
were repurchased from a shareholder for $11,250, the amount originally paid by
the shareholder in fiscal year 1999. During March 2000, the Company issued
123,000 shares of common stock for net proceeds of $454,065.
6. Stock Options and Warrants
The Company has a stock option and incentive plan whereby options to
purchase shares of the Company's common stock are granted at a price equal to
the estimated fair value of the stock on the date of the grant as determined by
the committee administering the plan. The Plan provides for the granting of
both fixed and variable options for financial accounting purposes. Options may
be exercised upon vesting, which generally occurs over a period of three years.
Options expire upon the earlier of five years from the grant date or 90 days
after termination of employment. The Company has reserved 1,300,000 shares of
common stock for issuance under the stock option plan.
Pro forma information regarding net income is required by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the minimum
value method with the following assumptions: risk-free interest rates of 5.50
percent; dividend yields of 0.0 percent; and an expected life of an option of
five years.
Option valuation models require the input of highly subjective assumptions
including the expected life of an option. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options. For purposes of pro forma disclosures, the estimated
fair value of the options was amortized to expense over the vesting period of
the options outstanding. The Company's pro forma net loss in 1999, is
$1,954,510.
Summary information related to the fixed options which vest ratably over
three years and expire five years after the date of grant are as follows:
<TABLE>
<CAPTION>
Number of Number of Weighted-
Shares Options Average
Under Immediately Option Exercise
Option Exercisable Price Price
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Options outstanding at January
1, 1999........................ -- $ -- $ --
Granted....................... 1,059,168 1.75-3.75 2.49
Canceled...................... -- -- --
Exercised..................... -- -- --
--------- ---------- -----
Options outstanding at December
31, 1999....................... 1,059,168 222,057 1.75-3.75 2.49
Granted....................... 181,500 -- 3.75 3.75
Canceled...................... 208,702 1.75-3.75 3.32
Exercised..................... -- -- --
--------- ---------- -----
Options outstanding at June 30,
2000........................... 1,031,966 239,470 1.75-3.75 2.55
========= ========== =====
</TABLE>
F-53
<PAGE>
ZANOVA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has also granted options for up to 105,000 shares of common
stock at $3.75 per share to certain employees based upon the attaining of
certain performance objectives. Under the plan these shares become exercisable
if certain sales related performance criteria are met by December 31, 2000. As
of June 30, 2000, the 105,000 options granted which were based on the
attainment of certain performance objectives were canceled.
The weighted-average fair value of options granted during 1999 was $0.63.
The weighted-average remaining contractual life for options outstanding at
December 31, 1999 was 4.69 years. The weighted average exercise price for
exercisable options was $1.75.
In connection with the sale of its common shares the Company issued certain
immediately vested warrants to the third party who sold the common shares. The
warrants were issued at a strike price of 20 percent greater than the sale
price of the related common shares and expire five years after the date of
issuance. At December 31, 1999 there were 140,000 warrants to purchase common
shares at $2.10 per share and 200,000 warrants to purchase common shares at
$4.50 per share.
7. Commitments and Contingencies
In the ordinary course of business, the Company may become a party to
pending or threatened litigation. Management does not believe the resolution of
such matters will have a material adverse impact on the Company's financial
position.
The Company is obligated under a noncancelable operating lease for office
space used by the Company. The following is a schedule by year of future
minimum rental payments required under the operating lease which has a
remaining noncancelable lease term in excess of one year as of December 31,
1999.
<TABLE>
<S> <C>
2000.............................................................. $148,248
2001.............................................................. 148,248
2002.............................................................. 148,248
2003.............................................................. 148,248
2004.............................................................. 24,708
--------
$617,700
========
</TABLE>
Total rent expense was $73,234 and $-0- for the six months ended June 30,
2000 and 1999, respectively, and $51,972 for the year ended December 31, 1999.
8. Subsequent Events
On June 9, 2000, the Company entered into a purchase agreement with Onvia,
Inc., to sell all the issued and outstanding shares of the Company in exchange
for approximately 2,470,520 shares of Onvia, Inc. common stock. The merger was
approved by the Company's stockholders on July 5, 2000 and was consummated on
July 11, 2000.
F-54
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholder of DemandStar.com, Inc.:
We have audited the accompanying balance sheet of Information On Demand,
Inc. (the Predecessor, a Florida corporation) as of December 31, 1998, and the
related statements of operations, shareholder's deficit and cash flows for the
year then ended, and for the period from January 1, 1999, to June 17, 1999, and
the accompanying balance sheet of DemandStar.com, Inc., a Florida corporation
(the Company), as of December 31, 1999, and the related statements of
operations, shareholder's deficit and cash flows for the period from June 18,
1999, to December 31, 1999. These financial statements are the responsibility
of management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Predecessor as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, and for the period from January 1, 1999, to June 17, 1999, and
the financial position of the Company as of December 31, 1999, and the results
of its operations and its cash flows for the period from June 18, 1999, to
December 31, 1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
/s/ Arthur Andersen LLP
Orlando, Florida
February 4, 2000
F-55
<PAGE>
The Purchase Method of Accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting results in increased
amortization reported in future periods. Accordingly, the accompanying
financial statements of the Predecessor and the Company are not comparable in
all material respects since those financial statements report financial
position, results of operations, and cash flows of these two separate entities.
DEMANDSTAR.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Information On
Demand, Inc.
(Predecessor) DemandStar.com, Inc.
December 31, 1998 December 31, 1999
----------------- --------------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash.................................................................................. $ 17,564 $ 127,733
Accounts receivable................................................................... 1,691 8,593
Prepaid assets........................................................................ -- 92,844
--------- -----------
Total current assets.............................................................. 19,255 229,170
--------- -----------
Property and Equipment, net (Note 2).................................................... -- 108,855
--------- -----------
Other Assets:
Deposits.............................................................................. -- 8,900
Intangible assets (Note 3):
Customer lists and vendor database, net of accumulated amortization of $53,031 at
December 31, 1999.................................................................. -- 245,268
Goodwill, net of accumulated amortization of $155,503 at December 31, 1999.......... -- 719,198
--------- -----------
Total other assets................................................................ -- 973,366
--------- -----------
Total assets...................................................................... $ 19,255 $ 1,311,391
========= ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
-------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities.............................................. $ 123,399 $ 191,558
Current portion of note payable (Note 7).............................................. -- 200,000
Deferred revenue...................................................................... 104,469 139,252
--------- -----------
Total current liabilities......................................................... 227,868 530,810
--------- -----------
Note payable, less current portion (Note 7)............................................. -- 1,106,885
Commitments and Contingencies (Notes 3 and 8)
Shareholder's Deficit (Note 4):
Common stock: $.0001 par value, 100,000,000 shares authorized and 1,250,000 shares
issued and outstanding as of December 31, 1999....................................... -- 125
Additional paid-in capital............................................................ -- 812,413
Shareholder's capital................................................................. 72,098 --
Accumulated deficit................................................................... (280,711) (1,138,842)
--------- -----------
Total shareholder's deficit....................................................... (208,613) (326,304)
--------- -----------
Total liabilities and shareholder's deficit....................................... $ 19,255 $ 1,311,391
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
The Purchase Method of Accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting results in increased
amortization reported in future periods. Accordingly, the accompanying
financial statements of the Predecessor and the Company are not comparable in
all material respects since those financial statements report financial
position, results of operations, and cash flows of these two separate entities.
DEMANDSTAR.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Information On Demand, Inc. DemandStar.com,
(Predecessor) Inc.
---------------------------- -----------------
For the period For the period
For the year from from
ended January 1, 1999 June 18, 1999
December 31, to to
1998 June 17, 1999 December 31, 1999
------------ --------------- -----------------
<S> <C> <C> <C>
Revenue........................................................................ $ 33,718 $ 132,135 $ 196,855
Operating Expenses:
Marketing and advertising.................................................... 12,350 15,866 304,800
Research and development..................................................... 125,010 136,279 136,100
General and administrative................................................... 177,069 250,349 651,520
Depreciation and amortization................................................ -- -- 215,969
--------- --------- -----------
Total operating expenses................................................... 314,429 402,494 1,308,389
--------- --------- -----------
Operating loss................................................................. (280,711) (270,359) (1,111,534)
Interest expense............................................................... -- -- 27,308
--------- --------- -----------
Loss before income tax benefit................................................. (280,711) (270,359) (1,138,842)
--------- --------- -----------
Income tax benefit (Note 6).................................................... -- -- --
--------- --------- -----------
Net loss................................................................... $(280,711) $(270,359) $(1,138,842)
========= ========= ===========
Basic and diluted loss per common share........................................ $ (0.91)
===========
Weighted average number of common shares outstanding........................... 1,250,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
DEMANDSTAR.COM, INC.
STATEMENTS OF SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
Information On Demand, Inc.
(The Predecessor)
-----------------------------------
Shareholder's Accumulated
Capital Deficit Total
------------- ----------- ---------
<S> <C> <C> <C>
Balance, January 1, 1998.................. $ -- $ -- $ --
Issuance of common stock................ 72,098 -- 72,098
Net loss................................ -- (280,711) (280,711)
-------- --------- ---------
Balance, December 31, 1998................ 72,098 (280,711) (208,613)
Issuance of common stock................ 50,441 -- 50,441
Net loss................................ -- (270,359) (270,359)
-------- --------- ---------
Balance, June 17, 1999.................... $122,539 $(551,070) $(428,531)
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
DemandStar.com, Inc. (the Company)
---------------------------------------------------
Common Stock Additional
---------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
at inception............ 1,250,000 $125 $799,875 $ -- $ 800,000
Net loss............... -- -- -- (1,138,842) (1,138,842)
Compensation from stock
options............... -- -- 12,538 -- 12,538
--------- ---- -------- ----------- ----------
Balance, December 31,
1999.................... 1,250,000 $125 $812,413 $(1,138,842) $ (326,304)
========= ==== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
The Purchase Method of Accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting results in increased
amortization reported in future periods. Accordingly, the accompanying
financial statements of the Predecessor and the Company are not comparable in
all material respects since those financial statements report financial
position, results of operations, and cash flows of these two separate entities.
DEMANDSTAR.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Information On Demand, Inc.
(Predecessor) DemandStar.com, Inc.
------------------------------------ --------------------
For the For the
For the period from period from
year ended January 1, 1999 to June 18, 1999 to
December 31, 1998 June 17, 1999 December 31, 1999
----------------- ------------------ --------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.......................................................... $(280,711) $(270,359) $(1,138,842)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... -- -- 215,969
Compensation from stock options................................. -- -- 12,538
Changes in operating assets and liabilities, net of effects from
acquisition:
Increase in accounts receivable............................... (1,691) (2,663) (8,593)
Increase in prepaid assets.................................... -- -- (92,844)
Increase in deposits.......................................... -- -- (8,900)
Increase in accounts payable and accrued liabilities.......... 123,399 146,634 191,558
Increase (decrease) in deferred revenue....................... 104,469 66,232 (33,748)
--------- --------- -----------
Net cash used in operating activities....................... (54,534) (60,156) (862,862)
--------- --------- -----------
Cash Flows From Investing Activities:
Cash paid for acquisition......................................... -- -- (1,000,000)
Capital expenditures.............................................. -- (3,064) (116,290)
--------- --------- -----------
Net cash used in investing activities....................... -- (3,064) (1,116,290)
--------- --------- -----------
Cash Flows From Financing Activities:
Contributions of capital.......................................... 72,098 50,441 --
Proceeds from issuance of common stock............................ -- -- 800,000
Borrowings under note payable..................................... -- -- 1,306,885
--------- --------- -----------
Net cash provided by financing activities................... 72,098 50,441 2,106,885
--------- --------- -----------
Net increase (decrease) in cash..................................... 17,564 (12,779) 127,733
Cash, beginning of period........................................... -- 17,564 --
--------- --------- -----------
Cash, end of period................................................. $ 17,564 $ 4,785 $ 127,733
========= ========= ===========
Supplemental disclosure:
Cash paid for interest............................................ $ -- $ -- $ --
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. Organization and Summary of Significant Accounting Policies:
Organization and Funding
Information On Demand, Inc. (the Predecessor) was formed as a Florida
corporation in June 1997 and commenced operations in January 1998. No financial
statements of the Predecessor have been presented for 1997, as there was no
activity during 1997. The Predecessor was an S corporation. On June 1, 1999,
H.T.E., Inc. (HTE), formed a wholly-owned subsidiary, HTE-IOD, Inc., by
purchasing 1,250,000 shares for $800,000 and advancing $200,000 of cash. On
June 18, 1999, HTE-IOD, Inc. purchased the business and certain net assets of
the Predecessor. See Note 3. On August 23, 1999, HTE-IOD, Inc. changed its name
to Information On Demand, Inc. and on December 21, 1999, its name was changed
to DemandStar.com, Inc. (the Company). The Company is a provider of Internet-
based procurement systems for governmental agencies, which operates primarily
in Florida. Businesses that provide goods and services to agencies enrolled in
the Company's program are provided the opportunity to register with the Company
as registered vendors for an annual fee. The Company operates as a single
business unit.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements as of December 31, 1999, and for the
period from June 18, 1999, to December 31, 1999, reflect the financial position
and results of operations and cash flows of the Company. The accompanying
financial statements as of December 31, 1998, and for the year ended December
31, 1998, and for the period from January 1, 1999, to June 17, 1999, reflect
the financial position and results of operations and cash flows of the
Predecessor. The accompanying financial statements of the Predecessor are not
necessarily comparable to the accompanying financial statements of the Company,
due to the 1999 acquisition. See Note 3. On December 17, 1999, the Company's
board of directors approved a 1,250-to-1 stock split for the Company's common
stock, effective December 21, 1999. All share and per share information
contained herein have been adjusted to reflect the split.
Liquidity/Going Concern
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Accordingly, the financial statements
do not include any adjustments that might result from the Company's inability
to continue as a going concern. The Predecessor and the Company have generated
losses since inception and have relied on capital contributions and loans from
shareholders to fund operations. Management expects to continue to generate
losses during the next twelve months and, based on the current operating
budget, does not anticipate having sufficient cash on hand or available through
current lending arrangements to fund operations. To address this funding need,
in December 1999, the Company's board of directors authorized management to (i)
file a registration statement with the U.S. Securities and Exchange Commission
on Form S-1 to pursue a rights offering of the Company's common stock, (ii)
execute an investment and distribution agreement with HTE covering HTE's
purchase of Series A preferred stock (See Note 4), and (iii) execute a
Conditional Series B Stock Purchase Agreement with HTE and certain Company
employees and directors (See Note 4). Management believes that the funds
generated by the transactions noted above will be sufficient to fund operations
for at least the next twelve months. In the event all the funding is not
received, management believes it can revise its operating plan to reduce costs
to such a level that the Company will be able to fund operations for the next
twelve months.
F-60
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are recorded for financial statement purposes on a straight-line basis over the
estimated useful lives of the assets. Repair and maintenance costs, which do
not extend the useful lives of the related assets are expensed as incurred. The
estimated useful lives of property and equipment are as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Computer equipment.................................................. 3-5
Leasehold improvements.............................................. 2
Furniture and fixtures.............................................. 7
</TABLE>
Depreciation and amortization expense related to property and equipment of
approximately $7,400 is included in depreciation and amortization expense in
the accompanying statement of operations for the period from June 18, 1999, to
December 31, 1999, of the Company. No depreciation expense was incurred by the
Predecessor in 1998 and 1999.
Intangible Assets
Intangible assets represent identifiable assets, such as customer lists and
vendor database, along with amounts paid in excess of the fair market value of
net assets purchased in the acquisition and is being amortized using the
straight-line method over a period of 36 months. Amortization expense related
to intangible assets of approximately $208,500 is included in depreciation and
amortization expense in the accompanying statement of operations for the period
from June 18, 1999, to December 31, 1999, of the Company. No amortization
expense was incurred by the Predecessor in 1998 and 1999.
Deferred Revenue and Revenue Recognition
DemandStar.com, Inc. earns revenues primarily by providing notification of
agency bid proposals to vendors of governmental agencies. Revenue for such
notification is deferred and recognized ratably over the terms of agreements
with these vendors, as services are typically billed at the beginning of the
agreement term. The typical term for these agreements is one year.
Revenue for fax on demand and document fulfillment services is recognized
when the requested documents are provided to vendors.
Income Taxes
The Predecessor elected to be taxed as an S corporation for both federal and
state income tax reporting purposes. Accordingly, the losses related to periods
presented for the Predecessor are includable in the personal income tax returns
of the Predecessor's shareholder. The operating results of the Company are
included in the consolidated federal and state income tax returns of HTE. The
Company's income tax provision is computed as if it were filing separate
federal and state tax returns. The Company accounts for income taxes using an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, the Company generally considers all
expected future events other than enactments of changes in the tax laws or
rates. Changes in tax laws or rates will be recognized in the future years in
which they occur.
F-61
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company measures compensation expense for stock options issued to
employees using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). Under APB No. 25, if the exercise price of the
Company's stock options equals or exceeds the estimated fair value of the
underlying stock on the date of the grant, no compensation expense is generally
recognized. For stock options granted to non-employees, compensation cost is
measured using the fair value based method. Additionally, the Company has
provided pro forma disclosures of net income and earnings per share as if the
fair value based method had been applied to all stock options issued by the
Company as required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). See Note 5. As the stock
options issued to employees have had no intrinsic value at the date of grant,
no compensation expense related to stock options issued has been recorded.
Fair Value of Financial Instruments
The carrying values of cash, accounts receivable, accounts payable and
accrued liabilities, approximate fair value due to the short-term maturities of
these assets and liabilities. The fair value of the note payable is
approximately $1,045,000. The fair value was estimated as the discounted amount
of future cash flows using a discount rate of 8%.
Net Loss Per Share
The Company's basic and diluted net loss per share are found in the
accompanying statements of operations. Basic and diluted per share information
are the same as the Company generated a net loss and had no outstanding
potential common stock instruments. Earnings per share information for the
Predecessor has not been presented as this information is not meaningful given
the Predecessor's capital structure.
Research and Development
Research and development expense includes expenses incurred by the Company
or Predecessor for research, design and development of proprietary technology.
Research and development costs are expensed as incurred. Software development
costs are required to be capitalized when a product's technological feasibility
has been established by completion of a working model of the product and ending
when a product is available for general release to customers. To date,
completion of a working model of the Company's product and general release have
substantially coincided. As a result, the Company and Predecessor have not
capitalized any software development costs because such costs have not been
significant.
Long-Lived Assets
The Company reviews its long-lived assets, intangible assets and goodwill
for impairment whenever circumstances indicate that the carrying amount of an
asset may not be recoverable. Due to the Company's current operating and cash
flow loss combined with its historical operating and cash flow loss, the
Company has reviewed its long-lived assets, intangible assets and goodwill for
impairment. Management believes the expected future cash flows (undiscounted
and without interest charges) is sufficient to recover the carrying amount of
its long-lived assets, intangible assets and goodwill as stated in the
accompanying balance sheet. An impairment loss shall be recognized if the sum
of the expected future cash flows (undiscounted and without interest charges)
for the Company is less than the carrying amount of the asset. If an impairment
loss is recognized, the reduced carrying amount of the asset shall be accounted
for its new cost. For a depreciable asset, the new cost shall be depreciated
over the asset's remaining useful life. There has been no material impairment
reflected in the accompanying financial statements.
F-62
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income
Comprehensive income is equal to net loss presented in the accompanying
financial statements.
2. Property and Equipment
Property and equipment as of December 31, 1999, consisted of the following:
<TABLE>
<S> <C>
Computer equipment............................................... $ 94,607
Leasehold improvements........................................... 20,382
Furniture and fixtures........................................... 1,301
--------
116,290
Less--Accumulated depreciation................................... (7,435)
--------
$108,855
========
</TABLE>
3. Business Combination
On June 18, 1999, the Company purchased the business and certain net assets
of the Predecessor for $1 million in cash. The Company could pay up to an
additional $2,000,000 in cash over a three-year period from the purchase date
for the purchase if certain financial targets set forth in the Agreement for
Sale and Purchase of Assets are attained. The net assets acquired consisted of
$1,173,000 of intangible assets and $173,000 of deferred revenue for vendor
agreements. The purchase was accounted for using the purchase method of
accounting and, accordingly, the operating results from June 18, 1999, to
December 31, 1999, of the purchased business have been included in the
accompanying statement of operations of the Company for the same period and
will continue to be reflected going forward.
4. Shareholder's Deficit
On December 22, 1999, the Company filed a registration statement with the
U.S. Securities and Exchange Commission on Form S-1 in contemplation of a
rights offering to HTE shareholders and employees and the sale of Series A and
Series B preferred stock. Immediately following the consummation of the rights
offering, the Company's authorized preferred stock will consist of 10,000,000
shares with a par value of $.01 per share, of which 2,000,000 shares are
designated as Series A preferred stock, 4,000,000 shares are designated as
Series B preferred stock, and 4,000,000 shares are undesignated. As of December
31, 1999, no preferred stock was issued or outstanding.
Under the terms of the rights offering, the Company intends to distribute
rights to the shareholders and employees of HTE that will entitle each holder
to purchase shares of common stock at $1 per share.
F-63
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Stock Compensation Plan
In December 1999, the Company's board of directors approved the 1999
Employee Incentive Compensation Plan (the Plan). The Plan provides that awards
may be granted to the Company's key officers, employees, consultants, advisors
and directors or others designated by the board of directors at the fair
market value at the date of grant. Awards under the Plan may take the form of
stock options, share appreciation rights or restricted stock. The Plan limits
the number of shares which may be issued pursuant to incentive stock options
to 4,000,000 shares. As of December 31, 1999, the Company had not awarded
share appreciation rights or restricted stock under the Plan.
A summary of the status of the Company's outstanding stock options, each of
which is fixed with respect to number of shares and exercise price, including
employee stock options discussed above, as of December 31, 1999, and changes
during the period ending on that date is presented below:
<TABLE>
<CAPTION>
1999
------------------------------------
Employees Non-Employees
------------------- ----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at inception................. -- $ -- -- $ --
Granted................................ 1,310,000 1.00 90,000 1.00
Exercised.............................. -- -- -- --
Forfeited.............................. -- -- -- --
--------- ----- ------ -----
Outstanding at end of year............... 1,310,000 $1.00 90,000 $1.00
========= ===== ====== =====
Options exercisable at year end.......... 167,500 $1.00 22,500 $1.00
Weighted-average fair value of options
granted during the year................. $0.26 $0.52
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Number Number
Outstanding at Weighted-Average Weighted- Exercisable at Weighted-
Exercise December 31, Remaining Average December 31, Average
Type Price 1999 Contractual Life Exercise Price 1999 Exercise Price
---- -------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Employees............... $1.00 1,310,000 9.9 $1.00 167,500 $1.00
Non-Employees........... $1.00 90,000 10.0 $1.00 22,500 $1.00
</TABLE>
F-64
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of options granted during the fiscal year ended December 31,
1999, reported below has been estimated at the date of grant using a Black-
Scholes option pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. The Company's options have characteristics
significantly different from those of traded options, and changes in the
subjective assumptions can materially affect the fair value estimate. The fair
value of each option grant was estimated on the date of grant based on the
following weighted-average assumptions for options granted during 1999:
<TABLE>
<CAPTION>
Stock Option Plan
-------------------
For the Period from
June 18, 1999 to
December 31, 1999
-------------------
<S> <C>
Weighted-average expected life (in years)................ 4.9
Weighted-average risk-free interest rate................. 6.15%
Volatility--employees.................................... 0%
Volatility--non-employees................................ 60%
Dividend yield........................................... --
</TABLE>
The compensation from stock options of $12,538 was related to options
granted to a consultant and was calculated at the fair value using the Black-
Scholes options valuation model as described above. This expense is included in
general and administrative expenses in the statement of operations for the
period from June 18, 1999, to December 31, 1999. Had compensation cost related
to employees for the Company's stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method under SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
For the Period from
June 19, 1999 to
December 31, 1999
-------------------
<S> <C>
Net loss attributable to common shareholders:
As reported............................................ $(1,138,842)
Pro forma.............................................. (1,195,778)
Basic and diluted earnings per share:
As reported............................................ $ (0.91)
Pro forma.............................................. (0.96)
</TABLE>
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and earnings per share for fiscal 1999 are not likely to be representative of
the pro forma effects on net income and earnings per share in future years.
6. Income Taxes
No provision for income taxes has been recorded in the accompanying
financial statements for the Predecessor, as the taxable losses related to the
periods presented are includable in the personal income tax returns of the
Predecessor's shareholder.
F-65
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for the period from June 18, 1999, to
December 31, 1999, differs from the amount computed by applying the U.S.
federal corporate tax rate of 34 percent to income before provision for income
taxes as follows:
<TABLE>
<S> <C>
U.S. federal income tax rate.......................................... 34.0%
Valuation allowance................................................... (34.0)
-----
Effective tax rate.................................................... 0.0%
=====
</TABLE>
Deferred income taxes consisted of the following as of December 31, 1999:
<TABLE>
<CAPTION>
Current Noncurrent Total
------- ---------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenues......................... $ 9,952 $ -- $ 9,952
Net operating loss (NOL) carryforwards.... -- 422,248 422,248
------- --------- ---------
Total assets............................ 9,952 422,248 432,200
------- --------- ---------
Valuation allowance......................... (9,952) (422,248) (432,200)
------- --------- ---------
Net deferred tax assets................. $ -- $ -- $ --
======= ========= =========
</TABLE>
The Company had NOL carryforwards as of December 31, 1999, of approximately
$1,093,000 available to offset future taxable income. The NOL carryforwards
expire in 2019. Utilization of the NOL is dependent on generating sufficient
future taxable income. Due to uncertainties regarding the Company's ability to
realize the benefits of its deferred tax assets through future operations, a
valuation allowance has been established that completely offsets the NOL as of
December 31, 1999.
