<PAGE>
As filed with the Securities and Exchange Commission on October 10, 2000
Registration No. 333-31878
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-----------
CLEARCOMMERCE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 7372 74-2760053
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
ClearCommerce Corporation
11500 Metric Boulevard, Suite 300
Austin, Texas 78758
(512) 832-0132
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Michael S. Grajeda
Vice President, Chief Financial Officer and Secretary
ClearCommerce Corporation
11500 Metric Boulevard, Suite 300
Austin, Texas 78758
(512) 832-0132
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Paul R. Tobias Paul E. Hurdlow, P.C.
Dana Fallon P. Steven Hacker
Alan D. Bickerstaff John J. Gilluly III
John B. Sartain, Jr. Ariane A. Chan
Wilson Sonsini Goodrich & Rosati Gray Cary Ware & Freidenrich LLP
Professional Corporation 100 Congress Avenue, Suite 1440
8911 Capital of Texas Highway North, Austin, Texas 78701
Suite 3350 (512) 457-7000
Austin, Texas 78759
(512) 338-5400
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting offers to buy these +
+securities in any jurisdiction where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 10, 2000.
3,500,000 Shares
{ClearCommerce Corporation Logo]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $11.00 and $13.00
per share. We have applied to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "CLCM."
The underwriters have an option to purchase a maximum of 525,000 additional
shares to cover over-allotment shares.
Investing in the common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions ClearCommerce
-------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Chase H&Q
SG Cowen
This date of this prospectus is , 2000.
<PAGE>
[Artwork]
Top of Gatefold
A rectangular box with depiction of credit cards, a chain, numbers, a
computer with a box coming out and a globe with an oblong depiction of a
portion of a computer screen with the words "Forward" and "To: http://www."
At the top of the box, appear the words "ClearCommerce. Internet Transaction
Management." Beneath the box, appears the following paragraph:
"We provide e-commerce transaction management software and services
that enable businesses to automate transaction and payment processing.
Our e-commerce software allows businesses to conduct real-time
transaction processing, fraud analysis and protection, automated
shipping and tax calculation, digital content downloading and business
reporting and analysis. Our solution integrates with a business' online
storefront and customer relationship management, or CRM, applications
and with its existing business systems and processes."
At the bottom right corner of the page appear the ClearCommerce trademark
and the phrase "The Engine that drives eBusiness."
Back of Gatefold
The back of the gatefold will include a diagram with pictures of computer
monitors with boxes coming out on the left side with arrows pointing between a
black diamond shaped box in the center of the page. On the top of the left
side of the page, a single picture of a computer monitor with a box coming out
appears under the caption "Single storefront." To the right of the picture is
the following sentence:
"The ClearCommerce Merchant Engine(TM) is designed for single
storefronts."
On bottom left side of the page, five overlapping pictures of computer
monitors with boxes coming out appear over the caption "Multiple Storefronts."
To the right of the pictures is the following sentence:
"The ClearCommerce Hosting Engine(R) supports multiple storefronts."
A globe appears inside the diamond shaped box. The following pictures
appear beside the black diamond shaped box in the center of the page and on
the right side of the box: credit cards, a chain, a person with business
reports, a computer screen, computer diskettes, a router with cables and a
highway. Within the box, the following headings are included next to the
pictures: Payment, Fraud Protection, Reporting, Storefront APIs, Legacy API,
Shipping/Tax and Digital Content Download. The heading "ClearCommerce Engine"
appears under the black box.
An arrow from the black box points to a picture of a computer terminal with
data on the screen. The heading "Credit card processors" appears under the
picture.
At the bottom right hand corner of the page are the ClearCommerce trademark
and the caption "THE ENGINE THAT DRIVES eBUSINESS."
2
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 8
Special Note Regarding Forward-
Looking Statements................. 22
Use of Proceeds..................... 23
Dividend Policy..................... 23
Capitalization...................... 24
Dilution............................ 25
Selected Consolidated Financial
Data............................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Business............................ 39
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management.......................... 52
Related Party Transactions.......... 62
Principal Stockholders.............. 65
Description of Capital Stock........ 68
Shares Eligible for Future Sale..... 72
Underwriting........................ 74
Notice to Canadian Residents........ 77
Legal Matters....................... 78
Experts............................. 78
Where You Can Find More Information. 78
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
different information. This document may only be used where it is legal to sell
these securities. The information in this document may only be accurate on the
date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as an underwriter
and with respect to unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully, including our financial statements and the risks
of investing in our common stock discussed under "Risk Factors," before making
an investment decision.
ClearCommerce Corporation
We provide e-commerce transaction management software and services that
enable businesses to automate transaction and payment processing. Our e-
commerce software allows businesses to conduct real-time transaction
processing, fraud analysis and protection, automated shipping and tax
calculation, downloading of software or other digital goods through the
Internet and business reporting and analysis. Our software is designed to
readily integrate with a business' online storefront and customer relationship
management applications and with its existing business systems and processes.
Our software processes business-to-business, business-to-consumer and person-
to-person transactions received through the Internet, wireless telephones, some
personal digital assistants, call centers and in-store devices. We sell our
software to large enterprises who have commercial websites. In addition, we
sell our software to application service providers focused on e-commerce and
business-to-business market makers, both of which are known as commerce service
providers, or CSPs. CSPs provide outsourced e-commerce software applications to
businesses who choose not to buy and operate the software or hardware
themselves. In addition, we also provide ongoing hosting services for customers
who prefer for us to manage and administer our software.
International Data Corporation estimates that the worldwide e-commerce
application market will increase from $1.7 billion in 1999 to $13.1 billion by
2003. This market is highly competitive and rapidly evolving. Although many e-
businesses have implemented a variety of solutions to improve the online
customer shopping experience, these solutions generally fail to provide
transaction management--the automation of payment processing and the
integration of related transaction information with existing business systems
and processes. Automated transaction management that delivers a comprehensive
solution 24 hours a day, seven days a week, without costly and lengthy
implementation, is critical to increasing efficiency as businesses grow.
We have designed the architecture of our transaction management software to
meet the stringent performance, reliability and growth requirements of e-
businesses. Our two principal e-commerce software products, Merchant Engine and
Hosting Engine, include similar functionality, but each is designed to meet the
needs of different customers. Merchant Engine supports single businesses.
Hosting Engine enables CSPs to simultaneously support multiple businesses and
enables large businesses to simultaneously support multiple divisions. We also
offer customization and implementation services, customer service and support
and maintenance and hosting services for our products.
Many businesses engaged in e-commerce have used our software either directly
or through CSPs. Some of the customers that have licensed our products directly
from us include the following: Apple Computer, BuyitNow.com, Cabela's,
Cooking.com, Corbis, Electronic Arts, E-Stamp, Flooz, HP Shopping Village,
Harrods, Mary Kay Cosmetics, Onvia, Pets.com, Pitney Bowes, Playstation.com
(Europe), Sun Microsystems, TheStreet.com and X.com. In addition, our products
have been licensed by a number of leading CSPs, including Barclays Bank,
Cardservice International, Chase Merchant Services, CSP Source, EDS, eMerge
Interactive, Intel, Internet Capital Group, Network Commerce, Orbit Commerce,
Planet Online and PNC Bank. We believe that this list is a representative
cross-section of our customer base because it includes customers of various
sizes from a variety of industries and we derived 53% of our total revenues
from these customers since the beginning of 1999 through June 30, 2000.
Excluding revenues derived from our relationship with Cardservice
International, the customers listed above have accounted for 33% of our total
revenues since the beginning of 1999 through June 30, 2000. As the market
grows, our customers, CSPs and other companies
4
<PAGE>
could enter the market for our products and services. Therefore, in order to
expand the adoption of our software and services, we also have established
joint marketing or distribution relationships with other e-business
infrastructure companies, including Art Technology Group, BroadVision, Hewlett-
Packard, Mercantec, Microsoft and Vignette. In the six months ended June 30,
2000, 13% of our revenues were derived from software licensed directly from us.
We were incorporated in Delaware and began operations in September 1995 as
Outreach Communications Corporation. We had revenues of $396,000 in 1997, $1.1
million in 1998, $5.3 million in 1999 and $6.1 million for the six months ended
June 30, 2000. We incurred net losses of $1.1 million in 1997, $7.2 million in
1998, $14.2 million in 1999 and $9.9 million for the six months ended June 30,
2000. As of June 30, 2000 we had an accumulated deficit of approximately $32.8
million. Two of our significant customers, Hewlett-Packard and Cardservice
International, accounted for 34% of our total revenues in 1999 and 42% of our
total revenues for the six months ended June 30, 2000. Since our inception, we
have funded our operations primarily through private placements of preferred
stock to venture capital funds and strategic investors.
Immediately after this offering, our present directors and executive
officers and their affiliates will own approximately 69.5% of our outstanding
common stock. As a result, if these stockholders act together, they will be
able to exercise significant influence over all matters requiring stockholder
approval.
Our principal executive offices are located at 11500 Metric Boulevard, Suite
300, Austin, Texas 78758, and our telephone number is (512) 832-0132. We
maintain a web site at www.clearcommerce.com. Information contained on our web
site does not constitute part of this prospectus.
"ClearCommerce" and "Hosting Engine" are registered trademarks of our
company. We have applied for trademarks for "FraudShield" and "Merchant
Engine." Each trademark, trade name or service mark of any other company
appearing in this prospectus belongs to its holder.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by us.............. 3,500,000 shares
Common stock to be outstanding after
this offering.......................... 19,983,173 shares
Use of proceeds......................... For working capital and general
corporate purposes.
Proposed Nasdaq National Market symbol.. CLCM
</TABLE>
Unless otherwise indicated, the number of shares of common stock outstanding
after this offering is based on 16,483,173 shares outstanding as of June 30,
2000, assuming conversion of all outstanding preferred stock and payment in
shares of common stock of accrued and unpaid dividends on the preferred stock
as of June 30, 2000 and excluding:
. 1,644,900 shares of common stock issuable upon exercise of stock options
outstanding as of September 1, 2000 with a weighted average exercise
price of $10.15 per share;
. 6,250 shares of common stock issued upon exercise of stock options
between June 30, 2000 and September 1, 2000;
. 968,994 shares of common stock issuable upon exercise of common stock and
preferred stock warrants, including accrued and unpaid dividends on the
preferred stock warrants, outstanding as of September 1, 2000 with a
weighted average exercise price of $6.24 per share;
. 1,753,457 shares reserved for future issuance under our stock plans as of
September 1, 2000 which includes 37,396 shares of unvested common stock
that were repurchased from former employees between June 30, 2000 and
September 1, 2000 pursuant to our stock plans; and
. 49,967 shares of common stock issuable as payment of accrued and unpaid
dividends on outstanding preferred stock from June 30, 2000 through
September 1, 2000.
Our 2000 Stock Plan, 2000 Director Plan and 2000 Employee Stock Purchase
Plan will be effective upon the closing of the offering. These plans are
designed to attract and retain employees and directors. The number of shares
reserved for issuance under our 2000 Stock Plan and our 2000 Employee Stock
Purchase Plan will automatically increase every year by the lesser of 5% of the
outstanding shares of our common stock, 2,500,000 shares or a lesser amount
determined by our board of directors. As shares are issued under these plans
and as the automatic increase occurs, our stockholders will be diluted.
6
<PAGE>
Summary Consolidated Financial Data
The summary consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes included elsewhere in this prospectus.
The "Pro Forma" column in the table below reflects our capitalization as of
June 30, 2000, the automatic conversion of all shares of outstanding Series A,
Series B and Series C preferred stock into 12,372,743 shares of common stock
upon the closing of this offering, which includes the payment in shares of
common stock of accrued and unpaid dividends on the preferred stock as of June
30, 2000. The "Pro Forma As Adjusted" column in the table below reflects the
application of the net proceeds from the sale by us of the 3,500,000 shares of
common stock in this offering at an assumed initial public offering price of
$12.00 per share and the deduction of the underwriting discounts and estimated
offering expenses.
<TABLE>
<CAPTION>
For the Year Ended December For the Six Months
31, Ended June 30,
-------------------------------- -------------------
Consolidated Statement of 1997 1998 1999 1999 2000
Operations Data: -------- --------- ----------- --------- ---------
(in thousands, except per
share data) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses...... $ 147 $ 582 $ 3,294 $ 949 $ 3,849
Services............... 249 481 1,988 485 2,213
-------- -------- -------- -------- ---------
Total revenues....... 396 1,063 5,282 1,434 6,062
Gross margin............. 227 636 3,331 625 3,870
Loss from operations..... (1,190) (7,122) (13,741) (6,845) (10,009)
Net loss................. (1,147) (7,215) (14,230) (6,910) (9,921)
Dividends on mandatorily
redeemable convertible
preferred stock......... -- (270) (1,176) (476) (1,798)
Beneficial conversion
feature related to
Series C preferred
stock................... -- -- (8,624) -- (3,809)
-------- -------- -------- -------- ---------
Net loss attributable to
common stock............ (1,147) (7,485) (24,030) (7,386) (15,528)
======== ======== ======== ======== =========
Basic and diluted net
loss per share.......... (0.89) (6.51) (12.72) (4.51) (5.90)
Shares used in computing
basic and diluted net
loss per share.......... 1,283 1,149 1,889 1,639 2,632
Pro forma basic and
diluted net loss per
share (unaudited)....... $ (0.66)
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)....... 15,005
<CAPTION>
June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(unaudited and in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and equivalents..... $ 15,522 $ 15,522 $ 53,332
Working capital.......... 13,051 13,051 50,861
Total assets............. 28,912 28,912 66,722
Mandatorily redeemable
convertible preferred
stock................... 47,931 -- --
Total common
stockholders' (deficit)
equity.................. (32,802) 15,129 52,939
</TABLE>
7
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. The risks and uncertainties described below are not the only risks and
uncertainties we face. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition and results of operations would suffer. In such case, the
trading price of our common stock could decline, and you may lose all or part
of your investment in our common stock.
Risks Related to Our Business
We have a limited operating history and are subject to the risks encountered by
early-stage companies.
We began operations in September 1995. We first offered transaction
processing hosting services for e-businesses in January 1996 and began selling
an early version of our software in November 1996. We began selling each of our
Merchant Engine and Hosting Engine in 1997. Accordingly, we have a very limited
operating history, and our business and prospects should be considered in light
of the heightened risks and uncertainties to which early-stage companies in
rapidly evolving markets, such as the e-commerce market, are particularly
exposed. These include:
. Risks that the intense competition and rapid technological change in our
industry could adversely affect demand for our products and services;
. Risks that we may not be able to expand our direct sales and marketing
channels or establish and fully utilize CSP, value-added reseller,
original equipment manufacturer or co-marketing relationships and
indirect sales channels;
. Risks that our products or services may not perform to or adequately
support our customers' technical specifications or scale to handle
increased transaction volumes;
. Risks that our global expansion may not be successful; and
. Risks that any fluctuations in our quarterly operating results will be
significant relative to our revenues for the corresponding period.
Because we have a limited operating history, it may be difficult for you to
evaluate our business and its future prospects. Our business strategy may not
be successful, and we may not successfully address the risks that are discussed
in more detail below. If an adequate market does not develop for our software
and services, our operating results may not improve, which will materially harm
our business and have an adverse impact on our common stock.
We have a history of losses, expect future losses and cannot assure you that we
will achieve profitability.
We have incurred significant net losses since our inception. We incurred net
losses of $1.1 million in 1997, $7.2 million in 1998, $14.2 million in 1999,
and $9.9 million for the six months ended June 30, 2000. As of June 30, 2000,
we had an accumulated deficit of approximately $32.8 million. We increased our
sales and marketing, research and development and general and administrative
expenses in 1999 and the first six months of 2000 compared to the first six
months of 1999, which contributed to our increased losses in these time
periods. Because we plan to continue to do so in future periods, our net losses
will likely increase, and we will need to generate significantly higher
revenues in order to achieve profitability. If we do achieve profitability, we
may not be able to sustain it. Our inability to achieve or maintain
profitability will have an adverse effect on the price of our common stock and,
therefore, your investment in our company. If the price of our common stock
falls, you may lose some or all of your investment.
8
<PAGE>
Our limited operating history makes it difficult to forecast our revenues and
expenses.
Our limited operating history makes it difficult to forecast our future
revenues and expenses. Although our revenues increased on a quarterly basis in
1999 and the first six months of 2000, you should not consider quarterly
revenue growth as indicative of future performance. Our revenues and operating
results may be adversely affected by a number of risks and uncertainties,
including those listed elsewhere in these risk factors. As a result, our
revenues may not grow at similar levels in future periods and may remain flat
or decline over any given period, which could have an adverse effect on the
price of our common stock and, therefore, your investment in our company.
We base our forecast for expenses in part on future revenue projections. We
incur expenses in advance of revenues, and we may not be able to quickly reduce
spending if our revenues are lower than expected. In particular, we expect to
incur additional costs and expenses related to the following:
. The development of relationships with companies that can co-market our
products and services, system integrators, value-added resellers, CSPs,
and original equipment manufacturers;
. The development and expansion of our sales force and marketing
operations;
. The development and enhancement of existing and new products and
services; and
. The expansion of our management team.
We expect that our business, stock price, operating results and financial
condition could be materially adversely affected if our revenues do not meet
our projections or our net losses are greater than expected.
The expected fluctuations of our quarterly results could cause our stock price
to fluctuate or decline.
We expect that our quarterly operating results will fluctuate significantly
in the future based upon a number of factors, many of which are not within our
control. We plan to further increase our operating expenses in order to expand
our sales and marketing activities and broaden our product offerings. We base
our operating expenses on anticipated market growth, and our operating expenses
are relatively fixed in the short term. As a result, if our revenues are lower
than we expect, our quarterly operating results may not meet the expectations
of public market analysts or investors, which could cause the market price of
our common stock to decline. Our quarterly results may fluctuate in the future
as a result of many other factors, including the following:
. Our ability to retain our existing customers and to attract new e-
businesses, value-added resellers, CSPs and original equipment
manufacturers;
. The ability of our CSPs, value-added resellers and original equipment
manufacturers to attract new merchants and other e-business;
. Customer acceptance of our pricing model;
. Changes in the level of demand for our products or services;
. Our success in expanding our sales and marketing programs;
. The number, timing and significance of product enhancements and new
product announcements by us or our competitors;
. The length of our sales cycle;
. The level of e-commerce transactions;
. The evolution of related technology and the emergence of standards and
competing technology; and
. Changes in the level of our operating expenses.
These risks and uncertainties are particularly significant for companies
such as ours that are in the evolving market for Internet products and
services. In addition, other factors that may affect our quarterly results are
set forth elsewhere in these risk factors. As a result of these and other
factors, our revenues and expenses may not be predictable.
9
<PAGE>
Due to the uncertainty surrounding our revenues and expenses, we believe
that quarter to quarter comparisons of our historical operating results may not
be meaningful and our historical operating results should not be relied upon as
an indicator of our future performance.
The market for our products and services is in its early stages of development
and may fail to mature into a sustainable market.
Our products and services facilitate e-commerce. The market for these
products and services is in its early stages of development and is rapidly
evolving, and a viable market may fail to emerge or be sustainable. We cannot
predict the level of demand and market acceptance for our products and
services, especially because acquisition of our products and services may
require large capital and other significant resource commitments. If the market
for our products and services does not mature or if significant competitive
pressures develop, our business will be materially harmed and you may lose some
or all of your investment.
Adoption of e-commerce, particularly by those individuals and companies that
have historically relied upon traditional means of commerce, will require a
broad acceptance of new and different methods of conducting business and
exchanging information. Critical issues concerning the Internet, including
security, reliability, cost, ease of use and quality of service, remain
unresolved and may limit the growth of e-commerce. Delays in the deployment of
improvements to the infrastructure for Internet access, including higher speed
modems and other access devices, adequate capacity and a reliable network
backbone, could also hinder the development of the Internet as a viable
commercial marketplace. Our future revenues and profits will depend
substantially on the Internet being accepted and widely used for commerce. If
e-commerce does not continue to grow or grows more slowly than expected, our
business will be harmed.
In the emerging marketplace of e-commerce, our products and services involve
a new approach to the conduct of e-commerce. As a result, intensive marketing
and sales efforts may be necessary to educate prospective customers regarding
the uses and benefits of our products and services. Companies that have already
invested substantial resources in other methods of conducting business may be
reluctant to adopt a new approach that may replace, limit or compete with their
existing systems. Similarly, companies with established patterns of commerce
may be reluctant to alter those patterns. In addition, the security and privacy
concerns of existing and potential online purchasers may inhibit the growth of
online business generally and the market's acceptance of our products and
services in particular. Accordingly, a viable market for our products and
services may not emerge or be sustainable and our business would be materially
harmed.
The intense competition in our industry could reduce or eliminate the demand
for our products and services.
The market for our products and services is intensely competitive and
subject to rapid technological change. An increasing number of market entrants
have introduced or are developing products and services that compete with our
software and services, and we expect competition to intensify in the future. We
face competition from developers of other systems for e-commerce, such as
CyberCash, CyberSource, HNC Software, Open Market, and Verisign/Signio. In
addition, our CSP customers, other CSPs and other companies, including
financial services companies, supply chain management providers and credit card
companies, may enter the market for our products and services. In the future,
we may also compete with large Internet-focused companies that derive a
significant portion of their revenues from e-commerce and that may offer, or
provide a means for others to offer, e-commerce transaction management products
and services.
Many of our current and potential competitors have longer operating
histories, substantially greater financial, technical, marketing or other
resources, or greater name recognition than we do. These competitors may be
able to respond more quickly than we can to new or emerging technologies and
changes in customer requirements. Competition could seriously impede our
ability to sell additional products and services on terms favorable to us, if
at all. Our current and potential competitors may develop and market new
technologies that render our existing or future services obsolete, unmarketable
or less competitive. Our current and potential competitors may make
acquisitions or establish relationships among themselves or with other solution
10
<PAGE>
providers, thereby increasing the ability of their products and services to
address the needs of our current and prospective customers. Our current and
potential competitors may establish or strengthen cooperative relationships
with the companies that provide current or future indirect sales channels for
our products and services that would limit our ability to sell services through
these channels. We expect that competitive pressures may require the reduction
of the prices of our services and reduce our market share, either of which
could materially and adversely affect our business, financial condition and
operating results and, therefore, your investment in our company.
Our future financial performance is largely dependent on the successful
development and sale of new products and new and enhanced versions of our core
products.
Our future financial performance will depend, in significant part, on our
successful development and sale of new products and new and enhanced versions
of our core products, Merchant Engine and Hosting Engine, and our failure to do
so could materially harm our business. We may not be able to successfully
develop product enhancements or new products and, to the extent that we do,
these enhancements and new products may not achieve market acceptance. To
remain competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our products and services. In addition, we must
continue to operate all services we offer in an efficient manner. The e-
commerce industry is characterized by rapid technological change, changes in
user requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices that could render our technology and systems obsolete.
Our success will depend, in part, on our ability to both internally develop and
license leading technologies to enhance our existing products and develop new
products. We must continue to address the increasingly sophisticated and varied
needs of our customers and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of technology involves significant technical and business risks. We
may fail to develop new technologies effectively or in a cost-effective manner
or to adapt our technology and systems to merchant requirements or emerging
industry standards. As a result of such failure, our business could be harmed
materially.
To increase market awareness of our products and generate increased revenue, we
need to expand our sales and distribution capabilities.
We must expand our direct and indirect sales operations to increase market
awareness of our products and services and generate increased revenue. Failure
to expand our direct and indirect sales operations could materially harm our
business and, therefore, adversely affect your investment in our company. We
have recently begun to expand our direct sales force and plan to hire
additional sales personnel. Our products and services require a sophisticated
sales effort targeted at the senior management of our prospective customers.
Consequently, recent and new hires will require extensive training and take
time to achieve full productivity. We cannot be certain that our recent or new
hires will become as productive as necessary or that we will be able to hire
enough qualified individuals in the future. As a result, we may be unable to
expand our direct sales operations to the extent necessary for us to maintain
or grow our business.
We also expect to continue to expand our relationships with value-added
resellers, CSPs, original equipment manufacturers and other third-party
resellers to expand our indirect sales channel. We will need to manage
potential conflicts between our direct sales and third-party reselling efforts.
To avoid channel conflict, we pay commissions to both our direct sales
representatives and members of our business development organization. This
results in a higher cost of sales and could increase our losses or make us less
profitable.
Our failure to establish and maintain co-marketing, value-added resellers,
original equipment manufacturers and CSP arrangements with third parties may
limit our ability to penetrate our target markets and grow our business.
We derive a significant portion of our sales through formal and informal
relationships with system integrators, value-added resellers, CSPs, original
equipment manufacturers and other third parties that help develop, deploy and
co-market applications for our customers. In particular, most of our revenues
are derived
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through our relationships with e-commerce software providers and CSPs that
license our products to e-businesses in conjunction with other products and
services. The maintenance and development of these relationships is a critical
part of our business strategy, and we believe that our future revenues
increasingly will be derived from such relationships and marketing and
distribution channels. If we fail to maintain and develop these relationships
our business may be materially harmed. In the future, we may be unable to
establish these relationships, or adequately service them once established. As
a result, any of these third parties may choose to contract instead with one of
our competitors. If we lose a CSP to a competitor, then we would likely lose
the entire merchant base associated with such CSP and the related revenues. In
addition, we do not have written agreements with some of the system
integrators, e-commerce providers and CSPs that offer or recommend our products
to their customers, and, therefore, they are under no obligation to recommend
or support our products and may recommend or give higher priority to the
products of other companies or to their own products. The occurrence of any of
these circumstances would limit our ability to sell our products and services
and could result in decreased revenues.
Our relationships with our significant customers are important to us and any
deterioration or termination of these relationships could adversely affect our
revenues.
A deterioration or termination of our relationships with our significant
customers could materially adversely affect our revenues and our ability to
market and sell our products. Sales to our two largest customers, Cardservice
International and Hewlett-Packard, represented 18% and 16% of our total
revenues in 1999, respectively. Sales to Cardservice International and Hewlett-
Packard represented 19% and 23% of our total revenues for the six months ended
June 30, 2000, respectively.
Our reputation and revenues would be harmed if we experience any problems with
our Merchant Engine and Hosting Engine products or related services.
To date, substantially all of our revenues have been attributable to
licenses of our Merchant Engine and Hosting Engine products and to related
services. We currently expect these products and services to account for most
of our future revenues. Factors negatively affecting the pricing of or demand
for Merchant Engine and Hosting Engine products and related services, such as
increased competition or rapid technological change, could cause our revenues
to decline which could have an adverse impact on the price of our common stock.
Our software products may contain undetected defects that may prove costly and
time-consuming for us to correct.
Our software products may contain undetected errors or defects that become
apparent when we introduce the products or when we provide an increased volume
of services. Our products integrate with a variety of third-party products and
systems and operate on multiple platforms. In addition, we often customize our
products for individual customers. As a result, the complexity of our products
makes the likelihood of an undetected error or defect more prevalent. We cannot
assure you that defects in our products will be detected by us or others prior
to licensing, sale or implementation. Product defects could result in all or
any of the following consequences to our business:
. Loss of revenues;
. Delay in market acceptance;
. Damage to our reputation;
. Increased service and warranty costs;
. Diversion of development resources; and
. Liability for damages to our customers.
Any one or all of these consequences could materially harm our business and
cause the price of our common stock to decline.