7. Related Party Transactions
The Predecessor used office space owned by the shareholder for which rent of
approximately $6,300 and $4,200 was paid for the year ended December 31, 1998,
and for the period from January 1, 1999 to June 17, 1999, respectively. This
rent charge is included in general and administrative expenses in the
accompanying statements of operations of the Predecessor. During the period
from June 18, 1999, to December 31, 1999, the Company paid approximately
$21,800 to a member of the board of directors for legal services provided by
the member to the Company, which is included in general and administrative
expenses in the accompanying statement of operations of the Company.
HTE charges the Company a management fee for finance, accounting, management
and basic processing services based on a percentage of total expenses. The
total of these charges was $52,000 for the period from June 18, 1999, to
December 31, 1999, which is included in general and administrative expenses in
the accompanying statement of operations of the Company.
Certain payroll and other administrative costs of HTE were allocated to the
Company based on actual time and expenses incurred on the Company's behalf.
These costs totaled approximately $131,500 for the period from June 18, 1999,
to December 31, 1999.
During 1999, the Company borrowed money from HTE to acquire the business and
certain net assets of the Predecessor and fund its operations under an informal
lending arrangement. On October 31, 1999, the Company entered into an unsecured
loan agreement which has a principal amount of $1,750,000 (the Loan) with HTE.
Borrowings outstanding under the Loan as of December 31, 1999, totaled
$1,306,885 with an
F-66
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
available balance of $443,115. Interest at a rate of eight percent, which
totaled approximately $27,300, was charged by HTE and is included in accounts
payable and accrued liabilities in the accompanying balance sheet as of
December 31, 1999. The unpaid principal balance is due at the earlier of the
following maturity schedule which is payable on the anniversary of the note
through 2004 or the date of the effectiveness of a secondary public offering of
the Company's common stock yielding gross proceeds of at least $10,000,000.
Scheduled principal reductions of the Loan, by year, were as follows as of
December 31, 1999:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ----------
<S> <C>
2000.......................................................... $ 200,000
2001.......................................................... 250,000
2002.......................................................... 350,000
2003.......................................................... 450,000
2004.......................................................... 56,885
----------
$1,306,885
==========
</TABLE>
8. Commitments and Contingencies
Operating Leases
The Company leases office space and equipment under certain long-term non-
cancelable operating lease agreements with varying terms and conditions.
Future aggregate minimum rental payments under these agreements are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ --------
<S> <C>
2000............................................................ $185,918
2001............................................................ 126,740
2002............................................................ 32,551
2003............................................................ 7,106
2004............................................................ 2,690
--------
$355,005
========
</TABLE>
Rent expense under operating leases totaled approximately $23,500 and
$20,200 for the Predecessor for the year ended December 31, 1998, and the
period from January 1, 1999, to June 17, 1999, respectively. The Company had
rent expense under operating leases totaling approximately $79,700 for the
period from June 18, 1999, to December 31, 1999, which is included in general
and administrative expenses in the accompanying statement of operations of the
Company.
Employment Agreements
In December 1999, the former sole shareholder of the Predecessor voluntarily
resigned and concurrently entered into a one-year consulting arrangement
whereby the Company is obligated to pay him $150,000.
9. Subsequent Events
In January 2000, HTE purchased 500,000 shares of Series A Preferred Stock
for $1,000,000. In February 2000, HTE exercised its option to purchase an
additional 250,000 shares of Series A Preferred Stock for $500,000 in cash.
Each share of Series A Preferred Stock shall be convertible into one share of
fully paid
F-67
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
common stock at either the election of the holder of the Series A Preferred
Stock or automatically upon the sale of substantially all of the Company's
assets or a merger of the Company. The conversion price for such conversion
shall be $2.00 per each share of DemandStar common stock received as a result
of such conversion. Upon liquidation of the Company, HTE, as sole shareholder
of the Series A Preferred Stock, generally shall be entitled to receive $2.00
per share or a total liquidation preference of $1,500,000.
The Company also intends to enter into an agreement for the conditional
purchase of Series B Preferred Stock with HTE and certain employees and
directors of the Company (collectively the Buyers). Under the terms of this
agreement, in the event the rights offering raises less than $5,000,000, the
Buyers will agree to purchase 2,000,000 shares of Series B Preferred Stock for
$2,000,000. The Series B Preferred Stock will accrue dividends on the
liquidation amount of the stock at the rate of 6% per annum. The dividends are
cumulative, but shall not be payable unless and until declared by the board of
directors. The dividends are payable through accretion of the liquidation
preference or additional shares of Series B Preferred Stock until June 15,
2002, at which time dividends will be payable in cash.
Following the second anniversary of the later of (i) the closing date of the
rights offering or (ii) June 30, 2000, the Company may be required to
mandatorily redeem all or a portion of the Series B Preferred Stock at the
election of the holders of the Series B Preferred Stock. The redemption price
will equal the liquidation value of the shares being redeemed plus all accrued
and unpaid cash dividends. In order to induce the Buyers to enter into the
conditional Series B Preferred Stock purchase agreement, the Company, in
January 2000, issued warrants entitling the Buyers to purchase an aggregate of
1,000,000 shares of the Company's common stock at an exercise price of $2.00
per share.
In January and February 2000, the following stock options were granted under
the Company's 1999 Employee Incentive Compensation Plan:
<TABLE>
<CAPTION>
Number of Exercise
Description Type Options Granted Price
----------- ------------- --------------- --------
<S> <C> <C> <C>
Officer............................... Qualified 100,000 $1.00
Two officers.......................... Non-qualified 100,000 $1.00
Various employees..................... Non-qualified 670,000 $1.00
-------
Total Granted......................... 870,000
=======
</TABLE>
In February 2000, HTE's board of directors granted, under its Employee
Incentive Compensation Plan, 100 shares of DemandStar common stock to each of
DemandStar's 36 employees (exclusive of officers and directors) and 106 of
HTE's management employees, for an aggregate of 14,200 shares.
F-68
<PAGE>
DEMANDSTAR.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DemandStar.com, Inc.
(The Company)
---------------------------
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash.............................................. $ 127,733 $ 1,899,195
Accounts receivable............................... 8,593 18,803
Prepaid assets.................................... 92,844 368,791
----------- -----------
Total current assets............................ 229,170 2,286,789
----------- -----------
Property and equipment, net......................... 108,855 867,945
----------- -----------
Other Assets:
Deposits.......................................... 8,900 8,900
Customer lists and vendor database, net........... 245,268 170,693
Goodwill, net..................................... 719,198 500,523
----------- -----------
Total other assets.............................. 973,366 680,116
----------- -----------
Total assets.................................... $ 1,311,391 $ 3,834,850
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities.......... $ 191,558 $ 951,905
Due to HTE........................................ -- 10,401
Current portion of note payable................... 200,000 200,000
Deferred revenue.................................. 139,252 523,454
----------- -----------
Total current liabilities....................... 530,810 1,685,760
----------- -----------
Note payable, less current portion.................. 1,106,885 1,550,000
----------- -----------
Shareholders' Equity:
Common stock...................................... 125 764
Preferred stock................................... -- 1,500,000
Additional paid-in capital........................ 812,413 6,595,701
Accumulated deficit............................... (1,138,842) (7,497,375)
----------- -----------
Total shareholders' (deficit) equity............ (326,304) 599,090
----------- -----------
Total liabilities and shareholders' (deficit)
equity......................................... $ 1,311,391 $ 3,834,850
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-69
<PAGE>
The Purchase Method of Accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting results in increased
amortization reported in future periods. Accordingly, the accompanying
financial statements of the Predecessor and the Company are not comparable in
all material respects since those financial statements report results of
operations and cash flows of these two separate entities.
DEMANDSTAR.COM, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(The Predecessor) (The Company)
----------------- -----------------------------------------------------------
Information
Information on Demand,
on Demand, Inc. for the DemandStar.com, DemandStar.com,
Information On Inc. for the period from Inc. for the Inc. for the
Demand, Inc. for three months June 1, 1999 three months nine months
the period from ended to ended ended
January 1,1999 to September 30, September 30, September 30, September 30,
June 17, 1999 1999 1999 2000 2000
----------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 132,135 $ 92,794 $ 92,891 $ 206,883 $ 435,480
Operating expenses
Marketing and
advertising............ 15,866 101,138 107,888 1,481,740 3,257,784
Research and
development............ 136,279 55,043 55,609 211,930 449,388
General and
administrative......... 250,349 159,935 177,677 1,102,283 2,720,737
Depreciation and
amortization........... -- 110,783 110,783 129,472 359,996
--------- --------- --------- ----------- -----------
Total operating
expenses............... 402,494 426,899 451,957 2,925,425 6,787,905
--------- --------- --------- ----------- -----------
Operating loss.......... (270,359) (334,105) (359,066) (2,718,542) (6,352,425)
Interest income
(expense), net......... -- (10,900) (10,900) 44,057 (6,108)
--------- --------- --------- ----------- -----------
Loss before income tax
benefit................ (270,359) (345,005) (369,966) (2,674,485) (6,358,533)
Income tax benefit...... -- -- -- -- --
--------- --------- --------- ----------- -----------
Net loss................ $(270,359) $(345,005) $(369,966) $(2,674,485) $(6,358,533)
========= ========= ========= =========== ===========
Basic and diluted loss
per common share....... $ (0.35) $ (1.31)
=========== ===========
Weighted average number
of common shares
outstanding............ 7,638,480 4,845,283
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
The Purchase Method of Accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting results in increased
amortization reported in future periods. Accordingly, the accompanying
financial statements of the Predecessor and the Company are not comparable in
all material respects since those financial statements report results of
operations and cash flows of these two separate entities.
DEMANDSTAR.COM, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(The
Predecessor) (The Company)
-------------- ------------------------------
Information On Information On
Demand, Inc. Demand, Inc.
for the period for the period DemandStar.com,
from from Inc. for the
January 1, June 1, nine months
1999 to 1999 to ended
June 17, September 30, September 30,
1999 1999 2000
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(270,359) $ (369,966) $(6,358,533)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ -- 110,783 359,996
Compensation from stock
transactions................ -- -- 34,266
Changes in operating assets
and liabilities:
Increase in accounts
receivable................ (2,663) (22,240) (10,210)
Increase in prepaid
assets.................... -- -- (275,947)
Increase in accounts
payable and accrued
liabilities............... 146,634 144,856 760,347
Increase in due to HTE..... -- 486,321 10,401
Increase (decrease) in
deferred revenue.......... 66,232 (66,484) 384,202
--------- ----------- -----------
Net cash (used in)
provided by operating
activities.............. (60,156) 283,270 (5,095,476)
--------- ----------- -----------
Cash flows from investing
activities:
Cash paid for acquisition...... -- (1,000,000) --
Capital expenditures........... (3,064) (79,103) (825,838)
--------- ----------- -----------
Net cash used in
investing activities.... (3,064) (1,079,103) (825,838)
--------- ----------- -----------
Cash flows from financing
activities:
Contributions of capital....... 50,441 -- --
Proceeds from issuance of
common stock, net of offering
costs......................... -- 800,000 5,749,661
Proceeds from issuance of
Series A preferred stock...... -- -- 1,500,000
Borrowings under note payable.. -- -- 443,115
--------- ----------- -----------
Net cash provided by
financing activities.... 50,441 800,000 7,692,776
--------- ----------- -----------
Net (decrease) increase in cash.. (12,779) 4,167 1,771,462
Cash, beginning of period........ 17,564 -- 127,733
--------- ----------- -----------
Cash, end of period.............. $ 4,785 $ 4,167 $ 1,899,195
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE>
DEMANDSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 2000
The financial statements included herein have been prepared by
DemandStar.com, Inc. (the "Company" or "DemandStar"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the financial statements for the year ended December 31, 1999, and the
notes thereto, included in the Company's registration statement on Form S-1, as
amended (Registration No. 333-93445).
The unaudited financial statements included herein include normal recurring
adjustments and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of such financial statements. The
interim results are not indicative of results for a full year.
Information On Demand, Inc. (the "Predecessor") was formed as a Florida
corporation in June 1997 and commenced operations in January 1998. The
Predecessor was an S corporation. On June 1, 1999, H.T.E., Inc. ("HTE"), formed
a wholly-owned subsidiary, HTE-IOD, Inc., by purchasing 1,250,000 shares for
$800,000 and advancing $200,000 of cash. On June 18, 1999, HTE-IOD, Inc.
purchased the business and certain net assets of the Predecessor. On August 23,
1999, HTE-IOD, Inc. changed its name to Information On Demand, Inc. and on
December 21, 1999, its name was changed to DemandStar.com, Inc. The
registration statement on Form S-1 filed by the Securities and Exchange
Commission (the "SEC") in connection with the Company's public rights offering
(File No. 333-93445), as amended, was declared effective by the SEC on March
27, 2000 and expired on May 1, 2000. The offering period for the rights
offering commenced on March 27, 2000 and expired on May 1, 2000, with the
offering closing May 5, 2000. Each right was exercisable for one share of
common stock at an exercise price of $1.00 per share. Upon closing, rights to
purchase an aggregate of 4,998,050 registered shares of common stock and an
aggregate of 1,376,030 restricted shares of common stock were exercised for an
aggregate purchase price of $6,374,080. After deducting reasonable estimated
total expenses incurred in connection with the offering of $624,419, the
Company's net proceeds from the offering were $5,749,661.
The Company is a provider of Internet based procurement systems for business
to government eCommerce over the Internet. The Company's electronic marketplace
enables governmental agencies to purchase goods and services more efficiently
and makes it easier for commercial vendors to do business with government
agencies. Membership in the Company's Internet-based procurement network is
provided free to governmental agencies that enter into an agreement to
distribute all of their formal bids and request for proposals through the
Internet site. Businesses pay an annual subscription fee to be registered
vendors in the Company's procurement network.
1. Loss Per Share
The Company's basic and diluted net loss per share are found in the
accompanying statement of operations. Basic and diluted per share information
are the same as the Company generated a net loss for the period. Options to
purchase approximately 3,381,700 shares were outstanding as of September 30,
2000, but were not included in the computation of diluted loss per share
because they are antidilutive. Loss per share information for the Predecessor
has not been presented as this information is not meaningful given the
Predecessor's capital structure.
F-72
<PAGE>
2. Due to HTE
Due to HTE represents amounts owed to HTE in excess of the loan agreement
discussed below. This amount results from timing of payments. HTE charged the
Company a management fee for finance, accounting, management and basic
processing services based on a percentage of total expenses for the first
quarter and actual hours incurred thereafter. The total of these charges was
approximately $74,500 for the nine months ended September 30, 2000, which are
included in general and administrative expenses in the accompanying statement
of operations of the Company. The amount owed to HTE as of September 30, 2000
is $10,401.
3. Related Party Transactions
The Predecessor used office space owned by the shareholder for which rent of
approximately $4,200 was paid for the period January 1, 1999 to June 17, 1999.
This rent charge is included in general and administrative expenses in the
accompanying statement of operations of the Predecessor.
4. Note Payable
During 1999 and 2000, the Company borrowed money from HTE to acquire the
business and certain net assets of the Predecessor and to fund its operations.
On October 31, 1999, the Company issued an unsecured note in the principal
amount of $1,750,000 in favor of HTE (the "Loan"). As of September 30, 2000,
borrowings under the Loan totaled $1,750,000, with no available balance.
Interest at a rate of eight percent, which totaled approximately $107,500, was
charged by HTE during the nine months ended September 30, 2000, pursuant to the
terms of the Loan. Approximately $134,800 related to accrued interest is
included in accounts payable and accrued liabilities in the accompanying
balance sheet as of September 30, 2000. Principal and interest due under the
Loan are payable in annual installments on each anniversary of the note, with
the entire remaining outstanding balance due upon the earlier of the maturity
date of the Loan or the date of the effectiveness of a secondary public
offering of the Company's common stock yielding gross proceeds of at least
$10,000,000. On October 31, 2000, the repayment terms of the unsecured note
were modified, as more fully described in the subsequent events disclosure in
Note 6.
In accordance with the modification agreement scheduled principal reductions
of the Loan will be as follows as of September 30, 2000:
<TABLE>
<CAPTION>
October 31, Amount
----------- ----------
<S> <C>
2001........................................................... $ 450,000
2002........................................................... 350,000
2003........................................................... 450,000
2004........................................................... 500,000
----------
$1,750,000
==========
</TABLE>
5. Income Taxes
The Predecessor elected to be taxed as an S corporation for both federal and
state income tax reporting purposes. Accordingly, the losses related to periods
presented for the Predecessor are includable in the personal income tax returns
of the Predecessor's shareholder. The operating results of the Company were
included in the consolidated federal and state income tax returns of HTE prior
to May 1, 2000. The Company's income tax provision is computed as if it were
filing separate federal and state tax returns. The Company accounts for income
taxes using an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, the Company generally considers
all expected future events other than enactments of changes in the tax laws or
rates. Changes in tax laws or rates will be recognized in the future years in
which they occur.
F-73
<PAGE>
Due to uncertainties regarding the Company's ability to realize the benefits
of its deferred tax assets through future operations, a valuation allowance has
been established that completely offsets the net operating loss as of September
30, 2000.
6. Subsequent Events
On October 31, 2000, a modification agreement to the $1,750,000 unsecured
note in favor of HTE (the "Loan") was entered into between the Company and HTE.
Effective November 1, 2000, the modified payment terms include (i) an increase
in the interest rate from eight percent to ten percent, (ii) the deferral of
the October 31, 2000 payment of principal and interest to October 31, 2001 and
(iii) a one -time modification fee of $10,000 payable January 15, 2001. In
exchange for the modifications agreed to by HTE, in the event that, prior to
October 31, 2001, the Company issues a new equity security in a third- party
transaction in which equity capital in excess of $3,000,000 is raised, the
Company agrees to issue HTE within thirty days of third-party financing, in
full and complete satisfaction of the October 31, 2000 note payment, that
amount of such new equity security which is equivalent in " fair market value"
to the amounts due on the October 31, 2000 note payment, taking into account
the interest increase provided for in the modification agreement. For purposes
thereof, "fair market value" shall mean the face value of such new security
issued in the third party financing. In the event the Company does not issue a
new equity security as a result of third party financing prior to October 31,
2001, the deferred note payment plus all additional accrued interest due as a
result of the deferral shall be paid in cash on October 31, 2001, in addition
to the normal scheduled principal and interest payment.
F-74
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Onvia.com, Pro Forma
Inc. Globe-1 Zanova Adjustments Pro Forma
---------- ------- ------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue................... $ 96,094 $ 339 $ 291 $ 96,724
Cost of goods sold........ 103,542 90 103,632
-------- ------- ------- ---------
Gross margin............ (7,448) 249 291 (6,908)
Operating expenses
Sales and marketing..... 53,597 314 592 54,503
Technology and
development............ 18,685 38 1,354 20,077
General and
administrative......... 9,395 149 771 10,315
Goodwill amortization... 2,695 $ 6,586 9,281
Noncash stock-based
compensation........... 6,726 814 7,540
-------- ------- ------- ------- ---------
Total operating
expenses............. 91,098 1,315 2,717 6,586 101,716
-------- ------- ------- ------- ---------
Loss from operations...... (98,546) (1,066) (2,426) (6,586) (108,624)
Interest income, net...... 7,183 41 36 7,260
-------- ------- ------- ------- ---------
Net loss.................. (91,363) (1,025) (2,390) (6,586) (101,364)
Reduction of beneficial
conversion feature....... 287 287
-------- ------- ------- ------- ---------
Net loss attributable to
common stockholders...... $(91,076) $(1,025) $(2,390) $(6,586) $(101,077)
======== ======= ======= ======= =========
Basic and diluted net loss
per common share......... $ (1.48) $ (1.52)
======== =========
Basic and diluted weighted
average common shares
outstanding.............. 61,663 4,823 66,486
======== ======= =========
</TABLE>
See notes to the unaudited pro forma financial statements.
F-75
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Onvia.com, Pro Forma
Inc. Globe-1 Zanova Adjustments Pro Forma
---------- ------- ------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 27,177 $ 360 $ 338 $ 27,875
Cost of goods sold.......... 31,574 77 31,651
-------- ----- ------- --------
Gross margin.............. (4,397) 283 338 (3,776)
Operating expenses
Sales and marketing....... 16,286 155 510 16,951
Technology and
development.............. 7,444 1,361 8,805
General and
administrative........... 4,235 106 375 4,716
Goodwill amortization..... $ 13,171 13,171
Noncash stock-based
compensation............. 10,463 134 10,597
-------- ----- ------- -------- --------
Total operating
expenses............... 38,428 395 2,246 13,171 54,240
-------- ----- ------- -------- --------
Loss from operations........ (42,825) (112) (1,908) (13,171) (58,016)
Interest expense, net....... (541) (3) (544)
-------- ----- ------- -------- --------
Net loss.................... (43,366) (115) (1,908) (13,171) (58,560)
Beneficial conversion
feature.................... (14,008) (14,008)
-------- ----- ------- -------- --------
Net loss attributable to
common stockholders........ $(57,374) $(115) $(1,908) $(13,171) $(72,568)
======== ===== ======= ======== ========
Basic and diluted net loss
per common share........... $ (4.59) $ (4.19)
======== ========
Basic and diluted weighted
average common shares
outstanding................ 12,508 4,823 17,331
======== ======== ========
</TABLE>
See notes to the unaudited pro forma financial statements.
F-76
<PAGE>
ONVIA.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
1. General
The unaudited pro forma statements of operations for the year ended December
31, 1999 and the nine months ended September 30, 2000 have been prepared as if
the merger between Onvia.com, Inc. (Onvia) and Globe-1, Incorporated and
Zanova, Inc. (the "acquired entities") had occurred as of the beginning of the
periods presented.
2. Basis of Presentation
These unaudited pro forma statements of operations are based on estimates
and assumptions. The pro forma adjustments made in connection with the
development of the pro forma information are preliminary and have been made
solely for purposes of developing such pro forma information as necessary to
comply with the disclosure requirements of the Securities and Exchange
Commission. The unaudited pro forma statements of operations do not purport to
be indicative of the financial position or results of operations of the
combined entity or indicative of future periods' results of operations that
actually would have been realized had the entities been a single entity during
these periods. The financial information for the acquired entities has been
included in the financial statements for Onvia as of the date of their
respective acquisitions.
3. Pro Forma Loss Per Share
The pro forma basic net loss per share is based on the combined weighted
average number of shares of the Onvia's common stock outstanding during the
period and the number of shares of Onvia's common stock issued in the exchange.
Historical basic and diluted earnings per share are calculated using the
weighted average shares of common stock outstanding, reduced for shares subject
to repurchase by Onvia. For the year ended December 31, 1999 and the nine
months ended September 30, 2000, the effects of stock options, warrants and
nonvested common stock are excluded from the calculation of diluted net loss
per share, as they would be anti-dilutive.
4. Pro Forma Adjustments
The purchase prices were calculated based upon the average common stock
value at the announcement of the mergers. To consummate the transaction of
Globe-1, Onvia issued 2,351,705 shares of Onvia's common stock, assumed all of
the outstanding options and warrants of Globe-1, and incurred approximately
$200,000 of transaction costs; this consideration has an aggregate value of
$24.8 million. To consummate the transaction of Zanova, Onvia issued 2,470,520
shares of Onvia's common stock, assumed all of the outstanding options and
warrants of Zanova, and incurred approximately $627,000 of transaction costs;
this consideration has an aggregate value of $18.5 million.
The $39.5 million excess of the purchase prices over the estimated fair
value of assets and liabilities acquired in connection with the mergers was
recorded as goodwill. The purchase price allocation is based on management's
estimates of the fair value of the net tangible and intangible assets. The book
value of the tangible assets acquired and liabilities assumed approximate fair
value. The estimated useful life of the goodwill is 3 years.
F-77
<PAGE>
DEMANDSTAR.COM, INC.
INTRODUCTION TO UNAUDITED
PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma combined statement of operations for the
year ended December 31, 1999, has been prepared to reflect the results of
operations of DemandStar.com Inc. ("DemandStar" or "the Company") as if the
acquisition of Information On Demand, Inc. ("IOD" or "the Predecessor") in June
1999 was completed on January 1, 1999.
The acquisition of IOD was treated under the purchase method of accounting
for financial reporting purposes. DemandStar purchased the business and certain
net assets of IOD for $1 million in cash. The Company could pay up to an
additional $2,000,000 in cash over a three-year period from the purchase date
for the purchase if certain financial targets set forth in the Agreement for
Sale and Purchase of Assets are attained. The net assets acquired consisted of
$1,173,000 of intangible assets and $173,000 of deferred revenue for vendor
agreements. As a result of this acquisition, the Form of Services Agreement
("the Agreement") was initiated by H.T.E., Inc. (HTE) and DemandStar. The
Agreement states that HTE will provide to DemandStar management and
administrative services through its employees. These services include financial
reporting, accounting, auditing, tax, office services, payroll, human
resources, as well as management consulting services. Since no services were
provided to the Predecessor by HTE prior to the acquisition, no allocation of
expenses has been made related to the Agreement. The costs incurred by the
Predecessor and recorded by the Predecessor for these services are comparable
to the costs charged by HTE to DemandStar for the services based on the level
of activity. The costs for these services are included in the general and
administrative expenses of the Predecessor since they were performed internally
by the employees of the Predecessor.
The Company believes that the assumptions used in preparing the unaudited
pro forma combined statement of operations contained herein provide a
reasonable basis on which to present the unaudited pro forma combined financial
data. The unaudited pro forma combined statement of operations is provided for
informational purposes only and should not be construed to be indicative of the
results of operations or financial position of the Company had the transaction
occurred on the date indicated and are not intended to project the Company's
results of operations for any future period. The unaudited pro forma combined
statement of operations should be read in conjunction with the separate
historical financial statements of the Company and IOD and in conjunction with
the related assumptions and notes to this unaudited pro forma combined
statement of operations. The historical financial statements of IOD for the
period from January 1, 1999, to June 17, 1999, were used in preparing the
unaudited pro forma combined statement of operations for the year ended
December 31, 1999.
The unaudited pro forma combined statement of operations does not reflect
the expected increase in the level of expenses as a result of planned increases
to the marketing strategy, expansion of product features and functionality, or
increases in general and administrative expenses to support the Company's
growth. Such items are not reflected because they are not factually
determinable or estimable.
F-78
<PAGE>
DEMANDSTAR.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Information On
Demand, Inc. DemandStar. com, Acquisition Pro Forma
(Predecessor) Inc. Adjustments Combined
--------------- ---------------- ------------ -----------
For the period For the period
from from June 18, For the year For the
January 1, 1999 1999 to ended year ended
to June 17, December 31, December 31, December
1999 1999 1999 31, 1999
--------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue................. $ 132,135 $ 196,855 $ -- $ 328,990
Operating expenses:
Marketing and
advertising.......... 15,866 304,800 -- 320,666
Research and
development.......... 136,279 136,100 -- 272,379
General and
administrative....... 250,349 651,520 -- 901,869
Depreciation and
amortization......... -- 215,969 182,467 (a) 398,436
--------- ----------- --------- -----------
Total operating
expenses........... 402,494 1,308,389 182,467 1,893,350
Operating loss.......... (270,359) (1,111,534) (182,467) (1,564,360)
Interest expense........ -- 27,308 18,209 (b) 45,517
--------- ----------- --------- -----------
Loss before income tax
benefit................ (270,359) (1,138,842) (200,676) (1,609,877)
Income tax benefit (Note
6)..................... -- -- -- --
--------- ----------- --------- -----------
Net loss................ $(270,359) $(1,138,842) $(200,676) $(1,609,877)
========= =========== ========= ===========
Basic and diluted loss
per common share....... $ (0.91) $ (1.29)
=========== ===========
Weighted average number
of common shares
outstanding............ 1,250,000 1,250,000
=========== ===========
</TABLE>
--------
(a) To reflect the increase in amortization expense related to the customer
list and vendor database and goodwill recorded under the purchase method of
accounting. At the purchase date, the Company recorded $298,299 for
customer lists and vendor database and $874,701 for goodwill. The Company
amortizes intangibles over 3 years.
(b) To reflect the additional interest expense on the note payable to H.T.E.,
Inc., for the $200,000 advance from H.T.E., Inc., assuming the funds were
advanced on January 1, 1999.
F-79
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ONVIA.COM, INC.
DRAGON ACQUISITION CORPORATION
AND
DEMANDSTAR.COM, INC.
Dated as of November 20, 2000
A-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER
1.1 The Merger.......................................................... A-7
1.2 Effective Time; Closing............................................. A-7
1.3 Effect of the Merger................................................ A-8
1.4 Certificate of Incorporation; Bylaws................................ A-8
1.5 Directors and Officers.............................................. A-8
1.6 Effect on Capital Stock............................................. A-8
1.7 Surrender of Certificates........................................... A-9
1.8 No Further Ownership Rights in Target Stock......................... A-10
1.9 Lost, Stolen or Destroyed Certificates.............................. A-11
1.10 Tax and Accounting Consequences..................................... A-11
1.11 Taking of Necessary Action; Further Action.......................... A-11
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET........................ A-11
2.1 Organization of Target.............................................. A-11
2.2 Target Capital Structure............................................ A-12
2.3 Obligations With Respect to Capital Stock........................... A-12
2.4 Authority........................................................... A-13
2.5 SEC Filings; Target Financial Statements............................ A-14
2.6 Absence of Certain Changes or Events................................ A-14
2.7 Taxes............................................................... A-15
2.8 Title to Properties; Absence of Liens and Encumbrances.............. A-16
2.9 Intellectual Property............................................... A-16
2.10 Compliance; Permits; Restrictions................................... A-18
2.11 Litigation.......................................................... A-19
2.12 Employee Benefit Plans.............................................. A-19
2.13 Environmental Matters............................................... A-22
2.14 Agreements, Contracts and Commitments............................... A-23
2.15 Affiliates.......................................................... A-24
2.16 Statements; Proxy Statement/Prospectus.............................. A-24
2.17 State Anti-Takeover Statutes........................................ A-24
2.18 Board Approval...................................................... A-24
2.19 Brokers', Finders' and Financial Advisory Fees...................... A-24
2.20 Fairness Opinion.................................................... A-24
2.21 No Illegal or Improper Transactions................................. A-25
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB........ A-25
3.1 Organization of Parent and Merger Sub............................... A-25
3.2 Parent and Merger Sub Capital Structure............................. A-25
</TABLE>
A-3
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.3 Authority........................................................... A-25
3.4 SEC Filings; Parent Financial Statements............................ A-26
3.5 Valid Issuance...................................................... A-27
3.6 Proxy Statement/Prospectus.......................................... A-27
3.7 Litigation.......................................................... A-27
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME............................. A-27
4.1 Conduct of Business by Target....................................... A-27
4.2 Conduct of Business by Parent....................................... A-29
ARTICLE V ADDITIONAL AGREEMENTS............................................ A-29
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings... A-29
5.2 Meeting of Target Stockholders...................................... A-30
5.3 Confidentiality: Access to Information.............................. A-31
5.4 No Solicitation..................................................... A-31
5.5 Public Disclosure................................................... A-33
5.6 Reasonable Efforts; Notification.................................... A-33
5.7 Third Party Consents................................................ A-34
5.8 Stock Options, Warrants and Restricted Stock........................ A-34
5.9 Certain Employee Benefit Matters.................................... A-35
5.10 Indemnification..................................................... A-35
5.11 Legends............................................................. A-35
5.12 Letter of Target's Accountants...................................... A-35
5.13 Bridge Financing.................................................... A-36
5.14 Board Observer...................................................... A-36
ARTICLE VI CONDITIONS TO THE MERGER........................................ A-36
6.1 Conditions to Obligations of Each Party to Effect the Merger........ A-36
6.2 Additional Conditions to Obligations of Target...................... A-37
6.3 Additional Conditions to the Obligations of Parent and Merger Sub... A-37
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER.............................. A-39
7.1 Termination......................................................... A-39
7.2 Notice of Termination Effect of Termination......................... A-41
7.3 Fees and Expenses................................................... A-41
7.4 Amendment........................................................... A-42
7.5 Extension; Waiver................................................... A-42
ARTICLE VIII GENERAL PROVISIONS............................................ A-42
8.1 Non-Survival of Representations and Warranties...................... A-42
8.2 Notices............................................................. A-42
</TABLE>
A-4
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.3 Interpretation; Certain Defined Terms............................... A-43
8.4 Counterparts........................................................ A-44
8.5 Entire Agreement; Third Party Beneficiaries......................... A-44
8.6 Severability........................................................ A-44
8.7 Other Remedies; Specific Performance................................ A-44
8.8 Governing Law....................................................... A-44
8.9 Rules of Construction............................................... A-44
8.10 Assignment.......................................................... A-44
8.11 No Waiver; Remedies Cumulative...................................... A-44
8.12 Waiver of Jury Trial................................................ A-45
</TABLE>
A-5
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<C> <S>
Exhibit A Form of Target Voting Agreement
Exhibit B Form of Convertible Promissory Note
Exhibit C Form of Certificate of Designation
Exhibit D-1 Form of Ramos Employment Agreement Amendment
Exhibit D-2 Form of Ramos Option Agreement Amendment
Exhibit D-3 Form of Ramos Option Agreement Amendment
Exhibit E-1 Form of Jordan Employment Agreement Amendment
Exhibit E-2 Form of Jordan Option Agreement Amendment
Exhibit E-3 Form of Jordan Option Agreement Amendment
Exhibit F-1 Form of North Employment Agreement Amendment
Exhibit F-2 Form of North Option Agreement Amendment
Exhibit F-3 Form of North Option Agreement Amendment
Exhibit G Form of Lockup Agreement
</TABLE>
A-6
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of November
20, 2000 (this "Agreement"), among Onvia.com, Inc. a Delaware corporation
("Parent"), Dragon Acquisition Corporation, a Florida corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), and DemandStar.com, Inc., a Florida
corporation ("Target").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware General Corporation Law ("Delaware Law") and the
Florida Business Corporation Act ("Florida Law"), Parent, Merger Sub and Target
intend to enter into a business combination transaction.
B. The Board of Directors of Target (i) has determined that the Merger (as
defined in Section 1.1) is consistent with and in furtherance of the long-term
business strategy of Target and advisable and fair to, and in the best
interests of, Target and its stockholders, (ii) has unanimously approved this
Agreement, the Merger and the other transactions contemplated by this Agreement
and (iii) has determined to recommend that the stockholders of Target adopt and
approve this Agreement and approve the Merger.
C. The Board of Directors of Parent (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of Parent
and advisable and fair to, and in the best interests of, Parent and its
stockholders and (ii) has unanimously approved this Agreement, the Merger and
the other transactions contemplated by this Agreement.
D. Contemporaneously with the execution and delivery of this Agreement, and
as a condition and inducement to Parent's willingness to enter into this
Agreement, certain stockholders of Target are entering into Voting Agreements
with Parent in substantially the form attached hereto as Exhibit A (the "Target
Voting Agreements").
E. The parties intend by executing this Agreement to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
covenants, agreements, representations and warranties set forth herein, the
parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time and subject to and upon the terms and
conditions of this Agreement and the applicable provisions of Florida Law,
Merger Sub shall be merged with and into Target (the "Merger"), the separate
corporate existence of Merger Sub shall cease and Target shall continue as the
surviving corporation. Target as the surviving corporation after the Merger is
hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing articles
of merger, in such appropriate form as determined by the parties, with the
Secretary of State of the State of Florida in accordance with the relevant
provisions of Florida Law (the "Articles of Merger") (the time of such filing
(or such later time as may be agreed in writing by Target and Parent and
specified in the Articles of Merger) being the "Effective Time") as soon as
practicable on or after the Closing Date (as herein defined). The closing of
the Merger (the "Closing") shall take place at the offices of Venture Law
Group, 4750 Carillon Point, Kirkland, Washington, at a time and date to be
specified by the parties, which shall be no later than the third business day
after the satisfaction or waiver of the conditions
A-7
<PAGE>
set forth in Article VI, or at such other time, date and location as the
parties hereto agree in writing (the "Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of Florida
Law. Without limiting the generality of the foregoing, at the Effective Time
all the property, rights, privileges, powers and franchises of Target and
Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities
and duties of Target and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Articles of Incorporation of Merger Sub, as
in effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law and such Articles of Incorporation of the Surviving Corporation;
provided, however, that at the Effective Time Article I of the Certificate of
Incorporation of the Surviving Corporation shall be amended to read: "The name
of the corporation is DemandStar.com, Inc."
(b) At the Effective Time, the Bylaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter amended in accordance with the provisions thereof
or as provided by law.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial corporate officers of the Surviving Corporation
shall be the corporate officers of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, Target or the holders of any
of the following securities:
(a) Conversion of Target Common Stock. Each (i) share of common stock, par
value $0.0001 per share, of Target ("Target Common Stock"), and (ii) share of
Series A Preferred Stock, par value $.01 per share ("Series A Preferred" and,
together with the Target Common Stock, the "Target Stock"), participating on an
as converted basis pursuant to the Articles of Incorporation of Target, issued
and outstanding immediately prior to the Effective Time, other than any shares
of Target Stock to be canceled pursuant to Section 1.6(b) and any Dissenting
Shares as defined in and to the extent provided in Section 1.6(f), will be
canceled and extinguished and automatically converted (subject to Sections
1.6(d) and (e)) into the right to receive a number of shares of common stock,
par value $0.0001 per share, of Parent ("Parent Common Stock") multiplied by
the Exchange Ratio (as defined in the next sentence), upon surrender of the
certificate representing such share of Target Common Stock in the manner
provided in Section 1.7. The "Exchange Ratio" shall be the fraction (A) having
a numerator equal to 6,000,000 and (B) having a denominator equal to the
aggregate number of shares of Target Stock outstanding immediately prior to the
Effective Time plus any vested Target Option (as defined in Section 2.2)
outstanding immediately prior to the Effective Time (1) including all Target
Options that become vested as a result of this Agreement and the transactions
contemplated hereby, including, without limitation, upon consummation of the
Merger, and (2) excluding Target Options that would otherwise become vested
upon consummation of the Merger but that will not become vested as a result of
the Agreements entered into pursuant to Section 6.3(d).
(b) Cancellation of Target-Owned and Parent-Owned Stock. Each share of
Target Stock held by Target or owned by Merger Sub, Parent or any direct or
indirect wholly owned subsidiary of Target or of Parent immediately prior to
the Effective Time shall be canceled and extinguished without any conversion
thereof.
(c) Capital Stock of Merger Sub. Each share of common stock, $0.000l par
value per share, of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into one validly
A-8
<PAGE>
issued, fully paid and nonassessable share of common stock, $0.0001 par value
per share, of the Surviving Corporation. Each certificate evidencing ownership
of shares of the common stock of Merger Sub shall evidence ownership of such
shares of capital stock of the Surviving Corporation.
(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect appropriately the effect of any stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Target Stock), merger (with respect to Parent, a merger
in which more than 50% of the voting power of Parent is disposed of), share
exchange (with respect to Parent, a share exchange in which more than 50% of
the voting power of Parent is disposed of), reorganization, recapitalization,
reclassification or other like change with respect to Parent Common Stock or
Target Stock occurring on or after the date hereof and prior to the Effective
Time.
(e) Fractional Shares. No fraction of a share of Parent Common Stock will be
issued by virtue of the Merger, but in lieu thereof each holder of shares of
Target Stock who would otherwise be entitled to a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock
that otherwise would be received by such holder) shall receive from Parent an
amount of cash (rounded to the nearest whole cent) equal to the product of (i)
such fraction, multiplied by (ii) the average closing sale price of one share
of Parent Common Stock for the five (5) most recent days that Parent Common
Stock has traded ending on the trading day immediately prior to the Effective
Time, as reported on the Nasdaq Stock Market.
(f) Dissenting Shares.
(i) Notwithstanding any provision of this Agreement to the contrary, any
shares of Target Stock held by a holder who has exercised such holder's
dissenters' rights in accordance with Sections 607.1301, 607.1302 and
607.1320 of Florida Law, and who, as of the Effective Time, has not
effectively withdrawn or lost such dissenters' rights ("Dissenting
Shares"), shall not be converted into or represent a right to receive
Parent Common Stock pursuant to Section 1.6, but the holder of the
Dissenting Shares shall only be entitled to such rights as are granted by
Florida Law.
(ii) Notwithstanding the provisions of Section 1.6(a), if any holder of
shares of Target Stock who demands his dissenters' rights with respect to
such shares under Section 1.6(a) shall effectively withdraw or lose
(through failure to perfect or otherwise) his rights to receive payment for
the fair market value of such shares under Florida Law, then, as of the
later of the Effective Time or the occurrence of such event, such holder's
shares shall automatically be converted into and represent only the right
to receive Target Common Stock and payment for fractional shares as
provided in Section 1.6(e), without interest, upon surrender of the
certificate or certificates representing such shares.
(iii) Target shall give Parent (i) prompt notice of any written demands
for payment with respect to any shares of capital stock of Target pursuant
to Sections 607.1302, 1607.1302 and 607.1320 of Florida Law, withdrawals of
such demands, and any other instruments served pursuant to Florida Law and
received by the Target, and (ii) the opportunity to participate at its own
expense in all negotiations and proceedings with respect to demands for
dissenters' rights under Florida Law. Target shall not, except with the
prior written consent of Parent, voluntarily make any payment with respect
to any demands for dissenters' rights with respect to Target Stock or offer
to settle or compromise any such demands.
1.7 Surrender of Certificates.
(a) Exchange Agent. Parent shall select a bank or trust company reasonably
acceptable to Target to act as the exchange agent (the "Exchange Agent") in the
Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I, the shares of Parent Common Stock issuable pursuant to
Section 1.6 in exchange for outstanding shares of Target Stock, (ii) cash in an
amount sufficient for payment in lieu of fractional shares pursuant to Section
1.6(e), and (iii) any dividends or distributions to which holders of shares of
Target Stock may be entitled pursuant to Section 1.7(d).
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(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "Certificates"), which immediately
prior to the Effective Time represented outstanding shares of Target Stock,
whose shares were converted into shares of Parent Common Stock: (i), a letter
of transmittal in customary form (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall contain such other
customary provisions as Parent may reasonably specify), (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock, cash in lieu of any fractional
shares pursuant to Section 1.6(e), and (iii) any dividends or other
distributions pursuant to Section 1.7(d). Upon surrender of Certificates for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holders
of such Certificates shall be entitled to receive in exchange therefor
certificates representing the number of whole shares of Parent Common Stock
into which their shares of Target Stock were converted at the Effective Time,
payment in lieu of fractional shares which such holders have the right to
receive pursuant to Section 1.6(e) and any dividends or distributions payable
pursuant to Section 1.7(d), and the Certificates so surrendered shall forthwith
be canceled. Until so surrendered, outstanding Certificates will be deemed from
and after the Effective Time, for all corporate purposes, to evidence only the
ownership of the number of full shares of Parent Common Stock into which such
shares of Target Stock shall have been so converted and the right to receive an
amount in cash in lieu of the issuance of any fractional shares in accordance
with Section 1.6(e) and any dividends or distributions payable pursuant to
Section 1.7(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holders of any unsurrendered Certificates with respect to the shares of
Parent Common Stock represented thereby until the holders of record of such
Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall deliver
to the record holders thereof, without interest, certificates representing
whole shares of Parent Common Stock issued in exchange therefor, along with
payment in lieu of fractional shares pursuant to Section 1.6(e) hereof and the
amount of any such dividends or other distributions with a record date after
the Effective Time payable with respect to such shares of Parent Common Stock.
(e) Transfers of Ownership. If certificates representing shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the
persons requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the issuance
of certificates representing shares of Parent Common Stock in any name other
than that of the registered holder of the Certificates surrendered, or
established to the satisfaction of Parent or any agent designated by it that
such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, neither the Exchange Agent, Parent, the Surviving Corporation nor any
party hereto shall be liable to a holder of shares of Parent Common Stock or
Target Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Target Stock. All shares of Parent Common
Stock issued in accordance with the terms hereof (including any cash paid in
respect thereof pursuant to Section 1.6(e) and 1.7(d)) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Target Stock and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Target Stock which were
outstanding immediately prior to the Effective Time. If after the Effective
Time Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article I.
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1.9 Lost, Stolen or Destroyed Certificates. In the event that any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Certificates, upon
the making of an affidavit of that fact by the holder thereof, certificates
representing the shares of Parent Common Stock into which the shares of Target
Stock, represented by such Certificates were converted pursuant to Section 1.6,
cash for fractional shares, if any, as may be required pursuant to Section
1.6(e) and any dividends or distributions payable pursuant to Section 1.7(d);
provided, however, that Parent may, in its discretion and as a condition
precedent to the issuance of such certificates representing shares of Parent
Common Stock, cash and other distributions, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum and with
customary provisions as it may reasonably direct as indemnity against any claim
that may be made against Parent, the Surviving Corporation or the Exchange
Agent with respect to the Certificates alleged to have been lost, stolen or
destroyed.
1.10 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Code. The parties
hereto adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax Regulations.
(b) It is intended by the parties hereto that the Merger shall be accounted
for as a purchase transaction under generally accepted accounting principles.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Target and Merger Sub, the officers and directors of Target
and Merger Sub will take all such lawful and necessary action. Parent shall
cause Merger Sub to perform all of its obligations relating to this Agreement
and the transactions contemplated hereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
Target represents and warrants to Parent and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure schedules
delivered by Target to Parent dated as of the date hereof referencing the
representations and warranties in this Agreement by Section number and
certified by a duly authorized officer of Target (the "Target Disclosure
Schedules"), as follows:
2.1 Organization of Target.
(a) Target and each of its subsidiaries (i) is a corporation or other legal
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction in which it is organized; (ii) has the corporate or other
power and authority to own, lease and operate its assets and property and to
carry on its business as now being conducted; and (iii) except as would not be
material to Target, is duly qualified or licensed to do business in each
jurisdiction where the character of the properties owned, leased or operated by
it or the nature of its activities makes such qualification or licensing
necessary.
(b) Target has set forth in the Target Disclosure Schedules a true and
complete list of all of Target's subsidiaries as of the date of this Agreement,
together with a list of each partnership, joint venture or other business
entity in which Target holds an interest, whether voting, equity or otherwise
(collectively, the "Joint Ventures"), indicating the jurisdiction of
organization of each such entity and Target's equity interest therein. Except
as set forth on such list, neither Target nor any of its subsidiaries owns any
equity interest in any corporation, partnership or joint venture arrangement or
other business entity that is material to Target.
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(c) Target has delivered or made available to Parent a true and correct copy
of the Articles of Incorporation and Bylaws of Target and similar governing
instruments of each of its subsidiaries and each Joint Venture, each as amended
to date, and each such instrument is in full force and effect. Neither Target
nor any of its subsidiaries nor, to the knowledge of Target, any Joint Venture
is in violation of any of the provisions of its Articles of Incorporation or
Bylaws or equivalent governing instruments.
2.2 Target Capital Structure. The authorized capital stock of Target
consists of 100,000,000 shares of Common Stock, par value $0.0001 per share, of
which there were 7,638,480 shares issued and outstanding as of November 15,
2000 (none of which were held by Target in its treasury), and 10,000,000 shares
of Preferred Stock, par value $0.01 per share, of which there are authorized
2,000,000 shares of Series A Preferred, of which there were 750,000 shares
issued and outstanding as of November 15, 2000, and 4,000,000 shares of Series
B Preferred, of which there were no shares issued and outstanding as of
November 15, 2000. All outstanding shares of Target Stock are duly authorized,
validly issued, fully paid and nonassessable and are not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of Target or
any agreement or document to which Target is a party or by which it or its
assets is bound. As of November 15, 2000, (i) Target had reserved an aggregate
of 4,000,000 shares of Target Common Stock for issuance pursuant to Target's
1999 Employee Incentive Compensation Plan, and (ii) there were options ("Target
Options") outstanding to purchase an aggregate of 3,332,700 shares of Target
Common Stock pursuant to Target's 1999 Employee Incentive Compensation Plan. As
of November 15, 2000, there are warrants ("Target Warrants") outstanding to
purchase 1,000,000 shares of Target Common Stock and 1,000,000 shares of Target
Common Stock are reserved for issuance upon the exercise of the Target
Warrants. All shares of Target Common Stock subject to issuance as aforesaid,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, would be duly authorized, validly issued, fully
paid and nonassessable. The Target Disclosure Schedules list for each person
who held Target Options or Target Warrants to acquire shares of Target Common
Stock as of November 15, 2000, the name of the holder of such option or
warrant, the exercise price of such option or warrant, the number of shares as
to which such option or warrant had vested at such date, the vesting schedule
for such option or warrant and whether the exercisability of such option or
warrant will be accelerated in any way by the transactions contemplated by this
Agreement, and indicates the extent of acceleration, if any. Except as set
forth in Schedule 2.2 of the Target Disclosure Schedules, consummation of the
Merger, whether coupled with a termination of employment or not, will not
result in the acceleration of any vesting of any such Target Options or Target
Warrants.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of Target equity security, or any securities
exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar ownership interests, issued, reserved for
issuance or outstanding. Except for securities Target owns free and clear of
all claims and encumbrances, directly or indirectly through one or more
subsidiaries, there are no equity securities, partnership interests or similar
ownership interests of any class of equity security of any subsidiary of Target
or any Joint Venture, or any security exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as
set forth in Section 2.2, there are no subscriptions, options, warrants, equity
securities, partnership interests or similar ownership interests, calls, rights
(including preemptive rights), commitments or agreements of any character to
which Target or any of its subsidiaries or, to the knowledge of Target, any
Joint Venture is a party or by which it is bound obligating Target or any of
its subsidiaries or, to the knowledge of Target, any Joint Venture to issue,
deliver or sell, or cause to be issued, delivered or sold, or repurchase,
redeem or otherwise acquire, or cause the repurchase, redemption or acquisition
of, any shares of capital stock, partnership interests or similar ownership
interests of Target or any of its subsidiaries or any Joint Venture or
obligating Target or any of its subsidiaries or any Joint Venture to grant,
extend, accelerate the vesting of or enter into any such subscription, option,
warrant, equity security, call, right, commitment or agreement. There are no
registration rights and, except as otherwise contemplated by the Voting
Agreement, there is no voting trust, proxy, rights plan, antitakeover plan or
other agreement or understanding to which Target is a party or by
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which it is bound with respect to any equity security of any class of Target or
with respect to any equity security, partnership interest or similar ownership
interest of any class of any of its subsidiaries or any Joint Venture.