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Our sales and product implementation cycles could cause delays in revenue
recognition and make it difficult to predict our quarterly results.
Our sales and product implementation cycles are subject to delays over which
we have little or no control. These delays can affect the timing of revenue
recognition and make it difficult to predict our quarterly results. Licensing
our Merchant Engine and Hosting Engine products is often an enterprise-wide
decision by prospective customers. The importance of this decision requires us
to engage in a lengthy sales cycle with prospective customers. Our products and
services require a sophisticated sales effort targeted at the senior management
of our prospective customers. During the sales process, we provide a
significant level of education regarding the uses and benefits of our products.
In addition, if a customer requires that we integrate our products with other
systems that we do not already support, then our professional services
department may be required to commit significant resources to this integration
over an extended period of time. Delays in acquiring new customers could cause
our revenues to stop growing or even to decline, and delays due to lengthy
sales cycles or prolonged deployment or implementation schedules could reduce
our revenue in any given period and cause operating results to vary
significantly from quarter to quarter and, therefore, cause the price of our
common stock to decline.
Delays in our product releases or upgrades may result in decreased revenues and
a loss of market share.
Delays in the releases of our new products or upgrades may adversely affect
future revenues and create operational inefficiencies resulting from increases
in expenses in anticipation of such releases. Our failure to introduce new
products, services or product enhancements on a timely basis may delay or
hinder market acceptance and allow competitors to gain market share. In
particular, we expect to release new versions of our Merchant Engine and
Hosting Engine. Our release of these versions may not be timely for a number of
factors including:
. Inadequate planning and estimation of required resources;
. Prolonged testing due to higher than expected defect rates;
. Design changes due to changing customer needs or technological
specifications or evolving standards;
. Unavailability of adequate resources; or
. Diversion of management's attention.
If a release of a new version of our products is delayed for any reason,
then our revenues may not grow as expected. As a result, we could lose market
share, and the price of our common stock could decline.
We may not be able to secure funding in the future necessary to operate our
business as planned.
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect this to continue for the foreseeable future. In addition,
we may incur significant capital expenditures in connection with our planned
expansion of our hosting services. We expect to use the net proceeds of this
offering primarily for working capital purposes and to continue investments in
product development, to expand sales and marketing activities, to fund capital
expenditures and potentially to make future acquisitions. We believe that these
proceeds, together with our existing capital resources, will be sufficient to
meet our capital requirements for at least the next twelve months. However, our
capital requirements depend on several factors, including the rate of market
acceptance of our products and services, our ability to expand our customer
base, increased sales and marketing expenses, the growth of the number of our
employees and related expenses and other factors. If capital requirements vary
materially from those currently planned, we may require additional financing
sooner than anticipated. If additional funds are raised through our issuance of
equity securities, the percentage ownership of our stockholders will be
reduced, and the holders of these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
Additional financing may not be available when needed on terms favorable to us
or at all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop, enhance or market our products
and services, adequately support and maintain relationships with key customers
and companies that market and distribute our products and services, take
advantage of future opportunities or respond to competitive pressures. Any one
of these factors may materially harm our business and cause the price or our
common stock to decline.
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Our key customers may require our entry into international markets sooner or
more rapidly than we may have anticipated.
We derive a significant portion of our sales through our strategic
customers, including our relationships with CSPs, value-added resellers,
original equipment manufacturers, e-commerce software providers and system
integrators. Many of these companies are expanding their service offerings
internationally. If one of our key customers requests us to localize our
products and services for international markets, then we may need to accelerate
our product and service development to avoid harming our relationship. Any
acceleration of our international product and service development could require
us to divert attention and resources from other initiatives which could limit
our growth and adversely affect our business.
We may be unable to adequately grow and sustain a profitable professional
services organization, which could affect both our operating results and our
ability to assist our clients with the implementation of our products.
If we are unable to grow our professional services organization, our
revenues and operating results will be materially adversely affected. We cannot
be certain that we can attract, retain or successfully manage a sufficient
number of qualified professional services personnel, which could affect our
ability to assist our customers with implementation of our products and
materially harm our business. Clients that license our software often engage
our professional services organization to assist with support and
implementation of, and training and consulting related to, our products. We
believe that growth in our product sales depends on our ability to provide our
clients with these services and to attract and educate third-party consultants
and service providers to provide similar services. As a result, we expect to
significantly increase the number of our services personnel to meet these
needs. New services personnel will require extensive training and education and
take time to reach full productivity. Competition for qualified services
personnel with the appropriate Internet- specific knowledge is intense. We are
in a new emerging market, and a limited number of people have the skills needed
to provide the services that our customers demand.
To meet our needs for services personnel, we may also need to use more
costly third-party service providers and consultants to supplement our own
professional services organization. To date, costs related to professional
services have exceeded professional services revenues. We cannot be certain
that our professional services revenues will continue to exceed professional
services costs in future periods. We generally bill our customers for our
services on a "time and materials" basis. However, from time to time we enter
into fixed-price contracts for services. On occasion, the costs of providing
the services have exceeded our fees from these contracts and, from time to
time, we may misprice future contracts to our detriment.
Difficulties we may encounter managing our growth could adversely affect our
results of operations.
We have experienced a period of rapid and substantial growth since 1997 that
has placed a strain on our administrative infrastructure. We have increased the
number of our employees from 24 employees at December 31, 1997 to 129 employees
at December 31, 1999, to 213 employees at September 1, 2000. We expect to
continue to experience periods of rapid growth and substantial change that will
place significant demands on our administrative, operational, financial and
other resources. We also expect operating expenses and staffing levels to
continue to increase substantially in the future. In particular, we intend to
continue hiring a significant number of additional personnel this year and in
later years. If we are unable to grow to meet demand for our products and
services or to manage and support this growth effectively, we will be required
to divert additional resources away from expanding our business and toward
internal administration, causing our financial condition and operating results
to be materially adversely affected.
A breach of our security could expose us to liability, harm our reputation or
otherwise harm our business.
If any breach of our security were to occur, our reputation and business
could be harmed, and we could be exposed to liability. Customer transaction
data, such as credit card information, that our products process is
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highly sensitive and personally identifying. A significant barrier to market
acceptance of e-commerce and communication is the concern regarding the secure
exchange of valuable and confidential information over the Internet. The risk
has been particularly relevant in the last year, when several of the most
popular and most frequently visited Internet sites were attacked by hackers and
other third parties with malicious intent. We rely on third-party encryption
and authentication technology to provide the security and authentication
necessary to effect the secure exchange of valuable and confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
(such as break-ins and similar disruptive problems caused by Internet users)
will not result in a compromise or breach of security measures incorporated in
our products to protect customer transaction data. In addition, as we continue
to develop localized products for international markets, regulatory and export
restrictions may prohibit us from using the strongest and most secure
cryptographic protection available and thereby expose us to a risk of data
interception. A party who is able to circumvent our security measures also
could misappropriate proprietary information and customer's information,
interrupt our operations or both. Any compromise or breach of our security
could reduce demand for our product and services. If any such compromise or
breach were to occur, it could have a material adverse effect on our business,
financial condition or operating results.
We may be required to expend significant capital and other resources to
protect against security breaches or to address any problems they may cause.
Concerns over the security of the Internet and other online transactions and
the privacy of users may also inhibit the growth of the Internet and other
online services generally, and the Web in particular, especially as a means of
conducting commercial transactions. Because our activities involve the storage
and transmission of highly sensitive, confidential and personal information,
such as credit card numbers, security breaches could damage our reputation and
expose us to a risk of loss or litigation and possible liability. Our security
measures may not prevent security breaches, and failure to prevent security
breaches may disrupt our operations.
Potential system failures and lack of capacity could negatively affect demand
for our products and services.
Our ability to deliver products and services to our merchants depends on the
uninterrupted operation of our e-commerce transaction processing and hosting
systems. The availability of our hosting services, including our QuickStart
program that provides for rapid implementation of our software on our servers,
is critical to our growth and operating results. Our systems and operations are
vulnerable to damage or interruption from many factors including:
. Power loss;
. Telecommunications or data network failure;
. Operator negligence;
. Improper operation by employees;
. Physical and electronic break-ins, overloads and similar events; and
. Computer viruses.
Despite the fact that we are implementing redundant servers in third-party
hosting centers, we may still experience service interruptions for the reasons
listed above and a variety of other reasons. If our redundant servers are
overloaded or otherwise unavailable, our insurance may not cover all or some
portion of the resulting losses. We have experienced periodic interruptions,
affecting all or a portion of our systems, which we believe will continue to
occur from time to time. In addition, any interruption in our systems that
impairs our ability to provide services could damage our reputation and reduce
demand for our services.
Our success also depends on our ability to grow, or scale, our e-commerce
transaction systems to accommodate increases in the volume of traffic on our
systems, especially during peak periods of demand. We may not be able to
anticipate increases in the use of our systems and successfully expand the
capacity of our network infrastructure. Our inability to expand our systems to
handle increased traffic could result in system disruptions, slower response
times and other difficulties in providing services to our customers, which
could materially harm our business.
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If we lose key personnel or are unable to attract and retain additional
qualified personnel, we may not be able to successfully manage our business and
achieve our objectives.
We believe our future success will depend upon our ability to retain our key
management personnel because of their experience and knowledge regarding the
development, opportunities and challenges of our business. All of our key
employees are at-will employees and may terminate their relationship with us at
any time. We may not be successful in attracting and retaining key employees in
the future.
Our future success and our ability to expand our operations will also depend
in large part on our ability to attract and retain additional qualified
marketing, sales and technical personnel. Competition for these types of
employees is intense due to the limited number of qualified professionals. We
have in the past experienced difficulty in recruiting and retaining qualified
marketing, sales, engineering and support personnel. Failure to attract and
retain personnel, particularly marketing, sales and technical personnel, could
make it difficult for us to manage our business and meet our objectives which
could cause the price of our common stock to decline.
We may be unable to protect our intellectual property.
Our success depends to a significant degree upon the protection of our
software and other intellectual property rights. We rely on patent, trade
secret, copyright and trademark laws and confidentiality agreements with
employees and third-parties, all of which offer only limited protection.
Moreover, the laws of other countries in which we market our products may
afford little or no effective protection of our technology. The reverse
engineering, unauthorized copying or other misappropriation of our technology
could enable third parties to benefit from our technology without paying us for
it. This could have a material adverse effect on our business, operating
results and financial condition. If we resort to legal proceedings to enforce
our intellectual property rights, the proceedings could be burdensome and
expensive and could involve a high degree of risk.
Claims by other companies that our products infringe their copyrights or
patents could adversely affect our financial condition.
If any of our products violate third party proprietary rights, we may be
required to reengineer our products or seek to obtain licenses from third
parties to continue offering our products without substantial reengineering.
Any efforts to reengineer our products or obtain licenses from third parties
may not be successful and, in any case, would substantially increase our costs
and have a material adverse effect on our business, operating results and
financial condition. Although we perform limited patent searches to determine
whether the technology used in our products infringes patents held by third
parties, we cannot be certain that our products do not infringe the
intellectual property rights of others. Product development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when
filed, with regard to similar technologies.
Seasonal trends in sales of our software products may affect our quarterly
operating results.
We may experience seasonality in sales of our products. These seasonal
trends may materially affect our quarter to quarter operating results. Revenues
and operating results in our quarter ending December 31 may be lower relative
to our other quarters, because many customers defer purchase decisions until
the following calendar year or to avoid changes close to the holiday season. In
addition, credit card processors may halt implementation of new lease line
connections during the holiday season, delaying implementation of our software.
We are also currently attempting to expand our presence in international
markets, particularly in Europe. We expect our quarters ending September 30 to
reflect the effects of the slowing of international business activity and
spending activity generally associated with that time of year, particularly in
Europe. To the extent that our revenues in Europe or other parts of the world
increase in future periods, we expect our period to period revenues to reflect
any seasonal buying patterns in these markets.
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If we experienced a product liability claim, we could incur substantial
litigation costs and liability to third parties.
Since our customers use our products for mission critical applications such
as e-commerce, errors, defects or other performance problems could result in
financial or other damages to our clients. They could seek damages for losses
from us, which, if successful, could have a material adverse effect on our
business, financial condition or operating results. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable judicial
decisions could negate such limitation of liability provisions. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if not successful, would likely be time
consuming and costly and direct management's attention from the management of
the business.
We may become subject to government regulation and legal uncertainties that
would adversely affect our financial results.
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
export control laws and laws or regulations directly applicable to e-commerce.
However, due to the increasing usage of the Internet, it is possible that a
number of laws and regulations may be applicable or may be adopted in the
future with respect to conducting business over the Internet, covering issues
such as:
. Taxes;
. User privacy;
. Pricing;
. Content;
. Right to access and use personal data;
. Copyrights and patents;
. Distribution; and
. Characteristics and quality of services.
Compliance with any additional laws or regulations could be expensive and
burdensome or reduce demand for our products and services, either of which
could materially harm our business and cause the price of our common stock to
decline. Further, failure to comply with any laws or regulations may result in
liability to our company. For example, we recently received a letter from the
Federal Trade Commission, or the FTC, noting that the FTC was conducting an
inquiry into our compliance with the Fair Credit Reporting Act, or the FCRA. In
connection with such inquiry, the FTC has requested that we provide information
regarding all services that we offer that may involve consumer reports, as
defined in the FCRA. Although we believe that we do not provide services that
involve consumer reports as defined in the FCRA and have responded to the FTC's
request accordingly, if the FTC determines that we are subject to the FCRA and
are not in compliance with that statute, we could be subject to claims being
made against us. Those claims could include claims from consumers for actual
damages and an enforcement action by the FTC or other federal government
agencies and may include mandatory penalties. If any of these claims are
successfully prosecuted, we could be required to change certain aspects of our
business and any damages we could be required to pay could have a material
adverse effect on our business, financial condition or results of operations.
Furthermore, the growth and development of the market for e-commerce may
prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting e-commerce. The adoption of additional
laws or regulations may decrease the growth of the Internet or other online
services, which could, in turn, decrease the demand for our services and
increase our cost of doing business.
The applicability of existing laws governing issues related to the Internet,
such as property ownership, copyrights, encryption and other intellectual
property issues, taxation, libel, export or import matters and personal
privacy, is uncertain. The vast majority of laws were adopted prior to the
broad commercial use of the Internet and related technologies. As a result,
they do not contemplate or address the unique issues of the
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Internet and related technologies. Changes to these laws intended to address
these issues, including some recently proposed changes in the United States
regarding taxation and encryption and in the European Union regarding contract
formation and privacy, could create uncertainty in the Internet marketplace and
impose additional costs and other burdens. This uncertainty, additional costs
and other burdens could reduce demand for our products and services or increase
the cost of doing business due to increased costs of litigation or increased
service delivery costs and materially adversely affect our financial results.
Due to the encryption technology contained in our products, such products
are subject to United States export controls. United States export controls,
either in their current form or as may be subsequently enacted, may delay the
introduction of new products or limit our ability to distribute products
outside of the United States. In addition, federal or state legislation or
regulation may further limit the levels of encryption or authentication
technology we can use in our products. Further, various countries regulate the
import of certain encryption technology and have adopted laws relating to
personal privacy issues that could limit our ability to distribute products in
those countries. Any such export or import restrictions, new legislation or
regulation or government enforcement of existing regulations could have a
material adverse effect on our business, financial condition and operating
results.
The scope of the information that we collect and use in the future may be
considered personally identifying, which would limit our ability to collect and
report this data.
We may collect information about users of systems that implement our
products and use such information for our benefit and the benefit of our
customers. There are both existing and proposed laws regulating and restricting
the collection of information over the Internet that is considered "personally
identifying" and the use of this information. These laws are dynamic and vary
among domestic and foreign jurisdictions. In the event that the information
that we collect and use is considered to be personally identifying, our ability
to collect and use this information may be restricted. As a result, although we
do not currently sell such data, our ability to earn revenues in the future
from the sale of demographic data that profiles users of systems that implement
our products may be impaired.
Our international business exposes us to additional foreign risks.
Sales of our products and services to customers outside the United States
accounted for approximately 5% and 13% of our total revenues in 1999 and for
the six months ended June 30, 2000, respectively. We expect that international
revenues will account for a significant percentage of our revenues in the
future. The growth of our international operations will require us to recruit
and hire a number of new sales and marketing and support personnel in foreign
countries. These countries may not have a sufficient pool of qualified
personnel from which we may hire, or we may not be successful at hiring,
training or retaining such personnel. In addition, we have only limited
experience in developing localized versions of our products and in marketing
and distributing our products in international markets. Introductions of our
products into international markets will require significant investment by us
in advance of anticipated future revenues. We may not be able to successfully
localize, market, sell and deliver our products in international markets which
would materially adversely affect our business, operating results and financial
condition. Conducting business outside of the United States is subject to
additional risks that may affect our ability to sell our products and result in
reduced revenues, including:
. Changes in regulatory requirements;
. Currency conversion risks and currency fluctuations;
. Potentially adverse tax consequences, including taxes on the repatriation
of earnings;
. Political instability, civil unrest and economic instability;
. Greater difficulty enforcing intellectual property rights and weaker laws
protecting such rights;
. Greater difficulty and expense in conducting business abroad;
. Complications in complying with foreign laws and changes in governmental
policies;
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. Longer accounts receivable payment cycles in certain countries;
. Potentially less developed communications and Internet infrastructure;
and
. Tariffs, licensing and other trade restrictions.
Any one or more of these factors could significantly limit our ability to
grow our business abroad and limit the growth of our revenue, which could
materially adversely affect our business and cause the price of our common
stock to decline. To the extent our international operations expand, we expect
that an increasing portion of our international revenue will be denominated in
foreign currencies, subjecting us to fluctuations in foreign currency exchange
rates. We do not currently engage in foreign currency hedging transactions.
However, as we expand our international operations, we may choose to limit such
exposure by entering into forward foreign exchange contracts or engaging in
similar hedging strategies. Any currency exchange strategy we implement may be
unsuccessful in avoiding and potentially could increase exchange-related
losses, materially adversely affecting our financial results.
Risks Related to Our Industry
The demand for our services could be negatively affected by the reduced growth
of e-commerce or by delays in the development of Internet infrastructure.
Sales of goods and services over the Internet do not currently represent a
significant portion of overall sales of goods and services. We depend on the
growing use and acceptance of e-commerce as an effective medium of commerce by
merchants and customers in the United States and internationally. Rapid growth
in the use of and interest in the Internet is a relatively recent development
and its continuation is important to our business. Sales of goods and services
over the Internet have developed more slowly outside of the United States. We
cannot be certain that acceptance and use of the Internet will continue to
develop or that a sufficiently broad base of businesses and consumers will
adopt, or continue to use, the Internet as a medium of commerce.
The emergence of the Internet as a commercial marketplace may occur more
slowly than anticipated for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If the
number of Internet users or their use of Internet resources continues to grow,
it may overwhelm the existing Internet infrastructure. Delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity could also have a detrimental effect.
These factors could result in slower response times or adversely affect usage
of the Internet, resulting in lower numbers of e-commerce transactions and
lower demand for our services. Any delays or reductions in the growth of the
Internet as a medium of commerce would adversely affect the growth of or even
reduce our revenues, which could cause the price of common stock to decline.
The imposition of new sales or other taxes could limit the growth of e-commerce
generally and, as a result, the demand for our products.
Recent federal legislation limits the imposition of state and local taxes on
Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act,
which places a three-year moratorium on state and local taxes on Internet
access, unless the tax was already imposed prior to October 1, 1998, and
discriminatory taxes on e-commerce. There is a possibility that Congress may
not renew this legislation in 2001. If Congress chooses not to renew this
legislation, state and local governments would be free to impose taxes on
electronically purchased goods. We believe that, in accordance with current
industry practice, most companies that sell products over the Internet do not
currently collect sales or other taxes on shipments of their products into
states or foreign countries where they are not physically present. However, one
or more states or foreign countries may seek to impose sales or other tax
collection obligations on out-of-jurisdiction companies that engage in e-
commerce. A
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successful assertion by one or more states or foreign countries that companies
engaged in e-commerce should collect sales or other taxes on the sale of their
products over the Internet, even though not physically present in the state or
foreign country, could indirectly reduce demand for our products and
materially adversely affect our financial results.
Risks Related to this Offering
Our stock price may fluctuate substantially, and you may not be able to resell
your shares above the offering price.
The market price for our common stock will be affected by a number of
factors, including the following:
. The announcement or delay of new services or service enhancements by us
or our competitors;
. Quarterly variations in our or our competitors' results of operations;
. Changes in earnings estimates or recommendations by securities analysts;
. Developments in our industry and e-commerce generally; and
. General market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
In addition, stock prices for many companies in the technology and emerging
growth sectors have been especially volatile and have experienced wide
fluctuations that have often been unrelated to operating performance. These
factors and fluctuations, as well as general economic, political and market
conditions may materially and adversely affect the market price of our common
stock and, therefore, your investment in our common stock.
Because we are currently unable to identify the specific uses to which the net
proceeds from this offering will be applied, you will be relying on the
judgment of our management regarding the application of the proceeds.
We have not designated any specific use for the net proceeds from our sale
of common stock described in this prospectus. Rather, we expect to use the net
proceeds for general corporate purposes, including working capital.
Consequently, our management will have significant flexibility in applying the
net proceeds of this offering. You will be relying on the judgment of our
management regarding the application of the proceeds. Our management will have
the ability to change the application of the proceeds of this offering without
stockholder approval.
Our business may be adversely affected by class action litigation due to stock
price volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert
management's attention and resources, which could have a material adverse
effect on our business, operating results and financial condition.
Because our executive officers and directors own a significant percentage of
our common stock, they will be able to exercise significant influence over us.
Upon completion of this offering, our present directors and executive
officers and their affiliates will beneficially own approximately 69.5% of the
outstanding common stock. See "Principal Stockholders." As a result, if these
stockholders act together, they will be able to exercise significant influence
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions like mergers and
other business combinations. This concentration of ownership may also have the
effect of delaying or preventing a change in control over us unless it is
supported by our directors and executive officers.
20
<PAGE>
There may be sales of a substantial number of shares of our common stock after
this offering by our stockholders, including our executive officers and
directors, and these sales could cause our stock price to decline.
Our executive officers, directors and current stockholders hold a
substantial number of shares, which they can sell in the public market in the
near future. Substantially all of our executive officers, directors and
stockholders have executed lock-up agreements that prevent them from selling or
otherwise disposing of our common stock for a period of 180 days from the date
of this prospectus, without the prior written approval of Credit Suisse First
Boston. These lock-up agreements will expire on the 181st day after the date of
this prospectus and an aggregate of 16,245,715 shares, or 81% of our total
outstanding shares will be eligible for resale from time to time beginning upon
the expiration of these lock-up agreements, in some cases subject only to the
volume, manner of sale and notice requirements of Rule 144 under the Securities
Act. Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall or create the perception to the
public of difficulties or problems with our products and services which could
cause our stock price to fall. The sale of these shares or the negative
perception created by the sale of these shares also could impair our ability to
raise capital through the sale of additional stock, which could prevent us from
executing our business plan and materially adversely affect our financial
results. You should read "Shares Available for Future Sale" for a full
discussion of shares that may be sold in the public market in the future.
The anti-takeover provisions of Delaware law, our certificate of incorporation
and our bylaws could adversely affect the rights of the holders of our common
stock.
Anti-takeover provisions of Delaware law, our certificate of incorporation
and our bylaws may make a change in control of our company more difficult, even
if a change in control would be beneficial to the stockholders. These
provisions may allow the board of directors to prevent changes in the
management and control of our company. Under Delaware law, our board of
directors may adopt additional anti-takeover measures in the future.
One anti-takeover provision that we have is the ability of our board of
directors to determine the terms of preferred stock and issue preferred stock
without the approval of the holders of the common stock. Upon the closing of
this offering, our certificate of incorporation will allow the issuance of up
to 5,000,000 shares of preferred stock. However, because the rights and
preferences of any series of preferred stock may be set by the board of
directors in its sole discretion without approval of the holders of the common
stock, the rights and preferences of this preferred stock may be superior to
those of the common stock. Accordingly, the rights of the holders of common
stock may be adversely affected. You should read "Description of Capital
Stock--Delaware Anti-takeover Law and Certain Charter and Bylaw Provisions" for
a discussion of additional anti-takeover measures.
21
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," contains forward-looking
statements. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such risks and other factors
include, among other things, those listed under "Risk Factors" and elsewhere in
this prospectus. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue" or the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined under "Risk Factors." These factors may cause our actual
results to differ materially from any forward-looking statement.
22
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 3,500,000 shares of
common stock that we are selling in this offering will be $37,810,000
($43,669,000 if the underwriters exercise their over-allotment option in full)
based on an assumed public offering price of $12.00 per share and after
deducting the estimated underwriting discount and estimated offering expenses
payable by us.
The principal purpose of this offering is to create a public market for our
common stock. We expect to use the net proceeds from this offering for working
capital and general corporate purposes. A portion of the net proceeds may also
be used to acquire or invest in complementary businesses, technologies, product
lines or products. We have no current plan or agreement with respect to any
such acquisition. Our management will have broad discretion concerning the
allocation and use of the net proceeds. Pending such uses, we intend to invest
the net proceeds in interest-bearing, investment-grade securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DIVIDEND POLICY
In connection with this offering we will pay accumulated dividends in common
stock on our outstanding Series A, Series B and Series C preferred stock as
required by our certificate of incorporation. We have never declared or paid
any dividends on our common stock. We currently expect to retain future
earnings, if any, for use in the operation and expansion of our business and do
not anticipate paying any cash dividends in the foreseeable future. A covenant
made by us under our existing line of credit prohibits the payment of cash
dividends.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 on:
. An actual basis;
. A pro forma basis giving effect to the automatic conversion of all
shares of outstanding Series A, Series B and Series C preferred stock
into 12,372,743 shares of common stock upon the closing of this
offering, which includes the payment in shares of common stock of
accrued and unpaid dividends on the preferred stock as of June 30, 2000;
and
. A pro forma as adjusted basis to reflect our capitalization with the
preceding pro forma adjustments plus the receipt of the estimated net
proceeds from our sale of 3,500,000 shares of common stock at an assumed
initial public offering price of $12.00 per share.
The table below should be read in conjunction with our balance sheet as of
June 30, 2000 and the related notes, which are included elsewhere in this
prospectus. You should review Note 10 to the notes to our financial statements
for descriptions of our Series A, Series B and Series C preferred stock. The
table below also reflects a beneficial conversion feature of approximately
$12.4 million at June 30, 2000 that resulted from the issuance of the Series C
preferred stock. The beneficial conversion feature was calculated in accordance
with Emerging Issues Task Force Issue No. 98-5.