2.4 Authority.
(a) Target has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated has been duly authorized by all necessary corporate
action on the part of Target, subject only to the approval and adoption of this
Agreement and the approval of the Merger by Target's stockholders and the
filing of the Articles of Merger pursuant to Florida Law. The following votes
are required for Target's stockholders to approve and adopt this Agreement and
approve the Merger: (x) an affirmative vote of the holders of a majority of the
outstanding shares of Target Stock, (y) an affirmative vote of the holders of a
majority of the shares of Series A Preferred, and (z) an affirmative vote of
the holders of a majority of the Target Common Stock. This Agreement has been
duly executed and delivered by Target and, assuming the due execution and
delivery by Parent and Merger Sub, constitutes a valid and binding obligation
of Target, enforceable against Target in accordance with its terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity. The execution and delivery of this Agreement by Target
does not, and the performance of this Agreement by Target will not, (i)
conflict with or violate the Articles of Incorporation or Bylaws of Target or
the equivalent organizational documents of any of its subsidiaries,
(ii) subject to obtaining the approval and adoption of this Agreement and the
approval of the Merger by Target's stockholders as contemplated in Section 5.2
and compliance with the requirements set forth in Section 2.4(b) below,
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to Target or any of its subsidiaries or by which Target or any of
its subsidiaries or any of their respective properties is bound or affected, or
(iii) result in any material breach of or constitute a material default (or an
event that with notice or lapse of time or both would become a material
default) under, or impair Target's rights or alter the rights or obligations of
any third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a material lien
or encumbrance on any of the material properties or assets of Target or any of
its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise, concession, or other instrument
or obligation, in each case that is material to Target, to which Target or any
of its subsidiaries is a party or by which Target or any of its subsidiaries or
its or any of their respective assets are bound or affected. The Target
Disclosure Schedules list all consents, waivers and approvals under any of
Target's or any of its subsidiaries' agreements, contracts, licenses or leases
required to be obtained in connection with the consummation of the transactions
contemplated hereby, which, if individually or in the aggregate not obtained,
would result in a loss of benefits to Target, Parent or the Surviving
Corporation as a result of the Merger that would be reasonably likely to result
in a Material Adverse Effect (as defined in Section 8.3(c)) with respect to
Target, Parent or the Surviving Corporation.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or instrumentality, foreign or domestic
("Governmental Entity"), is required to be obtained or made by Target in
connection with the execution and delivery of this or the consummation of the
Merger, except for (i) the filing of the Articles of Merger with the Secretary
of State of the State of Florida, (ii) the filing of the Proxy
Statement/Prospectus (as defined in Section 2.16) with the Securities and
Exchange Commission ("SEC"), (iii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable federal, foreign and state securities (or related) laws and
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and (iv) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not be material to Target or
Parent or have a material adverse effect on the ability of the parties hereto
to consummate the Merger.
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2.5 SEC Filings; Target Financial Statements
(a) Target has filed all forms, reports and documents required to be filed
by Target with the SEC since March 27, 2000, and has made available to Parent
such forms, reports and documents in the form filed with the SEC. All such
required forms, reports and documents (including those that Target may file
subsequent to the date hereof) are referred to herein as the "Target SEC
Reports." As of their respective dates, the Target SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as the case may be, and the rules and regulations
of the SEC thereunder applicable to such Target SEC Reports and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
Target's subsidiaries or Joint Ventures is required to file any forms, reports
or other documents with the SEC or similar regulatory body.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Target SEC Reports (the "Target
Financials"), including each Target SEC Reports filed after the date hereof
until the Closing, (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (ii) was
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on Form
10-Q under the Exchange Act) and (iii) fairly presented the consolidated
financial position of Target and its subsidiaries as at the respective dates
thereof and the consolidated results of Target's operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
may not contain footnotes and were or are subject to normal and recurring year-
end adjustments. The balance sheet of Target contained in Target SEC Reports as
of December 31, 1999 is hereinafter referred to as the "Target Balance Sheet."
Except as disclosed in the Target Financials, since the date of the Target
Balance Sheet neither Target nor any of its subsidiaries has any liabilities
required under GAAP to be set forth on a balance sheet (absolute, accrued,
contingent or otherwise) which are, individually or in the aggregate, material
to the business, results of operations or financial condition of Target and its
subsidiaries taken as a whole, except for liabilities incurred since the date
of the Target Balance Sheet in the ordinary course of business consistent with
past practices and liabilities under this Agreement or incurred in connection
with the transactions contemplated hereby.
(c) Target has heretofore furnished to Parent a complete and correct copy of
any amendments or modifications, which have not yet been filed with the SEC but
which are required to be filed, to agreements, documents or other instruments
which previously had been filed by Target with the SEC pursuant to the
Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the Target
Balance Sheet there has not been: (i) any Material Adverse Effect with respect
to Target and its subsidiaries and Joint Ventures, taken as a whole, (ii) any
declaration, setting aside or payment of any dividend on, or other distribution
(whether in cash, stock or property) in respect of, any of Target's capital
stock, or any purchase, redemption or other acquisition by Target of any of
Target's capital stock or any other securities of Target or any options,
warrants, calls or rights to acquire any such shares or other securities except
for repurchases from employees following their termination pursuant to the
terms of their pre-existing stock option or purchase agreements, (iii) any
split, combination or reclassification of any of Target's capital stock, (iv)
any granting by Target or any of its subsidiaries of any increase in
compensation or fringe benefits to any of their officers, directors or managers
or employees who earn more than $50,000 per year, or any payment by Target or
any of its subsidiaries of any bonus to any of their officers, directors or
managers or employees who earn more than $50,000 per year, or any granting by
Target or any of its subsidiaries of any increase in severance or termination
pay or any entry by Target or any of its subsidiaries into, or material
modification or amendment of, any currently effective employment, severance,
termination or indemnification agreement or any agreement the benefits of which
are
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contingent or the terms of which are materially altered upon the occurrence of
a transaction involving Target of the nature contemplated hereby, (v) any
material change or alteration in the policy of Target relating to the granting
of stock options to its employees and consultants, (vi) entry by Target or any
of its subsidiaries or, to the knowledge of Target, any Joint Venture into, or
material modification, amendment or cancellation of, any licensing,
distribution, sponsorship, advertising, merchant program or other similar
agreement or which either is not terminable by Target or its subsidiaries or
Joint Venture, as the case may be, without penalty upon no more than 45 days'
prior notice or provides for payments by or to Target or its subsidiaries or a
Joint Venture in an amount in excess of $25,000 over the term of the agreement,
(vii) any material change by Target in its accounting methods, principles or
practices, except as required by concurrent changes in GAAP, or (viii) any
revaluation by Target of any of its assets, including, without limitation,
writing off notes or accounts receivable other than in the ordinary course of
business.
2.7 Taxes
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or
"Taxes" refers to (i) any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and liabilities
relating to taxes, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed
with respect to such amounts, (ii) any liability for payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated
consolidated, combined or unitary group, and (iii) any liability for amounts of
the type described in clauses (i) and (ii) as a result of any express or
implied obligation to indemnify another person or as a result of any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a predecessor
entity.
(b) Tax Returns and Audits.
(i) Target and each of its subsidiaries have timely filed all material
federal, state, local and foreign returns, estimates, information
statements and reports ("Returns") relating to Taxes required to be filed
by or on behalf of Target and each of its subsidiaries with any Tax
authority, such Returns are true, correct and complete in all material
respects, and Target and each of its subsidiaries have paid (where required
by law or otherwise accrued) all Taxes shown to be due on such Returns.
(ii) Target and each of its subsidiaries have withheld with respect to
its employees all federal and state income Taxes, Taxes pursuant to the
Federal Insurance Contribution Act ("FICA"), Taxes pursuant to the Federal
Unemployment Tax Act ("FUTA") and other Taxes required to be withheld.
(iii) There is no material Tax deficiency outstanding, proposed or
assessed against Target or any of its subsidiaries, nor has Target or any
of its subsidiaries executed any unexpired waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax that is still in effect.
(iv) No audit or other examination of any Return of Target or any of its
subsidiaries by any Tax authority is presently in progress, nor has Target
or any of its subsidiaries been notified of any request for such an audit
or other examination.
(v) No adjustment of Tax relating to any Returns filed by Target or any
of its subsidiaries has been proposed in writing formally or informally by
any Tax authority to Target or any of its subsidiaries or any
representative thereof.
(vi) Neither Target nor any of its subsidiaries has any liability for
unpaid Taxes which has not been accrued for or reserved on the Target
Balance Sheet, whether asserted or unasserted, contingent or otherwise,
which is material to Target, other than any liability for unpaid Taxes that
may have accrued since the date of the Target Balance Sheet in connection
with the operation of the business of Target and its subsidiaries in the
ordinary course.
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(vii) There is no contract, agreement, plan or arrangement to which
Target is a party, including but not limited to the provisions of this
Agreement and the agreements entered into in connection with this
Agreement, covering any employee or former employee of Target or any of its
subsidiaries that, individually or collectively, would be reasonably likely
to give rise to the payment of any amount that would not be deductible
pursuant to Sections 280G, 404 or 162(m) of the Code.
(viii) Neither Target nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as defined in Section 341(f)(4) of the Code) owned by Target.
(ix) Neither Target nor any of its subsidiaries is party to or has any
obligation under any tax-sharing, tax indemnity or tax allocation agreement
or arrangement.
(x) Except as may be required as a result of the Merger, Target and its
subsidiaries have not been and will not be required to include any material
adjustment in Taxable income for any Tax period (or portion thereof)
pursuant to Section 481 or Section 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions,
events or accounting methods employed prior to the Closing.
(xi) Target has made available to Parent or its legal or accounting
representatives copies of all foreign, federal and state income tax and all
state sales and use tax Returns for Target and each of its subsidiaries
filed for all periods since its inception.
(xii) There are no liens, pledges, charges, claims, restrictions on
transfer, mortgages, security interests or other encumbrances of any sort
(collectively, "Liens") on the assets of Target or any of its subsidiaries
relating to or attributable to Taxes, other than Liens for Taxes not yet
due and payable.
(xiii) Since April 16, 1997, neither Target nor any subsidiary of Target
has been a distributing corporation or a controlled corporation in a
transaction described in Section 355(a) of the Code.
2.8 Title to Properties; Absence of Liens and Encumbrances
(a) Target owns no real property interests. The Target Disclosure Schedules
list all real property leases to which Target is a party and each amendment
thereto that is in effect as of the date of this Agreement. All such current
leases are in full force and effect, are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any
existing default or event of default (or event which with notice or lapse of
time, or both, would constitute a default) that would give rise to a claim
against Target in an amount greater than $25,000.
(b) Target has good and valid title to, or, in the case of leased properties
and assets, valid leasehold interests in, all of its tangible properties and
assets, real, personal and mixed, used or held for use in its business, free
and clear of any Liens, except as reflected in the Target Financials and except
for Liens for Taxes and rents not yet due and payable and such Liens or other
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the
value, or materially interfere with the present use, of the property subject
thereto or affected thereby.
2.9 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
(i) "Intellectual Property" shall mean any or all of the following and
all rights in, arising out of or associated therewith: (i) all United
States, international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists, and
all documentation relating to any of the foregoing; (iii) all copyrights,
copyrights registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) all industrial designs and
any registrations
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and applications therefor throughout the world; (v) all trade names, logos,
common law trademarks and service marks, trademark and service mark
registrations and applications therefor throughout the world; (vi) all
databases and data collections and all rights therein throughout the world;
(vii) all moral and economic rights of authors and inventors, however
denominated, throughout the world; and (viii) any similar or equivalent
rights to any of the foregoing anywhere in the world.
(ii) "Target Intellectual Property" shall mean any Intellectual Property
that is owned by, or exclusively licensed to, Target or one of its
subsidiaries.
(iii) "Registered Intellectual Property" means all United States,
international and foreign: (i) patents and patent applications (including
provisional applications); (ii) registered trademarks, applications to
register trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; and (iv) any other Intellectual
Property that is the subject of an application, certificate, filing,
registration or other document issued, filed with, or recorded by any
state, government or other public legal authority.
(iv) "Target Registered Intellectual Property" means all of the
Registered Intellectual Property owned by, or filed in the name of, Target
or one of its subsidiaries.
(b) No Target Intellectual Property or product or service of Target is
subject to any proceeding or outstanding decree, order, judgment, agreement, or
stipulation restricting in any manner the use, transfer, or licensing thereof
by Target, or which may affect the validity, use or enforceability of such
Target Intellectual Property, which in any such case would be reasonably likely
to have a Material Adverse Effect on Target.
(c) Each material item of Target Registered Intellectual Property is valid
and subsisting. All necessary registration, maintenance and renewal fees
currently due in connection with such Registered Intellectual Property have
been made and all necessary documents, recordations and certificates in
connection with such Registered Intellectual Property have been filed with the
relevant patent, copyright, trademark or other authorities in the United States
or foreign jurisdictions, as the case may be, for the purposes of maintaining
such Registered Intellectual Property, except where the failure to do so would
not be reasonably likely to have a Material Adverse Effect on Target.
(d) Target or one of its subsidiaries owns and has good and exclusive title
to, or has license sufficient for the conduct of its business as currently
conducted and as proposed to be conducted to, each material item of Target
Intellectual Property used in connection with the conduct of its business as
currently conducted and as proposed to be conducted free and clear of any lien
or encumbrance (excluding licenses and related restrictions); and Target or one
of its subsidiaries is the exclusive owner of all trademarks and trade names
used in connection with and material to the operation or conduct of the
business of Target and its subsidiaries, including the sale of any products or
the provision of any services by Target and its subsidiaries.
(e) Target or one of its subsidiaries owns exclusively, and has good title
to, all copyrighted works that are Target products or which Target otherwise
expressly purports to own.
(f) To the extent that any material Intellectual Property has been developed
or created by a third party for Target or any of its subsidiaries, Target or
its subsidiaries, as the case may be, has a written agreement with such third
party with respect thereto and Target or its subsidiary thereby either (i) has
obtained ownership of and is the exclusive owner of, or (ii) has obtained a
license sufficient for the conduct of its business as currently conducted and
as proposed to be conducted to all such third party's Intellectual Property in
such work, material or invention by operation of law or by valid assignment, to
the fullest extent it is legally possible to do so.
(g) The Target Disclosure Schedules list all material contracts, licenses
and agreements to which Target is a party (i) with respect to Target
Intellectual Property licensed or transferred to any third party (other than
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end-user licenses in the ordinary course); or (ii) pursuant to which a third
party has licensed or transferred any material Intellectual Property to Target.
(h) All material contracts, licenses and agreements relating to the Target
Intellectual Property are in full force and effect. The consummation of the
transactions contemplated by this Agreement will neither violate nor result in
the breach, modification, cancellation, termination, or suspension of such
contracts, licenses and agreements in accordance with its terms, the effect of
which would have a Material Adverse Effect on Target. Target is in material
compliance with, and has not materially breached any term of any of such
contracts, licenses and agreements and, to the knowledge of Target, all other
parties to such contracts, licenses and agreements are in compliance in all
material respects with, and have not materially breached any term of, such
contracts, licenses and agreements. Following the Closing Date, the Surviving
Corporation will be permitted to exercise all of Target's rights under such
contracts, licenses and agreements to the same extent Target would have been
able to had the transactions contemplated by this Agreement not occurred and
without the payment of any additional amounts or consideration other than
ongoing fees, royalties or payments which Target would otherwise be required to
pay.
(i) The operation of the business of Target as such business currently is
conducted, including Target's design, development, marketing and sale of the
products or services of Target (including with respect to products currently
under development) has not, does not and will not infringe or misappropriate in
any material manner the Intellectual Property of any third party or, to the
knowledge of Target, constitute unfair competition or trade practices under the
laws of any jurisdiction.
(j) Target has not received written notice from any third party, and to the
knowledge of Target, no other overt threat from any third party, that the
operation of the business of Target or any act, product or service of Target,
infringes or misappropriates the Intellectual Property of any third party or
constitutes unfair competition or trade practices under the laws of any
jurisdiction.
(k) To the knowledge of Target, no person has or is infringing or
misappropriating any Target Intellectual Property.
(l) Target and its subsidiaries have taken reasonable steps to protect
Target's and its subsidiaries' rights in Target's and such subsidiaries'
confidential information and trade secrets that they wish to protect or any
trade secrets or confidential information of third parties provided to Target
or such subsidiaries, and, without limiting the foregoing, Target and its
subsidiaries have and enforce a policy requiring each employee and contractor
to execute a proprietary information/confidentiality agreement in substantially
the form provided to Parent, and except under confidentiality obligations,
there has not been disclosure by Target or one of its subsidiaries of any such
trade secrets or confidential information.
2.10 Compliance with Laws; Permits; Restrictions.
(a) Neither Target nor any of its subsidiaries nor, to the knowledge of
Target, any Joint Venture is in any material respect in conflict with, or in
default or in violation of (i) any law, rule, regulation, order, judgment or
decree applicable to Target or any of its subsidiaries or any Joint Venture or
by which Target or any of its subsidiaries or any Joint Venture or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Target or any of its subsidiaries or
any Joint Venture is a party or by which Target or any of its subsidiaries or
any Joint Venture or its or any of their respective properties is bound or
affected, except for conflicts, violations and defaults that (individually or
in the aggregate) would not be reasonably likely to result in a Material
Adverse Effect on Target. No investigation or review by any Governmental Entity
is pending or, to Target's knowledge, has been threatened in a writing
delivered to Target against Target or any of its subsidiaries or, to the
knowledge of Target, any Joint Venture, nor, to the knowledge of Target, has
any Governmental Entity indicated an intention to conduct an investigation of
Target or any of its subsidiaries or any Joint Venture. There is no material
agreement, judgment, injunction, order or decree binding upon Target or
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any of its subsidiaries or, to the knowledge of Target, any Joint Venture which
has or could reasonably be expected to have the effect of prohibiting or
materially impairing any business practice of Target or any of its subsidiaries
or any Joint Venture, any acquisition of material property by Target or any of
its subsidiaries or any Joint Venture or the conduct of business by Target as
currently conducted. Target has complied in all material respects with all
applicable federal, state and local laws and regulations relating to the
collection and use of user information gathered in the course of Target's
operations, and Target has at all times complied with the rules, policies and
procedures established by Target from time to time with respect to the
foregoing. All content and services distributed through Target's website are
being distributed in compliance in all material respects with applicable law.
(b) Target and its subsidiaries and, to the knowledge of Target, the Joint
Ventures hold, to the extent legally required, all permits, licenses,
variances, exemptions, orders and approvals from governmental authorities that
are material to and required for the operation of the business of Target and
its subsidiaries and the Joint Ventures as currently conducted (collectively,
the "Target Permits"). Target and its subsidiaries and, to the knowledge of
Target, the Joint Ventures are in compliance in all material respects with the
terms of the Target Permits.
2.11 Litigation. There are no claims, suits, actions or proceedings pending
or, to the knowledge of Target, threatened against, relating to or affecting
Target or any of its subsidiaries or any Joint Venture, before any Governmental
Entity or any arbitrator that seek to restrain or enjoin the consummation of
the transactions contemplated by this Agreement or which could reasonably be
expected, either singularly or in the aggregate with all such claims, actions
or proceedings, to have a Material Adverse Effect on Target or the Surviving
Corporation following the Merger or have a material adverse effect on the
ability of the parties hereto to consummate the Merger. No Governmental Entity
has at any time challenged or questioned in a writing delivered to Target the
legal right of Target to design, offer or sell any of its services or products
in the present manner or style thereof.
2.12 Employee Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate" set
forth in Section 2.12(a)(i) below (which definition shall apply only to this
Section 2.12), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under common
control with Target within the meaning of Section 414(b), (c), (m) or (o)
of the Code and the regulations issued thereunder;
(ii) "Target Employee Plan" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether written or unwritten or otherwise, funded
or unfunded, including without limitation, each "employee benefit plan,"
within the meaning of Section 3(3) of ERISA which is or has been
maintained, contributed to, or required to be contributed to, by Target or
any Affiliate for the benefit of any Employee and pursuant to which Target
or any Affiliate has any material liability;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "Employee" shall mean any current, former, or retired employee,
officer, or director of Target or any Affiliate;
(vi) "Employee Agreement" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or similar agreement or contract between Target or any Affiliate and
any Employee or consultant;
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(vii) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(ix) "HIPAA" shall mean the Health Insurance Portability Amendments Act;
(ix) "IRS" shall mean the Internal Revenue Service;
(x) "Multiemployer Plan" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA;
(xi) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xii) "Pension Plan" shall mean each Target Employee Plan which is an
"employee pension benefit plan," within the meaning of Section 3(2) of
ERISA.
(b) Schedule. The Target Disclosure Schedules contain an accurate and
complete list of each Target Employee Plan and each Employee Agreement. Target
does not have any intention or commitment to establish any new Target Employee
Plan, to modify any Target Employee Plan or Employee Agreement (except to the
extent required by law or to conform any such Target Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to adopt
any Target Employee Plan or Employee Agreement, nor does it have any intention
or commitment to do any of the foregoing. The Target Disclosure Schedules also
contain a list of all Target employees as of the date hereof, each such
person's date of hire and each such person's annual compensation. The Target
Disclosure Schedules list all employees on a leave of absence (whether paid or
unpaid), the reasons therefor, the expected return date, and also list all
employees who have requested a leave of absence to commence at any time after
the date of this Agreement, the reason therefor, and the expected length of
such leave.
(c) Documents. Target has provided or made available to Parent: (i) correct
and complete copies of all material documents embodying to each Target Employee
Plan and each Employee Agreement including all amendments thereto and written
interpretations thereof; (ii) the most recent annual actuarial valuations, if
any, prepared for each Target Employee Plan; (iii) the three (3) most recent
annual reports (Form Series 5500 and all schedules and financial statements
attached thereto), if any, required under ERISA or the Code in connection with
each Target Employee Plan or related trust; (iv) if the Target Employee Plan is
funded, the most recent annual and periodic accounting of Target Employee Plan
assets; (v) the most recent summary plan description together with the summary
of material modifications thereto, if any, required under ERISA with respect to
each Target Employee Plan; (vi) all IRS determination, opinion, notification
and advisory letters, and rulings relating to Target Employee Plans and copies
of all applications and correspondence to or from the IRS or the DOL with
respect to any Target Employee Plan; (vii) all material written agreements and
contracts relating to each Target Employee Plan, including, but not limited to,
administrative service agreements, group annuity contracts and group insurance
contracts; (viii) all communications material to any Employee or Employees
relating to any Target Employee Plan and any proposed Target Employee Plans, in
each case, relating to any amendments, terminations, establishments, increases
or decreases in benefits, acceleration of payments or vesting schedules or
other events which would result in any material liability to Target; and (ix)
all registration statements and prospectuses prepared in connection with each
Target Employee Plan.
(d) Employee Plan Compliance. (i) Target has performed in all material
respects all obligations required to be performed by it under, is not in
default or violation of; and has no knowledge of any material default or
violation by any other party to each Target Employee Plan, and each Target
Employee Plan has been established and maintained in all material respects in
accordance with its terms and in compliance with all applicable laws, statutes,
orders, rules and regulations, including but not limited to ERISA or the Code;
(ii) each Target Employee Plan intended to qualify under Section 401(a) of the
Code and each trust intended to qualify under Section 501(a) of the Code is
qualified and has either received a favorable determination letter from the IRS
with respect to each such Plan as to its qualified status under the Code or has
remaining a period
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of time under applicable Treasury regulations or IRS pronouncements in which to
apply for such a determination letter and make any amendments necessary to
obtain a favorable determination with respect to its qualified status from the
date of adoption of such Plan and no event has occurred which would adversely
affect the status of such determination letter or the qualified status of such
Plan; (iii) no "prohibited transaction," within the meaning of Section 4975 of
the Code or Sections 406 and 407 of ERISA, and not otherwise exempt under
Section 408 of ERISA or Section 4975(d) of the Code, has occurred with respect
to any Target Employee Plan; (iv) there are no actions, suits or claims
pending, or, to the knowledge of Target, threatened or reasonably anticipated
(other than routine claims for benefits) against any Target Employee Plan or
against the assets of any Target Employee Plan; (v) each Target Employee Plan
can be amended, terminated or otherwise discontinued after the Effective Time
in accordance with its terms, without liability to Parent, Target or any of its
Affiliates (other than ordinary administration expenses typically incurred in a
termination event); (vi) there are no audits, inquiries or proceedings pending
or, to the knowledge of Target, threatened by the IRS or DOL with respect to
any Target Employee Plan; and (vii) neither Target nor any Affiliate is subject
to any penalty or tax with respect to any Target Employee Plan under Section
402(i) of ERISA or Sections 4975 through 4980B of the Code.
(e) Pension Plans. Target does not now, nor has it ever, maintained,
established, sponsored, participated in, or contributed to, any Pension Plan
which is subject to Title IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has Target contributed to or been
requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Target Employee Plan provides, or has
any liability to provide, retiree life insurance, retiree health or other
retiree employee welfare benefits to any person for any reason, except as may
be required by COBRA or other applicable statute, and Target has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) or any other person
that such Employee(s) or other person would be provided with retiree life
insurance, retiree health or other retiree employee welfare benefit, except to
the extent required by statute.
(h) COBRA; FMLA; HIPAA. Neither Target nor any Affiliate has, prior to the
Effective Time, and in any material respect, violated any of the health care
continuation requirements of COBRA (including all notice requirements thereof),
the requirements of FMLA or any similar provisions of state law applicable to
its Employees, the requirements of HIPAA, the requirements of the Women's
Health and Cancer Rights Act, as amended, the requirements of the Newborns' and
Mothers' Health Protection Act of 1996, as amended, or any similar provisions
of state law applicable to employees of Target or any Affiliate.
(i) Effect of Transaction.
(i) The execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any Target Employee Plan, Employee Agreement, trust or loan that will
or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligation to fund benefits with respect to any Employee.
(ii) No payment or benefit which will or may be made by Target or its
Affiliates with respect to any Employee as a result of the transactions
contemplated by this Agreement will be characterized as an "excess
parachute payment," within the meaning of Section 280G(b)(1) of the Code or
will be treated as a nondeductible expense within the meaning of Section
162 of the Code.
(j) Employment Matters. Target and each Affiliate: (i) is in compliance in
all material respects with all applicable foreign, federal, state and local
laws, rules and regulations respecting employment, employment practices, terms
and conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other
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payments to Employees; (iii) is not liable in any material respect for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any material payment to any trust or
other fund or to any governmental or administrative authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for Employees (other than routine payments to be made in the normal
course of business and consistent with past practice). There are no pending,
or, to Target's knowledge, threatened or reasonably anticipated claims or
actions against Target under any worker's compensation policy or long-term
disability policy which would be reasonably likely to have a Material Adverse
Effect on Target. To Target's knowledge, no Employee of Target has violated any
employment contract, nondisclosure agreement or noncompetition agreement by
which such Employee is bound due to such Employee being employed by Target and
disclosing to Target or using trade secrets or proprietary information of any
other person or entity. Target and its Affiliates have not incurred any
liability under, and have complied in all respect with, the Worker Adjustment
Retraining Notification Act ("WARN Act") and no fact or event exists that could
give rise to liability under the WARN Act.
(k) Labor. No work stoppage or labor strike against Target is pending, or to
Target's knowledge, threatened or reasonably anticipated. Target does not know
of any activities or proceedings of any labor union to organize any Employees.
There are no actions, suits, claims, labor disputes or grievances pending, or,
to the knowledge of Target, threatened or reasonably anticipated relating to
any labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in any material liability to Target. Neither Target nor any
of its subsidiaries has engaged in any unfair labor practices within the
meaning of the National Labor Relations Act. Target is not presently, nor has
it been in the past, a party to, or bound by, any collective bargaining
agreement or union contract with respect to Employees and no collective
bargaining agreement is being negotiated by Target.
(l) International Employee Plan. No Employee Plan has been adopted or
maintained by Target, whether informally or formally, for the benefit of
Employees outside the United States.
(m) Change of Control Payments. The Target Disclosure Schedules sets forth
each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former employees of Target
as a result of or in connection with the Merger.
2.13 Environmental Matters.
(a) Hazardous Material. Except as would not result in material liability to
Target, no underground storage tanks and no amount of any substance that has
been designated by any Governmental Entity or by applicable federal, state or
local law to be radioactive, toxic, hazardous or otherwise a danger to health
or the environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws, but excluding office and janitorial
supplies, (a "Hazardous Material") are present, as a result of the actions of
Target or any of its subsidiaries or any affiliate of Target, or, to Target's
knowledge, as a result of any actions of any third party or otherwise, in, on
or under any property, including the land and the improvements, ground water
and surface water thereof that Target or any of its subsidiaries has at any
time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a material
liability to Target (in any individual case or in the aggregate) (i) neither
Target nor any of its subsidiaries has transported, stored, used, manufactured,
disposed of released or exposed its employees or others to Hazardous Materials
in violation of any law, and (ii) neither Target nor any of its subsidiaries
has disposed of; transported, sold, used, released, exposed its employees or
others to or manufactured any product containing a Hazardous Material
(collectively
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"Hazardous Materials Activities") in violation of any rule, regulation, treaty
or statute promulgated by any Governmental Entity in effect prior to or as of
the date hereof to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
(c) Permits. Target and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "Target
Environmental Permits") material to and necessary for the conduct of Target's
and its subsidiaries' Hazardous Material Activities and other businesses of
Target and its subsidiaries as such activities and businesses are currently
being conducted.
2.14 Agreements, Contracts and Commitments. Except as otherwise set forth
in the Target Disclosure Schedules, neither Target nor any of its subsidiaries
is a party to or is bound by:
(a) any employment agreement, contract or commitment with any employee or
member of Target's Board of Directors, other than those that are terminable by
Target or any of its subsidiaries on no more than thirty days notice without
liability or financial obligation, except to the extent general principles of
wrongful termination law may limit Target's or any of its subsidiaries'
ability to terminate employees at will, or any consulting agreement;
(b) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will
be accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement;
(c) any agreement of indemnification outside the ordinary course of
Target's business or any guaranty;
(d) any agreement, contract or commitment containing any covenant limiting
in any respect the right of Target or any of its subsidiaries or a Joint
Venture to engage in any line of business or to compete with any person or
granting any exclusive distribution rights;
(e) any agreement, contract or commitment currently in force relating to
the disposition or acquisition by Target or any of its subsidiaries or a Joint
Venture after the date of this Agreement of a material amount of assets not in
the ordinary course of business or pursuant to which Target has any material
ownership interest in any corporation, partnership, joint venture or other
business enterprise other than Target's subsidiaries or a Joint Venture;
(f) any licensing, distribution, sponsorship, advertising, merchant
program, encoding services, hosting or other similar agreement to which Target
or one of its subsidiaries or a Joint Venture is a party which may not be
canceled by Target or its subsidiaries or a Joint Venture, as the case may be,
without penalty in excess of $25,000 upon notice of 45 days or less or which
provides for payments by or to Target or its subsidiaries or a Joint Venture
in an amount in excess of $25,000 over the term of the agreement;
(g) any agreement, contract or commitment currently in force to provide
source code to any third party for any product or technology; or
(h) any other agreement, contract or commitment currently in effect that is
material to Target's business as presently conducted.
Neither Target nor any of its subsidiaries, nor to Target's knowledge any
Joint Venture or any other party to a Target Contract (as defined below), is
in breach, violation or default under, and neither Target nor any of its
subsidiaries nor, to the knowledge of Target, any Joint Venture has received
written notice (or to its knowledge, any other form of notice) that it has
breached, violated or defaulted under, any of the material terms or conditions
of any of the agreements, contracts or commitments to which Target or any of
its subsidiaries or a Joint Venture is a party or by which it is bound that
are required to be disclosed in the Target
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Disclosure Schedules pursuant to clauses (a) through (h) above or pursuant to
Section 2.9 hereof (any such agreement, contract or commitment, a "Target
Contract") in such a manner as would permit any other party to cancel or
terminate any such Target Contract or seek damages or other remedies the effect
of which would have a Material Adverse Effect on Target.
2.15 Affiliates. Set forth on the Target Disclosure Schedules is a list of
those persons who may be deemed to be, in Target's reasonable judgment,
affiliates of Target within the meaning of Rule 145 promulgated under the
Securities Act (each a "Target Affiliate").
2.16 Statements; Proxy Statement/Prospectus. The information supplied by
Target for inclusion in the Registration Statement (as defined in Section
3.3(b)) shall not at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
information supplied by Target for inclusion in the proxy statement/prospectus
to be sent to the stockholders of Target in connection with the meeting of
Target's stockholders to consider the approval and adoption of this Agreement
and the approval of the Merger (the "Target Stockholders' Meeting") (such proxy
statement/prospectus as amended or supplemented is referred to herein as the
"Proxy Statement/Prospectus") shall not, on the date the Proxy
Statement/Prospectus is first mailed to Target's stockholders or at the time of
the Target Stockholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Target
Stockholders' Meeting which has become false or misleading. If at any time
prior to the Effective Time any event relating to Target or any of its
affiliates, officers or directors should be discovered by Target which is
required to be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement/Prospectus, Target shall promptly inform
Parent and provide the necessary information for inclusion in any such
amendment or supplement. Notwithstanding the foregoing, Target makes no
representation or warranty with respect to any information supplied by Parent
or Merger Sub which is contained in any of the foregoing documents.
2.17 State Anti-Takeover Statutes. No "fair price," "business combination,"
"moratorium," "control share acquisition," "interested shareholder,"
"affiliated transaction" or other anti-takeover statute or similar statute or
regulation enacted by any state, and no supermajority voting provision
contained in the Company's Articles of Incorporation or Bylaws, apply to the
Merger or the other transactions contemplated by this Agreement.
2.18 Board Approval. The Board of Directors of Target has, as of the date of
this Agreement, unanimously (i) approved this Agreement and the transactions
contemplated hereby, (ii) determined that the Merger is advisable and fair to,
and in the best interests of Target and its stockholders and (iii) determined
to recommend that the stockholders of Target approve and adopt this Agreement
and approve the Merger.
2.19 Brokers', Finders' and Financial Advisory Fees. Except for fees payable
to its financial advisor, which fees shall not exceed $125,000, Target has not
incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby. A copy
of the engagement letter between Target and its financial advisor has been
previously provided to Parent or will be provided prior to the Effective Time.
2.20 Fairness Opinion. Target's Board of Directors has received an opinion
from Janney Montgomery Scott LLC as of the date hereof, to the effect that, as
of the date hereof, , the terms of the Merger are fair to the stockholders of
Target from a financial point of view.
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2.21 No Illegal or Improper Transactions. Neither Target nor any of its
directors, officers, employees or Target Affiliates, has directly or indirectly
used funds or other assets of Target or made any promise or undertaking in such
regard, for: (a) illegal contributions, gifts, entertainment or other expenses
relating to any political activity; (b) illegal payments to or for the benefit
of governmental officials or employees, whether domestic or foreign, or
violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended; (c) illegal payments to or for the benefit or any person, firm,
corporation or other entity, or any director, officer, employee, agent or
representative thereof; or (d) the establishment of a secret or unrecorded
fund; and there have been no false or fictitious entries made in the books or
records of Target with respect to the foregoing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to Target, subject to the
exceptions specifically disclosed in writing in the Disclosure Schedules
delivered by Parent to Target dated as of the date hereof referencing the
representations and warranties in this Agreement by Section number and
certified by a duly authorized officer of Parent (the "Parent Disclosure
Schedules"), as follows:
3.1 Organization of Parent and Merger Sub
(a) Each of Parent and Merger Sub (i) is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is organized; (ii) has the corporate or other power and authority to
own, lease and operate its assets and property and to carry on its business as
now being conducted; and (iii) except as would not be material to Parent, is
duly qualified or licensed to do business in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary.
(b) Parent has delivered or made available to Target a true and correct copy
of the Certificate of Incorporation and Bylaws of Parent, each as amended to
date, and each such instrument is in full force and effect. Neither Parent nor
any of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent governing instruments.
3.2 Parent and Merger Sub Capital Structure. The authorized capital stock of
Parent consists of 250,000,000 shares of Parent Common Stock, of which there
were 86,707,052 shares issued and outstanding as of November 14, 2000, and
15,000,000 shares of Preferred Stock, none of which are issued and outstanding.
All outstanding shares of Parent Common Stock are duly authorized, validly
issued, fully paid and nonassessable and are not subject to preemptive rights
created by statute, the Certificate of Incorporation or Bylaws of Parent or any
agreement or document to which Parent is a party or by which it is bound. The
authorized capital stock of Merger Sub consists of 1,000 shares of Common
Stock, $0.0001 par value, all of which, as of the date hereof, are issued and
outstanding and are held by Parent. Merger Sub was formed for the purpose of
consummating the Merger and has no material assets or liabilities except as
necessary for such purpose.
3.3 Authority.
(a) Each of Parent and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Merger Sub, subject
only to the filing of the Articles of Merger pursuant to Florida Law. This
Agreement has been duly executed and delivered by each of Parent and Merger Sub
and, assuming the due authorization, execution and delivery by Target,
constitutes the valid and binding obligation of Parent and Merger Sub,
enforceable against Parent and Merger Sub in accordance with its terms, except
as enforceability may be limited by bankruptcy and other similar laws and
general principles of
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equity. The execution and delivery of this Agreement by each of Parent and
Merger Sub does not, and the performance of this Agreement by each of Parent
and Merger Sub will not: (i) conflict with or violate the Certificate of
Incorporation or Bylaws of Parent or the Articles of Incorporation or Bylaws of
Merger Sub, (ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Parent or Merger Sub or by which any of their
respective properties is bound or affected, or (iii) result in any material
breach of or constitute a material default (or an event that with notice or
lapse of time or both would become a material default) under, or impair
Parent's rights or alter the rights or obligations of any third party under, or
give to others any rights of termination, amendment, acceleration or
cancellation of; or result in the creation of a material lien or encumbrance on
any of the material properties or assets of Parent or Merger Sub pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation, in each case that is
material to Parent, to which Parent or Merger Sub is a party or by which Parent
or Merger Sub or any of their respective properties are bound or affected.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required to be obtained
or made by Parent or Merger Sub in connection with the execution and delivery
of this Agreement or the consummation of the Merger, except for (i) the filing
of a Form S-4 (or any similar successor form thereto) Registration Statement
(the "Registration Statement") with the SEC in accordance with the Securities
Act, (ii) the filing of the Articles of Merger with the Secretary of State of
the State of Florida, (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal, foreign and state securities (or related) laws and the HSR Act, and
(iv) such other consents, authorizations, filings, approvals and registrations
which if not obtained or made would not be material to Parent or have a
material adverse effect on the ability of the parties hereto to consummate the
Merger.
3.4 SEC Filings; Parent Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
by Parent with the SEC since February 29, 2000, and has made available to
Target such forms, reports and documents in the form filed with the SEC. All
such required forms, reports and documents (including those that Parent may
file subsequent to the date hereof) are referred to herein as the "Parent SEC
Reports." As of their respective dates, the Parent SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Parent SEC Reports, and (ii) did not at the time
they were filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. None of Parent's
subsidiaries is required to file any forms, reports or other documents with the
SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports (the "Parent
Financials"), including any Parent SEC Reports filed after the date hereof
until the Closing, (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (ii) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q under the Exchange Act) and (iii) fairly presented the
consolidated financial position of Parent and its subsidiaries as at the
respective dates thereof and the consolidated results of Parent's operations
and cash flows for the periods indicated, except that the unaudited interim
financial statements may not contain footnotes and were or are subject to
normal and recurring year-end adjustments.
(c) Parent has heretofore furnished to Target a complete and correct copy of
any amendments or modifications, which have not yet been filed with the SEC but
which are required to be filed, to agreements, documents or other instruments
which previously had been filed by Parent with the SEC pursuant to the
Securities Act or the Exchange Act.
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3.5 Valid Issuance. The Parent Common Stock to be issued in the Merger, when
issued in accordance with the provisions of this Agreement, will be validly
issued, fully paid and nonassessable.
3.6 Proxy Statement/Prospectus. The information supplied by Parent for
inclusion in the Registration Statement shall not at the time the Registration
Statement is filed with the SEC and at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The information supplied by Parent for inclusion in the
Proxy Statement/Prospectus shall not, on the date the Proxy
Statement/Prospectus is first mailed to Target's stockholders or at the time of
the Target Stockholders' Meeting contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Target
Stockholders' Meeting which has become false or misleading. If at any time
prior to the Effective Time, any event relating to Parent or any of its
affiliates, officers or directors should be discovered by Parent which is
required to be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement/Prospectus, Parent shall promptly inform
Target and provide the necessary information for inclusion in any such
amendment or supplement. Notwithstanding the foregoing, Parent makes no
representation or warranty with respect to any information supplied by Target
which is contained in any of the foregoing documents.
3.7 Litigation. There are no claims, suits, actions or proceedings pending
or, to the knowledge of Parent, threatened against, relating to or affecting
Parent or any of its subsidiaries or any joint venture of Parent, before any
Governmental Entity or any arbitrator that seek to restrain or enjoin the
consummation of the transactions contemplated by this Agreement or which could
reasonably be expected, either singularly or in the aggregate with all such
claims, actions or proceedings, to have a Material Adverse Effect on Parent or
the Surviving Corporation following the Merger or have a material adverse
effect on the ability of the parties hereto to consummate the Merger. No
Governmental Entity has at any time challenged or questioned in a writing
delivered to Parent the legal right of Parent to design, offer or sell any of
its services or products in the present manner or style thereof.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by Target. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Target and each of its
subsidiaries shall, except to the extent that Parent shall otherwise consent in
writing, carry on its business in the usual, regular and ordinary course, in
substantially the same manner as heretofore conducted and in compliance in all
material respects with all applicable laws and regulations, pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, pay or
perform other material obligations when due, and use its commercially
reasonable efforts consistent with past practices and policies to (i) preserve
intact its present business organization, (ii) keep available the services of
its present officers and employees and (iii) preserve its relationships with
customers, suppliers, licensors, licensees, and others with which it has
business dealings.
In addition, except as permitted by the terms of this Agreement, without the
prior written consent of Parent, during the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Target shall not do any of the
following and shall not permit its subsidiaries or any Joint Venture to do any
of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock plans or
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authorize cash payments in exchange for any options granted under any of such
plans, or permit the payment of the exercise price of any options to be paid by
any means other than cash, check or wire transfer of immediately available
funds;
(b) Grant any severance or termination pay to any officer or employee except
pursuant to written agreements in effect, or policies existing, on the date
hereof and as previously disclosed in writing to Parent, or adopt any new
severance plan;
(c) Transfer or license to any person or entity or otherwise extend, amend
or modify in any material respect any rights to the Target Intellectual
Property, other than non-exclusive licenses in the ordinary course of business
and consistent with past practice;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of Target or its subsidiaries, except repurchases of
unvested shares at cost in connection with the termination of the employment
relationship with any employee pursuant to stock option or purchase agreements
in effect on the date hereof;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber any shares
of capital stock or any securities convertible into shares of capital stock, or
subscriptions, rights, warrants or options to acquire any shares of capital
stock or any securities convertible into shares of capital stock, or enter into
other agreements or commitments of any character obligating it to issue any
such shares or convertible securities, other than (i) the issuance delivery
and/or sale of shares of Target Common Stock pursuant to the exercise of stock
options or warrants outstanding on November 15, 2000; and (ii) the issuance of
options to purchase up to 200,000 shares of Target Common Stock, with options
to purchase no more than 25,000 of such shares to be granted to any one person,
pursuant to Target's 1999 Employee Incentive Compensation Plan;
(g) Cause, permit or propose any amendments to its Certificate of
Incorporation, Bylaws or other charter documents (or similar governing
instruments of any of its subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof; or otherwise acquire or agree
to acquire any assets which are material, individually or in the aggregate, to
the business of Target or enter into any joint ventures, strategic partnerships
or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties or
assets which are material, individually or in the aggregate, to the business of
Target; provided, however, that Target may accept and execute an assignment of
lease from H.T.E., Inc., a Florida corporation ("H.T.E."), relative to the
property used and currently occupied by Target in Orange County, Florida;
(j) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of Target, enter
into any "keep well" or other agreement to maintain any financial statement
condition or enter into any arrangement having the economic effect of any of
the foregoing other than (i) in connection with the financing of ordinary
course trade payables consistent with past practice or (ii) pursuant to
existing credit facilities in the ordinary course of business;
(k) Adopt or amend any employee benefit plan or employee stock purchase or
employee stock option plan, or enter into any employment contract or collective
bargaining agreement (other than offer letters and
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letter agreements entered into in the ordinary course of business consistent
with past practice with employees who are terminable "at will"), pay any
special bonus or special remuneration to any director or employee, or increase
the salaries or wage rates or fringe benefits (including rights to severance
or indemnification) of its directors, officers, employees or consultants other
than in the ordinary course of business, consistent with past practice;
(l) Modify, amend or terminate any material contract or agreement to which
Target or any subsidiary thereof is a party, including any joint venture
agreement, or waive, release or assign any material rights or claims
thereunder;
(m) Enter into any licensing, distribution, sponsorship, advertising,
merchant program, encoding services, hosting or other similar contracts,
agreements, or obligations which may not be canceled without penalty by Target
or its subsidiaries upon notice of 45 days or less or which provide for
payments by or to Target or its subsidiaries in an amount in excess of $25,000
over the term of the Agreement or which involve any exclusive terms of any
kind;
(n) Revalue any of its assets or, except as required by GAAP, make any
change in accounting methods, principles or practices;
(o) Fail to make in a timely manner any filings with the SEC required under
the Securities Act or the Exchange Act or the rules and regulations
promulgated thereunder;
(p) Engage in any action with the intent to directly or indirectly
adversely impact any of the transactions contemplated by this Agreement; or
(q) Agree in writing or otherwise to take any of the actions described in
Section 4.1 (a) through (p) above.
4.2 Conduct of Business by Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, without the prior
written consent of Target, Parent shall not do any of the following and shall
not permit its subsidiaries to do any of the following: cause, permit or
propose any amendments to its Certificate of Incorporation or Bylaws or other
charter documents (or similar governing instruments of any of its
subsidiaries) in a manner that would have an adverse impact on Target's
stockholders.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings As
promptly as practicable after the execution of this Agreement, Target and
Parent will prepare, and file with the SEC, the Proxy Statement/Prospectus and
Parent will prepare and file with the SEC the Registration Statement in which
the Proxy Statement/Prospectus will be included as a prospectus. Each of
Target and Parent will respond to any comments of the SEC, will use its
respective commercially reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing and Target will cause the Proxy Statement/Prospectus to be mailed
to its stockholders at the earliest practicable time after the Registration
Statement is declared effective by the SEC. As promptly as practicable after
the date of this Agreement, each of Target and Parent will prepare and file
any other filings required to be filed by it under the Exchange Act, the
Securities Act or any other Federal, foreign or Blue Sky or related laws
relating to the Merger and the transactions contemplated by this Agreement
(the "Other Filings"). Each of Target and Parent will notify the other
promptly upon the receipt of any comments from the SEC or its staff or any
other government officials and of any request by the SEC or its staff or any
other government officials for amendments or supplements to the Registration
Statement, the Proxy Statement/Prospectus or any Other Filing or for
additional information and will supply the other with copies of all
correspondence between such party or
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any of its representatives, on the one hand, and the SEC or its staff or any
other government officials, on the other hand, with respect to the Registration
Statement, the Proxy Statement/Prospectus, the Merger or any Other Filing. Each
of Target and Parent will cause all documents that it is responsible for filing
with the SEC or other regulatory authorities under this Section 5.1(a) to
comply in all material respects with all applicable requirements of law and the
rules and regulations promulgated thereunder. Whenever any event occurs which
is required to be set forth in an amendment or supplement to the Proxy
Statement/Prospectus, the Registration Statement or any Other Filing, Target or
Parent, as the case may be, will promptly inform the other of such occurrence
and cooperate in filing with the SEC or its staff or any other government
officials, and/or mailing to stockholders of Target, such amendment or
supplement.
5.2 Meeting of Target Stockholders.
(a) Promptly after the date hereof, Target will take all action necessary in
accordance with Florida Law and its Articles of Incorporation and Bylaws to
convene the Target Stockholders' Meeting to be held as promptly as practicable
after the declaration of effectiveness of the Registration Statement for the
purpose of voting upon this Agreement and the Merger. Target will use its
commercially reasonable efforts to solicit from its stockholders proxies in
favor of the adoption and approval of this Agreement and the approval of the
Merger and will take all other action necessary or advisable to secure the vote
or consent of its stockholders required by the rules of the NASD or Florida Law
to obtain such approvals. Notwithstanding anything to the contrary contained in
this Agreement, Target may adjourn or postpone Target Stockholders' Meeting to
the extent necessary to ensure that any necessary supplement or amendment to
the Proxy Statement/Prospectus is provided to Target's stockholders in advance
of a vote on the Merger and this Agreement or, if as of the time for which
Target Stockholders' Meeting is originally scheduled (as set forth in the Proxy
Statement/Prospectus) there are insufficient shares of Target Stock represented
(either in person or by proxy) to constitute a quorum necessary to conduct the
business of the Target's Stockholders' Meeting. Target shall ensure that the
Target Stockholders' Meeting is called, noticed, convened, held and conducted,
and subject to Section 5.2(c) that all proxies solicited by Target in
connection with the Target Stockholders' Meeting are solicited, in compliance
with Florida Law, its Articles of Incorporation and Bylaws, the rules of the
NASD and all other applicable legal requirements. Target's obligation to call,
give notice of, convene and hold the Target Stockholders' Meeting in accordance
with this Section 5.2(a) shall not be limited to or otherwise affected by the
commencement, disclosure, announcement or submission to Target of any
Acquisition Proposal (as defined in Section 5.4(a)), or by any withdrawal,
amendment or modification of the recommendation of the Board of Directors of
Target with respect to the Merger.