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(unaudited and in thousands)
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred
stock, $.001 par value, 12,647,830 shares
authorized and designated actual; 12,102,404
shares issued and outstanding actual; no
shares authorized, issued or outstanding,
pro forma and pro forma as adjusted......... $ 47,931 $ -- $ --
Preferred stock, $.001 par value, 5,000,000
shares authorized pro forma as adjusted; no
shares issued and outstanding pro forma as
adjusted.................................... -- -- --
Common stock, $.001 par value, 20,000,000
shares authorized actual and pro forma;
4,110,430 shares issued and outstanding
actual; 16,483,173 issued and outstanding
pro forma; 100,000,000 authorized pro forma
as adjusted; 19,983,173 shares issued and
outstanding pro forma as adjusted........... 4 16 20
Additional paid-in-capital................... 1,279 49,198 87,004
Deferred compensation........................ (1,260) (1,260) (1,260)
Accumulated other comprehensive loss......... (22) (22) (22)
Accumulated deficit.......................... (32,803) (32,803) (32,803)
-------- -------- --------
Total stockholders' (deficit) equity......... (32,802) 15,129 52,939
-------- -------- --------
Total capitalization......................... $ 15,129 $ 15,129 $ 52,939
======== ======== ========
</TABLE>
The table above excludes the following:
. 1,644,900 shares of common stock issuable upon exercise of stock options
outstanding as of September 1, 2000 with a weighted average exercise
price of $10.15 per share;
. 6,250 shares of common stock issued upon exercise of stock options
between June 30, 2000 and September 1, 2000;
. 968,994 shares of common stock issuable upon exercise of common stock
and preferred stock warrants, including accrued and unpaid dividends on
the preferred stock warrants, outstanding as of September 1, 2000 with a
weighted average exercise price of $6.24 per share;
. 1,753,457 shares reserved for future issuance under our stock plans as
of September 1, 2000 which includes 37,396 shares of unvested common
stock that were repurchased from former employees between June 30, 2000
and September 1, 2000 pursuant to our stock plans; and
. 49,967 shares of common stock issuable as payment of accrued and unpaid
dividends on outstanding preferred stock from June 30, 2000 through
September 1, 2000.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$15.1 million, or $0.92 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets at June 30, 2000, reduced
by the amount of our total liabilities, and divided by the total number of
shares of common stock outstanding after giving effect to the automatic
conversion of the Series A, Series B and Series C preferred stock and payment
in shares of common stock of accrued unpaid dividends on the preferred stock as
of June 30, 2000. Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the pro forma net tangible book
value per share of common stock immediately after the completion of this
offering. After giving effect to the sale of 3,500,000 shares of common stock
in this offering at an assumed initial public offering price of $12.00 per
share, and after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma net tangible book
value at June 30, 2000 would have been approximately $52.9 million, or $2.65
per share of common stock. This represents an immediate increase in pro forma
net tangible book value of $1.73 per share to existing stockholders and an
immediate dilution of $9.35 per share to new investors of common stock. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................... $12.00
Pro forma net tangible book value per share as of June 30,
2000........................................................... $0.92
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 1.73
-----
Pro forma net tangible book value per share after the offering (as
adjusted)........................................................ 2.65
------
Dilution per share to new investors............................... $ 9.35
======
</TABLE>
The following table summarizes on a pro forma as adjusted basis after giving
effect to the offering, as of June 30, 2000, the differences between the
existing stockholders and new investors with respect to the number of shares of
common stock purchased from us, the total consideration paid by investors and
the average price per share paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 16,483,173 82% $48,648,000 54% $ 2.95
New investors.................. 3,500,000 18 42,000,000 46 $12.00
---------- --- ----------- ---
Totals....................... 19,983,173 100% $90,648,000 100%
========== === =========== ===
</TABLE>
The table above excludes the following:
. 1,644,900 shares of common stock issuable upon exercise of stock options
outstanding as of September 1, 2000 with a weighted average exercise
price of $10.15 per share;
. 6,250 shares of common stock issued upon exercise of stock options
between June 30, 2000 and September 1, 2000;
. 968,994 shares of common stock issuable upon exercise of common stock
and preferred stock warrants, including accrued and unpaid dividends on
the preferred stock warrants, outstanding as of September 1, 2000 with a
weighted average exercise price of $6.24 per share;
. 1,753,457 shares reserved for future issuance under our stock plans as
of September 1, 2000 which includes 37,396 shares of unvested common
stock that were repurchased from former employees between June 30, 2000
and September 1, 2000 pursuant to our stock plans; and
. 49,967 shares of common stock issuable as payment of accrued and unpaid
dividends on outstanding preferred stock from June 30, 2000 through
September 1, 2000.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes included elsewhere in this prospectus. The consolidated statement of
operations data set forth below for the period from inception (September 21,
1995) through December 31, 1995 and for the year ended December 31, 1996 and
the balance sheet data as of 1995, 1996 and 1997 have been derived from our
audited consolidated financial statements. The consolidated statement of
operations data set forth below for the years ended December 31, 1997, 1998 and
1999 and the consolidated balance sheet data as of December 31, 1998 and 1999
have been derived from our consolidated financial statements included elsewhere
in this prospectus, which have been audited by PricewaterhouseCoopers LLP. The
selected consolidated statement of operations data for the six months ended
June 30, 1999 and June 30, 2000 and the consolidated balance sheet data as of
June 30, 2000 are derived from our unaudited consolidated financial statements
and the related notes included elsewhere in this prospectus. The historical
results are not necessarily indicative of results to be expected for any future
period.
<TABLE>
<CAPTION>
For the Six
Period from Months Ended
Sept. 21, 1995 For the Year Ended December 31, June 30,
(Inception) to -------------------------------------- -----------------
Dec. 31, 1995 1996 1997 1998 1999 1999 2000
-------------- -------- -------- -------- -------- ------- --------
(in thousands, except per share
data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Software licenses...... $ 1 $ 11 $ 147 $ 582 $ 3,294 $ 949 $ 3,849
Services............... 1 175 249 481 1,988 485 2,213
-------- -------- -------- -------- -------- ------- --------
Total revenues....... 2 186 396 1,063 5,282 1,434 6,062
-------- -------- -------- -------- -------- ------- --------
Cost of revenues:
Software licenses...... 4 60 89 135 130 67 140
Services (excludes
stock-based charges of
$0, $0, $0, $0, $4, $0
and $18).............. -- 17 80 292 1,821 742 2,052
-------- -------- -------- -------- -------- ------- --------
Total cost of
revenues............ 4 77 169 427 1,951 809 2,192
-------- -------- -------- -------- -------- ------- --------
Gross margin........... (2) 109 227 636 3,331 625 3,870
Operating expenses:
Sales and marketing
(excludes stock-based
charges of $0, $0, $0,
$0, $227, $3 and
$348)................. 1 57 484 3,336 7,125 2,886 6,368
Research and
development (excludes
stock-based charges of
$0, $0, $0, $0, $100,
$0 and $234).......... -- 51 463 2,661 6,339 3,013 4,099
General and
administrative
(excludes stock-based
charges of $0, $0, $0,
$0, $17, $0 and
$124)................. 25 78 470 1,761 3,260 1,568 2,688
Stock-based charges.... -- -- -- -- 348 3 724
-------- -------- -------- -------- -------- ------- --------
Total operating
expenses............ 26 186 1,417 7,758 17,072 7,470 13,879
-------- -------- -------- -------- -------- ------- --------
Loss from
operations.......... (28) (77) (1,190) (7,122) (13,741) (6,845) (10,009)
-------- -------- -------- -------- -------- ------- --------
Interest income
(expense):
Interest expense....... -- -- (1) (132) (531) (87) (247)
Interest income ....... -- -- 44 39 42 22 335
-------- -------- -------- -------- -------- ------- --------
Net loss............. (28) (77) (1,147) (7,215) (14,230) (6,910) (9,921)
Dividends on
mandatorily redeemable
convertible preferred
stock................. -- -- -- (270) (1,176) (476) (1,798)
Beneficial conversion
feature related to
Series C preferred
stock(1).............. -- -- -- -- (8,624) -- (3,809)
-------- -------- -------- -------- -------- ------- --------
Net loss attributable
to common stock..... $ (28) $ (77) $ (1,147) $ (7,485) $(24,030) $(7,386) $(15,528)
======== ======== ======== ======== ======== ======= ========
Net loss per share:
Basic and diluted...... $ (0.08) $ (0.06) $ (0.89) $ (6.51) $ (12.72) $ (4.51) $ (5.90)
======== ======== ======== ======== ======== ======= ========
Basic and diluted
weighted average
shares................ 352 1,300 1,283 1,149 1,889 1,639 2,632
======== ======== ======== ======== ======== ======= ========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------ June 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and equivalents.... $ 2 $ 20 $ 2,230 $ 71 $ 16,915 $ 15,522
Working (deficit)
capital................ 2 20 1,975 (4,791) 12,518 13,051
Total assets............ 2 54 2,548 2,150 23,678 28,912
Mandatorily redeemable
convertible preferred
stock.................. -- -- 3,345 3,615 36,941 47,931
Long-term debt, net of
current portion........ 30 122 -- 387 221 542
Capital lease
obligations, net of
current portion........ -- -- 12 12 78 57
Total stockholders'
deficit................ $ (28) $ (104) $ (1,248) $ (8,649) $(23,194) $(32,802)
</TABLE>
---------------------
(1) The beneficial conversion feature of $12.4 million was calculated as the
difference between the deemed fair value of a share of common stock at the
time of the various issuances of the Series C preferred stock, $10 at both
December 1999 and January 2000, minus the conversion price of a share of
Series C preferred stock ($7.07 per share) multiplied by the number of
shares of common stock that would be issued upon conversion, 2,943,324 and
1,299,943 in December 1999 and January 2000, respectively.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and related notes included elsewhere in
this prospectus.
Overview
We provide e-commerce transaction management software and services that
enable businesses to automate transaction and payment processing. Our e-
commerce software allows businesses to conduct real-time transaction
processing, fraud analysis and protection, automated shipping and tax
calculation, downloading of software or other digital goods through the
Internet and business reporting and analysis.
We were incorporated in September 1995 and initially focused on providing
outsourced Internet hosting services for our customers' websites and e-commerce
transactions. In January 1996, we first offered transaction processing hosting
services for e-businesses. In November 1996 we began selling an early version
of our software. In 1997, we commercially released Merchant Engine, our first
transaction management software product for single businesses, and first
recognized software license revenues. In 1997, we also commercially released
Hosting Engine, designed to enable CSPs to simultaneously support multiple
businesses or large enterprises to support multiple divisions.
We derive revenues from licensing software products and providing related
services. Revenues derived from software licenses include fees from licenses of
Merchant Engine and Hosting Engine and annual merchant fees received from CSPs
that utilize Hosting Engine to provide transaction and payment processing
services on an outsourced basis. Revenues derived from services include fees
for hosting services and customization and implementation services, customer
service and support and maintenance for our products. Currently, all of our
existing Merchant Engine and Hosting Engine customers have service contracts
with us.
Software license revenues derived from Hosting Engine and Merchant Engine
are generally recognized when the product is shipped. Software license revenues
derived from annual merchant fees are generally recognized ratably over the
estimated usage period of the licenses. Services revenues are recognized as the
services are provided. Services revenues for maintenance are recognized ratably
over the term of the maintenance agreements.
Through 1997, $425,000, or 73% of our total revenues, were services revenues
derived from hosting fees. Since the beginning of 1998 through June 30, 2000,
$7.7 million, or 62% of our total revenues, have been derived from software
licenses.
We sell our products and services through a direct sales force and
contractual relationships with systems integrators, value-added resellers,
original equipment manufacturers, storefront and customer relationship
management vendors and CSPs that introduce us to their customers or resell our
products. International revenues generated for the six months ended June 30,
2000, were approximately 13% of our total revenues. We have an office in the
United Kingdom and plan to establish operations in other parts of Europe, Asia
Pacific and South America.
A relatively small number of customers accounted for a significant portion
of our total revenues in 1999 and the first six months of 2000. If this trend
continues, the loss or delay of revenues from any of these individual customers
could have a significant impact on our revenues. In 1998, sales to our largest
customer, Cardservice International, accounted for 16% of our total revenues.
In 1999, sales to our two largest customers, Cardservice International and
Hewlett-Packard, accounted for 18% and 16% of our total revenues, respectively.
For the six months ended June 30, 2000, sales to our two largest customers,
Cardservice International and Hewlett-Packard, accounted for 19% and 23% of our
total revenues, respectively.
We have incurred substantial net losses since inception, and as of June 30,
2000, we had an accumulated deficit of $32.8 million. This accumulated deficit
resulted from our lack of substantial revenues, the significant costs incurred
in the development of our products and the establishment of our sales and
marketing organization.
28
<PAGE>
Results of Operations
The following table sets forth items from our consolidated statements of
operations expressed as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
For the Six
Months
Period from For the Year Ended Ended June
Sept. 21, 1995 December 31, 30,
(Inception) to -------------------------------- -------------
Dec. 31, 1995 1996 1997 1998 1999 1999 2000
-------------- ----- ------ ------ ------ ----- -----
(unaudited)
Consolidated Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license....... 50% 6% 37% 55% 62% 66% 63%
Services............... 50 94 63 45 38 34 37
------- ----- ------ ------ ------ ----- -----
Total revenues....... 100 100 100 100 100 100 100
------- ----- ------ ------ ------ ----- -----
Cost of revenues:
Software licenses...... 200 32 23 13 3 5 2
Services............... -- 9 20 27 34 52 34
------- ----- ------ ------ ------ ----- -----
Total cost of
revenues............ 200 41 43 40 37 57 36
------- ----- ------ ------ ------ ----- -----
Gross margin........... (100) 59 57 60 63 43 64
Operating expenses:
Sales and marketing.... 50 31 122 314 135 201 105
Research and
development........... -- 27 117 250 120 210 68
General and
administrative........ 1,250 42 119 166 62 109 44
Stock-based charges.... -- -- -- -- 6 1 12
------- ----- ------ ------ ------ ----- -----
Total operating ex-
penses.............. 1,300 100 358 730 323 521 229
------- ----- ------ ------ ------ ----- -----
Loss from opera-
tions............... (1,400) (41) (301) (670) (260) (478) (165)
------- ----- ------ ------ ------ ----- -----
Interest income (ex-
pense):
Interest expense....... -- -- -- (13) (10) (6) (4)
Interest income ....... -- -- 11 4 1 2 5
------- ----- ------ ------ ------ ----- -----
Net loss............. (1,400)% (41)% (290)% (679)% (269)% (482)% (164)%
======= ===== ====== ====== ====== ===== =====
The following table sets forth, for each component of revenues, the cost of
these revenues as a percentage of the related revenues for the periods
indicated:
<CAPTION>
For the Six
Months
Period from For the Year Ended Ended June
Sept. 21, 1995 December 31, 30,
(Inception) to -------------------------------- -------------
Dec. 31, 1995 1996 1997 1998 1999 1999 2000
-------------- ----- ------ ------ ------ ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cost of software license
revenues............... 400% 545% 61% 23% 4% 7% 4%
Cost of services reve-
nues................... -- 10 32 61 92 153 93
</TABLE>
Comparison of the Six Months Ended June 30, 2000 and 1999
Revenues
Total revenues increased to $6.1 million for the six months ended June 30,
2000 from $1.4 million for the six months ended June 30, 1999.
Software License Revenues. Software license revenues increased to $3.8
million for the six months ended June 30, 2000 from $949,000 for the six months
ended June 30, 1999. The increase was primarily due to an increase in the
number of Hosting Engine and Merchant Engine licenses sold, as well as
increased revenues derived from annual merchant fees. As a percent of total
revenues, software license revenues decreased to 63% for the six months ended
June 30, 2000 from 66% for the six months ended June 30, 1999.
29
<PAGE>
Services Revenues. Services revenues increased to $2.2 million for the six
months ended June 30, 2000 from $485,000 for the six months ended June 30,
1999. This increase was primarily due to professional services sold to new and
existing customers, increased revenues from our hosting services and to
revenues from maintenance contracts sold to all of our new customers, as well
as from annual renewals from existing customers. As a percent of total
revenues, services revenues increased to 37% for the six months ended June 30,
2000 from 34% for the six months ended June 30, 1999.
Cost of Revenues
Cost of Software License Revenues. Cost of software license revenues
consists primarily of royalties paid to third parties under technology
licensing arrangements. Cost of license revenues increased to $140,000, or 4%
of software license revenues for the six months ended June 30, 2000, from
$67,000, or 7% of software license revenues for the six months ended June 30,
1999. The percentage decrease was due to an increase in the number of licenses
of our Hosting Engines and an increase in annual merchant fees. We historically
have realized higher gross margins on licenses of Hosting Engine than on
licenses of Merchant Engine due to a higher selling price for Hosting Engine.
We anticipate that the cost of software license revenues will increase in
absolute dollars but will vary as a percentage of software license revenues,
depending on the percentage mix of licenses of Hosting Engine and Merchant
Engine sold and the amount of annual merchant fees.
Cost of Services Revenues. Cost of services revenues consists primarily of
personnel costs for our hosting and professional services for our products.
Cost of services revenues increased to $2.1 million, or 93% of services revenue
for the six months ended June 30, 2000, from $742,000, or 153% of services
revenues for the six months ended June 30, 1999. The increase resulted
primarily from the hiring of additional personnel in anticipation of continued
growth of our business and the use of contractors to support increased demand
for consulting services. We anticipate the number of service personnel will
continue to increase.
Gross margin is affected by the costs associated with producing revenues and
the mix of software license revenues and service revenues. Gross margin
increased to 64% for the six months ended June 30, 2000 from 43% for the six
months ended June 30, 1999. We historically have realized higher gross margin
on software license revenues than on services revenues. If services revenues
increase as a percentage of total revenues, our overall gross margin may
decrease.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, costs associated with stock-based compensation, commissions and costs
associated with marketing and strategic relationship programs, such as trade
shows, seminars, public relations and marketing materials. Sales and marketing
expenses increased to $6.4 million, or 105% of total revenues for the six
months ended June 30, 2000, from $2.9 million, or 201% of total revenues for
the six months ended June 30, 1999. The increase was attributable to an
increase in sales and marketing personnel and related expenses. To a lesser
extent, the increase was related to an increase in marketing and customer
relationship programs, including trade shows, public relations and marketing
materials. We expect sales and marketing expenses to continue to increase in
absolute dollars as we continue to expand our marketing programs and our sales
force to support our key customers and domestic and international expansion.
Research and Development. Research and development expenses consist
primarily of employee salaries, fees for outside consultants and related costs
associated with the development of new products, the enhancement of existing
products, quality assurance, testing and documentation. Research and
development expenses increased to $4.1 million, or 68% of total revenues for
the six months ended June 30, 2000, from $3.0 million, or 210% of total
revenues for the six months ended June 30, 1999. The increase primarily
resulted from salaries and other costs associated with new personnel. We
anticipate that research and development expenses will continue to increase in
absolute dollars in the remainder of 2000.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting and insurance costs.
General and administrative expenses increased to $2.7 million, or 44% of total
revenues for the
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six months ended June 30, 2000, from $1.6 million, or 109% of total revenues
for the six months ended June 30, 1999. The increase resulted primarily from
salaries associated with an increase in the number of general and
administrative personnel and the costs required to manage our growth.
Stock-Based Charges. Stock-based charges represent the amortization of
deferred compensation for stock options granted to employees and consultants.
For stock options granted to employees, the deferred compensation was
calculated as the difference between the exercise price of stock options
granted to our employees and the then deemed fair market value of our common
stock. For stock options granted to consultants, the deferred compensation was
valued using the Black-Scholes model. Stock-based charges increased to
$724,000, or 12% of total revenues for the six months ended June 30, 2000 in
connection with the granting of stock options to our employees and consultants
from $3,000, or 1% of total revenues for the six months ended June 30, 1999.
Interest Income (Expense)
Interest expense increased to $247,000 for the six months ended June 30,
2000, or 4% of total revenues, from $87,000, or 6% of total revenues for the
six months ended June 30, 1999. This increase was primarily due to increased
borrowings under our line of credit, as well as loans from certain stockholders
and non-cash interest expense related to warrants issued in conjunction with
debt. The increase in interest income during the six months ended June 30, 2000
was primarily from the interest earned on the proceeds received from the
issuance of the Series C preferred stock in December 1999 and in January and
February 2000.
Provision for Income Taxes
At June 30, 2000, we had approximately $23.8 million of domestic net
operating loss carryforwards that expire on various dates and may be used to
offset future federal and state income taxes, if any. We have recorded a
valuation allowance for the full amount of the net deferred tax assets as
future realization of the tax benefit is not sufficiently assured.
Net Loss
The net loss for the six months ended June 30, 2000 increased to $9.9
million, or 164% of total revenues, from $6.9 million or 482% of total revenues
for the six months ended June 30, 1999. The increase was primarily due to the
increased expenses noted above, partially offset by the increase in gross
margin.
Comparison of Years Ended December 31, 1999 and 1998
Revenues
Total revenues increased to $5.3 million for 1999 from $1.1 million for
1998.
Software License Revenues. Software license revenues increased to $3.3
million for 1999 from $582,000 for 1998. The increase was due to an increase in
the number of Hosting Engine and Merchant Engine licenses as well as increased
revenues derived from annual merchant fees. As a percentage of total revenues,
software license revenues increased to 62% for 1999 from 55% for 1998. We
anticipate that software license revenues will increase as a percentage of
total revenues in 2000.
Services Revenues. Services revenues increased to $2.0 million for 1999 from
$481,000 for 1998. This increase was primarily due to professional services
sold to new and existing customers, increased revenues from our hosting
services and revenues from maintenance contracts sold to all of our new
customers. As a percentage of total revenues, services revenues decreased to
38% for 1999 from 45% for 1998.
Cost of Revenues
Cost of Software License Revenues. Cost of software license revenues
decreased to $130,000, or 4% of software license revenues, for 1999 from
$135,000, or 23% of software license revenues, for 1998. The decrease was
primarily due to an increase in the number of licenses of our Hosting Engine
and an increase in annual merchant fees. We historically have realized higher
gross margins on licenses of Hosting Engine than on
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<PAGE>
licenses of Merchant Engine due to a higher selling price for Hosting Engine.
We anticipate that the cost of license revenues will increase in absolute
dollars but will vary as a percentage of software license revenues, depending
on the percentage mix of licenses of Hosting Engine and Merchant Engine sold
and the amount of annual merchant fees.
Cost of Services Revenues. Cost of services revenues increased to $1.8
million, or 92% of services revenues, for 1999 from $292,000, or 61% of
services revenues, for 1998. The increase resulted primarily from the hiring of
additional personnel in anticipation of the growth of our business and the use
of contractors to support increased demand for consulting services. We
anticipate the number of service personnel will continue to increase in 2000.
Gross margin is affected by the costs associated with producing revenues and
the mix of software license revenues and services revenues. Gross margin
increased to 63% in 1999 from 60% in 1998. We historically have realized higher
gross margin on license revenues than on services revenues. If services
revenues increase as a percentage of total revenues, our overall gross margin
may decrease.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $7.1 million,
or 135% of total revenues, for 1999 from $3.3 million, or 314% of total
revenues, for 1998. The increase was attributable to an increase in the number
of sales and marketing personnel and related expenses. To a lesser extent, the
increase was related to an increase in marketing and customer relationship
programs, including trade shows, public relations and marketing materials. We
expect sales and marketing expenses to continue to increase in absolute dollars
as we continue to expand our marketing programs and our sales force to support
our key customers and domestic and international expansion.
Research and Development. Research and development expenses increased to
$6.3 million, or 120% of total revenues, for 1999 from $2.7 million, or 250% of
total revenues, for 1998. The increase primarily resulted from salaries and
other costs associated with new personnel. We anticipate that research and
development expenses will continue to increase in absolute dollars in 2000.
General and Administrative. General and administrative expenses increased to
$3.3 million, or 62% of total revenues, for 1999 from $1.8 million, or 166% of
total revenues, for 1998. The increase resulted primarily from salaries
associated with an increase in the number of general and administrative
personnel and the costs required to manage our growth.
Stock-Based Charges. Stock-based charges represent the amortization of
deferred compensation for stock options granted to employees and consultants.
For stock options granted to employees, the deferred compensation was
calculated as the difference between the exercise price of stock options
granted to our employees and the then deemed fair market value of our common
stock. For stock options granted to consultants, the deferred compensation was
valued using the Black-Scholes model. We recognized stock-based charges of
$348,000, or 6% of total revenues for 1999 in connection with the granting of
stock options to our employees and consultants. We did not recognize any stock-
based charges in 1998.
Interest Income (Expense)
Interest expense increased to $489,000 for 1999, or 9% of total revenues,
from $93,000, or 9% of total revenues, for 1998. This increase was primarily
due to increased borrowings under our line of credit as well as loans to us
from certain stockholders as well as non-cash interest expense related to
warrants issued in conjunction with debt.
Provision for Income Taxes
At December 31, 1999, we had approximately $18.6 million of domestic net
operating loss carryforwards that expire on various dates and may be used to
reduce future federal and state income taxes, if any. We have
32
<PAGE>
recorded a valuation allowance for the full amount of the net deferred tax
assets as the future realization of the tax benefit is not sufficiently
assured.
Net Loss
The net loss for 1999 increased to $14.2 million, or 269% of total revenues,
from $7.2 million, or 679% of total revenues, for 1998. The increase was
primarily due to the increased expenses noted above, partially offset by the
increase in gross margin.
Comparison of Years Ended December 31, 1998 and 1997
Revenues
Total revenues increased to $1.1 million for 1998 from $396,000 for 1997.
Software License Revenues. Software license revenues increased to $582,000
for 1998 from $147,000 for 1997. The increase was primarily due to an increase
in the number of licenses sold as well as revenues from annual merchant fees.
As a percentage of total revenues, software license revenues increased to 55%
for 1998 from 37% for 1997.
Services Revenues. Services revenues increased to $481,000 for 1998 from
$249,000 for 1997. The increase was primarily due to our provision of
additional hosting services, professional services sold to new and existing
customers and revenues from maintenance contracts sold to our new customers. As
a percentage of total revenues, services revenues decreased to 45% for 1998
from 63% for 1997.
Cost of Revenues
Cost of Software License Revenues. Cost of software license revenues
increased to $135,000, or 23% of software license revenues, for 1998 from
$89,000, or 61% of software license revenues, for 1997. The percentage decrease
was due to an increase in the proportion of higher margin Hosting Engine
licenses and annual merchant fees in the overall software license revenues mix.
Cost of Services Revenues. Cost of services revenues increased to $292,000,
or 61% of services revenues, for 1998 from $80,000, or 32% of services
revenues, for 1997. The dollar and percentage increases resulted primarily from
the hiring of additional personnel in anticipation of the growth of our
business and the use of contractors to support increased demand for maintenance
and consulting services. The decline in services gross margin to 39% for 1998
from 68% for 1997 was primarily due to the increase in the number of personnel
and related costs.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $3.3 million,
or 314% of total revenues, for 1998 from $484,000, or 122% of total revenues,
for 1997. The increase was primarily attributable to an increase in the number
of sales and marketing personnel. To a lesser extent, the increase was
attributable to an increase in marketing and customer and co-marketing
development programs, including trade shows, public relations and marketing
materials.
Research and Development. Research and development expenses increased to
$2.7 million, or 250% of total revenues, for 1998 from $463,000, or 117% of
total revenues, for 1997. The increase primarily resulted from salaries and
other costs associated with new personnel.
General and Administrative. General and administrative expenses increased to
$1.8 million, or 166% of total revenues, for 1998 from $470,000, or 119% of
total revenues, for 1997. Substantially all of the increase was due to salaries
associated with an increase in the number of general and administrative
personnel.
33
<PAGE>
Interest Income (Expense)
Interest expense increased to $93,000, or 9% of total revenue, for 1998,
from interest income of $43,000, or 11% of total revenues, for 1997. This
increase was primarily due to increased borrowings under our line of credit as
well as to loans to us from certain stockholders.
Net Loss
The net loss increased to $7.2 million, or 679% of total revenues, for 1998
from $1.1 million, or 290% of total revenues, for 1997. The increase in the net
loss was primarily due to the increases in spending noted above, partially
offset by the increase in gross margin.