(b) Subject to Section 5.2(c): (i) the Board of Directors of Target shall
recommend that Target's stockholders vote in favor of and adopt and approve
this Agreement and the Merger at the Target Stockholders' Meeting; (ii) the
Proxy Statement/Prospectus shall include a statement to the effect that the
Board of Directors of Target has recommended that Target's stockholders vote in
favor of and adopt and approve this Agreement and the Merger at the Target
Stockholders' Meeting; and (iii) neither the Board of Directors of Target nor
any committee thereof shall withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify in a manner adverse to Parent, the recommendation of
the Board of Directors of Target that Target's stockholders vote in favor of
and adopt and approve this Agreement and the Merger.
(c) Nothing in this Agreement shall prevent the Board of Directors of Target
from withholding, withdrawing, amending or modifying its recommendation in
favor of the Merger if (i) a Superior Offer (as defined below), or an offer
reasonably believed by the Board of Directors of Target to be a Superior Offer,
is made to Target and is not withdrawn, (ii) neither Target nor any of its
representatives shall have violated any of the restrictions set forth in
Section 5.4, and (iii) the Board of Directors of Target or any committee
thereof concludes in good faith, after consultation with its outside counsel,
that, in light of such Superior Offer, the withholding, withdrawal, amendment
or modification of such recommendation is required in order for the Board of
Directors of Target or any committee thereof to comply with its fiduciary
obligations to Target's stockholders under Florida Law. Nothing contained in
this Section 5.2(c) shall limit Target's obligation to hold
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and convene the Target Stockholders' Meeting (regardless of whether the
recommendation of the Board of Directors of Target shall have been withdrawn,
amended or modified). For purposes of this Agreement, the term "Superior Offer"
shall mean an unsolicited, bona fide written offer made by a third party to
consummate any of the following transactions: (i) a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving Target pursuant to which the stockholders of Target
immediately preceding such transaction hold less than 50% of the equity
interest in the surviving or resulting entity of such transaction; (ii) a sale
or other disposition by Target of assets representing in excess of 50% of the
fair market value of Target's business immediately prior to such sale, or (iii)
the acquisition by any person or group (including by way of a tender offer or
an exchange offer or issuance by Target), directly or indirectly, of beneficial
ownership or a right to acquire beneficial ownership of shares representing in
excess of 50% of the voting power of the then outstanding shares of capital
stock of Target, in each case on terms that the Board of Directors of Target
determines, in its reasonable judgment (based upon a written opinion of an
investment bank of nationally recognized reputation) to be more favorable to
Target stockholders than the terms of the Merger (after taking into account all
relevant factors, including all conditions to the offer, the timing of the
transaction contemplated by the offer, the risk of nonconsummation thereof and
the need for any required governmental or other consents, filings or
approvals); provided, however, that any such offer shall not be deemed to be a
"Superior Offer" if any financing required to consummate the transaction
contemplated by such offer is not committed and is not likely in the reasonable
judgment of Target's Board of Directors to be obtained by such third party on a
timely basis.
5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that Target and Parent have previously executed
a Mutual Nondisclosure Agreement dated October 30, 2000 and a letter agreement
dated November 3, 2000 (such agreements collectively, the "Confidentiality
Agreements"), which Confidentiality Agreements will continue in full force and
effect (for the period of time therein specified) in accordance with their
terms.
(b) Target will afford Parent and its representatives reasonable access to
information concerning Target's business that Parent may reasonably request in
order to permit, and solely for the purpose of permitting, Parent to confirm
the accuracy of the representations and warranties made by Target in Article
II. Parent will afford Target and its representatives reasonable access to
information concerning Parent's business that Target may reasonably request in
order to permit, and solely for the purpose of permitting, Target to confirm
the accuracy of the representations and warranties made by Parent in Article
III. All information and knowledge learned pursuant to this Section 5.3(b)
shall be subject to the Confidentiality Agreements. No information or knowledge
obtained by Parent or Target in any investigation pursuant to this Section 5.3
will affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
Merger.
5.4 No Solicitation.
(a) From and after the date of this Agreement until the Effective Time or
termination of this Agreement pursuant to Article VII, Target and its
subsidiaries will not, nor will they authorize or permit any of their
respective officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by any of them to,
directly or indirectly, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Acquisition Proposal, (ii) participate in any
discussions or negotiations regarding, or furnish to any person any non-public
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes or may reasonably be
expected to lead to, any Acquisition Proposal, (iii) engage in discussions with
any person with respect to any Acquisition Proposal, except as to the existence
of these provisions, (iv) subject to Section 5.2(c), approve, endorse or
recommend any Acquisition Proposal or (v) enter into any letter of intent or
similar document or any contract, agreement or commitment contemplating or
otherwise relating to any Acquisition Transaction; provided, however, that
prior to the approval of this Agreement by the required Target stockholder
vote, this Section 5.4(a) shall not prohibit Target from furnishing nonpublic
information regarding Target and its
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subsidiaries to, entering into a confidentiality agreement with or entering
into discussions with, any person or group in response to a Superior Offer
submitted by such person or group (and not withdrawn) if (1) neither Target nor
any representative of Target and its subsidiaries shall have violated any of
the restrictions set forth in this Section 5.4, (2) the Board of Directors of
Target concludes in good faith, after consultation with its outside legal
counsel, that such action is required in order for the Board of Directors of
Target to comply with its fiduciary obligations to Target's stockholders under
Florida Law, (3) prior to furnishing any such nonpublic information to, or
entering into discussions with, such person or group, Target gives Parent
written notice of the identity of such person or group and of Target's
intention to furnish nonpublic information to, or enter into discussions with,
such person or group and Target receives from such person or group an executed
confidentiality agreement containing customary limitations on the use and
disclosure of all nonpublic written and oral information furnished to such
person or group by or on behalf of Target, and (4) contemporaneously with
furnishing any such nonpublic information to such person or group, Target
furnishes such nonpublic information to Parent (to the extent such nonpublic
information has not been previously furnished by Target to Parent); provided,
further, that nothing herein shall prevent the Board of Directors of Target
from taking, and disclosing to Target's stockholders, a position contemplated
by Rules 14d-9 and 14e-2 promulgated under the Exchange Act. Target and its
subsidiaries will, and will cause their respective officers, directors,
affiliates, employees, investment bankers, attorneys and other advisors and
representatives to, immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal. Without limiting the foregoing, it is understood
that any violation of the restrictions set forth in the preceding two sentences
by any officer, director or employee of Target or any of its subsidiaries or
any investment banker, attorney or other advisor or representative of Target or
any of its subsidiaries shall be deemed to be a breach of this Section 5.4 by
Target. In addition to the foregoing, Target shall (i) provide Parent with at
least twenty-four (24) hours prior notice of any meeting of Target's Board of
Directors at which Target's Board of Directors is reasonably expected to
consider a Superior Proposal, (ii) provide Parent with at least two (2)
business days or forty-eight (48) hours prior written notice of a meeting of
Target's Board of Directors at which Target's Board of Directors is reasonably
expected to recommend a Superior Offer to its stockholders and together with
such notice a copy of the documentation relating to such Superior Offer that
exists at such time and (iii) provide Parent with reasonable notice of the
material terms of the Superior Offer and reasonable opportunity to make a
counter-offer prior to any commitment by Target with respect to the Superior
Offer.
For purposes of this Agreement, "Acquisition Proposal" shall mean any bona
fide offer or proposal (other than an offer or proposal by Parent) relating to
any Acquisition Transaction. For the purposes of this Agreement, "Acquisition
Transaction" shall mean any transaction or series of related transactions other
than the transactions contemplated by this Agreement involving: (A) any
acquisition or purchase from Target by any person or "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder) of
more than a 30% interest in the total outstanding voting securities of Target
or any of its subsidiaries or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder)
beneficially owning 30% or more of the total outstanding voting securities of
Target or any of its subsidiaries; (B) any merger, consolidation, business
combination or similar transaction involving Target; (C) any sale, lease (other
than in the ordinary course of business), exchange, transfer, license (other
than in the ordinary course of business), acquisition or disposition of more
than 50% of the assets of Target; or (D) any liquidation or dissolution of
Target.
(b) In addition to the obligations of Target set forth in paragraph (a) of
this Section 5.4, Target as promptly as practicable shall advise Parent orally
and in writing of any request for non-public information which Target
reasonably believes would lead to an Acquisition Proposal or of any Acquisition
Proposal, or any inquiry with respect to or which Target reasonably should
believe would lead to any Acquisition Proposal, the material terms and
conditions of such Acquisition Proposal (to the extent known), and the identity
of the person or group making any such request, Acquisition Proposal or
inquiry. Target will keep Parent informed in all material respects of any
material amendments or proposed amendments to any such Acquisition Proposal or
any requests for additional information or additional inquiries regarding
additional information.
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5.5 Public Disclosure. Parent and Target will consult with each other, and
to the extent practicable, agree, before issuing any press release or otherwise
making any public statement with respect to the Merger, this Agreement or an
Acquisition Proposal and will not issue any such press release or make any such
public statement prior to such consultation, except as may be required by law
or any listing agreement with a national securities exchange. The parties have
agreed to the text of the joint press release announcing the execution of this
Agreement.
5.6 Reasonable Efforts; Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including using commercially reasonable efforts
to accomplish the following: (i) the taking of all reasonable acts necessary to
cause the conditions precedent set forth in Article VI to be satisfied, (ii)
the obtaining of all necessary actions or nonactions, waivers, consents,
approvals, orders and authorizations from Governmental Entities and the making
of all necessary registrations, declarations and filings (including
registrations, declarations and filings with Governmental Entities, if any) and
the taking of all reasonable steps as may be necessary to avoid any suit,
claim, action, investigation or proceeding by any Governmental Entity, (iii)
the obtaining of all necessary consents, approvals or waivers from third
parties, (iv) the defending of any suits, claims, actions, investigations or
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed, and (v) the execution or delivery of
any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, this Agreement. In
connection with and without limiting the foregoing, Target and its Board of
Directors shall, if any state takeover statute or similar statute or regulation
is or becomes applicable to the Merger, this Agreement or any of the
transactions contemplated by this Agreement, use all reasonable efforts to
ensure that the Merger and the other transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effect of such
statute or regulation on the Merger, this Agreement and the transactions
contemplated hereby. Notwithstanding anything herein to the contrary, nothing
in this Agreement shall be deemed to require Parent or any of its affiliates to
make proposals, execute or carry out agreements or submit to orders providing
for the sale or other disposition or holding separate (through the
establishment of a trust or otherwise) of any assets or categories of assets of
Parent, any of its affiliates or Target or the holding separate of the shares
of Target Stock or imposing or seeking to impose any limitation on the ability
of Parent or any of its subsidiaries or affiliates to conduct their business or
own such assets or to acquire, hold or exercise full rights of ownership of the
shares of Target Stock.
(b) Target shall give prompt notice to Parent of any representation or
warranty made by it contained in this Agreement becoming untrue or inaccurate,
or any failure of Target to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement, in each case, such that the conditions set forth in Section
6.3(a) or 6.3(b) would not be satisfied; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
(c) Parent shall give prompt notice to Target of any representation or
warranty made by it or Merger Sub contained in this Agreement becoming untrue
or inaccurate, or any failure of Parent or Merger Sub to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied
with or satisfied by it under this Agreement, in each case, such that the
conditions set forth in Section 6.2(a) or 6.2(b) would not be satisfied;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
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<PAGE>
5.7 Third Party Consents. As soon as practicable following the date hereof,
Parent and Target will each use its commercially reasonable efforts to obtain
any consents, waivers and approvals under any of its or its subsidiaries'
respective agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby.
5.8 Stock Options, Warrants and Restricted Stock.
(a) At the Effective Time, each outstanding Target Option under Target's
1999 Employee Incentive Compensation Plan, whether or not exercisable, will be
assumed by Parent. Each Target Option assumed by Parent under this Agreement
will continue to have, and be subject to, the same terms and conditions set
forth in Target's 1999 Employee Incentive Compensation Plan immediately prior
to the Effective Time (including, without limitation, any repurchase rights or
vesting provisions), except that (i) each Target Option will be exercisable (or
will become exercisable in accordance with its terms) for that number of whole
shares of Parent Common Stock equal to the product of the number of shares of
Target Common Stock that were issuable upon exercise of such Target Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares of Parent Common Stock and
(ii) the per share exercise price for the shares of Parent Common Stock
issuable upon exercise of such assumed Target Option will be equal to the
quotient determined by dividing the exercise price per share of Target Common
Stock at which such Target Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
(b) It is intended that Target Options assumed by Parent shall qualify
following the Effective Time as "incentive stock options" as defined in Section
422 of the Code to the extent Target Stock Options qualified as incentive stock
options immediately prior to the Effective Time and the provisions of this
Section 5.8 shall be applied consistent with such intent.
(c) Parent agrees to file a registration statement on Form S-8 for the
shares of Parent Common Stock issuable with respect to assumed Target Stock
Options as soon as is reasonably practicable after the Effective Time, and in
any event within forty-five (45) days after the Effective Time, and shall use
commercially reasonable efforts to maintain the effectiveness of such
registration statement thereafter for so long as any of such options or other
rights remain outstanding.
(d) Each Target Warrant that by its terms survives the Merger, to the extent
outstanding at the Effective Time, whether or not exercisable and whether or
not vested at the Effective Time, shall remain outstanding at the Effective
Time. At the Effective Time, such Target Warrants shall, by virtue of the
Merger and without any further action on the part of Target or the holder of
any of such Target Warrants (unless further action may be required by the terms
of any of such Target Warrants), be assumed by Parent and each Target Warrant
assumed by Parent shall be exercisable upon the same terms and conditions as
under the applicable warrant agreements with respect to such Target Warrants,
except that (i) each such Target Warrant shall be exercisable for that whole
number of shares of Parent Common Stock (rounded down to the nearest whole
share) into which the number of shares of Target Common Stock subject to such
Target Warrant would be converted under Section 1.6(a), and (ii) the exercise
price per share of Parent Common Stock shall be an amount equal to the exercise
price per share of Target Common Stock subject to such Target Warrant in effect
immediately prior to the Effective Time divided by the Exchange Ratio (the
exercise price per share, so determined, being rounded to the nearest full
cent). From and after the Effective Time, all references to Target in the
warrant agreements underlying such Target Warrants shall be deemed to refer to
Parent. Parent further agrees that, notwithstanding any other term of this
Section 5.8(d) to the contrary, if required under the terms of Target Warrants
or if otherwise appropriate under the terms of Target Warrants, it will execute
a supplemental agreement with the holders of Target Warrants to effectuate the
foregoing. No payment shall be made for fractional shares. Parent shall (A) on
or prior to the Effective Time, reserve for issuance the number of shares of
Parent Common Stock that will become subject to warrants to purchase Parent
Common Stock ("Parent Warrants") pursuant to this Section 5.8(d), and (B) from
and after the Effective Time, upon exercise of the Parent Warrants in
accordance with the terms thereof, make available for issuance all shares of
Parent Common Stock covered thereby.
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<PAGE>
(e) Shares of Target Stock that are subject to repurchase by Target in the
event a Target employee ceases to be employed by Target ("Target Restricted
Stock") shall be converted into the right to receive Parent Common Stock on the
same basis as provided in Section 1.6. Shares of Target Restricted Stock shall
be replaced with shares of Parent Common Stock, subject to the same
restrictions as the original Target Restricted Stock. Such replacement shares
of Parent Common Stock shall be issued to and registered in the name of the
holder, but shall be held by Parent pending satisfaction of the applicable
vesting schedules pursuant to existing agreements in effect at the Effective
Time. Target hereby assigns to the Surviving Corporation all repurchase rights
relating to the Target Restricted Stock, effective at the Effective Time. A
listing of the holders of Target Restricted Stock, together with the number of
shares of Target Restricted Stock held by each, is set forth on Schedule 5.8(e)
of the Target Disclosure Schedules.
5.9 Certain Employee Benefit Matters. Target shall take all necessary action
to cause any 401(k) plan sponsored or maintained by Target to be terminated at
least one day prior to the Closing Date.
5.10 Indemnification.
(a) From and after the Effective Time, Parent will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of Target
pursuant to any indemnification agreements between Target and its directors and
officers as of the Effective Time (the "Indemnified Parties") and any
indemnification provisions under Target's Articles of Incorporation or Bylaws
as in effect on the date hereof. The Articles of Incorporation and Bylaws of
the Surviving Corporation will contain provisions with respect to exculpation
and indemnification that are at least as favorable to the Indemnified Parties
as those contained in the Articles of Incorporation and Bylaws of Target as in
effect on the date hereof, which provisions will not be amended, repealed or
otherwise modified for a period of six years from the Effective Time in any
manner that would adversely affect the rights thereunder of individuals who,
immediately prior to the Effective Time, were directors, officers, employees or
agents of Target, unless such modification is required by law.
(b) For a period of three years after the Effective Time, Parent shall cause
the Surviving Corporation to maintain in effect, if available, directors' and
officers' liability insurance covering those persons who are currently covered
by Target's directors' and officers' liability insurance policy on terms
comparable to those applicable to the current directors and officers of Target;
provided, however, that in no event will Parent or the Surviving Corporation be
required to expend in excess of 125% of the annual premium currently paid by
Target for such coverage (or such coverage as is available for such 125% of
such annual premium).
(c) This Section 5.10 shall survive the consummation of the Merger, is
intended to benefit Target, the Surviving Corporation and each indemnified
party, shall be binding on all successors and assigns of the Surviving
Corporation and Parent, and shall be enforceable by the indemnified parties.
5.11 Legends. Parent will be entitled to place appropriate legends on the
certificates evidencing any Parent Common Stock to be received by a Target
Affiliate pursuant to the terms of this Agreement and to issue appropriate stop
transfer instructions to the transfer agent for the Parent Common Stock.
5.12 Letter of Target's Accountants. Target shall use its reasonable efforts
to cause to be delivered to Parent, and Parent shall use its reasonable efforts
to cause to be delivered Target, "cold comfort" letters of the kind
contemplated by the Statement of Auditing Standards with respect to Letters to
Underwriters promulgated by the American Institute of Certified Public
Accountants (the "AICPA Statement") from their respective independent
accountants, one dated the date on which the Registration Statement shall
become effective and one dated as of the date the Effective Time occurs, each
addressed to the other party, in form and substance reasonably satisfactory to
the other party and customary in scope and substance for comfort letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement; provided that the other party
provides to the accountant of the party causing the cold comfort letter to be
issued a letter with the information required by the AICPA Statement.
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<PAGE>
5.13 Bridge Financing
(a) On the dates set forth below, Parent shall lend Target the amounts set
forth below:
<TABLE>
<CAPTION>
Aggregate Fully-
Funding Funding Diluted
Funding Date Amount Amount Percentage
------------ ------------ ------------ ----------
<S> <C> <C> <C>
December 1, 2000........................ US$2,000,000 US$2,000,000 15%
January 1, 2001......................... US$1,000,000 US$3,000,000 4%
February 1, 2001........................ US$1,000,000 US$4,000,000 4%
March 1, 2001........................... US$1,000,000 US$5,000,000 2%
</TABLE>
(b) Each loan made by Parent to Target pursuant to this Section 5.13 shall
be on the terms and conditions contained in the form of Convertible Promissory
Note attached hereto as Exhibit B. Each loan shall be evidenced by a separate
convertible promissory note, with the terms "Funding Date", "Funding Amount"
and "Fully-Diluted Percentage" completed in such forms using the table in
Section 5.13(a) for the corresponding Funding Date. As set forth in the form of
Convertible Promissory Note attached hereto as Exhibit B, if any such loan or
loans become repayable by its or their terms following termination of this
Agreement, Target shall immediately upon such event file the form of
Certificate of Designation attached hereto as Exhibit C to create only such
number of shares of Series C Preferred as required to permit conversion of all
such Convertible Promissory Notes in accordance with their terms. Each
occurrence of the bracketed term "Price Per Share" in such Certificate of
Designation shall be completed using the quotient of (i) the "Aggregate Funding
Amount" following the most recent "Funding Date" at which funds were provided,
each determined using the table in Section 5.13(a), divided by (ii) the
aggregate number of shares of Series C Preferred required to permit conversion
of such Convertible Promissory Notes in accordance with their terms.
5.14 Board Observer. For a period of eighteen (18) months following the
Effective Time, O.F. Ramos (the "Observer") shall have the right to attend
meetings of the Parent's Board of Directors and the right to participate
therein, but shall not have the right (a) to vote at such meetings or (b) to
attend meetings or portions of meetings of Parent's Board of Directors from
which directors who are also employees of Parent have been excluded. The
Observer shall be entitled to the same notice of such meetings and information
relating to same as is given to members of Parent's Board of Directors. If O.F.
Ramos declines or is unable to serve as the Observer, then Bernard B. Markey
shall be designated as the Observer.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Target Stockholder Approval. This Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite vote
under applicable law by the stockholders of Target.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose, and no similar proceeding in respect
of the Proxy Statement/Prospectus, shall have been initiated or threatened in
writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise
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prohibiting consummation of the Merger. All waiting periods, if any, under the
HSR Act relating to the transactions contemplated hereby will have expired or
terminated early and all material foreign antitrust approvals required to be
obtained prior to the Merger in connection with the transactions contemplated
hereby shall have been obtained.
(d) Tax Opinions. Parent and Target shall each have received written
opinions from their respective tax counsel (Venture Law Group, A Professional
Corporation, and Greenberg Traurig, P.A., respectively), in form and substance
reasonably satisfactory to them, to the effect that the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code and such
opinions shall not have been withdrawn; provided, however, that if the counsel
to either Parent or Target does not render such opinion, this condition shall
nonetheless be deemed to be satisfied with respect to such party if counsel to
the other party renders such opinion to such party. The parties to this
Agreement agree to make reasonable representations as requested by such counsel
for the purpose of rendering such opinions.
6.2 Additional Conditions to Obligations of Target. The obligation of Target
to consummate and effect the Merger shall be subject to the satisfaction at or
prior to the Closing Date of each of the following conditions, any of which may
be waived, in writing, exclusively by Target:
(a) Representations and Warranties. Each representation and warranty of
Parent and Merger Sub contained in this Agreement (i) shall have been true and
correct in all material respects as of the date of this Agreement, and (ii)
shall be true and correct on and as of the Closing Date with the same force and
effect as if made on the Closing Date except (A) in each case, or in the
aggregate, as does not constitute a Material Adverse Effect on Parent and
Merger Sub, (B) for changes contemplated by this Agreement, and (C) for those
representations and warranties which address matters only as of a particular
date (which representations shall have been true and correct except as does not
constitute a Material Adverse Effect on Parent and Merger Sub as of such
particular date) (it being understood that, for purposes of determining the
accuracy of such representations and warranties for purposes of clause (ii),
(1) all "Material Adverse Effect" qualifications and other qualifications based
on the word "material" or similar phrases contained in such representations and
warranties shall be disregarded, and (2) any update of or modification to the
Parent Disclosure Schedules made or purported to have been made after the date
of this Agreement shall be disregarded). Target shall have received a
certificate with respect to the foregoing signed on behalf of Parent by an
authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by them on or prior to the
Closing Date, and Target shall have received a certificate to such effect
signed on behalf of Parent by an authorized officer of Parent.
(c) Trading of Additional Shares. Parent shall have taken any required
actions so that shares of Parent Common Stock issuable in the Merger are
eligible for trading on The Nasdaq Stock Market.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) Representations and Warranties. Each representation and warranty of
Target contained in this Agreement (i) shall have been true and correct in all
material respects as of the date of this Agreement, and (ii) shall be true and
correct on and as of the Closing Date with the same force and effect as if made
on and as of the Closing Date except (A) in each case, or in the aggregate, as
does not constitute a Material Adverse Effect on Target, (B) for changes
contemplated by this Agreement, and (C) for those representations and
warranties which address matters only as of a particular date (which
representations shall have been true and correct except as does not constitute
a Material Adverse Effect on Target as of such particular date) (it being
understood that, for purposes of determining the accuracy of such
representations and warranties, (1) all "Material Adverse Effect"
qualifications and other qualifications based on the word "material" or similar
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<PAGE>
phrases contained in such representations and warranties shall be disregarded,
and (2) any update of or modification to the Target Disclosure Schedules made
or purported to have been made after the date of this Agreement shall be
disregarded). Parent shall have received a certificate with respect to the
foregoing signed on behalf of Target by an authorized officer of Target.
(b) Agreements and Covenants. Target shall have performed or complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with by it at or prior to the Closing Date, and
Parent shall have received a certificate to such effect signed on behalf of
Target by the Chief Executive Officer and the Chief Financial Officer of
Target.
(c) Certificate Regarding Options. Parent shall have received a certificate
signed on behalf of Target by the Secretary and Chief Financial Officer of
Target setting forth the number of Target Options vested as of the Effective
Time, determined in accordance with Section 1.6(a)(ii)(B).
(d) Employment and Option Agreement Amendments. Each of O.F. Ramos, Edward
S. Jordan and William Knox North shall have entered into amendments to their
employment and option agreements with Target, in forms attached hereto as: (i)
Exhibits D-1, D-2 and D-3 in the case of Mr. Ramos, (ii) Exhibits E-1, E-2 and
E-3 in the case of Mr. Jordan, and (iii) Exhibits F-1, F-2 and F-3 in the case
of Mr. North.