Consolidated Quarterly Results of Operations
The following tables set forth a summary of our unaudited consolidated
quarterly operating results for each of the ten most recent quarters through
June 30, 2000. This information has been derived from unaudited consolidated
financial statements that, in management's opinion, have been prepared on a
basis consistent with the audited consolidated financial statements contained
elsewhere in the prospectus and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of such
information when read in conjunction with our audited consolidated financial
statements and related notes. We believe that period to period comparisons of
our financial results are not necessarily meaningful and should not be relied
upon as indicative of future performance.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license....... $ 173 $ 212 $ 47 $ 150 $ 161 $ 788 $ 987 $ 1,358 $ 1,575 $ 2,274
Services............... 85 159 167 70 174 311 701 802 1,118 1,095
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues........ 258 371 214 220 335 1,099 1,688 2,160 2,693 3,369
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Software license....... 21 33 45 36 38 29 46 17 74 66
Services............... 29 44 60 159 290 452 496 583 983 1,069
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............. 50 77 105 195 328 481 542 600 1,057 1,135
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin........... 208 294 109 25 7 618 1,146 1,560 1,636 2,234
Operating expenses:
Sales and marketing.... 542 669 960 1,165 1,439 1,447 2,170 2,069 2,522 3,846
Research and
development........... 302 520 846 993 1,362 1,651 1,644 1,682 1,617 2,482
General and
administrative........ 234 296 487 744 715 853 932 760 1,394 1,294
Stock-based charges.... -- -- -- -- 1 2 8 337 578 146
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 1,078 1,485 2,293 2,902 3,517 3,953 4,754 4,848 6,111 7,768
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.. (870) (1,191) (2,184) (2,877) (3,510) (3,335) (3,608) (3,288) (4,475) (5,534)
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Interest income
(expense):
Interest expense....... (17) (20) (30) (65) (65) (22) (36) (408) (112) (135)
Interest income........ 23 13 2 1 13 9 20 -- 172 163
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss.............. $ (864) $(1,198) $(2,212) $(2,941) $(3,562) $(3,348) $(3,624) $(3,696) $(4,415) $(5,506)
====== ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE>
The following table sets forth items from our consolidated results of
operations expressed as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license....... 67% 57% 22% 68% 48% 72% 58% 63% 58% 67%
Services............... 33 43 78 32 52 28 42 37 42 33
---- ---- ------ ------ ------ ---- ---- ---- ---- ----
Total revenues........ 100 100 100 100 100 100 100 100 100 100
---- ---- ------ ------ ------ ---- ---- ---- ---- ----
Cost of revenues:
Software license....... 8 9 21 17 11 3 3 1 2 2
Services............... 11 12 28 72 87 41 29 27 37 32
---- ---- ------ ------ ------ ---- ---- ---- ---- ----
Total cost of
revenues............. 19 21 49 89 98 44 32 28 39 34
---- ---- ------ ------ ------ ---- ---- ---- ---- ----
Gross margin........... 81 79 51 11 2 56 68 72 61 66
Operating expenses:
Sales and marketing.... 210 180 449 530 429 132 129 96 94 114
Research and
development........... 117 140 395 451 407 150 97 78 60 74
General and
administrative........ 91 80 228 338 213 78 55 35 51 38
Stock-based charges.... -- -- -- -- 1 1 1 16 22 4
---- ---- ------ ------ ------ ---- ---- ---- ---- ----
Total operating
expenses............. 418 400 1,072 1,319 1,050 361 282 225 227 230
---- ---- ------ ------ ------ ---- ---- ---- ---- ----
Loss from operations.. (337) (321) (1,021) (1,308) (1,048) (305) (214) (153) (166) (164)
---- ---- ------ ------ ------ ---- ---- ---- ---- ----
Interest income
(expense):
Interest expense....... (7) (5) (14) (29) (20) (2) (2) (19) (4) (4)
Interest income........ 9 3 1 -- 4 1 1 -- 6 5
---- ---- ------ ------ ------ ---- ---- ---- ---- ----
Net loss.............. (335)% (323)% (1,034)% (1,337)% (1,064)% (306)% (215)% (172)% (164)% (163)%
==== ==== ====== ====== ====== ==== ==== ==== ==== ====
The following table sets forth, for each component of revenues, the cost of
those revenues as a percentage of the related revenues for the periods
indicated:
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of software
license revenues...... 12% 16% 96% 24% 24% 4% 5% 1% 5% 3%
Cost of services....... 34 28 36 227 167 145 71 73 88 98
</TABLE>
Trends discussed in the period to period comparisons above generally apply
to the results of operations for our ten most recent quarters, except for
certain differences discussed below.
We have experienced significant fluctuations in revenues, expenses and
results of operations from quarter to quarter, and such fluctuations are likely
to continue. A significant portion of our revenues has been generated from a
limited number of customers, and it is difficult to predict the timing of
future orders and shipments to customers. We anticipate that in the near term
our results of operations in any given period will continue to depend to a
significant extent upon sales to a small number of customers. We have also
experienced significant variations in our quarterly gross margin for software
license revenues due to the volume and product mix. Our gross margin for
services revenues has varied due to the volume of services revenues, our
investment in the infrastructure of our hosting services and the timing and
number of additional services personnel hired and related costs.
Our sales and marketing expenses have generally increased in absolute
dollars on a quarterly basis, due in significant part to the timing and number
of additional personnel hired and compensation and related costs
35
<PAGE>
and the timing, number and significance of specific sales and marketing
activities, such as trade shows, customer and co-marketing development programs
and other promotional activities. Our expenditures for research and development
have increased in absolute dollars on a quarterly basis, primarily as a result
of the timing and number of additional personnel hired and related compensation
costs. Our general and administrative expenses have generally increased in
absolute dollars on a quarterly basis primarily as a result of the timing and
number of additional personnel hired and related costs and the costs required
to manage our growth.
Stock-Based Charges
Through June 30, 2000, we have granted options to purchase approximately
3,710,395 shares of common stock under our stock option plans at a weighted
average exercise price of $4.68 per share. We have recorded deferred stock-
based charges related to these options of approximately $2.3 million. This
deferred stock-based charge will be amortized over the vesting period of the
underlying options. Of this $2.3 million, an aggregate of $724,000 and $348,000
were amortized during the six months ended June 30, 2000 and the year ended
December 31, 1999, respectively. Expenses for the six months ended June 30,
2000 were allocated as follows:
. $18,000 to cost of services;
. $348,000 to sales and marketing;
. $234,000 to research and development; and
. $124,000 to general and administrative.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through private
placements of preferred stock totaling $45 million through June 30, 2000 and
borrowings from our stockholders and our bank. As of June 30, 2000, we had cash
and equivalents totaling $15.5 million.
Cash used for operating activities for the six months ended June 30, 2000
was $9.2 million, primarily due to a net loss of $9.9 million and an increase
in accounts receivable and contracts receivable, partially offset by increases
in accounts payable and, accrued expenses, deferred revenues and depreciation
and amortization. Cash used for operating activities for 1999 was $12.3
million, primarily due to a net loss of $14.2 million and an increase in
accounts receivable and contracts receivable, partially offset by increases in
accounts payable and accrued expenses, deferred revenues and depreciation and
amortization.
Cash used for investing activities was $2.5 million for the six months ended
June 30, 2000 and $1.7 million for 1999. Investing activities for the periods
were primarily purchases of equipment, consisting largely of computer servers,
workstations and networking equipment.
Cash provided by financing activities was $10.3 million for the six months
ended June 30, 2000 primarily from the issuance of preferred stock. Cash
provided by financing activities totaling $30.9 million for 1999 was primarily
from the issuance of preferred stock for net proceeds totaling $26.9 million.
Our primary financial commitments consisted of obligations outstanding under
capital leases and notes payable under our credit facilities of $3 million as
of June 30, 2000, and $2.3 million as of December 31, 1999. Future obligations
under operating leases totaled $663,000 at June 30, 2000.
In 1999, we entered into a new bank line of credit which allows us to borrow
up to $3.0 million for working capital purposes and up to $1.3 million for
equipment purchases. The working capital revolving line of credit expired in
July 2000 and an extension of that line expired on September 18, 2000. We
currently have an executed commitment letter with the bank and expect to renew
and extend the working capital revolving line in connection with that letter
for one year under a new agreement. The equipment line of credit expires in May
2002. Amounts available under the working capital revolving line of credit are
a function of eligible accounts receivable and both lines of credit bear
interest at the bank's prime rate plus .25%. As of June 30, 2000, $1.3 million
was available for borrowing and the bank's prime rate was 9.5%.
36
<PAGE>
Commencing on December 31, 2004, the Company may be required to redeem, upon
the affirmative vote of two-thirds of the preferred stockholders voting as a
group, 50% of the outstanding shares of preferred stock, an additional 50% on
December 31, 2005 and the remainder on December 31, 2006 at a redemption price
equal to $1.07, $2.46 and $7.07 for Series A, B and C respectively, plus
accrued dividends. Upon completion of this offering, our preferred stock will
automatically convert into common stock and our certificate of incorporation
will be amended and restated to make various changes, including the removal of
these redemption provisions.
As of June 30, 2000, we had approximately $23.8 million of domestic net
operating loss carryforwards that expire on various dates and may be used to
reduce future federal and state income taxes, if any. Under the provisions of
the Internal Revenue Code, the Company experienced a substantial change in
ownership, which resulted in an annual limitation for the usage of the net
operating loss carryforwards generated prior to the change in ownership of $2.2
million.
Since our inception, we have significantly increased our operating expenses.
We anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
and capital expenditures will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or investments
in businesses, technologies, products or services that are complementary to our
business. We believe that the net proceeds of this offering together with our
current cash balances will be sufficient to meet our anticipated cash
requirements for working capital and capital expenditures for at least 12
months immediately following the offering. To the extent that cash generated
from operations is insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity or debt securities, or obtain additional credit
facilities. The issuance of additional equity or convertible debt securities
could result in additional dilution to our stockholders.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000, with earlier application encouraged. The
Company does not currently use derivative instruments and, therefore, does not
expect that the adoption of SFAS No. 133 will have an impact on its financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In SAB No. 101, the SEC staff expresses its views regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company will be
required to adopt SAB No. 101, as amended by SAB No. 101B, for the quarter
beginning October 1, 2000. The Company does not believe that the adoption of
SAB No. 101 will have a significant impact on its financial statements and
related disclosures.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44")
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25 ("APB No. 25") "Accounting for Stock
Issued to Employees." FIN No. 44 clarifies the application of APB No. 25 for
only certain issues. It does not address any issues related to the application
of the fair value method in SFAS No. 123 "Accounting for Stock-Based
Compensation." Among other issues, FIN No. 44 clarifies (a) the definition of
employee for purposes of applying APB No. 25, (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. FIN No. 44 is effective July 1, 2000, but
certain conclusions in the interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. The Company has early
adopted the provisions of FIN No. 44. The adoption of FIN No. 44 did not have a
significant impact on the Company's financial statements and related
disclosures.
37
<PAGE>
Year 2000
We have not incurred any material expense nor have we experienced any
material disruptions in our systems or those of our vendors and service
providers as a result of Year 2000 system processing.
Qualitative and Quantitative Disclosure of Market Risk
We do not currently have any derivative financial instruments and do not
intend to invest in derivatives. We invest our cash in short-term, highly
liquid cash equivalents. Indebtedness under our bank line of credit bears
interest at the bank's prime rate plus .25% and therefore, we have some
interest rate risk to the extent that the bank increases its prime rate.
However, because of the short-term nature of the line of credit and small
amounts outstanding thereunder, we believe that our exposure to interest rate
risk is not material to our results of operations.
Beneficial Conversion Feature
The various issuances of our Series C preferred stock resulted in beneficial
conversion feature amounts upon each issuance of approximately $8.6 million in
December 1999 and $3.8 million in January 2000, calculated in accordance with
Emerging Issues Task Force Issue No. 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios."
38
<PAGE>
BUSINESS
Overview
We provide e-commerce transaction management software and services that
enable businesses to automate transaction and payment processing. Our e-
commerce software allows businesses to conduct real-time transaction
processing, fraud analysis and protection, automated shipping and tax
calculation, downloading of software or other digital goods through the
Internet and business reporting and analysis. Our software is designed to
readily integrate with a business' online storefront and customer relationship
management applications and its existing business systems and processes. Our
software processes business-to-business, business-to-consumer and person-to-
person transactions received through the Internet, wireless telephones, some
personal digital assistants, call centers and in-store devices. We have
designed the architecture of our transaction management software to meet the
stringent performance, reliability and growth requirements of e-businesses.
Each of our two principal e-commerce software products is designed to meet the
needs of different customers. Merchant Engine supports single businesses.
Hosting Engine enables commerce service providers, or CSPs, a category of
application service providers focused on e-commerce, including business-to-
business market makers, to simultaneously support multiple businesses and
allows large businesses to simultaneously support multiple divisions. We also
offer customization and implementation services, customer service and support,
maintenance and application hosting services for our products.
Industry Background
The Internet has emerged as a global communications medium to deliver and
share information and conduct business. The convenience and widespread
accessibility of the Internet has allowed businesses greater access to new and
existing customers, as well as the ability to interact with their customers 24
hours a day, seven days a week. International Data Corporation, or IDC,
estimates that the volume of goods and services exchanged over the Internet
will increase from $268 billion in 2000 to $1.6 trillion in 2003. In an effort
to gain greater access to new and existing customers and improve market share,
Internet-related businesses have focused on improving their marketing efforts
and enhancing the online user experience through storefront and customer
relationship management applications, also known as "front-end" Internet
infrastructure. IDC estimates that the worldwide e-commerce application market
will increase from $1.7 billion in 1999 to $13.1 billion by 2003. Although many
e-businesses have implemented a variety of front-end solutions to improve the
online customer shopping experience, these solutions generally fail to provide
transaction management--the automation of payment processing and the
integration of related transaction information with existing business systems
and processes. We believe that in order for businesses to grow online, they
will require automated transaction management.
Traditional Transaction Processing and Fulfillment
E-commerce transactions, whether business-to-business or business-to-
consumer, typically follow a standard process. Once an online customer clicks
the "buy" button, an online business generally takes the following steps to
process an order:
. Receives the order;
. Calculates shipping costs and sales or value-added taxes;
. Screens for fraud;
. Obtains payment authorization from a credit card or check processor;
. Processes the payment;
. Confirms the order with the customer;
. Coordinates the fulfillment and shipping of the order or downloading of
digital content; and
. Relays the information regarding the transaction to existing business
systems and processes.
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We believe that a majority of e-businesses lack the systems necessary to
automate transaction processing functions, performing most of these functions
manually. IDC estimates that in 1999 less than 6% of businesses selling online
had an automated payment system. Without automation, personnel generally
receive transaction information by printed copy or e-mail. This information
must often be entered manually into the credit card processing system and, once
authorization is received, entered manually into existing business systems and
processes, such as fulfillment and enterprise resource planning, or ERP,
systems that coordinate the manufacturing, inventory management, shipping,
accounting or related functions for the transaction. Further, if a merchant
screens for fraud, it is often limited to human review of lists of stolen
credit card numbers.
Problems Created by Manual Processing
Manual transaction processing may impair operational efficiency and customer
service. Specific problems include:
. Limited efficiency in growth. In order to process increasing volumes of
transactions, e-businesses must hire additional staff, resulting in
increased personnel costs and limited growth potential.
. Customer dissatisfaction. Human errors can result in shipment errors and
delays, resulting in customer dissatisfaction. According to an Andersen
Consulting study, nine out of ten online shoppers experienced problems
during the 1999 holiday season. Further, without automated systems,
customers typically are unable to track the status of their orders
online.
. Increased costs from fraudulent transactions. In e-commerce transactions,
because the credit card is not present, the business is responsible for
any loss resulting from the transaction in the event of credit card
fraud, even if the credit card processor pre-authorized the transaction.
In a manual process, it is difficult for personnel processing
transactions to detect fraudulent credit card transactions on a real-time
basis, leaving the e-business more susceptible to fraud related losses.
. Expensive and time-consuming. Businesses must hire and train additional
personnel to coordinate and perform transaction processes that could be
automated. The lack of automation results in increased transaction
processing time and costs.
. Increased errors. Manual data entry can lead to transaction processing
errors and impair the efficiency of existing information systems.
The Need for Transaction Management
We believe that e-businesses have principally focused on marketing and
enhancing the customer shopping experience, but their emphasis is now expanding
to include efficient e-commerce. The movement to efficient e-commerce can
require sophisticated integration of storefronts and customer relationship
management applications with transaction processing and management of
information into existing business systems and processes such as fulfillment
and ERP systems that coordinate manufacturing, inventory management, accounting
or related functions. Until recently, limited infrastructure has existed to
help support e-businesses as they grow. Automated transaction management that
delivers a comprehensive solution 24 hours a day, seven days a week, without
costly and lengthy implementation, is critical to enhance efficiency and
growth. A transaction management solution must be able to simultaneously
process increasing transaction volumes and a variety of payment methods and
currencies. Businesses also benefit from software that can provide enhanced
fraud protection for their online transactions.
Some businesses will find it more efficient and secure to handle transaction
management functions internally and others will prefer to outsource these
functions to CSPs. An ideal solution should address enterprise, CSP and
business-to-business market maker business models.
Our Software and Services
We provide e-commerce transaction management software and services that
enable businesses to automate transaction and payment processing. Our software
interfaces with credit card processors and provides enhanced
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fraud protection. Our e-commerce software readily integrates with leading
online storefront and customer relationship management applications and many
existing business systems and processes, such as fulfillment and ERP systems
that coordinate manufacturing, inventory management, accounting or related
functions. Our in-house software offerings provide businesses with greater
control over their order processing functions because they do not have to rely
on a CSP to manage their transaction process. Further, our software offerings
are cost-efficient for our customers that process a large number of
transactions because we charge a fixed license fee rather than a per
transaction fee. For these reasons, we believe that these software offerings
are especially appealing to the larger, more traditional retailers and catalog
merchants that are using the Internet as an additional sales channel. Our
software has been specifically designed to meet the stringent performance and
growth requirements of e-businesses. Our two principal e-commerce software
products, Merchant Engine and Hosting Engine, include similar functionality,
but each is designed to meet the needs of different customers. Merchant Engine
supports single businesses. Hosting Engine enables CSPs to simultaneously
support multiple businesses and allows large businesses to simultaneously
support multiple divisions.
We Offer Comprehensive Transaction Management Software and Services
We provide our customers with comprehensive transaction management software
that includes:
. Real-time transaction and payment processing;
. Enhanced fraud analysis and protection;
. Automated shipping and tax calculation;
. Digital content downloading; and
. Business reports and analysis.
We also offer customization and implementation services, customer service
and support, maintenance and application hosting services for our products.
Our Software Integrates with a Wide Range of Applications
Our software integrates with a wide range of leading e-commerce storefront
and customer relationship management applications and existing business systems
and processes. Our software allows our customers to process transactions for
business-to-business, business-to-consumer and person-to-person transactions
received through the Internet, wireless telephones, some personal digital
assistants, call centers and in-store devices. Our software is designed to
integrate with a variety of front-end software systems, including sophisticated
software that enhances the online customer shopping experience, such as
BroadVision, Art Technology Group and Vignette applications, and ready-to-use
storefronts, including those offered by Mercantec and Microsoft. Our systems
interface with credit card processors, such as Barclays, Chase Merchant
Services, First Data Merchant Services, Global Payment Systems, NatWest, Nova,
Paymentech and Vital, to automate credit card approval. In addition, our
systems interface with a check processor, Deluxe Corporation, which allows us
to process checks over the Internet. Our software also readily integrates with
existing business systems and processes such as fulfillment or ERP systems that
coordinate manufacturing, inventory management, accounting or related
functions. This integration minimizes human involvement, substantially
increasing operational efficiency.
We Provide Software for Growing Customers
Our software meets the growing transaction management needs of our
customers. Our software enables a business to reliably process multiple
transactions simultaneously for maximum performance and scalability. Product
scalability allows the customer to process increasing numbers of transactions.
Our Hosting Engine allows our CSPs to host thousands of merchants and also
supports several administrative functions, such as merchant reports for billing
and the ability to readily activate and deactivate merchants. This scalability
results in lower upgrade and maintenance costs for our customers and promotes
operating efficiency by allowing customers of CSPs to continue using
substantially the same systems if they decide to operate our software
themselves, as their business grows rather than using an outsourced hosting
service.
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We Can Implement Our Software Quickly, Bringing Our Customers to Market
Sooner
Our software is designed to readily and cost-effectively integrate with many
applications and business processes. Our ClearLink and Legacy application
programming interfaces make it easier for e-businesses to interface with a
variety of commercial and custom storefront packages and existing business
systems with reduced implementation time. An application programming interface
is a standard interface for integrating two different pieces of software. Our
application programming interfaces enable customers to integrate their
storefronts and existing business systems into our software without
understanding our internet technology such as our database structure and
security algorithms. In addition, our "QuickStart" program allows customers to
set up and run our software out of our facilities and begin processing e-
commerce transactions within days while their internal infrastructure is put in
place. Once their internal infrastructure is installed, customers can quickly
and easily migrate our transaction management solution to their facilities.
Our Software and Services are Cost-Effective and Flexible
Our software and services are cost-effective and provide flexibility for our
customers. For customers that license our software directly from us, we charge
an initial software licensing fee, fees for integration, if required, and
annual maintenance fees. We also charge CSPs a fixed annual fee per merchant
resulting in recurring revenue. Our fixed pricing allows these high volume
customers to capture economies of scale as they process an increasing number of
transactions and provide services to an increasing number of businesses. We
also provide hosting services for our products to e-businesses that prefer not
to operate and maintain their own infrastructure. In addition, these businesses
can easily and cost-effectively move our software in-house should they later
choose to perform these functions internally.
Our Strategy
Our objective is to become the leading provider of e-commerce transaction
management software and services. Key elements of our strategy include:
Increase Direct Sales and Indirect Distribution Channels and Expand
Internationally
We plan to simultaneously expand our direct sales force and develop and
solidify relationships with value-added resellers and original equipment
manufacturers that sell and implement our product. We plan to increase the
number of direct sales representatives to more than 20 by the end of 2000 and
expand our international direct sales force by expanding our office in the
United Kingdom and establishing operations in other parts of Europe, Asia
Pacific and South America. We believe that front-end solution providers,
systems integrators, consulting firms, and platform vendors have a strong
influence on their customers' software purchasing decisions. We believe a
majority of our revenues in 1999 and the first six months of 2000 were
influenced by the companies with which we have co-marketing and distribution
agreements. We believe that many of the companies with which we have co-
marketing or distribution agreements are seeking transaction management systems
that complement their existing product offerings. In order to expand the
adoption of our software, we have executed co-marketing or distribution
agreements with other e-business infrastructure companies, including Art
Technology Group, Breakaway Solutions, Breakthrough Software, BroadVision,
Chase Merchant Services, Hewlett-Packard, Intel, Intershop, Mercantec,
Microsoft, Sun Microsystems and Vignette. We plan to expand these relationships
and create new relationships to increase our access to additional geographic
markets and customers.
Leverage and Enhance CSP Relationships
We currently provide our software to leading CSPs and we intend to continue
to leverage these relationships to increase the adoption of our software.
Through our CSP customers, we believe we will be able to efficiently access
their large merchant bases. We believe that this is the most cost-effective
method to reach many e-businesses and increase our recurring annual fees.
Further, the effects of this distribution channel are multiplied because some
of our CSP customers host other CSPs that also provide us with annual fees. For
example, Cardservice International hosts msn.com's b-central and its merchants,
each of which pays an annual fee.
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Increase Market Penetration for Traditional Retailers and Catalog Merchants.
We intend to expand our direct sales and marketing efforts targeted at
traditional retailers and catalog merchants in an effort to increase our
penetration in this market. We believe this is an attractive market because we
expect more traditional and established enterprises to leverage their existing
brands and retail and distribution experience for a competitive advantage in
the e-commerce marketplace. We believe that these businesses prefer a
transaction management system that processes large transaction volumes cost
effectively and provides operational control over their transaction processing
functions for a fixed license fee.
Enhance Business-to-Business Solutions
Our software is currently used by many companies that sell products and
services to other businesses. We intend to enhance our business-to-business
features as companies move more of their purchasing and selling functions
online. Suppliers will need transaction management infrastructure targeted at
the needs of a corporate purchaser. We believe new business-to-business
transaction processing methods will emerge. For example, corporate purchase
cards, a new product offered by American Express, Visa and MasterCard, are a
business-to-business variant of ordinary credit cards. Corporate purchase cards
help businesses reduce the costs associated with their purchasing expenditures
by reducing the need for expensive purchase orders. Information that can be
useful in bookkeeping and cost-control activities such as line item details and
SIC codes of items purchased and tax amounts are supplied on the monthly
purchase card statements. Processing corporate purchase card transactions
involves many of the same technologies and systems as ordinary credit card
transactions in which we have extensive expertise. The next release of our
software is expected to include corporate purchase card capabilities. In
addition, we have provided a customer with e-check capabilities and are in the
process of making that capability generally available for other customers. E-
check capabilities allow customers to write electronic checks using bank
routing numbers to debit funds from their checking account to pay for goods
ordered online.
Continue Our Technology Leadership
We intend to invest at least 60% of our research and development spending
over the next 12 months on developing new and innovative products and features
to increase the functionality, reliability, scalability and performance of our
software. We are adding several new features to the current versions of our
Merchant Engine and Hosting Engine that will provide increased support for
business-to-business e-commerce, enhanced fraud protection and payment
features. We anticipate that future releases will contain these features. In
addition, we are developing new products with features tailored to local
markets and credit card processor interfaces for major global markets.
Expand Service Offerings
We intend to continue to expand our service offerings to complement our
existing and future products. By continuing to invest in our hosting
infrastructure, we expect to improve and expand our hosting capabilities for
our products. We believe that by improving our hosting infrastructure, we can
expand our QuickStart services. We also intend to offer enhanced fraud
protection services.
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Products and Services
[ARTWORK]
A diagram with pictures of storefronts on the left side, joined with lines
to a cylinder in the center, joined with a line to a picture of a bank on the
right side.
On the top left side of the diagram, a single picture of a storefront
appears under the caption "Single Storefront." This storefront picture is
joined by a line to the cylinder in the center. On the lower left side are
pictures of 5 storefronts grouped together under the caption "Multiple
Storefronts." This group is joined to the cylinder in the center with a line.
In the center a cylinder appears underneath the caption "ClearCommerce
Engine." Seven black rectangles overlap the Cylinder and overlap each other,
and the rectangles are labeled as follows: "Payment, Fraud Protection,
Reporting, Storefront APIs, Legacy APIs, Shipping/Tax and Digital Delivery."
At the right appears a picture of a bank joined by a line to the cylinder in
the center. Inside the bank picture below the bank appears the caption "Credit
Card Processor."
Products
We have two principal software products, Merchant Engine and Hosting
Engine. Merchant Engine is designed to automate transaction management for
individual businesses. Hosting Engine performs the same function for multiple
businesses or multiple divisions of a large business. In addition, Hosting
Engine provides CSPs with administrative functions, such as the ability to
readily activate and deactivate merchants and prepare consolidated merchant
reports for billing and other purposes.
Merchant Engine and Hosting Engine generally include the same modules and
related functions, including:
Payment Module. The payment module communicates with major credit card
processors to authorize payment transactions enabling real-time payment
authorization and processing. Online customers can receive rapid purchase
confirmation reducing the risk that they will cancel a transaction. The
payment module allows transaction information to be sent over the Internet,
via a lease line, which is a dedicated long distance data connection, or dial-
up connection to the card processor. It also allows multiple transactions to
be processed simultaneously on a single server, reducing the time that the
customer has to "wait in line" for a transaction to be processed.
Although the vast majority of all domestic Internet purchases use credit
cards, other payment methods are evolving, particularly in international
locations. We currently interface with four credit card processors that can
process payments in multiple currencies, and we are developing features to
localize our software for major global markets. In addition, to support
business-to-business transactions, we anticipate releasing corporate purchase
card support modules in a future product release.
FraudShield. We developed our FraudShield module to perform automatic
checks that help reduce fraud. FraudShield enables our customers to
automatically reject attempted fraudulent purchases based on their historical
data. In addition, this module can perform address verification services,
valid card number checks, duplicate order checks and guards against programs
that generate numerically valid, yet fraudulent credit card numbers. We allow
merchants to customize their fraud protection and fraud detection rules, based
on their specific business conditions.
ClearLink Application Programming Interface. Our ClearLink application
programming interface allows our customers to integrate our software with
storefronts and customer relationship management applications. Our software
interfaces with many of the popular commercial storefronts and customer
relationship management applications, including those offered by Art
Technology Group, Breakthrough Software, Broadvision, Intel, Intershop,
Mercantec, Microsoft and Vignette. Our ClearLink application programming
interface is written in C and Java, and runs on Linux, Unix, Windows NT and
Windows 2000.
Legacy Application Programming Interface. Our Legacy application
programming interface helps e-businesses integrate our software with a variety
of existing business systems and processes with minimal disruption to business
flow. Our Legacy application programming interface acts as an interface
between our products and the existing business systems and processes, such as
fulfillment and enterprise resource planning systems that coordinate
manufacturing, inventory management, accounting or related functions. Our
Legacy application programming interface allows customers without specialized
knowledge of database and encryption technology to quickly link our software
to existing business systems.
Security. Our software uses secure sockets layer technology in conjunction
with encryption technology to protect all transaction data. The connection
between the storefront and customer relationship management applications and
our software is made via an encrypted secure sockets layer connection, using
digital
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certificates to ensure authentication. This enables businesses to take full
advantage of our software's secure payment environment by encrypting all credit
card information, reducing the risk of fraud.
Reporting Tools Module. The reporting tools module confirms shipment of
goods, initiates the process to obtain payments and credits once goods have
been shipped, adds and deletes entries in the customer's fraud database, tracks
sales through customer storefronts and provides graphical reports that display
transaction information. Because of the integrated components of our software,
these reports can automatically reconcile orders passed through the storefront
with those settled through the credit card processor.
Shipping and Tax Calculator Modules. The shipping calculator module allows
e-businesses to establish precise rules for how their customers will be charged
to ship the products they have ordered and can calculate shipping charges based
upon a flat amount per order or by levying a different charge for every state
and freight carrier. These rules can be tailored to the requirements of
multiple departments within an e-business. The tax calculator module allows
real-time calculation of sales tax at both state and municipal levels.
Digital Content Download Module. The digital content download module allows
automatic electronic transmission and retrieval of digital goods, such as
music, software, graphics, artwork and other content, immediately after
purchase, making purchased digital goods available to customers as downloads
from a unique internet address. This module can track the progress of the
download to verify successful completion and, once complete, prevents
additional downloads. This module also eliminates the need for proprietary
software to download digital content because it works with ordinary Web
browsers and standard Internet protocols.
New Product Development. We intend to continue to devote substantial
resources to the development of new and innovative products and features to
increase the reliability, scalability and performance of our software. We are
currently adding several new features to the current versions of Merchant
Engine and Hosting Engine to enable our customers to provide increased support
for business-to-business e-commerce transactions, enhanced fraud protection
capabilities and improved overall performance and efficiency of our products.
We anticipate that future releases will include the following features and
enhancements:
. A new architecture allowing for more rapid integration of third party
applications, more rapid feature deployment and faster new payment-type
implementations;
. Support for corporate purchase cards;
. Enhanced fraud protection to extend the current FraudShield functionality
to allow merchants greater control over fraud detection;
. Enhanced user interface designed to allow greater ease of configuring and
administering our software;
. New open application programming interfaces designed to allow better
integration of reports and existing business applications; and
. Enhanced CSP administration functions.
Services
We offer hosting services for our software and professional services for our
customers.
Hosting Services. We have provided hosting services since our inception.
Currently, we leverage this experience to provide hosting services to e-
businesses and CSPs through our "QuickStart" program that enables them to
rapidly implement our products by allowing us to initially host their Merchant
Engine or Hosting Engine while their in-house transaction management
infrastructure is put into place. This rapid implementation enables customers
to begin selling their products and services over the Internet quickly, often
within days. These customers can then quickly and easily migrate our products
from our servers to their internal systems when their infrastructure is
installed.
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Professional Services and Customer Support. Our professional services
organization provides our customers with custom development services, standard
product extensions and implementation and training related to our products. A
typical engagement lasts 90 to 120 days and involves planning, configuration,
testing and implementation. We often integrate these custom software solutions
into new product releases based on customer demand. Also, our professional
services organization often works closely with third-party systems integrators
to train their consultants on the implementation of our software.
We believe that providing a high level of customer service and technical
support is necessary to achieve rapid product implementation and customer
satisfaction. Our customer support organization provides a broad range of
customer service and technical support. We provide support for our products and
services primarily from our corporate headquarters in Austin, Texas but plan to
establish additional support and service sites in other markets as required.
Customers
Our products are targeted to two distinct categories of businesses, CSPs and
enterprises with an online presence. The following list is a sample of our
customers that have licensed our software. We believe that the list is a
representative cross-section of our customer base because it includes customers
of various sizes from a variety of industries and these customers have
accounted for 85% of our total revenues since the beginning of 1999 through
June 30, 2000.
<TABLE>
<CAPTION>
CSPs Enterprises
---- -----------
<S> <C>
AT&T Campuswide Adornis
Barclays Bank Apple Computer
Booksense (ABA) BuyitNow.com
Brandwise Cabela's
Cardservices International Cooking.com
Chase Merchant Services Corbis
Cobalt Electronic Arts
CSP Source E-Stamp
EDS Flooz
eMerge Interactive Harrods
E-quire Hewlett-Packard
First Bank of Omaha Jordan Formula One Racing
Intel Mary Kay Cosmetics
Internet Capital Group Onvia
Interpath Pets.com
Kinzan Petsmart
Network Commerce Pitney Bowes
Orbit Commerce Playstation.com (Europe)
Planet Online Sun Microsystems
PNC Bank TheStreet.com
Pointserve Wizards of the Coast
PSIGate X.com
</TABLE>
Excluding revenues derived through our relationship with Cardservice
International, the above listed customers have accounted for 65% of our total
revenues since the beginning of 1999 through June 30, 2000.
In addition, other businesses use our software through our CSP customers,
including other CSPs such as Bigstep.com, Cincinnati Bell, EarthLink, e-Charge,
Knight-Ridder, msn.com's b-central and Prodigy.
A relatively small number of customers accounted for a significant portion
of our total revenues in 1999 and the first six months of 2000. If this trend
continues, the loss or delay of revenues from any of these individual customers
could have a significant impact on our revenues. Sales to our two largest
customers, Cardservice International and Hewlett-Packard, accounted for 18% and
16% of our total revenues in 1999, respectively. Sales to Cardservice
International and Hewlett-Packard, accounted for 19% and 23% of our total
revenues for the six months ended June 30, 2000, respectively.
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Sales and Marketing
Sales
We sell our products primarily through a direct sales force and through
relationships with storefronts and customer relationship management application
vendors, platform vendors and system integrators.
Direct Sales. We maintain a direct sales force that is primarily responsible
for selling to CSPs and working with customers other than original equipment
manufacturers. On September 1, 2000, members of our direct sales organization
were located in five offices in North America and one office in the United
Kingdom. The direct sales organization in North America is divided into three
regions, east, central and west, and each region is staffed with a regional
sales manager, a sales engineer and at least one sales representative.
Strategic Relationships. We have established the following strategic
relationships to assist us in gaining greater market penetration and acceptance
for our software products and services:
Cardservice International. In June 1998 we entered into a License and
Service Agreement granting Cardservice International a license to our Hosting
Engine. Under this agreement, Cardservice International may act as a value-
added reseller of our software products and has agreed to exclusively market
our hosting engine to its customers until March 31, 2004. We have agreed to
provide professional services to Cardservice International for the same time
period.
Our relationship with Cardservice International has accounted for a
significant part of our revenues and any deterioration in this relationship
could have a significant negative impact on our future revenues. Revenues
derived from this relationship include license fees received directly from
Cardservice International for our Hosting Engine, professional services fees,
annual merchant fees received from the merchants to which Cardservice
International provides transaction and payment processing services on an
outsourced basis and license fees from merchants and CSPs that sublicense our
software from Cardservice International. We license our software to Cardservice
International at a discount. Revenues generated from this relationship
accounted for 18% and 19% of our total revenues in 1999 and the first six
months of 2000, respectively.
Hewlett-Packard. In September 1999, we entered into a Strategic Relationship
and Software License Agreement with Hewlett-Packard. Under this agreement we
granted Hewlett-Packard a license to use and distribute our software products,
including Hosting Engine, Merchant Engine and our ClearLink application
programming interface. Hewlett-Parckard receives our standard original
equipment manufacturer pricing. Hewlett-Packard also has the right to
sublicense distributors or resellers to distribute our products. Hewlett-
Packard may act as a reseller by distributing our software as a standalone
product, act as a value-added reseller by distributing our software in
conjunction with other Hewlett-Packard products, or act as an original
equipment manufacturer by integrating and distributing our software with
Hewlett-Packard products or other third-party products.
Our relationship with Hewlett-Packard has accounted for a significant part
of our revenues and any deterioration in this relationship could have a
significant negative impact on our future revenues. We receive revenue from
Hewlett-Packard through direct payments from Hewlett-Packard for its licensing
of our software and through royalties obtained by Hewlett-Packard for
sublicensing our software to its customers. Revenues generated from this
relationship accounted for 16% and 23% of our total revenues in 1999 and the
first six months of 2000, respectively.
The initial term of our agreement with Hewlett-Packard ends on September 30,
2003 and automatically renews for additional one-year periods thereafter unless
either party provides 90 days prior notice of its intent not to renew the
license. As part of the agreement, we have agreed to provide ongoing support
for our software products, localize the versions of our software for additional
countries at the request of Hewlett-Packard and develop mutually agreeable
enhancements to our software at the request of Hewlett-Packard.
Co-marketing Partners. A key element of our market penetration strategy is
the formation and development of co-marketing relationships with leading
providers of computer hardware, software and services. Co-marketing partners
often have the first point of contact with a business and have a strong
influence on their
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<PAGE>
customers' software buying decisions. As a result, we believe that
relationships with these partners increase our market exposure and presence,
generate qualified sales opportunities for our software and services and assist
us in implementing our software.
Our co-marketing agreements typically provide that co-marketers are entitled
to distribute our sales literature, and, after actively engaging prospective
customers and assisting us in securing customer license agreements, some of our
co-marketers are entitled to receive fees of up to 5% of the license fees we
collect. Our co-marketing agreements are typically terminable by either party
on 30 days written notice. We have established co-marketing relationships with
storefront and customer relationship management vendors, systems integrators,
CSPs and platform vendors, including the following:
Storefront/Customer Relationship Management Vendors CSPs
. Mercantec . Orbit
. BroadVision . EDS
. Vignette . Chase Merchant Services
. Art Technology Group Platform Vendors
System Integrators . Microsoft
. Hewlett-Packard . Intel
Implementing and maintaining a transaction processing system can be time-
consuming and expensive. As a result, we believe it will be more economically
feasible for most small and medium sized companies to outsource their e-
business infrastructure needs than to implement and maintain their own systems.
Because we believe that most small to medium-sized businesses will outsource
their e-business infrastructure, we have focused on penetrating leading CSPs,
which includes business-to-business market makers. Through our CSP customers,
we are able to efficiently access their large merchant bases. Further, the
effects of this distribution channel are multiplied because some of our CSP
customers host other CSPs that also provide us with annual fees. For example,
Cardservice International hosts msn.com's b-central and its merchants, from
each of which we receive an annual fee.
[REVENUE CHART]
[Graphical depiction of the ClearCommerce revenue model. The diagram is a flow
chart with arrows connecting oblong buttons labeled "CSP," "Merchant" and "M"
and the ClearCommerce trademark. Also, at the bottom of the page are two
buttons for license revenues and recurring merchant fees.]
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Marketing
Our marketing organization provides product and market direction, and
supports sales efforts through awareness and lead generation programs. Key
marketing programs include:
. Market analysis and product definition;
. Product strategy updates with industry analysts;
. Public relations activities and speaking engagements;
. Direct mail and relationship marketing programs;
. Brochures, data sheets and web site marketing;
. Industry focused programs, such as initiatives for CSPs, traditional
retailers, catalog merchants and business-to-business market makers; and
. Management of our domestic and international advisory boards.
Development and Technology
We devote a substantial portion of our resources to developing new products
and product features, extending and improving our products and technology and
researching new technological initiatives in the market for e-commerce
transaction management products. Our development organization works closely
with our marketing and services organizations to incorporate customer feedback
and market requirements into our products and services.
Our high performance server-based architecture is designed to be secure,
scaleable and reliable. Our software currently operates on Sun Microsystems and
Hewlett-Packard versions of Unix and on Windows NT and Windows 2000.
Our software employs a remote client-side interface called the ClearLink
application programming interface which is used as the primary integration
point into any application that requires access to our software. Our software
transmits data via an encrypted secure sockets layer connection between third-
party storefront and customer relationship management applications. Digital
certificates are used to enforce authentication and enhance fraud protection.
All transaction types are done through our ClearLink application programming
interface.
Our Hosting Engine enables users to add, configure, change and delete
merchant configurations. These modifications are enabled through a secure
browser-based application or through various utilities that are typically
integrated with the customer's existing business systems and processes. In
addition, our architecture enables CSPs providing hosting services to run one
secure server while many, less-expensive ordinary Web servers carry the load of
Web site traffic.
As of September 1, 2000, we had 73 employees engaged in research and
development activities. Our research and development expenditures for the years
ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 2000
were approximately $463,000, $2.7 million, $6.3 million and $4.1 million,
respectively (excluding stock-based charges of $0, $0, $100 and $234,
respectively). We expect that we will continue to commit significant resources
to the development of new products and enhancements in the future.
Competition
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We have experienced and expect to continue to experience
increased competition from current and potential competitors, many of which
have significantly greater financial, technical, marketing and other resources.
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<PAGE>
Companies offering competitive products vary in scope and breadth of the
products and services offered and include:
. Transaction processing service providers, such as CyberSource, CyberCash
and Verisign/Signio;
. E-commerce software suppliers, such as Open Market;
. Point solutions that address certain technology components of transaction
processing, such as HNC Software; and
. Vendors of supply chain management software.
In the future, we may also compete with large Internet-focused companies
that derive a significant portion of their revenues from e-commerce and that
may offer, or provide a means for others to offer, e-commerce transaction
management products and services.
Many of our current and potential competitors have longer operating
histories, substantially greater financial, technical, marketing and other
resources, or greater name recognition than we do. These competitors may be
able to respond more quickly than we can to new or emerging technologies and
changes in customer requirements. Competition could seriously impede our
ability to sell additional products and services on terms favorable to us. Our
current and potential competitors may develop and market new technologies that
render our existing or future products and services obsolete, unmarketable or
less competitive. Our current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
other e-commerce transaction service providers, thereby increasing the ability
of their products and services to address the needs of our prospective
customers. In addition, our current and potential competitors may establish or
strengthen cooperative relationships with our current or future indirect sales
channel partners, that would limit our ability to sell products and services
through these channels. Competitive pressures could reduce our market share or
require the reduction of the prices of our products and services, either of
which could materially and adversely affect our business, results of operations
or financial condition.
We compete on the basis of several factors, including:
. System reliability;
. Product performance and scalability;
. Breadth of service and product offering;
. Ease of implementation;
. Time to market;
. Customer support; and
. Price.
We believe that we presently compete favorably with respect to each of these
factors. In addition, our Hosting Engine product enables our CSPs to compete
with transaction processing service providers for the same merchants. However,
the market for our products and services is still evolving, and we may not be
able to compete successfully against current and potential competitors.
Intellectual Property
We rely primarily on a combination of patent, copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
our proprietary rights. As part of our confidentiality procedures, we generally
enter into confidentiality and assignment agreements with our employees and
other third parties. However, we believe that these measures afford only
limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and
50
<PAGE>
use information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and we are unable to determine the extent to which
piracy of our software products exists. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
United States.
We are not aware that we are infringing any proprietary rights of third
parties. We expect that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, to protect our patents, copyrights,
trademarks or trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Any litigation, with or without merit, could be costly and time
consuming, divert management's attention and resources, cause product shipment
delays or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to us, if at all. Consequently, any intellectual property disputes
could have a material adverse effect on our business, financial condition and
operating results.
Employees
As of September 1, 2000, we had 213 full-time employees, 73 of whom were
engaged in research and development, 75 in sales and marketing, 20 in
professional services, 13 in customer services, and 32 in finance,
administration and operations. Our future performance depends in significant
part upon the continued service of our key technical, sales and senior
management personnel. The loss of the services of one or more of our key
employees could have a material adverse effect on our business. Our future
success also depends on our ability to attract, train and retain highly
qualified technical, sales and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that we can retain our key
personnel in the future. None of our employees is represented by a labor union.
We have not experienced any work stoppages and consider our relations with our
employees to be good.
Facilities
We lease approximately 35,000 square feet for our headquarters in a single
office complex located in Austin, Texas. The lease expires in January 2002. We
also lease space for sales offices in Atlanta, Georgia; Oconomowoc, Wisconsin;
San Francisco, California and London, England. We believe our facilities are
adequate for our current needs. We may need to locate additional space to meet
our needs in the future.
Legal Proceedings
As of the date hereof, there is no material litigation pending against us.
From time to time, we are a party to litigation and claims incident to the
ordinary course of business. Although the results of litigation and claims
cannot be predicted with certainty, we believe the final outcome of such
matters will not have a material adverse effect on our business.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to the
executive officers and directors of our company and their ages as of September
1, 2000.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
James G. Treybig (2).... 59 Chairman of the Board of Directors
Robert J. Lynch......... 47 Chief Executive Officer, President and Director
Julie Fergerson......... 32 Chief Technology Officer
Michael S. Grajeda ..... 41 Vice President, Chief Financial Officer and Secretary
Joseph C. Aragona (2)... 44 Director
R.C. Estes.............. 35 Director, Treasurer and Vice President, Strategy
Wendy L. Harrington
(1).................... 34 Director
William H. McAleer (1).. 49 Director
Scott D. Sandell (1).... 36 Director
Stuart H. Fullerton..... 55 Vice President, Sales
Alan Scutt.............. 47 Vice President, Europe
Michael R. Turner....... 47 Vice President, Marketing
</TABLE>
---------------------
(1) Member of audit committee
(2) Member of compensation committee
James G. Treybig has been Chairman of our board of directors since September
1997. Since 1996, Mr. Treybig has been a Venture Partner with Austin Ventures,
a venture capital firm, and has served as a director or chairman of the board
of several privately held companies. From 1974 through 1996, Mr. Treybig was
the Chief Executive Officer of Tandem Computers. Mr. Treybig received a B.A.
and B.S. in electrical engineering from Rice University in 1963 and 1964,
respectively, and an M.B.A. from Stanford University in 1968.
Robert J. Lynch has been one of our directors since November 1996 and has
been our Chief Executive Officer and President since September 1997. From 1994
through 1996, Mr. Lynch was the Vice President of Sales of Netsolve
Incorporated. From 1989 to 1994 he was an executive with Affiliated Computer
Services, including President of ACS/Transfirst. Mr. Lynch received his B.S. in
economics from St. Johns University in 1975 and a P.D. in administration from
Fordham University in 1980.
Julie Fergerson, one of our co-founders, was a director from June 1995 until
August 1997. She has served as our Chief Technology Officer since September
1997. Ms. Fergerson was formerly a Project Manager and programmer with IBM from
1994 to 1995.
Michael S. Grajeda has been our Vice President, Chief Financial Officer and
Secretary since July 1998. From 1989 to 1998, Mr Grajeda held several
positions, including Chief Financial Officer, Chief Operating Officer and
General Manager of Electronic Arts, or its subsidiary, Origin Systems. Mr
Grajeda received a B.S. in accounting from California State University, Hayward
in 1982.
Joseph C. Aragona has been one of our directors since September 1997. Mr.
Aragona is a founder and General Partner of Austin Ventures, a venture capital
firm, and has been a general partner of Austin Ventures since 1982. Mr. Aragona
also serves on the board of directors of Pervasive Software and several
privately held companies. Mr. Aragona received an A.B. in economics from
Harvard College in 1978 and an M.B.A. from the Harvard Business School in 1982.
R.C. Estes, one of our co-founders, has been one of our directors since
inception, and is our Vice President, Strategy and our Treasurer. Mr. Estes was
our Chief Executive Officer from September 1995 until September 1997. Mr. Estes
received a B.A. in psychology with a minor in business administration from
Southern Methodist University in 1990 and an M.B.A. from the University of
Texas at Austin in 1995.
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<PAGE>
Wendy Harrington has been one of our directors since February 2000. Ms.
Harrington has been Vice President of Operations at Internet Capital Group, an
Internet holding company engaged in business-to-business e-commerce, since June
1999. From 1995 to 1999, Ms. Harrington was a Senior Engagement Manager at
McKinsey & Company, a consulting firm. Ms. Harrington is also a director of
several private companies. Ms. Harrington received a B.S. in business
administration and management information systems from the University of
Illinois at Urbana-Champaign in 1987 and an M.B.A. from Stanford Graduate
School of Business in 1995.
William H. McAleer has been one of our directors since January 1999. Mr.
McAleer has been a Managing Director of Voyager Capital, a venture capital
firm, since October 1996. From 1994 to 1996, Mr. McAleer was the President of
e.liance Partners, a firm advising early stage technology companies. From 1988
to 1994, Mr. McAleer was Vice President of Finance, Chief Financial Officer and
Secretary of Aldus Corporation. Mr. McAleer is also a director of Avocent and
several private companies. Mr. McAleer received a B.S. degree from Cornell
University in 1973 and an M.B.A. from Cornell University in 1975.
Scott D. Sandell has been one of our directors since January 1999. Mr.
Sandell is a partner of New Enterprise Associates, a venture capital firm, and
has served in other capacities at such firm since January 1996. Prior to
joining New Enterprise Associates, Mr. Sandell was the President of Yankee
Pacific Company, a marketing and business strategy consulting firm from March
1994 to December 1995. He is also a member of the board of directors of NetIQ
Corp., WebEX Communications, Inc. and several privately held companies.
Mr. Sandell holds a B.S. degree in engineering sciences from Dartmouth College
and an M.B.A. degree from the Stanford Graduate School of Business.
Stuart H. Fullerton has been our Vice President, Sales since September 1997.
From 1983 to 1997, Mr. Fullerton held a number of positions with Tandem
Computers, Inc., including Director of Sales--U.S. Finance and Securities, from
1994 to 1997. Mr. Fullerton received a B.S. in mechanical engineering from
Cornell University in 1973.
Alan Scutt has been our Vice President, Europe since November 1998. From
1997 to 1998, Mr. Scutt was with FTP Software Ltd., where he served as Vice
President for Northern Europe and Regional Manager of Central Europe. From 1996
to 1997, Mr. Scutt was a director of Tricom Communications, Ltd. From 1993 to
1996, Mr. Scutt was the United Kingdom Country Manager for Banyan Systems (UK)
Ltd. Mr. Scutt received a business studies diploma from Worthing College in
England.
Michael R. Turner has been our Vice President, Marketing since June 1999.
From 1995 to 1999, Mr. Turner was the Vice President of Marketing in charge of
product strategy, promotion and pricing for NetSolve Incorporated. Mr. Turner
received a B.S. in engineering from Case Western Reserve University in 1975,
and an M.S. in business from Purdue University in 1978.
Board Composition
Prior to the closing of this offering, our board of directors will be
divided into three classes, as nearly equal in number as possible, with each
director serving a three-year term and one class being elected at each year's
annual meeting of stockholders. Mr. Aragona, Mr. Lynch and Mr. Treybig will be
in the class of directors whose term expires at the 2001 annual meeting of
stockholders. Mr. Estes and Ms. Harrington will be in the class of directors
whose term expires at the 2002 annual meeting of the stockholders. Mr. McAleer
and Mr. Sandell will be in the class of directors whose term expires at the
2003 annual meeting of stockholders.
Our board of directors currently consists of seven members. At each annual
meeting of stockholders, the successors to each class of directors will be
elected to serve for three year terms from the time of election and
qualification until the next annual meeting at which such director's class
stands for election. Our bylaws provide that the authorized number of directors
may be changed only by resolution of the board of directors.
Executive officers are elected by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified.
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<PAGE>
Board Committees
We established a compensation committee in January 1999 and an audit
committee in February 2000.
Compensation Committee. The current members of our compensation committee
are James G. Treybig and Joseph C. Aragona. The compensation committee of the
board of directors determines the salaries and benefits for our employees,
consultants, directors and other individuals compensated by our company. The
compensation committee also administers our stock plans.
Audit Committee. The current members of our audit committee are Wendy L.
Harrington, William H. McAleer and Scott D. Sandell. Our audit committee
reviews and monitors our financial statements and accounting practices, makes
recommendations to our board regarding the selection of independent auditors
and reviews the results and scope of the audit and other services provided by
our independent auditors.
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in January
1999. Prior to establishing the compensation committee, the board of directors
as a whole performed the functions delegated to the compensation committee.
During 1999, our compensation committee consisted of Mr. Lynch, Mr. Treybig and
Mr. Aragona, but Mr. Lynch is no longer a member of our compensation committee.
The entire board of directors approved all option grants during the time that
Mr. Lynch was a member of the compensation committee. Mr. Treybig and
Mr. Aragona are both "non-employee directors" under federal securities laws and
"outside directors" under federal tax laws. No interlocking relationship exists
between our board of directors or compensation committee and the board of
directors or compensation committee of any other company, nor has an
interlocking relationship existed. Each of Messrs. Aragona, Lynch and Treybig
have engaged in certain transactions with our company. See "Related Party
Transactions."
Director Compensation
James G. Treybig received cash compensation of $60,000 in 1999 and $30,000
for the six months ended June 30, 2000 for his services as a director.
Otherwise, we do not currently pay any cash compensation to directors for their
service as members of the board of directors, although we reimburse them for
certain expenses in connection with attendance at board and committee meetings.
Under our 1997 Option/Stock Issuance Plan and 2000 Stock Plan, nonemployee
directors are eligible to receive stock option grants at the discretion of the
board of directors, and, after this offering is completed, all nonemployee
directors will receive stock options as part of the automatic option grant
program in effect under the 2000 Director Option Plan.