(e) Amendment Agreements. Each of Bernard B. Markey, L.A. Gornto, Jr. and
Edward Moses shall have amended their existing employment, consulting and
option agreements with Target effective, with such amendments effective as of
the Effective Time, to provide that (i) each such individual shall provide such
transition consulting services as are requested in writing on behalf of Parent
by the President or Vice President--Corporate Development of Parent until the
close of business on the one hundred and eightieth (180th) day after the
Closing Date, with such individuals to be compensated for such consulting
services at a rate of one hundred dollars (US$100) per hour for each hour of
services so rendered, (ii) each such individual's Target Options that are
exercisable at the Effective Time of the Merger (including options vesting as a
result of the Merger) shall be exercisable until the close of business on the
two hundred and seventieth (270th) day after the Closing Date, and (iii) other
than as specified in (i), (ii) and the provided, however, clause in this
sentence, those option, employment and consulting agreements shall be of no
further force and effect as of the Effective Time and each such individual
shall not be entitled to receive any payments or benefits of any kind
thereunder after the Effective Time; provided, however, amounts owed, and the
number of Target Options vested (including options vesting as a result of the
Merger), as of the Effective Time shall not be affected by such amendment, with
such amendment to be in form and substance reasonably satisfactory to Parent.
(f) H.T.E. Matters.
(i) H.T.E. and Target shall have terminated that certain Registration
Rights Agreement dated as of December 21, 1999, with such termination to be
effective immediately prior to the Effective Time if and only if the Merger
occurs, with such termination to be in form and substance reasonably
satisfactory to Parent.
(ii) H.T.E. and Target shall have entered into an agreement terminating
H.T.E.'s right to receive securities as a result of the transactions
contemplated by this Agreement (including, without limitation, securities
issuable as a result of the loans and potential conversion of promissory
notes entered into pursuant to Section 5.13) pursuant to that certain
Modification to Promissory Note dated as of into as of October 31, 2000, by
and between H.T.E. and Target which modified that certain Promissory Note
dated as of October 31, 1999 in the original principal amount of $1,750,000
executed by Target in favor of H.T.E., with such agreement to be in form
and substance reasonably satisfactory to Parent. A termination agreement
satisfying the requirements of Section 4(b) of any Convertible Promissory
Note entered into pursuant to Section 5.13 shall satisfy this condition.
(g) Lockup Agreements. H.T.E., each Target Affiliate (including, without
limitation, each director and officer of Target) shall have entered into Lockup
Agreements with Parent in the form attached hereto as Exhibit G.
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<PAGE>
(h) Dissenting Stockholders. Holders of not more than 5% of Target's issued
and outstanding capital stock as of Effective Time shall have elected to, or
continue to have contingent rights to, exercise dissenters' rights under
Florida Law as to such shares and the time for exercising those rights under
Florida Law shall have expired.
(i) Fairness Opinion. Target shall have received an opinion from its
financial adviser, who shall be reasonably acceptable to Parent, stating that
in the opinion of such financial adviser, the terms of the Merger are fair to
the stockholders of Parent from a financial point of view.
(j) Termination Agreement. Target shall have provided Parent with evidence
satisfactory to Parent of the termination of all employment, consulting and
option agreements and arrangements with Ronald Brown.
(k) Consents. Target shall have obtained all consents, waivers and approvals
under any of Target's or any of its subsidiaries' agreements, contracts,
licenses or leases required in connection with the consummation of the
transactions contemplated hereby, which, individually or in the aggregate, if
not obtained, would result in a material loss of benefits to Target, Parent or
the Surviving Corporation as a result of the Merger, including those consents,
waivers and approvals identified on Schedule 6.3(f) of the Target Disclosure
Schedules. Parent shall have received the consents required under that certain
Second Amended and Restated Investors' Rights Agreement dated as of December
20, 1999, Parent, the investors listed on Exhibit A thereto and the holders of
Parent Common Stock listed on Exhibit B thereto in connection with the
assumption of the registration rights contained in the Target Warrants.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, by action taken or authorized by the terminating party or
parties, whether before or after the requisite approval of the stockholders of
Target:
(a) by mutual written consent of Parent and Target (which consent shall not
be unreasonably withheld (i) in the case of Parent, if the conditions set forth
in Section 6.2(a) or 6.2(b) would not reasonably be expected to be satisfied
prior to the Termination Date (as defined in Section 7.1(b)) through the
exercise of Parent's commercially reasonable efforts or (ii) in the case of
Target, if the conditions set forth in Section 6.3(a) or 6.3(b) would not
reasonably be expected to be satisfied prior to the Termination Date through
the exercise of Target's commercially reasonable efforts);
(b) by either Target or Parent if the Effective Time shall not have occurred
on or before June 30,
2001 (the "Termination Date"); provided, however, that the right to terminate
this Agreement under this Section 7.1(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement (including without
limitation such party's obligations set forth in Section 5.6) has been the
cause of, or resulted in, the failure of the Effective Time to occur on or
before the Termination Date;
(c) by either Target or Parent if any Governmental Entity (i) shall have
issued an order, decree or ruling or taken any other action (which such party
shall have used its reasonable best efforts to resist, resolve or lift, as
applicable, in accordance with Section 5.6) permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this Agreement, and
such order, decree, ruling or other action shall have become final and
nonappealable; or (ii) shall have failed to issue an order, decree or ruling or
to take any other action (which order, decree or ruling or other action such
party shall have used its reasonable best efforts to obtain, in accordance with
Section 5.6), in the case of each of (i) and (ii) which is necessary to fulfill
the condition set forth in Section 6.1(c) and such denial of a request to issue
such order, decree, ruling or take such other action shall have become final
and nonappealable; provided, however, that the right to terminate this
Agreement under this Section 7.1(c) shall not be available to any party whose
failure to comply with Section 5.6 has been the cause of such action or
inaction;
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<PAGE>
(d) by either Target or Parent if the required approval of the stockholders
of Target contemplated by this Agreement shall not have been obtained by reason
of the failure to obtain the required vote at a meeting of Target stockholders
duly convened therefor or at any adjournment thereof (provided that the right
to terminate this Agreement under this Section 7.1(d) shall not be available to
Target where the failure to obtain Target stockholder approval shall have been
caused by the action or failure to act of Target and such action or failure to
act constitutes a breach by Target of this Agreement);
(e) by Parent if a Triggering Event (as defined below) shall have occurred;
(f) by Target, upon a breach of any representation, warranty, covenant or
agreement on the part of Parent set forth in this Agreement, or if any
representation or warranty of Parent shall have become untrue, in either case
such that the conditions set forth in Section 6.2(a) or Section 6.2(b) would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that if such
inaccuracy in Parent's representations and warranties or breach by Parent is
curable by Parent through the exercise of its commercially reasonable efforts,
then Target may not terminate this Agreement under this Section 7.1(f) for
twenty (20) days after delivery of written notice from Target to Parent of such
breach, provided Parent continues to exercise commercially reasonable efforts
to cure such breach (it being understood that Target may not terminate this
Agreement pursuant to this Section 7.1(f) if it shall have materially breached
this Agreement or if such breach by Parent is cured during such 20-day period,
provided that such cure shall be completed on or prior to the Termination
Date); or
(g) by Parent, upon a breach of any representation, warranty, covenant or
agreement on the part of Target set forth in this Agreement, or if any
representation or warranty of Target shall have become untrue, in either case
such that the conditions set forth in Section 6.3(a) or Section 6.3(b) would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that if such
inaccuracy in Target's representations and warranties or breach by Target is
curable by Target through the exercise of its commercially reasonable efforts,
then Parent may not terminate this Agreement under this Section 7.1(g) for
twenty (20) days after delivery of written notice from Parent to Target of such
breach, provided Target continues to exercise commercially reasonable efforts
to cure such breach (it being understood that Parent may not terminate this
Agreement pursuant to this Section 7.1(g) if it shall have materially breached
this Agreement or if such breach by Target is cured during such 20-day period,
provided that such cure shall be completed on or prior to the Termination
Date).
For the purposes of this Agreement, a "Triggering Event" shall be deemed to
have occurred if: (i) the Board of Directors of Target or any committee thereof
having authority to bind the Board shall for any reason have withheld or
withdrawn or shall have amended or modified in a manner adverse to Parent its
recommendation in favor of the adoption and approval of the Agreement or the
approval of the Merger; (ii) Target shall have failed to include in the Proxy
Statement/Prospectus the recommendation of the Board of Directors of Target in
favor of the adoption and approval of the Agreement and the approval of the
Merger; (iii) the Board of Directors of Target shall have failed to reaffirm
its recommendation in favor of the adoption and approval of the Agreement and
the approval of the Merger within five (5) business days after Parent requests
in writing that such recommendation be reaffirmed at any time following the
public announcement of an Acquisition Proposal or following the time at which
Parent becomes aware of the existence of an Acquisition Proposal; (iv) the
Board of Directors of Target or any committee thereof having authority to bind
the Board shall have approved or publicly recommended any Acquisition Proposal;
(v) Target shall have entered into any letter of intent or similar document or
any agreement, contract or commitment relating to any Acquisition Proposal;
(vi) a tender or exchange offer relating to securities of Target in excess of
15% of its outstanding voting securities shall have been commenced by a person
unaffiliated with Parent and Target shall not have sent to its stockholders
pursuant to Rule 14e-2 promulgated under the Exchange Act, within ten
(10) business days after such tender or exchange offer is first published sent
or given, a statement disclosing that Target's Board of Directors recommends
rejection of such tender or exchange offer; or (vii) Target shall have
intentionally breached its obligations under Section 5.4.
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<PAGE>
7.2 Notice of Termination Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect and there
shall be no liability hereunder on the part of Target, Parent, Merger Sub or
their respective officers or directors, except (i) as set forth in Section
5.13(b), this Section 7.2, Section 7.3 and Article VIII (Miscellaneous), each
of which shall survive the termination of this Agreement, and (ii) nothing
herein shall relieve any party from liability for any willful or intentional
breach of this Agreement. No termination of this Agreement shall affect the
obligations of the parties contained in the Confidentiality Agreements or the
Convertible Promissory Notes entered into pursuant to Section 5.13, all of
which obligations shall survive termination of this Agreement in accordance
with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, that Parent and Target shall share
equally all fees and expenses, other than attorneys' and accountants fees and
expenses, incurred in relation to the filing of the required materials under
the HSR Act and the printing and filing with the SEC of the Proxy
Statement/Prospectus (including any preliminary materials related thereto) and
the Registration Statement (including financial statements and exhibits) and
any amendments or supplements thereto.
(b) Termination Payments.
(i) In the event that this Agreement is terminated by Parent pursuant to
Section 7.1(e), Target shall promptly, but in no event later than one day
after the date of such termination, pay Parent a fee equal to $600,000 in
immediately available funds (the "Termination Fee") and shall pay Parent an
amount equal to Parent's documented expenses incurred in connection with
the transactions contemplated by this Agreement.
(ii) In the event that (A) this Agreement is terminated by Parent or
Target, as the case may be, pursuant to Section 7.1(d) or by Parent
pursuant to Section 7.1(g), Target shall promptly, but in no event later
than one business day after the date of such termination, pay Parent an
amount equal to the sum of Parent's documented expenses incurred in
connection with the transactions contemplated by this Agreement and the
Termination Fee; or (B) this Agreement is terminated by Target pursuant to
Section 7.1(f), Parent shall promptly, but in no event later than one
business day after the date of such termination, pay Target an amount equal
to the sum of Target's documented expenses incurred in connection with the
transactions contemplated by this Agreement and the Termination Fee.
(iii) In the event that (A) this Agreement is terminated by Parent or
Target, as the case may be, pursuant to Section 7.1(b), and (B) at any time
after the date of this Agreement and at or before the Termination Date an
Acquisition Proposal shall have been publicly announced or otherwise
communicated to the Board of Directors of Target, Target shall promptly,
but in no event later than one business day after the date of such
termination, pay Parent an amount equal to Parent's documented expenses
incurred in connection with the transactions contemplated by this
Agreement, and furthermore, in the event that within twelve (12) months
following such termination pursuant this Section 7.3(b)(iii) Target shall
enter into a definitive agreement with a third party with respect to an
Acquisition Transaction or shall consummate an Acquisition Transaction with
a third party, Target shall contemporaneously with such execution or
consummation, as the case may be, pay Parent a fee equal to the Termination
Fee.
(iv) Target acknowledges that the agreements contained in this Section
7.3(b) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Parent would not enter into
this Agreement; accordingly, if Target fails promptly to pay the amounts
due pursuant to this Section 7.3(b), and, in order to obtain such payment,
Parent commences a suit which results in a judgment against Target for the
amounts set forth in this Section 7.3(b), Target shall pay to Parent its
reasonable
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<PAGE>
costs and expenses (including attorneys' fees and expenses) in connection
with such suit, together with interest on the amounts set forth in this
Section 7.3(b) at the prime rate of Citibank, N.A. in effect on the date
such payment was required to be made.
(v) The remedies available pursuant to this Section 7.3(b) shall be in
addition to, but without duplication in any way of, the remedies referred
to in clause (ii) of Section 7.2.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of Parent, Merger Sub and Target.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto,
and (iii) waive compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Delay in exercising any
right under this Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of Target, Parent and Merger Sub contained in this Agreement shall
terminate at the Effective Time, and only the covenants that by their terms
survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub:
Onvia.com, Inc.
1260 Mercer Street
Seattle, WA 98109
Attention: Chief Strategy Officer
Telephone No.: (206) 282-5170
Telecopy No.: (206) 373-8961
with a copy at the same address to the attention of the Legal Counsel and
with a copy to:
Venture Law Group
A Professional Corporation
4750 Carillon Point
Kirkland, WA 98033
Attention: Mark J. Handfelt
Telephone No.: (425) 739-8700
Telecopy No.: (425) 739-8750
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<PAGE>
(b) if to Target:
DemandStar.com, Inc.
Attention: O. F. Ramos, President and CEO
1200 S. Pine Island Road, Suite 600
Plantation, FL 33324
Telephone No.: (954) 577-6500
Telecopy No.: (954) 577-3812
with a copy to:
Greenberg Traurig, P.A.
111 North Orange Avenue, 20th Floor
Orlando, FL 32801
Attention: Randolph H. Fields
Telephone No.: (407) 420-1000
Telecopy No.: (407) 420-5909
and with a copy to:
L. A. Gornto, Jr., Esq.
149 S. Ridgewood Avenue, Suite 300
Daytona Beach, FL 32114
Telephone No.: (904) 257-1899
Telecopy No.: (904) 257-1833
8.3 Interpretation; Certain Defined Terms.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. When a
reference is made in this Agreement to Sections, such reference shall be to a
Section of this Agreement unless otherwise indicated. The words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitations." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. When
reference is made herein to "the business of" an entity, such reference shall
be deemed to include the business of all direct and indirect subsidiaries of
such entity. Reference to the subsidiaries of an entity shall be deemed to
include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement the term "knowledge" means with respect
to a party hereto, with respect to any matter in question, that any of the
executive officers of such party has actual knowledge of such matter.
(c) For purposes of this Agreement, the term "Material Adverse Effect" when
used in connection with a party hereto means any change, event, circumstance or
effect that is materially adverse to the business, assets (including intangible
assets), capitalization, financial condition or results of operations of such
party and its subsidiaries taken as a whole, except (i) any continued or
increased operating losses (provided that obligations of Target set forth in
Section 4.1 are complied with) or (ii) to the extent that any such change,
event or effect is attributable to or results from (x) changes in general
economic conditions or changes affecting the industry generally in which such
party operates, or (y) changes in trading prices for such party's capital
stock.
(d) For purposes of this Agreement, the term "person" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability company, limited liability
partnership, joint venture, estate, trust, Target (including any limited
liability Target or joint stock Target), firm or other enterprise, association,
organization, entity or Governmental Entity.
A-43
<PAGE>
(e) For purposes of this Agreement, "subsidiary" of a specified entity will
be any corporation, partnership, limited liability company, joint venture or
other legal entity of which the specified entity (either alone or through or
together with any other subsidiary) owns, directly or indirectly, fifty percent
(50%) or more of the stock or other equity or partnership interests the holders
of which are generally entitled to vote for the election of the Board of
Directors or other governing body of such corporation or other legal entity.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, and by facsimile, all of which shall be considered one and the
same agreement and shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other party, it being
understood that all parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Target Disclosure
Schedules and the Parent Disclosure Schedules (a) constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof, it being understood that
the Confidentiality Agreements shall continue in full force and effect until
the Closing and shall survive any termination of this Agreement; and (b) are
not intended to confer upon any other person any rights or remedies hereunder,
except as specifically provided in Section 5.10.
8.6 Severability. If any provision of this Agreement is held invalid,
illegal or unenforceable for any reason, the parties agree that such
invalidity, illegality or unenforceability will not affect the validity,
legality or enforceability of the remaining provisions of this Agreement, if
(i) such invalidity, illegality or unenforceability does not materially affect
the intent or economic bargain detailed herein; or (ii) the parties agree to
substitute for the invalid, illegal or unenforceable provision a valid, legal
and enforceable provision which most closely approximates the intent and
economic effect of the invalid provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Any attempt to make any such assignment without such
consent shall be null and void. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
8.11 No Waiver; Remedies Cumulative. No failure or delay on the part of any
party hereto in the exercise of any right hereunder will impair such right or
be construed to be a waiver of, or acquiescence in, any
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<PAGE>
breach of any representation, warranty or agreement herein, nor will any single
or partial exercise of any such right preclude other or further exercise
thereof or of any other right. All rights and remedies existing under this
Agreement are cumulative to, and not exclusive to, and not exclusive of, any
rights or remedies otherwise available.
8.12 Waiver of Jury Trial. EACH OF PARENT, TARGET AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, TARGET OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
[Remainder of page intentionally left blank.]
A-45
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
PARENT:
ONVIA.COM, INC.
/s/ Michael D. Pickett
By: _________________________________
Michael D. Pickett
Name: _______________________________
President
Title: ______________________________
MERGER SUB:
DRAGON ACQUISITION CORPORATION
/s/ Michael D. Pickett
By: _________________________________
Michael D. Pickett
Name: _______________________________
President
Title: ______________________________
TARGET:
DEMANDSTAR.COM, INC.
/s/ Bernard B. Markey
By: _________________________________
Bernard B. Markey
Name: _______________________________
Chairman
Title: ______________________________
[SIGNATURE PAGE TO MERGER AGREEMENT]
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<PAGE>
APPENDIX B
VOTING AGREEMENT
B-1
<PAGE>
LIST OF STOCKHOLDERS THAT HAVE EXECUTED
VOTING AGREEMENTS AND IRREVOCABLE PROXIES
<TABLE>
<CAPTION>
Number of
Name of Stockholder Class of Stock Shares
------------------- ------------------ ---------
<S> <C> <C>
L.A. Gornto, Jr. .................................. Common Stock 275,000
H.T.E., Inc. ...................................... Series A Preferred 750,000
Common Stock 1,250,000
Edward S. Jordan................................... Common Stock 250,000
Bernard B. Markey.................................. Common Stock 113,000
D. Van Morris...................................... Common Stock 101,000
Edward A. Moses.................................... Common Stock 15,833
William Knox North................................. Common Stock 457,173
O.F. Ramos......................................... Common Stock 277,424
Trudy Sulzer....................................... None -0-
------------------ ---------
Total (including Series A Preferred on an as
converted basis)................................ 3,489,430
</TABLE>
B-2
<PAGE>
(Form of Voting Agreement and Irrevocable Proxy)
DEMANDSTAR.COM, INC.
VOTING AGREEMENT
This Voting Agreement (the "Agreement") is made and entered into as of
November 20, 2000, between Onvia.com, Inc., a Delaware corporation
("Acquiror"), and the undersigned stockholder ("Holder") of DemandStar.com,
Inc., a Florida corporation ("Target").
RECITALS
Pursuant to an Agreement and Plan of Merger dated as of November 20, 2000
(the "Merger Agreement") by and among Acquiror, Dragon Acquisition Corporation,
a Florida corporation and wholly owned subsidiary of Acquiror ("Sub"), and
Target, Sub is merging with and into Target (the "Acquisition") and Target, as
the surviving corporation of the Acquisition, will thereby become a wholly
owned subsidiary of Acquiror. Pursuant to the Merger Agreement and a request
from Acquiror, in order to induce Acquiror to enter into the Merger Agreement,
Target has agreed to use its best efforts to solicit the proxy of certain
significant stockholders of Target on behalf of Acquiror, and to cause certain
significant stockholders of Target to execute and deliver to Acquiror Voting
Agreements in the form hereof. The Holder is the beneficial owner (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of such number of shares of the outstanding Common Stock and
Preferred Stock, of Target as is indicated on the final page of this Agreement
(the "Shares").
In consideration of the execution of the Merger Agreement by Acquiror,
Holder agrees not to transfer or otherwise dispose of any of the Shares, or any
other shares of capital stock of Target acquired by Holder hereafter and prior
to the Expiration Date (as defined in Section 1(a) below), and agrees to vote
the Shares and any other such shares of capital stock of Target so as to
facilitate consummation of the Acquisition.
AGREEMENT
The parties agree as follows:
1. Agreement to Retain Shares.
(a) Transfer and Encumbrance. Holder agrees not to transfer (except as may
be specifically required by court order), sell, exchange, pledge (except in
connection with a bona fide loan transaction, provided that any pledgee agrees
not to transfer, sell, exchange, pledge or otherwise dispose of or encumber the
Shares or any New Shares (as defined in Section 1(b)) prior to the Expiration
Date and also agrees to be subject to the Proxy (as defined in Section 3)) or
otherwise dispose of or encumber the Shares or any New Shares, or to make any
offer or agreement relating thereto, at any time prior to the Expiration Date.
As used herein, the term "Expiration Date" shall mean the earlier to occur of
(i) such date and time as the Acquisition shall become effective in accordance
with the terms and provisions of the Merger Agreement, (ii) June 30, 2001, and
(iii) six months after the date of termination of the Merger Agreement.
(b) New Shares. Holder agrees that any shares of capital stock of Target
that Holder purchases or with respect to which Holder otherwise acquires
beneficial ownership after the date of this Agreement and prior to the
Expiration Date ("New Shares") shall be subject to the terms and conditions of
this Agreement to the same extent as if they constituted Shares.
2. Agreement to Vote Shares. At every meeting of the stockholders of Target
called with respect to any of the following, and at every adjournment thereof,
and on every action or approval by written consent of the stockholders of
Target with respect to any of the following, Holder shall vote the Shares and
any New Shares
B-3
<PAGE>
(i) in favor of approval of the Merger Agreement and the Acquisition and any
matter that could reasonably be expected to facilitate the Acquisition, and
(ii) against any proposal for any recapitalization, merger, sale of assets or
other business combination (other than the Acquisition) between Target and any
person or entity other than Acquiror or any other action or agreement that
would result in a breach of any covenant, representation or warranty or any
other obligation or agreement of Target under the Merger Agreement or which
could result in any of the conditions to Target's obligations under the Merger
Agreement not being fulfilled. This Agreement is intended to bind Holder as a
stockholder of Target only with respect to the specific matters set forth
herein.
3. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Holder agrees to deliver to Acquiror a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in
Section 607.0722(b)(5) of the Florida Business Corporation Act, covering the
total number of Shares and New Shares beneficially owned or as to which
beneficial ownership is acquired (as such term is defined in Rule 13d-3 under
the Exchange Act) by Holder set forth therein.
4. Representations, Warranties and Covenants of Holder. Holder hereby
represents, warrants and covenants to Acquiror that Holder (i) is the
beneficial owner of the Shares, which at the date of this Agreement and at all
times up until the Expiration Date will be free and clear of any liens, claims,
options, charges or other encumbrances; (ii) does not beneficially own any
shares of capital stock of Target other than the Shares (excluding shares as to
which Holder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into and
carry out the terms of this Agreement and the Proxy.
5. Additional Documents. Holder hereby covenants and agrees to execute and
deliver any additional documents necessary or desirable, in the reasonable
opinion of Acquiror, to carry out the purpose and intent of this Agreement.
6. Consent and Waiver. Holder hereby gives any consents or waivers that are
reasonably required for the consummation of the Acquisition under the terms of
any agreement to which Holder is a party or pursuant to any rights Holder may
have.
7. Termination. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Expiration Date.
8. Miscellaneous.
(a) Amendments and Waivers. Any term of this Agreement may be amended or
waived with the written consent of the parties or their respective successors
and assigns. Any amendment or waiver effected in accordance with this Section
8(a) shall be binding upon the parties and their respective successors and
assigns.
(b) Governing Law. This Agreement and all acts and transactions pursuant
hereto and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of Delaware,
without giving effect to principles of conflicts of law.
(c) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(d) Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
(e) Notices. Any notice required or permitted by this Agreement shall be in
writing and shall be deemed sufficient upon receipt, when delivered personally
or by courier, overnight delivery service or confirmed facsimile, or three
business days after being deposited in the regular mail as certified or
registered mail (airmail if sent internationally) with postage prepaid, if such
notice is addressed to the party to be notified at such party's address or
facsimile number as set forth below, or as subsequently modified by written
notice.
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<PAGE>
(f) Severability. If any provision of this Agreement is held invalid,
illegal or unenforceable for any reason, the parties agree that such
invalidity, illegality or unenforceability will not affect the validity,
legality or enforceability of the remaining provisions of this Agreement, if
(i) such invalidity, illegality or unenforceability does not materially affect
the intent or economic bargain detailed herein; or (ii) the parties agree to
substitute for the invalid, illegal or unenforceable provision a valid, legal
and enforceable provision which most closely approximates the intent and
economic effect of the invalid provision.