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<PAGE>
Executive Compensation
The following table sets forth the compensation earned for services rendered
in all capacities by our President and Chief Executive Officer and our four
next most highly compensated executive officers who earned more than $100,000
for the year ended December 31, 1999. These executives are referred to as the
named executive officers in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation Awards
----------------- ----------------------
Restricted Securities
Name and Stock Underlying All Other
Principal Position Salary Bonus Award Options Compensation
------------------ -------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Robert J. Lynch.......... $169,375 $ -- -- -- $ --
Chief Executive Officer
R.C. Estes............... 117,383 -- -- -- --
Vice President, Strategy
Stuart H. Fullerton...... 134,583 115,323 -- -- --
Vice President, Sales
Michael S. Grajeda....... 144,458 -- 30,000(1) -- --
Chief Financial Officer
Alan Scutt (3)........... 138,352 11,413 -- -- 16,476(2)
Vice President, Europe
</TABLE>
---------------------
(1) Restricted stock award represents 1999 option grants exercised prior to
vesting. These shares are subject to repurchase by our company at the
original exercise price if the individual leaves our company prior to
vesting.
(2) Represents a car allowance of $1,373 per month.
(3) Mr. Scutt is paid in British pounds. These figures are based upon a
conversion rate of $1.419 per pound.
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<PAGE>
Stock Options
The following table presents the stock option grants during the year ended
December 31, 1999 under our 1997 Stock Option/Stock Issuance Plan to each of
the persons listed in the Summary Compensation Table.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------
Potential
Realizable
Value at
Assumed
Percent of Annual Rates
Total of Stock
Number of Options Appreciation
Securities Granted to Exercise for Option
Underlying Employees or Base Term(3)
Options During Price Expiration -------------
Name Granted(1) Period(2) ($/share) Date 5% 10%
---- ---------- ---------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Lynch......... -- --% $ -- -- $ -- $ --
Chief Executive Officer
R.C. Estes.............. -- -- -- -- -- --
Vice President,
Strategy
Stuart H. Fullerton..... -- -- -- -- -- --
Vice President, Sales
Michael S. Grajeda...... 30,000 2.5 0.492 3/25/09 24,042 38,284
Chief Financial Officer
Alan Scutt.............. -- -- -- -- -- --
Vice President, Europe
</TABLE>
---------------------
(1) 25% of the shares subject to the option vest one year after the date of
grant and the remaining 75% of the shares subject to the option vest
monthly over the next three years. All options to employees are immediately
exercisable.
(2) We granted options to purchase an aggregate of 1,194,154 shares during the
fiscal year ended December 31, 1999 to employees under our 1997 Stock
Option/Stock Issuance Plan.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future common stock prices and
are based on the exercise price of $0.492 per share.
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<PAGE>
Aggregate Option Exercises in 1999 and Option Values at December 31, 1999
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during 1999 and the number of shares of
common stock subject to "exercisable" and "unexercisable" stock options held as
of December 31, 1999 by each of the persons listed in the Summary Compensation
Table. Also presented are values of unexercised "in-the-money" options. Upon a
change of control, the expiration of our repurchase right automatically
accelerates by 12 months and accelerates fully if the surviving corporation
does not assume all options under the 1997 Stock Plan or following an
involuntary termination of an employee without cause within 18 months of such
change of control.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 1999 December 31, 1999
Acquired on Value ------------------------- -------------------------
Name Exercise(1) Realized(2) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Lynch......... -- $ -- -- -- $ -- $ --
Chief Executive Officer
R. C. Estes............. -- -- -- -- -- --
Vice President,
Strategy
Stuart H. Fullerton..... 259,000 1,803,417 -- -- -- --
Vice President, Sales
Michael S. Grajeda...... 70,000 487,410 -- -- -- --
Chief Financial Officer 30,000 197,340 -- -- -- --
Alan Scutt.............. 56,000 389,928 -- -- -- --
Vice President, Europe
</TABLE>
---------------------
(1) Shares acquired on exercise represents option grants exercised prior to
vesting. These shares are subject to repurchase by our company at the
original exercise price if the individual leaves our company prior to
vesting. The repurchase right generally expires as to 25% of the shares on
the first anniversary of the date of grant and the remainder expires
ratably over a 36-month period thereafter.
(2) "Value realized" is calculated on the basis of the fair market value of the
common stock on December 31, 1999 minus the exercise price. It does not
necessarily indicate that the optionee sold such stock for such amount.
Stock Plans
1997 Stock Option/Stock Issuance Plan
Our 1997 Stock Option/Stock Issuance Plan, referred to as the 1997 Stock
Plan, was adopted by our board of directors in December 1997, and our
stockholders initially approved the plan in December 1997. Our 1997 Stock Plan
provides for the grant of incentive stock options, which may provide for
preferential tax treatment, to our employees, and for the grant of nonstatutory
stock options and stock purchase rights to our employees, directors and
consultants. As of September 1, 2000, we had reserved for future issuance
2,498,357 shares of our common stock under this plan and options to purchase
1,644,900 shares of common stock were outstanding. Following the closing of
this offering, we will not grant any additional stock options under our 1997
Stock Plan although options granted under the 1997 Stock Plan will remain
outstanding in accordance with their terms. Instead, we will grant options
under our 2000 Stock Plan. Our 1997 Stock Plan, as amended, and our stock
option agreements provide that the vesting of shares subject to options granted
to employees shall accelerate by 12 months following a change in control and
shall accelerate fully if the surviving corporation does not assume all options
under the 1997 Stock Plan or following an involuntary termination of an
employee without cause within 18 months of such change of control.
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<PAGE>
2000 Stock Plan
Our 2000 Stock Plan was adopted by our board of directors in February 2000,
and we intend to submit the plan to our stockholders for approval. This plan
provides for the grant of incentive stock options to our employees and
nonstatutory stock options and stock purchase rights to our employees,
directors and consultants. As of September 1, 2000, the lower of 1,000,000
shares or the number of shares of our common stock reserved under the 1997 Plan
but not subject to grants immediately prior to the closing of our public
offering were reserved for issuance under our 2000 Stock Plan. We have not yet
issued any options under the 2000 Stock Plan. The number of shares reserved for
issuance under our 2000 Stock Plan will increase annually on January 1st of
each calendar year, starting January 2001, equal to the lesser of 5% of the
outstanding shares of our common stock on the first day of the year, 2,500,000
shares or such lesser amount as our board of directors may determine.
The compensation committee of our board administers our 2000 Stock Plan. The
administrator has the power to determine the terms of the options or stock
purchase rights granted, including the exercise price, the number of shares
subject to each option or stock purchase right, the exercisability of the
options and the form of consideration payable upon exercise. The administrator
determines the exercise price of options granted under our 2000 Stock Plan, but
with respect to incentive stock options, the exercise price must at least be
equal to the fair market value of our common stock on the date of grant.
Additionally, the term of an incentive stock option may not exceed ten years.
The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 1,000,000 shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted an additional option to purchase up to 1,000,000 shares of our
common stock. After termination of one of our employees, directors or
consultants, he or she may exercise his or her option for the period of time
stated in the option agreement. If termination is due to death or disability,
the option will generally remain exercisable for 12 months following such
termination. In all other cases, the option will generally remain exercisable
for three months. However, an option may never be exercised later than the
expiration of its term.
The administrator determines the exercise price of stock purchase rights
granted under our 2000 Stock Plan. Unless the administrator determines
otherwise, the restricted stock purchase agreement will grant us a repurchase
option that we may exercise upon the voluntary or involuntary termination of
the purchaser's service with us for any reason (including death or disability).
The purchase price for shares we repurchase will generally be the original
price paid by the purchaser. The administrator determines the rate at which our
repurchase option will lapse. Our 2000 Stock Plan generally does not allow for
the transfer of options or stock purchase rights, and only the optionee may
exercise an option and stock purchase right during his or her lifetime.
Our 2000 Stock Plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute for each option or stock purchase right.
If the outstanding options or stock purchase rights are not assumed or
substituted for, all outstanding options and stock purchase rights will
terminate as of the closing of such merger or sale of assets. Our 2000 Stock
Plan will automatically terminate in 2010, unless we terminate it sooner. In
addition, our board of directors has the authority to amend, suspend or
terminate the stock option plans provided such action does not adversely affect
any option previously granted under our stock option plans.
2000 Director Option Plan
Our board of directors adopted our 2000 Director Option Plan, referred to as
the Director Plan, in February 2000, and we plan to submit this plan to our
stockholders for approval. Our Director Plan provides for the periodic grant of
nonstatutory stock options to our non-employee directors. As of September 1,
2000, 300,000 shares were reserved for issuance under our Director Plan, none
of which was issued and
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<PAGE>
outstanding as of September 1, 2000. All grants of options to our non-employee
directors under our Director Plan are automatic. We will grant each non-
employee director an option to purchase 20,000 shares upon the later of:
. The effective date of our Director Plan, or
. When such person first becomes a non-employee director (except for those
directors who became non-employee directors by ceasing to be employee
directors).
All non-employee directors who have been directors for at least six months
will receive an option to purchase 20,000 shares on the date the Director Plan
is approved by our stockholders of each year. All options granted under our
Director Plan have a term of ten years and an exercise price equal to fair
market value on the date of grant. Each option becomes exercisable as to 25% of
the shares subject to the option on each anniversary of the date of grant,
provided the non-employee director remains a director on such dates. After
termination as a non-employee director with us, an optionee must exercise an
option at the time set forth in his or her option agreement. If termination is
due to death or disability, the option will remain exercisable for 12 months.
In all other cases, the option will remain exercisable for a period of three
months. However, an option may never be exercised later than the expiration of
its term.
A non-employee director may not transfer options granted under our Director
Plan other than by will or the laws of descent and distribution. Only the non-
employee director may exercise the option during his or her lifetime. In the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute each
option. If such assumption or substitution occurs, the options will continue to
be exercisable according to the same terms as before the merger or sale of
assets. Following such assumption or substitution, if a non-employee director
is terminated other than by voluntary resignation, the option will become fully
exercisable and generally will remain exercisable for a period of three months.
If the outstanding options are not assumed or substituted for, our board of
directors will notify each non-employee director that he or she has the right
to exercise the option as to all shares subject to the option for a period of
30 days following the date of the notice. The option will terminate upon the
expiration of the 30-day period.
Unless terminated sooner, our Director Plan will automatically terminate in
2010. Our board of directors has the authority to amend, alter, suspend, or
discontinue our Director Plan, but no such action may adversely affect any
grant made under our Director Plan.
2000 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish a 2000 Employee
Stock Purchase Plan, referred to as our Purchase Plan. A total of 600,000
shares of our common stock will be made available for sale. In addition, our
Purchase Plan provides for annual increases in the number of shares available
for issuance under the Purchase Plan on January 1st of each year, beginning in
2001, equal to the lesser of 5% of the outstanding shares of our common stock
on the first day of the calendar year, 2,500,000 shares, or such other lesser
amount as may be determined by our board of directors. Our compensation
committee of our board administers our Purchase Plan. Our board of directors or
its committee has full and exclusive authority to interpret the terms of our
Purchase Plan and determine eligibility. All of our employees are eligible to
participate if they are customarily employed by us or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year. However, an employee may not be granted the right to purchase
stock under our Purchase Plan if such employee:
. Immediately after the grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. Whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
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<PAGE>
Our Purchase Plan is intended to qualify for preferential tax treatment and
contains consecutive, overlapping 24-month offering periods. Each offering
period includes four 6-month purchase periods. The offering periods generally
start on the first trading day on or after February 15 and August 15 of each
year, except for the first such offering period which will commence on the
first trading day on or after the effective date of this offering and will end
on the last trading day on or before February 14, 2003.
Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of their eligible compensation which includes a
participant's base straight time gross earnings and commissions but excludes
all other compensation paid to our employees. A participant may purchase no
more than 50,000 shares during any 6-month purchase period.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each 6-month purchase period. The
price is 85% of the lower of the fair market value of our common stock at the
beginning of an offering period or after a purchase period ends. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will be withdrawn from
the current offering period following their purchase of shares on the purchase
date and will be automatically re-enrolled in a new offering period.
Participants may end their participation at any time during an offering period
and will be paid their payroll deductions to date. Participation ends
automatically upon termination of his or her employment with us.
A participant may not transfer rights granted under our Purchase Plan other
than by will, the laws of descent and distribution or as otherwise provided
under the our Purchase Plan.
In the event of our merger with or into another corporation or a sale of all
or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Our Purchase Plan will terminate in 2010. However, our board of directors
has the authority to amend or terminate our Purchase Plan, except that, subject
to certain exceptions described in the plan, no such action may adversely
affect any outstanding rights to purchase stock under our Purchase Plan.
401(k) Plan
In January 1999, we adopted a Retirement Savings and Investment Plan, our
401(k) Plan, covering our full-time employees located in the United States. Our
401(k) Plan is intended to qualify under Section 401(k) of the Internal Revenue
Code, so that contributions to our 401(k) Plan by employees or by us, and the
investment earnings thereon, are not taxable to employees until withdrawn from
our 401(k) Plan. If our 401(k) Plan qualifies under Section 401(k) of the
Internal Revenue Code, contributions by us, if any, will be deductible by us
when made.
Our 401(k) Plan allows employees to elect to reduce their current
compensation by up to the statutorily prescribed annual limit of $10,500 in
2000 and to have the amount of such reduction contributed to our 401(k) Plan.
Our 401(k) Plan permits, but does not require, additional matching
contributions to our 401(k) Plan by us on behalf of all participants in our
401(k) Plan. To date, we have not made any contributions to our 401(k) Plan.
Employment Agreements and Change in Control Arrangements
With the exception of Alan Scutt, we do not have any employment agreements
with any of our executive officers. Our employment agreement with Mr. Scutt
sets his current salary at (Pounds)90,000 ($127,710 assuming a conversion rate
of $1.419 per pound) annually and permits Mr. Scutt's to participate in our
bonus plan. His employment agreement also provides for other compensation of
(Pounds)850 ($1,206) per month, reimbursement of
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<PAGE>
expenses, 4 weeks of paid vacation, and an option to purchase 56,000 shares of
our common stock. One month's written notice is required to make any
significant changes to Mr. Scutt's employment agreement.
Employment with our executives is generally at will. Our executives are
eligible to participate in our bonus plan. Bonuses under our bonus plan are
determined by a combination of our financial performance, the individual
employee's negotiated target bonus and the employee's performance rating. Our
executives receive stock options, subject to the approval of our board of
directors or compensation committee, in connection with their employment.
Our 1997 Stock Plan, as amended, and our stock option agreements provide
that the vesting of shares subject to options granted to employees shall
accelerate by 12 months following a change in control and shall accelerate
fully if the surviving company does not assume all options outstanding under
the 1997 Stock Plan or following an involuntary termination of an employee
without cause within 18 months of such change of control.
Our repurchase agreements with Julie Fergerson and R.C. Estes, and our stock
subscription agreement with Robert J. Lynch, provide that the schedule
releasing our right to repurchase their shares upon termination of employment
shall accelerate by one year upon a change of control, and our repurchase right
shall expire completely if such employee is involuntarily terminated without
cause within 12 months of a change of control.
Limitations On Directors' Liability And Indemnification
Our certificate of incorporation limits the liability of our directors and
executive officers to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
. Any breach of their duty of loyalty to the corporation or its
stockholders;
. Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. Unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. Any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we must indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such persons in any
action or proceeding, including any action by or in the right of our company,
arising out of such persons' services as our directors or executive officers,
any subsidiary of our company or any other company or enterprise to which such
persons provide services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as our
directors and executive officers.
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RELATED PARTY TRANSACTIONS
Other than the employment agreements described in "Management," and the
transactions described below, since we were formed there has not been nor is
there currently proposed, any transaction or series of similar transactions to
which we were or will be a party:
. In which the amount involved exceeded or will exceed $60,000; and
. In which any director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
Sales of Common Stock and Preferred Stock
Common Stock. On October 20, 1999, we sold 125,000 shares of common stock to
Michael R. Turner at a price of $0.4920 per share upon exercise of an option to
purchase these shares through our 1997 Stock Plan. Mr. Turner exercised this
option under an early exercise provision in his Stock Option Agreement.
Preferred Stock. In January and April 1999, we sold an aggregate of
4,706,196 shares of Series B Preferred Stock at a purchase price of $2.46 per
share. In December 1999 and in January and February 2000, we sold an aggregate
of 4,243,267 shares of Series C Preferred Stock at a purchase price of $7.07
per share. Of these shares, 8,355,851 shares were purchased by the executive
officers, directors and holders of more than 5% of our outstanding stock listed
in the following table.
<TABLE>
<CAPTION>
Shares of Preferred
Stock
-------------------
Stockholder Series B Series C
----------- --------- ---------
<S> <C> <C>
Entities affiliated with Austin Ventures.................... 1,199,241 1,610,600
Internet Capital Group...................................... 572,889 265,698
R.C. Estes.................................................. 52,226 54,076
Julie Fergerson............................................. 6,071 543
Entities affiliated with Voyager Capital Fund............... 962,191 320,879
Entities affiliated with New Enterprise Associates.......... 962,192 819,843
Robert J. Lynch............................................. 6,098 70,892
Michael S. Grajeda.......................................... 20,325 1,667
James G. Treybig............................................ 40,650 21,335
Entities affiliated with Intel.............................. 813,008 271,128
Alan Scutt.................................................. -- 1,414
Hewlett-Packard............................................. -- 282,885
</TABLE>
Joseph Aragona, one of our directors, is a general partner of Austin
Ventures, and may be deemed to beneficially own the shares held by the entities
associated with Austin Ventures. Wendy L. Harrington, one of our directors, is
a vice president of Internet Capital Group and may be deemed to own
beneficially the shares held by the entities associated with Internet Capital
Group. William H. McAleer, one of our directors, is a managing director of
Voyager Capital Fund and may be deemed to beneficially own the shares held by
the entities associated with Voyager Capital Fund. Scott D. Sandell, one of our
directors, is a partner of New Enterprise Associates and may be deemed to
beneficially own the shares held by the entities associated with New Enterprise
Associates. R.C. Estes is one of our founders and is currently our Vice
President, Strategy. Julie Fergerson is one of our founders and is currently
our Chief Technology Officer. Robert J. Lynch is our President, Chief Executive
Officer and is a member of our board of directors. Michael S. Grajeda is a Vice
President and our Chief Financial Officer and Secretary. James G. Treybig is
our chairman of the board of directors. Alan Scutt is our Vice President,
Europe.
In connection with the issuances of the preferred stock described above, we
entered into an investors' rights agreement with the holders of preferred
stock, including those stockholders listed above, and with R.C. Estes, Julie
Fergerson and Bill Fergerson. The terms of this investors' rights agreement
grant certain
62
<PAGE>
registration rights that obligate us, under certain circumstances, to affect a
registration under the Securities Act of shares of common stock. See
"Description of Capital Stock--Registration Rights."
Warrants
In November 1999, in connection with a bridge financing, we issued warrants
to purchase shares of our Series C Preferred Stock to the following executive
officers, directors and holders of more than 5% of our outstanding stock:
<TABLE>
<CAPTION>
Number of
shares
subject to
Warrantholder warrant
------------- ----------
<S> <C>
Entities affiliated with Austin Ventures....................... 59,723
R.C. Estes..................................................... 2,749
Julie Fergerson................................................ 183
Entities affiliated with Internet Capital Group................ 28,513
Robert J. Lynch................................................ 54
Entities affiliated with New Enterprise Associates............. 17,217
Entities affiliated with Voyager Capital Fund.................. 17,216
Entities affiliated with Intel................................. 14,548
</TABLE>
The exercise price per share under these warrants is $7.07. As of June 30,
2000, 2,749 of these warrants have been exercised. These warrants terminate on
the earlier of the closing of this offering or November 29, 2004.
In February 2000, we issued a warrant to Hewlett-Packard to purchase 555,183
shares of our common stock with an exercise price per share of $7.07.
In March 2000, we issued a warrant to Hewlett-Packard to purchase 125,000
shares of our common stock with an exercise price per share of $5.00.
Loans from Directors, Officers and 5% Stockholders
On September 27, 1999, we entered into a loan and warrant agreement which
was amended on November 29, 1999, providing for the issuance of revolving
short-term notes to the following executive officers, directors and holders of
more than 5% of our outstanding stock:
<TABLE>
<CAPTION>
Amount of
Noteholder loans
---------- ----------
<S> <C>
Entities affiliated with Austin Ventures...................... $1,688,992
R.C. Estes.................................................... 77,767
Entities affiliated with Internet Capital Group............... 806,366
Entities affiliated with New Enterprise Associates............ 486,916
Entities affiliated with Voyager Capital Fund................. 486,916
Entities affiliated with Intel................................ 411,422
</TABLE>
The outstanding principal of and all accrued and unpaid interest on all of
these short-term notes were converted into shares of our Series C Preferred
Stock on December 31, 1999.
Customer Contracts
We have several agreements with Hewlett-Packard. Our principal agreement is
the Strategic Relationship and Software License Agreement, and the amendments
thereto. See "Business--Strategic Relationships," and the exhibits hereto. In
addition, we have executed agreements for professional or hosting services,
non-disclosure agreements software licenses and hardware purchase and lease
agreements. As of September 1, 2000, we had issued Hewlett-Packard warrants to
purchase a total of 680,183 shares of our common stock.
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<PAGE>
One of our stockholders, Intel, is also one of our customers. In September
1998, we entered into a contract with iCat to become one of our CSPs. Intel
subsequently acquired iCat, and has become one of our CSPs. We have also
executed a professional services agreement with Intel Online Services, Inc. to
provide product enhancements, and a Software and Related Services Agreement
providing for a license of our Hosting Engine software product and software
maintenance and support services.
On May 10, 2000 we executed a license agreement for our Hosting Engine
Product with Internet Capital Group Inc., one of our largest stockholders. We
believe that the license with Internet Capital Group was entered into on an
arms-length basis, and on terms no more favorable than those that are customary
between unaffiliated parties.
Stock-Options Granted to Executive Officers
The following table presents stock option grants to our named executive
officers after December 31, 1999 under our 1997 Stock Option/Stock Issuance
Plan. The exercise price per share of these options is the price to the public
in this offering, estimated to be $12.00 per share. For information regarding
the grant of stock options to executive officers and directors prior to January
1, 2000, see "Management -- Stock Options."
<TABLE>
<CAPTION>
Number of Securities
Name Underlying Options Granted
---- --------------------------
<S> <C>
Robert J. Lynch 105,600
Stuart Fullerton 42,000
Michael S. Grajeda 27,000
Alan Scutt 44,000
</TABLE>
All future transactions, including any loans from our company to our
officers, directors, principal stockholders or affiliates, will be approved by
a majority of the board of directors, including a majority of the independent
and disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to our company than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of September 1, 2000 and as
adjusted to reflect the sale of common stock offered hereby by:
. Each stockholder known by us to own beneficially more than 5% of the
common stock;
. Each of the named executive officers;
. Each director of our company; and
. All directors and executive officers as a group.
The percentage of ownership in the following table is based on 16,501,994
shares of common stock outstanding on September 1, 2000, assuming conversion of
all outstanding preferred stock and payment in common stock of all accrued and
unpaid dividends thereon and 20,001,994 shares of common stock outstanding
after completion of the offering. This table assumes conversion of all
outstanding shares of preferred stock, but does not assume the exercise of the
underwriters' over-allotment option or additional exercise of outstanding
options or warrants. If the over-allotment option is exercised in full, we will
sell an aggregate of 4,025,000 shares of common stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
September 1, 2000 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
Unless otherwise indicated in the footnotes below, to our knowledge, the
persons and entities named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Outstanding
-----------------
Number of Shares Before After
Beneficial Owner(1) Beneficially Owned Offering Offering
------------------- ------------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with Austin Ventures
(2)..................................... 5,134,092 30.1% 25.5%
114 W. 7th St., Suite 300
Austin, Texas 78701
Entities affiliated with Internet Capital
Group (3)............................... 1,932,086 11.7 9.6
44 Montgomery Street, Suite 3705
San Francisco, CA 94104
R.C. Estes (4)........................... 1,365,382 8.3 6.8
Julie Fergerson (5)...................... 871,401 5.3 4.4
Entities affiliated with Voyager Capital
Fund (6)................................ 1,336,861 8.1 6.7
800 Fifth Avenue, Suite 4100
Seattle, WA 98104
Robert J. Lynch (7)...................... 774,436 4.7 3.9
Michael S. Grajeda (8)................... 149,592 * *
James G. Treybig (9)..................... 260,241 1.6 1.3
10915 Bee Caves Road
Austin, Texas 78733
Entities affiliated with Intel (10)...... 1,129,590 6.8 5.6
2200 Mission College Blvd.
Santa Clara, CA 95052
Entities affiliated with New Enterprise
Associates (11)......................... 1,851,508 11.2 9.3
2490 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Number of Percentage of
Shares Common Stock
Beneficially Owned Outstanding
------------------ -----------------
Before After
Beneficial Owner(1) Number Offering Offering
------------------- ------ -------- --------
<S> <C> <C> <C>
Alan Scutt (12).......................... 101,458 * *
Hewlett-Packard (13)..................... 971,957 5.7 4.9
3000 Hanover Street
Palo Alto, CA 94304
Joseph C. Aragona (14)................... 5,134,092 30.1 25.5
Wendy L. Harrington (15)................. 1,932,086 11.7 9.6
William H. McAleer (16).................. 1,336,861 8.1 6.7
Scott D. Sandell (17).................... 1,851,508 11.2 9.3
Stuart H. Fullerton (18)................. 301,000 1.8 1.5
All executive officers and directors as a
group................................... 14,078,057 84.0 69.5
</TABLE>
---------------------
* Less than 1% of the outstanding shares of common stock.
(1) Except as otherwise noted below, the address of each person listed on
the table is 11500 Metric Blvd., Suite 300, Austin, Texas 78758.
(2) Includes 170,444 shares held by Austin Ventures V Affiliates Fund, L.P.,
3,405,663 shares held by Austin Ventures V, L.P. and 1,411,230 shares
held by Austin Ventures VII, L.P. Also includes warrants to purchase
7,027 shares of preferred stock and dividends thereon held by Austin
Ventures V Affiliates Fund and warrants to purchase 139,758 shares of
preferred stock and dividends thereon held by Austin Ventures V, L.P.,
which warrants are exercisable within 60 days.
(3) Includes 1,862,029 shares and includes warrants to purchase 70,057
shares of preferred stock and dividends thereon exercisable within 60
days.
(4) Includes shares that are subject to our right of repurchase at the
original purchase price upon termination of Mr. Estes' employment. Our
repurchase right generally expires ratably on a monthly basis over a
42-month period which began in September 1997.
(5) Includes warrants to purchase 531 shares of preferred stock and
dividends thereon, which warrants are exercisable within 60 days,
130,000 shares held by The Fergerson Trust of 2000, 4,000 shares held by
the Kenneth D. Simone Trust of 2000, 4,000 shares held by the Debra D.
Fergerson Trust of 2000 and 200,123 shares held by Ms. Fergerson's
husband, William Fergerson. Also includes shares that are subject to our
right of repurchase at the original purchase price upon termination of
Ms. or Mr. Fergerson's employment. Our repurchase rights generally
expire ratably on a monthly basis over a 42-month period that began in
September 1997.
(6) Includes 1,251,172 shares held by Voyager Capital Fund I, L.P., 67,933
shares held by Voyager Capital Founders Fund, L.P. and warrants to
purchase 16,843 shares of preferred stock and dividends thereon held by
Voyager Capital Fund I, L.P. and warrants to purchase 913 shares of
preferred stock and dividends thereon held by Voyager Capital Founders
Fund, L.P., which warrants are exercisable within 60 days.
(7) Includes 127,000 shares held by the Cynthia M. Lynch 1999 Exempt Trust,
127,000 shares held by the Robert J. Lynch 1999 Exempt Trust, an option
to purchase 105,600 shares of common stock and a warrant to purchase 55
shares of preferred stock and dividends thereon, which warrant and
option are exercisable within 60 days. Also includes shares that are
subject to our right of repurchase at the original purchase price in the
event of the termination of Mr. Lynch's employment. Our repurchase
rights generally expire ratably over a 42-month period that began in
September 1997.
(8) Includes an option to purchase 27,000 shares of common stock that is
exercisable within 60 days. Mr. Grajeda's shares are subject to our
right of repurchase upon the termination of his employment. Our
repurchase right generally expires over a four-year period, with our
repurchase right expiring with respect to 25% of the shares one year
after the vesting commencement date and the remainder expiring ratably
on a monthly basis over the remaining 36-month period, which vesting
periods began in July 1998 and March 1999.
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<PAGE>
(9) Includes 238,236 shares individually owned by Mr. Treybig, and 22,005
shares held by the Treybig CC Family Trust Limited. Also includes shares
that are subject to our right of repurchase at the original purchase
price upon termination of Mr. Treybig's service as a director. Our
repurchase right generally expires over a four-year period, with our
repurchase right expiring with respect to 50% of the shares 18 months
after the vesting commencement date and the remainder, expiring ratably
over the 30 months thereafter. The vesting period began in September
1997.
(10) Includes a warrant to purchase 15,005 shares of preferred stock and
dividends thereon held by Middlefield Ventures, Inc., an affiliate of
Intel which warrant is exercisable within 60 days.
(11) Includes 1,814,996 shares held by New Enterprise Associates VIII, L.P.,
16,698 shares held by NEA Presidents Fund, L.P., 2,086 shares held by
NEA Ventures 1999, L.P. and a warrant to purchase 17,758 shares of
preferred stock and dividends thereon held by New Enterprise Associates
VIII, L.P., which warrant is exercisable within 60 days.
(12) Includes an option to purchase 44,000 shares of common stock. Also
includes shares that are subject to our right to repurchase the shares
upon the termination of Mr. Scutt's employment. Our repurchase right
generally expires over a four-year period, with our repurchase right
expiring with respect to 25% of the shares are year after the vesting
commencement date and the remainder expiring ratably on a monthly basis
over the remaining 36-month period, which vesting period began in
November 1998 and February 2000.
(13) Includes warrants to purchase 680,183 shares, which warrants are
exercisable within 60 days.
(14) Includes 170,444 shares held by Austin Ventures V Affiliates Fund, L.P.,
3,405,663 shares held by Austin Ventures V, L.P., 1,411,230 shares held
by Austin Ventures VII, L.P., warrants to purchase 7,027 shares of
preferred stock and dividends thereon held by Austin Ventures V
Affiliates Fund and warrants to purchase 139,758 shares of preferred
stock and dividends thereon held by Austin Ventures V, L.P., which
warrants are exercisable within 60 days. Mr. Aragona is a general
partner of AV Partners V, L.P, the general partner of Austin Ventures V
Affiliates Fund, L.P. and Austin Ventures V, L.P. and a general partner
of AV Partners VII, L.P., the general partner of Austin Ventures VII,
L.P. Mr. Aragona disclaims beneficial ownership of these shares, except
to the extent of his pecuniary interest in those shares.
(15) Includes 1,862,029 shares and warrants to purchase 70,057 shares of
preferred stock and dividends thereon, which warrants are exercisable
within 60 days, owned by entities associated with Internet Capital Group
of which Ms. Harrington may be deemed to be the beneficial owner. Ms.
Harrington disclaims beneficial ownership of these shares except to the
extent of her pecuniary interest.
(16) Includes 1,251,172 shares held by Voyager Capital Fund I, L.P., 67,933
shares held by Voyager Capital Founders Fund, L.P., warrants to purchase
16,843 shares of preferred stock and dividends thereon held by Voyager
Capital Fund I, L.P. and warrants to purchase 913 shares of preferred
stock and dividends thereon held by Voyager Capital Founders Fund, L.P.,
which warrants are exercisable within 60 days, of which Mr. McAleer
maybe deemed to be the beneficial owner. Mr. McAleer is a managing
partner of Voyager Capital Management, LLC, the general partner of
Voyager Capital Fund I, L.P. and Voyager Capital Founders Fund, L.P. Mr.
McAleer disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest.
(17) Includes 1,814,996 shares held by New Enterprise Associates VIII, L.P.,
16,698 shares held by New Enterprise Associates President's Fund, L.P.,
2,086 shares held by New Enterprise Ventures 1999, L.P. and a warrant to
purchase 17,758 shares of preferred stock and dividends thereon held by
New Enterprise Associates VIII, L.P., which warrant is exercisable
within 60 days, of which Mr. Sandell may be deemed to be the beneficial
owner. Mr. Sandell is a general partner of each of New Enterprise
Associates VIII, L.P., New Enterprise Associates President's Fund, L.P.
and New Enterprise Associates Ventures 1999, L.P. Mr. Sandell disclaims
beneficial ownership of these shares except to the extent of his
pecuniary interest.
(18) Includes an option to purchase 42,000 shares of common stock that is
exercisable within 60 days. Mr. Fullerton's shares are subject to our
right of repurchase at the original purchase price upon termination of
his employment. Our repurchase right generally expires over a four-year
period, with our repurchase right expiring with respect to 25% of the
shares one year after the vesting commencement date and the remainder
expiring ratably on a monthly basis over the remaining 36-month period,
which periods began in September 1997 and February 2000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon the closing of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our certificate of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
Common Stock
As of September 1, 2000, there were 16,501,994 shares of common stock
outstanding that were held of record by approximately 170 stockholders,
assuming the conversion of all outstanding shares of preferred stock and
payment in common stock of all accrued and unpaid dividends on the preferred
stock as of September 1, 2000. In addition, as of September 1, 2000, there were
1,644,900 shares of common stock subject to outstanding options, 680,183 shares
of common stock and 280,564 shares of preferred stock issuable upon exercise of
outstanding warrants and 8,247 shares of common stock issuable as payment of
accrued and unpaid dividends on outstanding preferred stock warrants as of
September 1, 2000. When this offering is completed, there will be
20,001,994 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option or additional exercise of outstanding
options or warrants.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
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 nonassessable, and the
shares of common stock to be issued upon the closing of this offering will be
fully paid and nonassessable. The rights, preferences and privileges of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock that we may
designate in the future.
Preferred Stock
As of September 1, 2000, we had three series of preferred stock: Series A,
Series B and Series C preferred stock. Each series of preferred stock has the
rights, preferences and privileges described in our current certificate of
incorporation, which is included as an exhibit to the registration statement of
which this prospectus forms a part. As of September 1, 2000, the number of
outstanding shares for each series of our preferred stock was:
. 3,147,830 shares of Series A preferred stock;
. 4,708,558 shares of Series B preferred stock; and
. 4,246,016 shares of Series C preferred stock.
Upon the closing of this offering, all outstanding shares of our preferred
stock as of September 1, 2000 will be converted into 12,102,404 shares of
common stock and 320,307 shares of common stock will be issued as payment of
accrued dividends on our preferred stock. Thereafter, our board of directors
will have the authority, without action by our stockholders, to designate and
issue preferred stock in one or more series and to designate the rights,
preferences and privileges of each series, any or all of which may be greater
than the rights of the common stock. It is not possible to state the actual
effect of the issuance of any shares of
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preferred stock upon the rights of holders of the common stock until the board
of directors determines the specific rights of the holders of such preferred
stock. However, the effects might include, among other things, restricting
dividends on the common stock, diluting the voting power of the common stock,
impairing the liquidation rights of the common stock and delaying or preventing
a change in control of our company without further action by the stockholders.
We have no present plans to issue any shares of preferred stock.
Warrants
As of September 1, 2000, we had outstanding warrants to purchase:
. 680,183 shares of common stock;
. 127,866 shares of Series B preferred stock; and
. 152,698 shares of Series C preferred stock.
One warrant to purchase 555,183 shares of common stock will expire five
trading days after the completion of this offering, unless earlier exercised. A
warrant to purchase 125,000 shares of common stock will expire on March 1,
2004, unless exercised prior to that date. The warrants to purchase 127,866
shares of Series B preferred stock expire upon the completion of this offering,
unless exercised prior to completion of the offering. Of the warrants to
purchase shares of Series C preferred stock, warrants to purchase 138,554
shares of Series C preferred stock will expire upon completion of this
offering, unless exercised prior to that date. The remaining warrant to
purchase 14,144 shares of Series C preferred stock will remain outstanding
after the completion of this offering and, as of September 1, 2000, will become
exercisable to purchase an aggregate of 14,588 shares of common stock. This
warrant will expire on February 28, 2004, unless exercised prior to that date.
Registration Rights
The holders of the 14,415,941 shares of common stock assuming conversion of
all outstanding preferred stock and payment in common stock of accrued and
unpaid dividends on preferred stock, or the registrable securities, or their
permitted transferees are entitled to have their shares registered by us under
the Securities Act of 1933, as amended, under the terms of an agreement between
us and the holders of these registrable securities. These registration rights
include the following:
. The holders of at least a majority of the then outstanding registrable
securities may require, on two occasions beginning 180 days after the
date of this prospectus, that we register their shares for public resale.
However, we are obligated to register these shares only if the holders of
a majority of these shares request registration and only if such
registration covers at least a majority of the registrable securities.
. The holders of at least 25% of the then outstanding registrable
securities, the holder of a warrant to purchase 555,183 shares of common
stock may require not more than two times in every twelve-month period
that we register their shares for public resale on Form S-3 or similar
short-form registration, assuming that we are eligible to use Form S-3 or
similar short-form registration. However, the value of the securities to
be registered must be at least $500,000.
. If we register any of our shares of common stock in connection with a
public offering, the holders of registrable securities, the holder of a
warrant to purchase 555,183 shares of common stock are entitled to
include their shares of common stock in the registration. However we may
reduce the number of shares that these holders request to be registered
in view of market conditions.
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We will bear all registration expenses in connection with any registration
(other than underwriting discounts and commissions). All registration rights
terminate on the date that is five years following the closing of this
offering, or, with respect to any holder of registrable securities with less
than 1% of the then outstanding shares of capital stock, at the time that such
holder is entitled to sell all of its shares during any three-month period
under rule 144 of the Securities Act.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult our acquisition by means of a tender offer, a proxy
contest or otherwise and the removal of incumbent officers and directors. These
provisions, summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of our company to first negotiate with our board of directors.
We believe that the benefits of increased protection of our ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure our company outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless (with certain exceptions):
. The board of directors approves the transaction in which the stockholder
became an interested stockholder prior to the date the interested
stockholder attained to that status;
. When the stockholder became an interested stockholder, he or she owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding shares owned by persons who
are directors and also officers; or
. On or subsequent to the date the business combination is approved by the
board of directors, the business combination is authorized at an annual
or special meeting of stockholders.
Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision would be expected
to have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held
by stockholders.
Certain Provisions of Our Certificate of Incorporation and Bylaws
Upon the closing of this offering, our certificate of incorporation will
divide the board of directors into three classes, as nearly equal in number as
possible, serving staggered terms. Approximately one-third of the board will be
elected each year. See "Management." Our having a classified board could
prevent a party who acquires control of a majority of the outstanding voting
stock from obtaining control of the board of directors until the second annual
stockholders meeting following the date the acquiror obtains the controlling
stock interest. A classified board could also have the effect of discouraging a
potential acquiror from making a tender offer or otherwise attempting to obtain
control of our company and could increase the likelihood that incumbent
directors will retain their positions.
Our certificate of incorporation will provide that directors may be removed:
. With cause, by the affirmative vote of the holders of at least a
majority of the voting power of all of the outstanding shares of voting
stock or
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. Without cause, by the affirmative vote of the holders of at least 66
2/3% of the voting power of all of the then-outstanding shares of the
voting stock.
Our bylaws establish an advance notice procedure for stockholder proposals
to be brought before our annual meeting of stockholders, including proposed
nominations of persons for election to the board of directors. Stockholders at
an annual meeting may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the direction of the
board of directors or by a stockholder who was a stockholder of record on the
record date for the meeting, who is entitled to vote at the meeting and who has
given to our Secretary timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. Although the
bylaws do not give the board of directors the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at a special or annual meeting of the stockholders, the bylaws may
have the effect of precluding the conduct of certain business at a meeting if
the proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of our company.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. Our bylaws authorize a majority of
the board of directors, the chairman of the board or the chief executive
officer to call a special meeting of stockholders. The elimination of the right
of stockholders to call a special meeting means that a stockholder could not
force stockholder consideration of a proposal over the opposition of the board
of directors by calling a special meeting of stockholders prior to such time as
a majority of the board of directors believed such consideration to be
appropriate or until the next annual meeting provided that the requestor met
the notice requirements. The restriction on the ability of stockholders to call
a special meeting means that a proposal to replace the board could be delayed
until the next annual meeting.
Our certificate of incorporation will provide for the elimination of actions
by written consent of stockholders upon the closing of this offering. Under
Delaware law, stockholders may execute an action by written consent in lieu of
a stockholder meeting. Delaware law permits a corporation to eliminate such
actions by written consent. Elimination of written consents of stockholders may
lengthen the amount of time required to take stockholder actions since certain
actions by written consent are not subject to the minimum notice requirement of
a stockholder's meeting. The elimination of stockholders' written consents,
however, deters hostile takeover attempts. Without the availability of
stockholder's actions by written consent, a holder or group of holders
controlling a majority in interest of our capital stock would not be able to
amend our bylaws or remove directors using a stockholder's written consent. Any
such holder or group of holders would have to obtain the consent of a majority
of the board of directors, the chairman of the board or the chief executive
officer to call a stockholders' meeting and wait until the applicable notice
periods expire prior to taking any such action.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Equiserve LP,
Boston Equiserve Division. Equiserve LP is located at 150 Royall Street,
Canton, Massachusetts 02021, and its telephone number is (781) 575-2000.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect prevailing market prices for our common stock or could impair
our ability to raise capital through an offering of equity securities.
Upon completion of this offering, we will have outstanding 19,983,173 shares
of common stock, based upon shares outstanding as of June 30, 2000, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants after June 30, 2000. Of these shares, 3,500,000
sold in this offering will be freely tradable without restriction under the
Securities Act except for any shares purchased by "affiliates" of our company
as that term is defined in Rule 144 under the Securities Act.
Upon completion of this offering, 16,483,173 shares of common stock held by
our stockholders will be "Restricted Securities" as that term is defined in
Rule 144 under the Securities Act. We issued and sold the Restricted Securities
in private transactions in reliance upon exemptions from registration under the
Securities Act. Restricted Securities may be sold in the public market only if
they are registered under the Securities Act or if they qualify for an
exemption from registration, such as Rule 144 or 701 under the Securities Act,
which are summarized below. The holders of these Restricted Shares are subject
to lock-up agreements that provide that the stockholder, with certain limited
exceptions, will not offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of our company for a period of 180
days after the effective date of this offering. Credit Suisse First Boston
Corporation may, in its sole discretion and at any time without prior notice,
release all or any portion of the shares subject to these lock-up agreements.
We have also entered into an agreement with Credit Suisse First Boston
Corporation that we will not offer, sell or otherwise dispose of our common
stock until 181 days after the effective date of this offering.
The remaining 16,483,173 shares of our common stock will be eligible for
sale in the public market under provisions of Rules 144, 144(k) and 701
approximately when indicated in the following table:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
At the effective date.......................................... 0
181 days after the effective date.............................. 16,245,715
More than 181 days after the effective date.................... 237,458
</TABLE>
Following the expiration of the lock-up period, certain shares issued upon
exercise of options granted by us prior to the completion of this offering will
also be available for sale in the public market under Rule 701 under the
Securities Act.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year (including the holding period of any prior owner
except an affiliate) would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding
(approximately 203,331 shares immediately after this offering) or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about our company. Under Rule 144(k), a person who is not deemed to have been
an affiliate of our company at any time during the three months preceding a
sale, and who
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<PAGE>
has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
We intend to file a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under the stock plans
and subject to outstanding options under the 1997 Stock Plan. See "Management--
Stock Plans." Such registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Shares of common stock issued upon exercise of options under the Form S-8 will
be available for sale in the public market, subject to Rule 144 volume
limitations applicable to affiliates and subject to the contractual
restrictions described above. At September 1, 2000, options to purchase
1,644,900 shares of common stock were outstanding, all of which options were
then exercisable. Of such shares, 742,877 shares would be vested upon exercise
and 902,023 shares would be subject to a right of repurchase of the Company.
Beginning 180 days after the effective date of this offering, approximately
355,734 shares issuable upon the exercise of vested stock options will become
eligible for sale in the public market, if such options are exercised.
Following this offering, the holders of an aggregate of approximately
829,406 shares of outstanding common stock and common stock issuable upon
conversion of outstanding warrants will have the right to require us to
register their shares for sale upon meeting certain requirements. See
"Description of Capital Stock--Registration Rights."
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc.
and SG Cowen Securities Corporation are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Chase Securities Inc...............................................
SG Cowen Securities Corporation....................................
---------
Total............................................................ 3,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 525,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other brokers/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives. As used in this section,
. Underwriters are securities broker/dealers that are parties to the
underwriting agreement and will have a contractual commitment to purchase
shares of our common stock from us, and the representatives are the three
firms acting on behalf of the underwriters.
. Broker/dealers are firms registered under applicable securities laws to
sell securities to the public.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and
Commissions paid by us.. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The commissions and estimated expenses in the table includes all of the
compensation and expense considered by the NASD to be underwriting compensation
under its Rules of Fair Practice.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, announce an
intention to sell, pledge or directly or indirectly dispose of, or file with
the Commission a registration statement under the Securities Act relating to,
any additional shares of common stock or securities convertible into or
exchangeable or exercisable for any shares of common stock or publicly disclose
the intention to make any such offer, sale, pledge,
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<PAGE>
disposition or filing, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this prospectus.
These restrictions do not prohibit us from issuing employee stock options and
common stock issuable upon exercise of employee stock options outstanding on
the date of this prospectus, or filing a registration statement on Form S-8
covering all shares of common stock reserved for issuance under our
compensation plans.
Substantially all of officers, directors and our stockholders have agreed
that they will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any
of the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 280,000 shares of the common stock for our customers, business
partners and other parties, including friends and family of key employees of
our company. The number of shares available for sale to the general public in
the offering will be reduced to the extent these persons purchase directed
shares. Any directed shares not so purchased will be offered by the
underwriters to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to have our common stock approved for listing on The Nasdaq
National Market under the symbol "CLCM."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
. The information included in this prospectus and otherwise available to
the underwriters;
. The history and the prospects for the industry in which we will compete;
. The ability of our management;
. The prospects for our future earnings;
. The present state of our development and our current financial condition;
. The general condition of the securities markets at the time of this
offering; and
. The recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act").
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the
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number of shares over-allotted by the underwriters is not greater than
the number of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is greater than
the number of shares in the over-allotment option. The underwriters may
close out any short position by either exercising their over-allotment
option and/or purchasing share in the open market.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, that
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares
in the open market after pricing that could adversely affect investors
who purchase in the offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the effect of raising or maintaining the market price of the
common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of the common stock may be higher than
the price that might otherwise exist in the open market. These transactions
may be effected on The Nasdaq National Market or otherwise and, if commenced,
may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions
will be allocated by the underwriters that will make internet distributions on
the same basis as other allocations.
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NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
. Such purchaser is entitled under applicable provincial securities laws
to purchase such common stock without the benefit of a prospectus
qualified under such securities laws;
. Where required by law, that such purchaser is purchasing as principal
and not as agent; and
. Such purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer, and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one such report must
be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for our
company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Austin,
Texas. Certain legal matters will be passed upon for the underwriters by Gray
Cary Ware & Freidenrich LLP, Austin, Texas. Upon the completion of this
offering, WS Investments, an investment partnership composed of some current
and former members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, as well as certain individual attorneys of
this firm, will beneficially own 3,536 shares of our common stock.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement (which term shall include any amendments thereto) on Form S-1 under
the Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, some
items of which are contained in exhibits to the Registration Statement, as
permitted by the rules and regulations of the Commission. For further
information with respect to our company and the common stock offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each document
filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including exhibits thereto and the
financial statements and notes filed as a part thereof, as well as reports and
other information filed with the Commission, may be inspected without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, NY 10048,
and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon payment of fees prescribed by the Commission. These reports
and other information may also be inspected without charge at a Web site
maintained by the Commission. The address of the site is http://www.sec.gov.
Prior to this offering, we have not been required to file reports under the
Securities Exchange Act of 1934. Following consummation of the offering, we
will be required to file reports and other information with the Commission
under the exchange act. You are invited to read and copy any reports,
statements or other information that we file with the Commission.
We intend to provide to our stockholders proxy statements and annual reports
prepared in accordance with applicable law. Our annual reports will contain
audited consolidated financial statements following the end of each fiscal
year, and we will make available quarterly reports containing unaudited summary
consolidated financial information for each of the first three fiscal quarters
of each fiscal year.