[Remainder of page intentionally left blank]
B-5
<PAGE>
The parties have caused this Agreement to be duly executed on the date first
above written.
ACQUIROR
ONVIA.COM, INC.
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
Address: ____________________________
______________________________
HOLDER
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
Holder's Address for Notice:
_____________________________________
_____________________________________
_____________________________________
Shares beneficially owned:
Class of Shares Number of Shares
--------------- ----------------
[Signature Page to Voting Agreement]
B-6
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
TO VOTE STOCK OF
DEMANDSTAR.COM, INC.
The undersigned stockholder of DemandStar.com, Inc., a Florida corporation
("Target"), hereby irrevocably (to the full extent permitted by Section
607.0722(b)(5) of the Florida Business Corporation Law) appoints the members of
the Board of Directors of Onvia.com, Inc., a Delaware corporation ("Acquiror"),
and each of them, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to vote and
exercise all voting and related rights (to the full extent that the undersigned
is entitled to do so) with respect to all of the shares of capital stock of
Target that now are or hereafter may be beneficially owned by the undersigned,
and any and all other shares or securities of Target issued or issuable in
respect thereof on or after the date hereof (collectively, the "Shares") in
accordance with the terms of this Proxy and in accordance with the third
paragraph hereof. The Shares beneficially owned by the undersigned stockholder
of Target as of the date of this Proxy are listed on the final page of this
Proxy. Upon the undersigned's execution of this Proxy, any and all prior
proxies given by the undersigned with respect to any Shares are hereby revoked
and the undersigned agrees not to grant any subsequent proxies with respect to
the Shares until after the expiration Date (as defined below).
This Proxy is irrevocable (to the extent permitted by Section 607.0722(b)(5)
of the Florida Business Corporation Law) is granted pursuant to that certain
Voting Agreement of even date herewith, by and among Acquiror and the
undersigned stockholder (the "Voting Agreement"), and is granted in
consideration of Acquiror entering into that certain Agreement and Plan of
Merger, of even date herewith, by and among Target, Acquiror and Dragon
Acquisition Corporation, a Florida corporation ("Sub") and wholly owned
subsidiary of Acquiror (the "Merger Agreement"). The Agreement provides for the
merger of Sub with and into Target (the "Acquisition"). As used herein, the
term "Expiration Date" shall mean the earlier to occur of (i) such date and
time as the Acquisition shall become effective in accordance with the terms and
provisions of the Merger Agreement, (ii) June 30, 2001, and (ii) six months
after the date of termination of the Merger Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting and other rights of the undersigned with
respect to the Shares (including, without limitation, the power to execute and
deliver written consents pursuant to Section 607.0722(b)(5) of the Florida
Business Corporation Law), at every annual, special or adjourned meeting of the
stockholders of Target and in every written consent in lieu of such meeting (i)
in favor of approval of the Acquisition and the Merger Agreement and in favor
of any matter that could reasonably be expected to facilitate the Acquisition,
and (ii) against any proposal for any recapitalization, merger, sale of assets
or other business combination (other than the Acquisition) between Target and
any person or entity other than Acquiror or any other action or agreement that
would result in a breach of any covenant, representation or warranty or any
other obligation or agreement of Target under the Merger Agreement or which
could result in any of the conditions to Target's obligations under the Merger
Agreement not being fulfilled. The attorneys and proxies named above may not
exercise this Proxy on any other matter except as provided above. The
undersigned stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
[Remainder of page intentionally left blank]
B-A-1
<PAGE>
This Proxy is irrevocable (to the extent provided in Section 607.0722(b)(5)
of the Florida Business Corporation Law).
Dated: November 20, 2000
_____________________________________
(Signature of Holder)
_____________________________________
(Print Name of Holder)
Shares beneficially owned:
<TABLE>
<CAPTION>
Class of Shares Number of Shares
--------------- ----------------
<S> <C> <C>
</TABLE>
B-A-2
<PAGE>
APPENDIX C
OPINION OF FINANCIAL ADVISOR TO DEMANDSTAR
C-1
<PAGE>
JANNEY MONTGOMERY SCOTT
INVESTMENT BANKING
Established 1832
November 17, 2000
Board of Directors
DemandStar.com Inc.
1200 Pine Island Rd., Suite 600
Plantation, FL 33324
Dear Members of the Board:
You have requested our opinion with respect to the fairness, from a
financial point of view, to the shareholders of DemandStar.com, Inc. (the
"Company") of the consideration to be received by such shareholders pursuant to
the Agreement and Plan of Merger (the "Agreement") dated November 17, 2000 by
and among Onvia.com, Inc. ("Onvia") and the Company.
Under the terms of the Agreement, the Company's shareholders will receive
0.6 shares of common stock of Onvia for each share of common stock of the
Company (the "Merger Consideration"). A wholly-owned subsidiary of Onvia would
be merged with and into the Company (the "Merger"). The terms and conditions of
the Merger are more fully set forth in the Agreement.
In reaching our opinion, we (i) reviewed certain historical and projected
financial information relating to the Company; (ii) reviewed selected financial
and stock market data for Onvia and certain other publicly traded companies;
(iii) reviewed the financial terms of certain recent business combinations;
(iv) performed discounted cash flow analysis for the Company; (v) reviewed the
terms of the Agreement and certain related documents in draft form; and (vi)
performed such other analyses, and considered such other factors, as we deemed
appropriate. In addition, we held discussions with the management of the
Company regarding the Company's business, operating results, financial
condition and prospects.
In connection with our review, we have relied upon the accuracy and
completeness of all information provided to us by the Company and its
representatives, and we have not attempted to independently verify any such
information. We have also relied upon the assessment of the management of the
Company regarding the Company's business and prospects, and assumed that the
budgets and financial projections of the Company were prepared by management on
the basis of reasonable assumptions and reflected the best currently available
estimates and good faith judgments of the future financial performance of the
Company. We have also assumed that the final terms of the Agreement and certain
related documents reviewed by us in draft form will not vary materially from
the drafts reviewed by us. We have not made an independent evaluation or
appraisal of the Company's assets and liabilities. Our opinion is necessarily
based on financial, market, economic and other conditions as they exist and can
be evaluated as of the date of this letter. We undertake no obligation to
update this opinion to reflect any developments occurring after the date
hereof.
Janney Montgomery Scott LLC ("Janney") is acting as financial advisor to the
Company in connection with the Merger and will receive customary fees in
connection with, and upon completion of, the Merger. In addition, the Company
has agreed to indemnify Janney against certain liabilities arising out of the
rendering of
1801 Market Street
Philadelphia,
PA 19103-1675
Tel 215.665.6180
Fax 215.665.6197
Members New York
Stock Exchange,
Inc.
Other Principal
Exchanges
<PAGE>
JANNEY MONTGOMERY SCOTT
INVESTMENT BANKING
this opinion. Janney is a nationally recognized investment banking firm and, as
part of its investment banking activities, is regularly engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations for corporate and other purposes. During the
spring of 2000, Janney was identified to certain state securities regulatory
authorities as the broker of record in such jurisdictions in connection with
the Company's rights offering.
It is understood that this letter is for the information of the Board of
Directors of the Company in evaluating the Merger. This opinion may not be used
for any other purpose, and may not be quoted or referred to, in whole or in
part, without our prior written consent. This opinion does not address the
relative merits of the Merger, any alternatives to the Merger available to the
Company or the underlying decision of the Company to proceed with the Merger.
Based upon the foregoing, we are of the opinion as of the date hereof, that
the Merger consideration to be received by the shareholders of the Company
pursuant to the Agreement is fair to such shareholders from a financial point
of view.
Very truly yours,
/s/ JANNEY MONTGOMERY SCOTT LLC
C-3
<PAGE>
APPENDIX D
FLORIDA DISSENTERS' RIGHTS PROVISIONS
D-1
<PAGE>
607.1301 Dissenters' rights; definitions.--The following definitions apply
to ss. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the value of
the shares as of the close of business on the day prior to the shareholders'
authorization date, excluding any appreciation or depreciation in anticipation
of the corporate action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken, the date on
which the corporation received written consents without a meeting from the
requisite number of shareholders in order to authorize the action, or, in the
case of a merger pursuant to s. 607.1104, the day prior to the date on which a
copy of the plan of merger was mailed to each shareholder of record of the
subsidiary corporation.
History.--s. 118, ch. 89-154
607.1302 Right of shareholders to dissent.--
(1) Any shareholder of a corporation has the right to dissent from, and
obtain payment of the fair value of his or her shares in the event of, any of
the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its parent
under s. 607.1104, and the shareholders would have been entitled to vote on
action taken, except for the applicability of s. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation, other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange
pursuant to s. 607.1202, including a sale in dissolution but not including a
sale pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be distributed
to the shareholders within 1 year after the date of sale;
(c) As provided in s. 607.0902(l1), the approval of a control-share
acquisition;
(d) Consummation of a plan of share exchange to which the corporation is a
party as the corporation the shares of which will be acquired, if the
shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the shareholder is
entitled to vote on the amendment and if such amendment would adversely affect
such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of his
or her shares;
2. Altering or abolishing the voting rights pertaining to any of his or
her shares, except as such rights may be affected by the voting rights of
new shares then being authorized of any existing or new class or series of
shares;
3. Effecting an exchange, cancellation, or reclassification of any of
his or her shares, when such exchange, cancellation, or reclassification
would alter or abolish the shareholder's voting rights or alter his or her
percentage of equity in the corporation, or effecting a reduction or
cancellation of accrued dividends or other arrearages in respect to such
shares;
4. Reducing the stated redemption price of any of the shareholder's
redeemable shares, altering or abolishing any provision relating to any
sinking fund for the redemption or purchase of any of his or her shares, or
making any of his or her shares subject to redemption when they are not
otherwise redeemable;
D-2
<PAGE>
5. Making noncumulative, in whole or in part, dividends of any of the
shareholder's preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of the shareholder's
preferred shares; or
7. Reducing any stated preferential amount payable on any of the
shareholder's preferred shares upon voluntary or involuntary liquidations;
or
(f) Any corporate action taken, to the extent the articles of incorporation
provide that a voting or nonvoting shareholder is entitled to dissent and
obtain payment for his or her shares.
(2) A shareholder dissenting from any amendment specified in paragraph
(1)(e) has the right to dissent only as to those of his or her shares which are
adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares registered in
his or her name. In that event, the shareholder's rights shall be determined as
if the shares as to which he or she has dissented and his or her other shares
were registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this section
does not apply with respect to a plan of merger or share exchange or a proposed
sale or exchange of property, to the holders of shares of any class or series
which, on the record date fixed to determine the shareholders entitled to vote
at the meeting of shareholders at which such action is to be acted upon or to
consent to any such action without a meeting, were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his or her
shares under this section may not challenge the corporate action creating his
or her entitlement unless the action is unlawful or fraudulent with respect to
the shareholder or the corporation.
History.--s. 119, ch. 89-154; s 5, ch 94-327; s 31, ch. 97-102.
607.1320 Procedure for exercise of dissenters' rights.--
(1)(a) If a proposed corporate action creating dissenters' rights under s.
607.1302 is submitted to a vote at a shareholders' meeting. the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights and be accompanied by a copy of ss. 607.1301, 607.1302, and 607.1320. A
shareholder who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written notice of
the shareholder's intent to demand payment for his or her shares if the
proposed action is effectuated, and
2. Not vote his or her shares in favor of the proposed action. A proxy
or vote against the proposed action does not constitute such a notice of
intent to demand payment.
(b) If proposed corporate action creating dissenters' rights under s.
607.1302 is effectuated by written consent without a meeting, the corporation
shall deliver a copy of ss. 607.1301, 607.1302, and 607.1320 to each
shareholder simultaneously with any request for the shareholder's written
consent or, if such a request is not made, within 10 days after the date the
corporation received written consents without a meeting from the requisite
number of shareholders necessary to authorize the action.
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his or her shares pursuant to
paragraph (1)(a) or, in the case of action authorized by written consent, to
each shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
D-3
<PAGE>
(3) Within 20 days after the giving of notice to him or her, any shareholder
who elects to dissent shall file with the corporation a notice of such
election, stating the shareholder's name and address, the number, classes, and
series of shares as to which he or she dissents, and a demand for payment of
the fair value of his or her shares. Any shareholder failing to file such
election to dissent within the period set forth shall be bound by the terms of
the proposed corporate action. Any shareholder filing an election to dissent
shall deposit his or her certificates for certificated shares with the
corporation simultaneously with the filing of the election to dissent. The
corporation may restrict the transfer of uncertificated shares from the date
the shareholder's election to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and shall
not be entitled to vote or to exercise any other rights of a shareholder. A
notice of election may be withdrawn in writing by the shareholder at any time
before an offer is made by the corporation, as provided in subsection (5), to
pay for his or her shares. After such offer, no such notice of election may be
withdrawn unless the corporation consents thereto. However, the right of such
shareholder to be paid the fair value of his or her shares shall cease, and the
shareholder shall be reinstated to have all his or her rights as a shareholder
as of the filing of his or her notice of election, including any intervening
preemptive rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by
the board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been taken in
the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the
shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a court has
been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such shareholder is
not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which shareholders
may file their notices of election to dissent, or within 10 days after such
corporate action is effected, whichever is later (but in no case later than 90
days from the shareholders' authorization date), the corporation shall make a
written offer to each dissenting shareholder who has made demand as provided in
this section to pay an amount the corporation estimates to be the fair value
for such shares. If the corporate action has not been consummated before the
expiration of the 90-day period after the shareholders' authorization date, the
offer may be made conditional upon the consummation of such action. Such notice
and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the dissenting
shareholder holds, as of the latest available date and not more than 12 months
prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the 12-month period
ended on the date of such balance sheet or, if the corporation was not in
existence throughout such 12-month period, for the portion thereof during which
it was in existence.
(6) If within 30 days after the making of such offer any shareholder accepts
the same, payment for his or her shares shall be made within 90 days after the
making of such offer or the consummation of the proposed action, whichever is
later. Upon payment of the agreed value, the dissenting shareholder shall cease
to have any interest in such shares.
D-4
<PAGE>
(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of
30 days thereafter, then the corporation, within 30 days after receipt of
written demand from any dissenting shareholder given within 60 days after the
date on which such corporate action was effected, shall, or at its election at
any time within such period of 60 days may, file an action in any court of
competent jurisdiction in the county in this state where the registered office
of the corporation is located requesting that the fair value of such shares be
determined. The court shall also determine whether each dissenting shareholder,
as to whom the corporation requests the court to make such determination, is
entitled to receive payment for his or her shares. If the corporation fails to
institute the proceeding as herein provided, any dissenting shareholder may do
so in the name of the corporation. All dissenting shareholders (whether or not
residents of this state), other than shareholders who have agreed with the
corporation as to the value of their shares, shall be made parties to the
proceeding as an action against their shares. The corporation shall serve a
copy of the initial pleading in such proceeding upon each dissenting
shareholder who is a resident of this state in the manner provided by law for
the service of a summons and complaint and upon each nonresident dissenting
shareholder either by registered or certified mail and publication or in such
other manner as is permitted by law. The jurisdiction of the court is plenary
and exclusive. All shareholders who are proper parties to the proceeding are
entitled to judgment against the corporation for the amount of the fair value
of their shares. The court may, if it so elects. appoint one or more persons as
appraisers to receive evidence and recommend a decision on the question of fair
value. The appraisers shall have such power and authority as is specified in
the order of their appointment or an amendment thereof. The corporation shall
pay each dissenting shareholder the amount found to be due him or her within 10
days after final determination of the proceedings. Upon payment of the
judgment, the dissenting shareholder shall cease to have any interest in such
shares.
(8) The judgment may, at the discretion of the court, include a fair rate of
interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by the
court and shall be assessed against the corporation. but all or any part of
such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the dissenting shareholders who are parties to
the proceeding, to whom the corporation has made an offer to pay for the
shares, if the court finds that the action of such shareholders in failing to
accept such offer was arbitrary, vexatious, or not in good faith. Such expenses
shall include reasonable compensation for, and reasonable expenses of, the
appraisers, but shall exclude the fees and expenses of counsel for, and experts
employed by, any party. If the fair value of the shares, as determined,
materially exceeds the amount which the corporation offered to pay therefor or
if no offer was made, the court in its discretion may award to any shareholder
who is a party to the proceeding such sum as the court determines to be
reasonable compensation to any attorney or expert employed by the shareholder
in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed
value thereof or pursuant to payment of the judgment entered therefor, as
provided in this section, may be held and disposed of by such corporation as
authorized but unissued shares of the corporation, except that, in the case of
a merger, they may be held and disposed of as the plan of merger otherwise
provides. The shares of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
History.--s. 120, ch. 89-154; s. 35, ch. 93-281; s. 32, ch. 97-102.
D-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit indemnification under
specific circumstances for liabilities including reimbursement for expenses
incurred arising under the Securities Act. Onvia's certificate of incorporation
and bylaws provide for indemnification of Onvia directors, officers, employees
and other agents to the maximum extent permitted by Delaware law. In addition,
Onvia has entered into indemnification agreements with some of its officers and
directors. Currently, there is no pending litigation or proceeding involving a
director for which indemnification is sought, nor is Onvia aware of any
threatened litigation that may result in claims for indemnification.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
The following exhibits are filed herewith or incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1(1) Agreement and Plan of Merger dated June 9, 2000 among Onvia, Zanova,
Inc. and Zanova Acquisition Corp.
2.2(2) Agreement and Plan of Merger dated July 25, 2000 among Onvia, Griffin
Acquisition Corporation and Globe-1, Incorporated.
2.3 Agreement and Plan of Merger dated November 20, 2000 among Onvia,
DemandStar.com, Inc. and Dragon Acquisition Corporation (incorporated
by reference to Appendix A of the proxy statement/prospectus filed as
part of this Registration Statement).
3.1(3) Certificate of Incorporation of Onvia.
3.2(3) Bylaws of Onvia.
4.1(3) Form of Onvia's common stock certificate.
4.2(3) Amended and Restated Investors' Rights Agreement dated December 20,
1999, as amended.
4.3(3) Warrant to Purchase Shares of Series A Preferred Stock issued by Onvia
to Meier Mitchell & Company as of August 5, 1999.
4.4 Form of Warrant to Purchase Common Stock of Zanova, Inc. (formerly
iTool.com, Inc.) (assumed by Onvia).
4.5 Form of Common Stock Purchase Warrant of Globe-1, Incorporated
(assumed by Onvia).
4.6 Form of Warrant Agreement dated December 21, 1999 issued by
DemandStar.com, Inc. (to be assumed by Onvia upon completion of the
merger).
5.1* Opinion of Venture Law Group, A Professional Corporation.
8.1* Tax Opinion of Venture Law Group, A Professional Corporation.
8.2* Tax Opinion of Greenberg Traurig, P.A.
9.1 Form of Voting Agreement dated November 20, 2000 by and between Onvia
and certain holders of DemandStar capital stock (incorporated by
reference to Appendix B of this proxy statement/prospectus filed as
part of this Registration Statement).
10.1(3) Form of Indemnification Agreement between Onvia and each of its
officers and directors.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.2(3) Loan and Security Agreement between Onvia and Dominion Venture
Finance L.L.C. dated as of June 15, 1999.
10.3(3) Loan and Security Agreement among MMC/GATX Partnership No. 1,
Comdisco, Inc. and Onvia dated as of August 5, 1999.
10.4(3) Office Lease between Firdex Associates and MegaDepot.com, Inc. dated
as of April 1999.
10.5(3) Office Lease among Stratton Properties, Inc., Glenn S. Ballman and
MegaDepot.com, Inc. dated as of May 9, 1998.
10.6(3) Lease between Onvia and No. 150 Cathedral Ventures Ltd. dated as of
June 1, 1999.
10.7(3) Amended and Restated 1999 Stock Option Plan.
10.8(3) Secured Promissory Note issued by Glenn S. Ballman to Onvia dated as
of October 14, 1999.
10.9(3) Offer Letter dated March 25, 1999 with Mark T. Calvert.
10.10(3) Offer Letter dated August 25, 1999 with Douglas H. Kellam.
10.11(3) Offer Letter dated July 23, 1999 with Mark A. Pawlosky.
10.12(3) Common Stock Purchase Agreement with Glenn S. Ballman dated as of
January 9, 1999.
10.13(3) Common Stock Purchase Agreement with Glenn S. Ballman dated as of
January 18, 1999.
10.14(3) Common Stock Purchase Agreement with Robert D. Ayer dated as of
January 18, 1999.
10.15(3) Common Stock Purchase Agreement with Kristen M. McLaughlin (formerly
Kristen M. Hamilton) dated as of January 18, 1999.
10.16(3) Common Stock Purchase Agreement with William W. Ericson dated as of
January 18, 1999.
10.17(3) Common Stock Purchase Agreement with Michael D. Pickett dated as of
April 9, 1999.
10.18(3) Common Stock Purchase Agreement with Jeffrey C. Ballowe dated as of
December 8, 1999.
10.19(3) Mercer Yale Building Amended and Restated Office Lease Agreement
between Onvia and Blume Yale Limited Partnership dated as of
February 8, 2000.
10.20(3) 2000 Employee Stock Purchase Plan.
10.21(3) 2000 Directors' Stock Option Plan.
10.22(3) Offer Letter dated October 14, 1999 with James R. Bridges.
10.23+(3) Interactive Marketing Agreement between America Online, Inc. and
Onvia dated as of February 4, 2000.
10.24(3) Common Stock Purchase Agreement between Internet Capital Group, Inc.
and Onvia dated as of February 4, 2000.
10.25(3) Form of Indemnification Agreement (Delaware).
10.26(3) General Security Agreement between Onvia and Imperial Bank dated May
7, 1999.
10.27(3) Form of Secured Promissory Note (Officers).
10.28(4) Form of Convertible Promissory Note to be issued by DemandStar to
Onvia.
10.29*+ Community E-Commerce Agreement dated as of December 18, 2000 by and
between Onvia and firstsource corp.
10.30 Separation Agreement dated as of December 4, 2000 between Onvia and
Mark Calvert.
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.3 Consent of Arthur Andersen LLP.
23.4* Consent of Venture Law Group, A Professional Corporation.
23.5 Consent of Janney Montgomery Scott, LLC.
24.1 Power of Attorney (see page II-5 of this proxy statement/prospectus as
filed on December 21, 2000).
</TABLE>
--------
(1) Incorporated by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K filed on July 26, 2000.
(2) Incorporated by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K filed on August 18, 2000.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 dated December 21, 1999, as amended (File No. 333-93273).
(4) Incorporated by reference to Exhibit 3 to Registrant's Schedule 13D filed
with respect to DemandStar.com, Inc. on November 29, 2000 (File No. 0-
28703).
+ Confidential treatment has been granted as to certain portions of this
Exhibit.
* To be filed by amendment.
+ Confidential treatment will be sought for portions of this Exhibit.
(b) Financial Statement Schedules
All financial statement schedules are omitted because they are inapplicable
or the requested information is shown in the financial statements of the
registrant or the related notes to the financial statements.
Item 22. Undertakings
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such re-offering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by
the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a) (3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation of the Registrant and the laws of the State of Delaware, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the 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
II-3
<PAGE>
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
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<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 Seattle, State of
Washington, on December 21, 2000.
ONVIA, INC.
/s/ Glenn S. Ballman
By: _________________________________
Glenn S. Ballman
Chief Executive Officer and
Chairman of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Glenn Ballman, Michael Jacobsen and
Andrew Mun, and each of them, as his attorney-in-fact, with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Registration Statement (including post-effective amendments), and any
and all Registration Statements filed pursuant to Rule 462 under the Securities
Act of 1933, as amended, in connection with or related to the offering
contemplated by documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act of 1933, 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/ Glenn S. Ballman Chief Executive Officer December 21, 2000
______________________________________ and Chairman of the Board
Glenn S. Ballman of Directors (Principal
Executive Officer)
/s/ Michael D. Pickett President, Chief Operating December 21, 2000
______________________________________ Officer, Director
Michael D. Pickett
/s/ Michael A. Jacobsen Vice President of Finance December 21, 2000
______________________________________ (Principal Financial and
Michael A. Jacobsen Accounting Officer)
/s/ Jeffrey C. Ballowe Director December 21, 2000
______________________________________
Jeffrey C. Ballowe
/s/ William W. Ericson Director December 21, 2000
______________________________________
William W. Ericson
/s/ Kenneth A. Fox Director December 21, 2000
______________________________________
Kenneth A. Fox
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nancy J. Schoendorf Director December 21, 2000
______________________________________
Nancy J. Schoendorf
/s/ Steven D. Smith Director December 21, 2000
______________________________________
Steven D. Smith
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.4 Form of Warrant to Purchase Common Stock of Zanova, Inc. (formerly
iTool.com, Inc.) (assumed by Onvia).
4.5 Form of Common Stock Purchase Warrant of Globe-1, Incorporated
(assumed by Onvia).
4.6 Form of Warrant Agreement dated December 21, 1999 issued by
DemandStar.com, Inc. (to be assumed by Onvia upon completion of the
merger).
10.30 Separation Agreement dated as of December 4, 2000 between Onvia and
Mark Calvert.
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Arthur Andersen LLP.
23.5 Consent of Janney Montgomery Scott, LLC.
</TABLE>