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CLEARCOMMERCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Changes in Common Stockholders' Deficit.......... F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of ClearCommerce Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in common stockholders' deficit
and cash flows present fairly, in all material respects, the financial position
of ClearCommerce Corporation and its subsidiary (the "Company") at December 31,
1998 and 1999 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
February 25, 2000
F-2
<PAGE>
CLEARCOMMERCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
--------------- June 30, Equity
1998 1999 2000 June 30, 2000
------ ------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Cash and equivalents............... $ 71 $16,915 $15,522
Accounts receivable, net of
allowance of $21, $212 and $184,
respectively...................... 539 2,152 3,686
Contracts receivable............... 764 2,358 4,418
Prepaid expenses and other current
assets............................ 179 255 1,177
------ ------- -------
Total current assets.............. 1,553 21,680 24,803
Property and equipment, net........ 597 1,998 4,109
------ ------- -------
Total assets...................... $2,150 $23,678 $28,912
====== ======= =======
Liabilities, mandatorily redeemable
convertible
preferred stock and common
stockholders' (deficit) equity
Accounts payable................... $ 691 $ 1,001 $ 1,272
Accrued expenses................... 372 601 808
Accrued compensation............... 490 1,319 2,247
Current portion of deferred
revenues.......................... 1,443 4,191 4,977
Related party loan................. 1,216 -- --
Current portion of debt............ 2,113 2,003 2,401
Current portion of capital lease
obligations....................... 19 47 47
------ ------- -------
Total current liabilities......... 6,344 9,162 11,752
Long-term deferred revenues, net of
current portion................... 441 470 1,432
Long-term debt, net of current
portion........................... 387 221 542
Capital lease obligations, net of
current portion................... 12 78 57
------ ------- -------
Total liabilities................. 7,184 9,931 13,783
------ ------- -------
Mandatorily redeemable convertible
preferred stock (Note 10)......... 3,615 36,941 47,931 --
------ ------- ------- -------
Commitments and contingencies
Common stock, $.001 par value;
8,000,000, 20,000,000 and
20,000,000 shares authorized,
respectively; 100,000,000 shares
authorized pro forma; 2,787,120,
3,919,655 and 4,110,430 shares
issued and outstanding,
respectively; 16,483,173 issued
and outstanding pro forma......... 3 4 4 16
Additional paid-in capital......... -- 841 1,279 49,198
Deferred compensation.............. -- (1,144) (1,260) (1,260)
Accumulated other comprehensive
loss.............................. -- (13) (22) (22)
Accumulated deficit................ (8,652) (22,882) (32,803) (32,803)
------ ------- ------- -------
Total common stockholders'
(deficit) equity................. (8,649) (23,194) (32,802) 15,129
------ ------- ------- -------
Total liabilities, mandatorily
redeemable convertible preferred
stock and common stockholders'
(deficit) equity................. $2,150 $23,678 $28,912
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CLEARCOMMERCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the Year Ended Six Months Ended
December 31, June 30,
------------------------------- -----------------------
1997 1998 1999 1999 2000
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses...... $ 147 $ 582 $ 3,294 $ 949 $ 3,849
Services............... 249 481 1,988 485 2,213
--------- --------- --------- --------- ----------
Total revenues........ 396 1,063 5,282 1,434 6,062
--------- --------- --------- --------- ----------
Cost of revenues:
Software licenses ..... 89 135 130 67 140
Services (excludes
stock-based charges of
$0, $0, $4, $0 and
$18).................. 80 292 1,821 742 2,052
--------- --------- --------- --------- ----------
Total cost of
revenues............. 169 427 1,951 809 2,192
--------- --------- --------- --------- ----------
Gross margin........... 227 636 3,331 625 3,870
Operating expenses:
Sales and marketing
(excludes stock-based
charges of $0, $0,
$227, $3 and $348).... 484 3,336 7,125 2,886 6,368
Research and
development (excludes
stock-based charges of
$0, $0, $100, $0 and
$234)................. 463 2,661 6,339 3,013 4,099
General and
administrative
(excludes stock-based
charges of $0, $0,
$17, $0 and $124)..... 470 1,761 3,260 1,568 2,688
Stock-based charges.... -- -- 348 3 724
--------- --------- --------- --------- ----------
Total operating
expenses............. 1,417 7,758 17,072 7,470 13,879
--------- --------- --------- --------- ----------
Loss from operations.. (1,190) (7,122) (13,741) (6,845) (10,009)
--------- --------- --------- --------- ----------
Interest income
(expense):
Interest expense ...... (1) (132) (531) (87) (247)
Interest income........ 44 39 42 22 335
--------- --------- --------- --------- ----------
Net loss.............. (1,147) (7,215) (14,230) (6,910) (9,921)
Dividends on
mandatorily redeemable
convertible preferred
stock................. -- (270) (1,176) (476) (1,798)
Beneficial conversion
feature related to
Series C preferred
stock (Note 10)....... -- -- (8,624) -- (3,809)
--------- --------- --------- --------- ----------
Net loss attributable
to common stock...... $ (1,147) $ (7,485) $ (24,030) $ (7,386) $ (15,528)
========= ========= ========= ========= ==========
Net loss per share:
Basic and diluted...... $ (0.89) $ (6.51) $ (12.72) $ (4.51) $ (5.90)
========= ========= ========= ========= ==========
Basic and diluted
weighted average
shares................ 1,283,347 1,149,145 1,889,101 1,639,146 2,631,832
========= ========= ========= ========= ==========
Pro forma net loss per
share (unaudited):
Basic and diluted...... $ (0.66)
==========
Weighted average
shares................ 15,004,575
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CLEARCOMMERCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' DEFICIT
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total Common
Common Stock Paid-in Deferred Comprehensive Accumulated Stockholders'
Shares Dollars Capital Compensation Loss Deficit Deficit
--------- ------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 1,299,500 $-- $ -- $ -- $ -- $ (104) $ (104)
Issuance of common
stock.................. 1,291,130 3 -- -- -- -- 3
Net loss................ -- -- -- -- -- (1,147) (1,147)
--------- --- ------ ------- ---- -------- --------
Balance at December 31,
1997................... 2,590,630 3 -- -- -- (1,251) (1,248)
Issuance of common stock
under employee plans... 196,490 -- 21 -- -- -- 21
Issuance of warrants in
conjunction with bridge
loan................... -- -- 63 -- -- -- 63
Accrued dividends on
preferred stock........ -- -- (84) -- -- (186) (270)
Net loss................ -- -- -- -- -- (7,215) (7,215)
--------- --- ------ ------- ---- -------- --------
Balance at December 31,
1998................... 2,787,120 3 -- -- -- (8,652) (8,649)
Issuance of common stock
under employee plans... 1,132,535 1 283 -- -- -- 284
Deferred compensation... -- -- 1,492 (1,492) -- -- --
Amortization of stock-
based charges.......... -- -- -- 348 -- -- 348
Issuance of warrants in
conjunction with bridge
loan................... -- -- 242 -- -- -- 242
Accrued dividends on
preferred stock........ -- -- (1,176) -- -- -- (1,176)
Beneficial conversion
feature related to
Series C
preferred stock
at issuance (Note 10).. -- -- 8,624 -- -- -- 8,624
Beneficial conversion
feature dividend
related to Series C
preferred stock (Note
10).................... -- -- (8,624) -- -- -- (8,624)
Unrealized translation
gain/(loss)............ -- -- -- -- (13) -- (13)
Net loss................ -- -- -- -- -- (14,230) (14,230)
--------- --- ------ ------- ---- -------- --------
Balance at December 31,
1999................... 3,919,655 4 841 (1,144) (13) (22,882) (23,194)
Unaudited:
Beneficial conversion
feature related to
Series C preferred
stock at issuance
(Note 10)............. -- -- 3,809 -- -- -- 3,809
Beneficial conversion
feature dividend
related to Series C
preferred stock (Note
10)................... -- -- (3,809) -- -- -- (3,809)
Issuance of common
stock under employee
plans................. 237,760 -- 420 -- -- -- 420
Repurchase of unvested
stock from employees.. (72,285) -- (11) -- -- -- (11)
Issuance of common
stock upon exercise of
warrants.............. 20,300 -- -- -- -- -- --
Issuance of common
stock................. 5,000 -- 85 -- -- -- 85
Deferred compensation.. -- -- 840 (840) -- -- --
Amortization of stock-
based charges......... -- -- -- 724 -- -- 724
Issuance of warrants
for computer
equipment............. -- -- 335 -- -- -- 335
Amortization of
warrants for
consulting services... -- -- 432 -- -- -- 432
Issuance of warrants in
conjunction with line
of credit............. -- -- 135 -- -- -- 135
Accrued dividends on
preferred stock....... -- -- (1,798) -- -- -- (1,798)
Unrealized translation
gain/(loss)........... -- -- -- -- (9) -- (9)
Net loss............... -- -- -- -- -- (9,921) (9,921)
--------- --- ------ ------- ---- -------- --------
Balance at June 30,
2000 (unaudited)...... 4,110,430 $ 4 $1,279 $(1,260) $(22) $(32,803) $(32,802)
========= === ====== ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CLEARCOMMERCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
For the Year Ended Six Months Ended
December 31, June 30,
-------------------------- -----------------------
1997 1998 1999 1999 2000
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(1,147) $(7,215) $(14,230) $(6,910) $(9,921)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............ 19 118 448 200 783
Non-cash interest
expense................. -- 63 242 16 135
Amortization of stock-
based charges........... -- -- 348 3 724
Amortization of
warrants................ -- -- -- -- 432
Net changes in assets and
liabilities:
Change in deferred
revenue................ 114 1,759 2,777 1,625 1,748
Change in accounts
receivable............. (42) (473) (1,613) (980) (1,534)
Change in contracts
receivable............. (75) (689) (1,594) (736) (2,060)
Change in prepaid
expenses and other
assets................. (33) (136) (76) (83) (922)
Change in accounts
payable and accrued
expenses............... 287 1,246 1,368 (291) 1,406
------- ------- -------- ------- -------
Net cash used in
operating activities... (877) (5,327) (12,330) (7,156) (9,209)
------- ------- -------- ------- -------
Cash flows from investing
activities:
Purchases of property and
equipment................ (129) (556) (1,682) (811) (2,474)
------- ------- -------- ------- -------
Cash flows from financing
activities:
Payments on capital lease
obligations.............. (4) (14) (73) (24) (21)
Proceeds from issuance of
common stock, net........ 3 21 284 4 409
Proceeds from issuance of
preferred stock, net..... 2,976 -- 26,859 10,273 9,192
Proceeds from bridge
loans.................... 250 1,206 4,000 -- --
Payments on debt.......... (80) -- (1,596) (1,577) (77)
Proceeds from debt........ 71 2,511 1,395 16 796
------- ------- -------- ------- -------
Net cash provided by
financing activities... 3,216 3,724 30,869 8,692 10,299
------- ------- -------- ------- -------
Effect of exchange rate
changes on cash.......... -- -- (13) (8) (9)
------- ------- -------- ------- -------
Increase (decrease) in
cash and equivalents..... 2,210 (2,159) 16,844 717 (1,393)
Cash and equivalents at
beginning of period...... 20 2,230 71 71 16,915
------- ------- -------- ------- -------
Cash and equivalents at
end of period............ $ 2,230 $ 71 $ 16,915 $ 788 $15,522
======= ======= ======== ======= =======
Supplemental information:
Interest paid............. $ -- $ -- $ -- $ -- $ 112
======= ======= ======== ======= =======
Taxes paid................ -- 11 20 7 32
======= ======= ======== ======= =======
Assets acquired under
capital lease............ 24 25 167 78 --
======= ======= ======== ======= =======
Accrued dividends......... -- 270 1,176 476 1,798
======= ======= ======== ======= =======
Conversion of founders'
loans into Series A
preferred stock.......... 119 -- -- -- --
======= ======= ======== ======= =======
Conversion of bridge loan
into Series A preferred
stock.................... 250 -- -- -- --
======= ======= ======== ======= =======
Conversion of bridge loan
into Series B preferred
stock.................... -- -- 1,232 1,232 --
======= ======= ======== ======= =======
Conversion of bridge loan
into Series C preferred
stock.................... -- -- 4,059 -- --
======= ======= ======== ======= =======
Deferred compensation..... -- -- 1,492 375 840
======= ======= ======== ======= =======
Warrants issued in
conjunction with bridge
loan..................... -- 63 242 -- --
======= ======= ======== ======= =======
Warrants issued for
equipment................ $ -- $ -- $ -- $ -- $ 335
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Organization and Business Operations
ClearCommerce Corporation (formerly Outreach Communications)
("ClearCommerce" or the "Company") was incorporated on September 21, 1995. The
Company provides solutions in e-Commerce transaction processing, fraud tracking
and reporting. The Company's products provide online customer credit card
authorizations, online order and payment processing, automated tax and shipping
calculations, online order tracking and integration into legacy systems. The
Company's principal offices are located in Austin, Texas and the United
Kingdom. The Company is organized and operates as one business segment.
Effective September 15, 1997, the Board of Directors authorized a 1,299.5
for 1 stock split of the Company's common stock. The effect of the stock split
has been reflected in these consolidated financial statements for all periods
presented. In accordance with the Company's amended and restated articles of
incorporation as of September 15, 1997, the Company changed the par value of
its common stock from no par to $.001.
2. Significant Accounting Policies
Unaudited Interim Financial Information
The consolidated financial statements and following notes, insofar as they
are applicable to the six month periods ended June 30, 2000 and 1999 and
transactions subsequent to February 25, 2000, the date of the Report of
Independent Accountants, are not covered by the Report of Independent
Accountants. The accompanying consolidated balance sheet as of June 30, 2000
and the interim consolidated statements of operations, changes in common
stockholders' deficit and cash flows for the six months ended June 30, 1999 and
2000 are unaudited but include all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of financial position at June 30, 2000 and the results of
operations and cash flows for the six months ended June 30, 1999 and 2000. The
results of operations and cash flows for the six months ended June 30, 2000 are
not necessarily indicative of the results to be expected for the entire fiscal
year or future periods. The data disclosed in these notes to the financial
statements for these periods is unaudited.
Unaudited Pro Forma Information
In February 2000, the board of directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering is closed under the terms presently
anticipated, all of the mandatorily redeemable convertible preferred stock
outstanding and accrued dividends will automatically convert into 12,372,743
shares of common stock. Accrued dividends are payable in common stock based on
fair market value. The unaudited pro forma balance sheet is adjusted for
payment of dividends in the form of common stock and the conversion of the
mandatorily redeemable convertible preferred stock, as if such transactions had
occurred as of June 30, 2000.
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.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company's wholly owned subsidiary. All significant
F-7
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
intercompany transactions and balances have been eliminated in consolidation.
Certain amounts reported in previous periods have been reclassified to conform
to the current presentation.
Revenues
The Company derives revenues from licenses of its software and related
services, which include assistance in implementation, customization and
integration, customer support, training and consulting.
License fees are recognized when there is persuasive evidence of an
arrangement for a fixed and determinable fee that is probable of collection and
when delivery has occurred. For arrangements with multiple elements, the
Company recognizes revenue for the delivered elements based upon the residual
method as prescribed by Statement of Position No. 98-9, "Modification of SoP
No. 97-2 with Respect to Certain Transactions."
Revenues from reseller arrangements are recognized when the licenses are
sold to the reseller if there are no specified undelivered elements and no
product return rights. For contracts with specified undelivered elements for
which there is no vendor specific objective evidence for the specified
undelivered element, revenue is deferred until the earlier of when the
specified undelivered element is delivered or vendor specific objective
evidence becomes available.
Annual merchant fees are generated from annual software licenses that enable
merchants to connect to commerce service providers. Annual merchant fees from
end users are recognized on a subscription basis over the service period.
Prepaid annual merchant fees from resellers are recognized over the estimated
usage period of the licenses, which is generally the contract period.
Other services revenues from consulting and training services are recognized
as such services are performed. Services revenues from post-contract customer
support are recognized ratably over the support period, generally one year.
The Company derives revenue from contracts that provide for consulting
services at a fixed hourly rate. In connection with such arrangements, the
Company recognizes the fair value of the implementation services as such
services are performed.
Deferred Revenues
To the extent the Company has billed customers or resellers for the
obligation to deliver licenses or perform future services, such obligations are
recorded as deferred revenue until delivery of the license or such services
have been performed. Additionally, as discussed above, post-contract customer
support revenue is deferred and recognized over the term of the agreement.
Cost of Software Licenses and Services
Cost of software licenses includes royalties as well as the costs of product
packaging, documentation and production. Cost of services consist primarily of
costs incurred in providing software support, maintenance and professional
consulting services.
Research and Development
Research and development costs are incurred for the development of new
products or bringing about significant improvements to existing products.
Statement of Financial Accounting Standards No. 86,
F-8
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", requires the capitalization of certain software development costs
once technological feasibility is established. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or based on
the ratio of current revenues to total projected product revenues, whichever is
greater. Technological feasibility does not occur for the Company's products
until all testing has been performed and the products are substantially ready
for release to the customer; therefore, to date, the Company has not
capitalized any software development costs.
Cash and Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets, generally three to seven years, or the shorter of the
useful lives or lease term for assets acquired under capital leases. Leasehold
improvements are amortized over the shorter of the remaining term of the lease
or the life of the asset.
Mandatorily Redeemable Convertible Preferred Stock
Mandatorily redeemable convertible preferred stock is presented net of
issuance costs and includes accrued dividends of $270, $1,446 and $3,244 at
December 31, 1998, 1999 and June 30, 2000, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Under this method, deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Prior to September 15, 1997, the Company was an S-Corporation for federal
income tax purposes. Effective September 15, 1997, the Company converted from
an S-Corporation to a C-Corporation for income tax purposes.
Advertising
The Company expenses advertising costs as incurred. During the years ended
December 31, 1997, 1998 and 1999, and the six months ended June 30, 1999 and
2000, the Company expended $62, $53, $354, $64 and $43, respectively, related
to advertising costs.
Concentration of Credit Risk
The Company sells its products to various companies across several
industries and geographies. The Company performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses.
Foreign Currency
The Company has determined that the functional currency of its foreign
subsidiary is the local currency. The financial statements of the foreign
subsidiary are translated into dollars in accordance with Statement of
F-9
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Financial Accounting Standards No. 52, "Foreign Currency Translation."
Translation gains and losses are accumulated and reported as accumulated other
comprehensive income or loss in the consolidated statement of changes in common
stockholders' deficit. There have been no transaction gains or losses in any of
the three years in the periods ended December 31, 1999 or for the six months
ended June 30, 2000.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and equivalents, accounts receivable, contracts receivable, trade payables and
long-term obligations, approximate fair value.
Stock-Based Compensation Plans
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). As allowed by SFAS No. 123, the Company
continues to apply the provisions of Accounting Principles Board Opinion No. 25
"Accounting for Stock issued to Employees" ("APB No. 25") and related
interpretations in accounting for its plan. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the determined fair value
of the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000, with earlier application encouraged. The
Company does not currently use derivative instruments and, therefore, does not
expect that the adoption of SFAS No. 133 will have an impact on its financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In SAB No. 101, the SEC staff expresses its views regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company will be
required to adopt SAB No. 101, as amended by SAB No. 101B, for the quarter
beginning October 1, 2000. The Company does not believe that the adoption of
SAB No. 101 will have a significant impact on its financial statements and
related disclosures.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44")
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25 ("APB No. 25") "Accounting for Stock
Issued to Employees." FIN No. 44 clarifies the application of APB No. 25 for
only certain issues. It does not address any issues related to the application
of the fair value method in SFAS No. 123 "Accounting for Stock-Based
Compensation." Among other issues, FIN No. 44 clarifies (a) the definition of
employee for purposes of applying ABP No. 25, (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. FIN No. 44 is effective July 1, 2000, but
certain conclusions in the interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. The Company has early
adopted the provisions of FIN No. 44. The adoption of FIN No. 44 did not have a
significant impact on the Company's financial statements and related
disclosures.
F-10
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
3. Net Loss Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") effective January 1,
1998. SFAS No. 128 requires the presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing income or loss
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share is computed by
giving effect to all dilutive potential common shares that were outstanding
during the period. The Company has excluded all mandatorily redeemable
convertible preferred stock and outstanding stock options and warrants from the
calculation of diluted net loss per share because all such securities are
antidilutive for all periods presented. The total number of common stock
equivalents excluded from the calculations of diluted net loss per common share
were 5,584,147, 5,750,228, 13,483,763 and, 10,033,650, 16,275,592 for the years
ended December 31, 1997, 1998 and 1999, and the six months ended June 30, 1999
and 2000, respectively.
Pro forma net loss per share, as presented in the statements of operations,
has been computed as described above and also gives effect, under Securities
and Exchange Commission guidance, to the conversion of the mandatorily
redeemable convertible preferred stock and payment of dividends in the form of
common stock (using the as-if-converted method).
The numerator in the pro forma net loss per share calculation is equivalent
to the net loss for each period presented. The denominator in the pro forma net
loss per share calculation is comprised of the following:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000
----------------
<S> <C>
Weighted average number of common shares outstanding...... 2,631,832
Effect of convertible securities:
Accrued dividends on mandatorily redeemable convertible
preferred stock.......................................... 270,339
Mandatorily redeemable convertible preferred stock........ 12,102,404
----------
Shares used in pro forma calculation...................... 15,004,575
==========
</TABLE>
4. Property and Equipment
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1998 1999 2000
----- ------ --------
<S> <C> <C> <C>
Computer equipment................................... $ 619 $1,555 $3,609
Software............................................. -- 332 678
Leasehold improvements............................... -- 186 429
Furniture and fixtures............................... 115 510 645
----- ------ ------
734 2,583 5,361
Less--accumulated depreciation....................... (137) (585) (1,252)
----- ------ ------
$ 597 $1,998 $4,109
===== ====== ======
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, and the six months
ended June 30, 1999 and 2000, depreciation expense was $19, $118, $448, $236
and $668, respectively. At December 31, 1998 and 1999 and June 30, 2000,
property and equipment includes $49, $216 and $216, respectively, of assets
acquired under
F-11
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
capital lease. Accumulated depreciation for assets under capital lease was $11,
$27 and $52 at December 31, 1998 and 1999 and June 30, 2000, respectively, and
related depreciation expense was $2, $9, $16, $20 and $25 for the years ended
December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and
2000, respectively.
5. Debt
In 1998, a bank granted the Company a line of credit for general purposes
and equipment purchases. The aggregate amounts borrowed under the facility were
not to exceed $1,000. Under this agreement, the Company borrowed in aggregate
$1,000, $232 and $155 as of December 31, 1998, 1999 and June 30, 2000,
respectively, at the bank's prime rate (7.75%, 8.5% and 9.50% at December 31,
1998 and 1999 and June 30, 2000, respectively).
Of the $1,000 outstanding at December 31, 1998, $613 was related to general
purposes and $387 was borrowed for equipment purchases. As discussed below, the
portion related to general purposes was subsequently transferred to a new line
of credit facility. The amounts borrowed for equipment were $387, $232 and $155
as of December 31, 1998 and 1999 and June 30, 2000, respectively, and will
mature on June 23, 2001.
In 1999 the Company was given an additional line of credit facility with a
bank which consists of two elements: (1) a working capital revolving line of
credit not to exceed $3,000; and (2) an equipment line not to exceed $1,323.
Under the $3,000 working capital revolving line of credit, the Company
borrowed $1,789 at December 31, 1999 and June 30, 2000 at the bank's prime rate
plus 0.25% (8.75% and 9.75% at December 31, 1999 and June 30, 2000,
respectively). This revolving line of credit loan under the facility matured on
July 18, 2000 and was extended for sixty days through September 18, 2000. The
Company currently has an executed commitment letter with the bank and expects
to renew and extend the working capital revolving line for one year under a new
agreement. During 1999, the Company transferred $613 from the equipment and
general purposes line mentioned above to this revolving line. Amounts available
under the working capital line of credit are a function of eligible accounts
receivable. As of December 31, 1999 and June 30, 2000, $2,100 and $1,304 was
available for borrowing, respectively.
Under the $1,323 equipment line, the Company borrowed $435 and $1,154 at
December 31, 1999 and June 30, 2000, respectively, at the bank's prime rate
plus 0.25% (8.75% and 9.75% at December 31, 1999 and June 30, 2000,
respectively). This equipment loan under the facility will mature on May 31,
2002. In conjunction with this loan, the Company issued the bank a warrant to
purchase 5,000 shares of the Company's Series B preferred stock at a price of
$3.69 per share that expires on July 19, 2004 (Note 9).
Additionally, the Company borrowed $1,500 as of December 31, 1998 at the
bank's prime rate plus 1% (8.75% at December 31, 1998) which matured on
December 11, 1998. The bank agreed to extend the loan until the Company
obtained its funding of the Company's Series B preferred stock, which occurred
in January 1999 (Note 10). The Company repaid the $1,500 in January 1999.
All loans are collateralized by a blanket security interest in all assets of
the Company and the Company must meet certain liquidity requirements on a
monthly basis. The loan agreement includes a restriction on the payment of
dividends.
The aggregate maturities of long-term debt as of December 31, 1999 were as
follows: $214 due in 2000, $179 due in 2001 and $42 due in 2002.
F-12
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
6. Related Party Transactions
On May 22, 1997, the Company issued 501,607 shares of common stock to one of
its founders for an aggregate purchase price of less than $1.
On June 2 and August 25, 1997, the Company issued convertible promissory
notes totaling $250 in connection with bridge financings to one investor. These
notes were non-interest bearing. Imputed interest on these notes is immaterial.
Principal and accrued interest were converted into 233,645 shares of Series A
preferred stock on September 15, 1997.
Prior to September 15, 1997, two of the Company's founders loaned the
Company $199. These notes were non-interest bearing. Imputed interest on these
notes is immaterial. Of this amount, $80 was repaid during the year ended
December 31, 1997. The remaining amount was converted into 111,440 shares of
Series A on September 15, 1997.
On September 15, 1997, the Company issued 789,523 shares of common stock to
a founder and an officer of the Company for an aggregate purchase price of
approximately $8.
In December 1998, the Company established a $2,000 bridge loan facility with
the Series A preferred stockholders. This loan bore interest at 8% per annum.
In conjunction with the bridge loan, the Company issued warrants to purchase
125,228 shares of Series B preferred stock at $2.46 per share (Note 9). These
warrants expire in December 2003 and include warrants issued to employees to
purchase a total of 2,696 shares of Series B preferred stock, of which 2,362
have been exercised as of June 30, 2000. Related party interest totaled less
than $1 for the year ended December 31, 1998. A total of $1,232, representing
the bridge loan plus accrued interest, was converted into 500,933 shares of
Series B preferred stock at $2.46 per share on January 9, 1999.
In September 1999, the Company's preferred stockholders established a
revolving loan facility in a maximum amount of $4,000 bearing interest at 15%
annually. In November 1999, this loan was renegotiated. The facility was
increased to $7,000 and the interest rate was changed to 9.5% per annum. In
addition, warrants to purchase 141,303 shares of Series C preferred stock were
issued (Note 9). These warrants expire November 2004 and include warrants
issued to employees to purchase a total of 3,153 shares of Series C preferred
stock, of which 2,749 have been exercised as of June 30, 2000. Related party
interest totaled less than $1 for the year ended December 31, 1999. Consistent
with the terms of the loan, a total of $4,059, representing the bridge loan
plus accrued interest, automatically converted into 574,153 shares of the
Company's Series C preferred stock at the closing of the Company's Series C
financing on December 31, 1999 at a rate of $7.07 per share.
In 1999, certain executive officers and directors of the Company purchased
125,370 shares of Series B preferred stock at $2.46 per share.
In 1999 and during the six months ended June 30, 2000, certain executive
officers and directors of the Company purchased 149,927 shares of Series C
preferred stock at $7.07 per share.
In February and March 2000, the Company received equipment and the right to
receive consulting services over a four year period in exchange for two
warrants issued to one of its customers who is also a preferred stockholder
(see Note 9). The warrants enable the customer to purchase 680,183 shares of
common stock at prices ranging from $5.00 to $7.07 per share.
F-13
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
7. Income Taxes
The income tax benefit is composed of the following:
<TABLE>
<CAPTION>
Pro-forma For the
For the Year Year Ended
Ended December 31, Six Months
December 31, ---------------- Ended June 30,
1997 1998 1999 2000
------------ ------- ------- --------------
<S> <C> <C> <C> <C>
Current...................... $ -- $ -- $ -- $ --
Deferred
Federal..................... (388) (2,393) (4,555) (3,318)
State....................... (52) (323) (597) (392)
Foreign..................... -- -- (299) (137)
Change in valuation
allowance................... 440 2,716 5,451 3,849
----- ------- ------- -------
$ -- $ -- $ -- $ --
===== ======= ======= =======
</TABLE>
The difference between the tax benefit derived by applying the Federal
statutory income tax rate to net losses and the benefit recognized in the
financial statements is as follows:
<TABLE>
<CAPTION>
Pro-forma For the
For the Year Year Ended
Ended December 31, Six Months
December 31, ---------------- Ended June 30,
1997 1998 1999 2000
------------ ------- ------- --------------
<S> <C> <C> <C> <C>
Benefit derived by applying
the federal statutory income
rate to net losses before
income taxes................. $(390) $(2,453) $(4,838) $(3,373)
State tax provision........... (34) (213) (394) (259)
Foreign tax rate
differentials................ -- -- (8) --
Permanent differences and
other........................ (2) 12 41 35
Research and development
credit....................... (14) (62) (252) (252)
Change in valuation
allowance.................... 440 2,716 5,451 3,849
----- ------- ------- -------
$ -- $ -- $ -- $ --
===== ======= ======= =======
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Current deferred tax assets (liabilities):
Deferred revenue................................ $ 299 $ 594 $1,575
Allowance for doubtful accounts................. 7 82 71
Accrued compensation............................ 51 521 1,165
Other assets.................................... 43 10 6
------- ------- --------
Gross deferred tax assets...................... 400 1,207 2,817
------- ------- --------
Long-term deferred tax assets (liabilities):
Net operating losses............................ 2,706 6,829 8,695
Foreign net operation loss...................... -- 299 437
Research and development and other credits...... 76 328 579
Basis of property and equipment................. (30) (60) (76)
------- ------- --------
Gross deferred tax assets...................... 2,752 7,396 9,635
------- ------- --------
Valuation allowance............................. (3,152) (8,603) (12,452)
------- ------- --------
Net deferred tax asset......................... $ -- $ -- $ --
======= ======= ========
</TABLE>
Due to the uncertainty surrounding the realization of the benefits of its
deferred tax assets in future tax returns, the Company has recorded a full
valuation allowance against its otherwise recognizable net deferred tax asset.
F-14
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
In 1999, the Company experienced a substantial change in ownership as
defined by the Internal Revenue Code. This change resulted in an annual
limitation for the usage of the net operating loss carryforwards generated
prior to the change in ownership of $2,237. At December 31, 1999 and June 30,
2000, the Company had total domestic net operating loss carryforwards of
$18,596 and $23,790, and research and development credit carryforwards of $328
and $579, respectively.
8. Commitments and Contingencies
The Company is obligated under operating lease agreements covering the
corporate facilities and certain equipment. Rental expense under these leases
was $37, $242 and $278 for the years ended December 31, 1997, 1998 and 1999,
and $149 and $225 for the six months ended June 30, 1999 and June 30, 2000,
respectively. Future minimum lease payments have been included in the table
below:
<TABLE>
<CAPTION>
Capital Operating
For the Year Ending December 31: Leases Leases
-------------------------------- ------- ---------
<S> <C> <C>
2000....................................................... $ 57 $355
2001....................................................... 57 286
2002....................................................... 27 51
---- ----
Total payments............................................. $141 $692
====
Less amounts representing interest......................... 16
----
Capital lease obligations.................................. $125
====
</TABLE>
The Company has a fair market value purchase option available at the
termination of three of its capital leases. In addition, two of the Company's
capital leases have automatic renewal terms, which are cancelable by the
Company within sixty days.
The Company has entered into an employment agreement with one of its
officers of the Company. The employment agreement provides for severance in the
event the individual is terminated without cause.
From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. Management believes that
there are no claims or actions pending or threatened against the Company, the
ultimate disposition of which would have a material impact on the Company's
financial position, results of operations or cash flows.
F-15
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
9. Warrants
Following is a summary of warrants issued by the Company through June 30,
2000.
<TABLE>
<CAPTION>
Preferred Stock
-----------------
Series Common Exercise Price
Series B C Stock Per Share
-------- ------- ------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996......... -- -- -- --
Issuance of common stock warrants.... -- -- 20,300 $ 0.01
------- ------- -------
Balance at December 31, 1997......... -- -- 20,300
Issuance of Series B preferred stock
warrants in conjunction with bridge
loan................................ 125,228 -- -- $ 2.46
Issuance of Series B preferred stock
warrants in conjunction with a bank
loan................................ 5,000 -- -- $ 3.69
------- ------- -------
Balance at December 31, 1998......... 130,228 -- 20,300
Issuance of Series C preferred stock
warrants in conjunction with bridge
loan................................ -- 141,303 -- $ 7.07
------- ------- -------
Balance at December 31, 1999......... 130,228 141,303 20,300
Issuance of common stock warrants in
conjunction with a strategic
relationship agreement.............. -- -- 680,183 $5.00-$7.07
Issuance of Series C preferred stock
warrants in conjunction with a bank
loan................................ -- 14,144 -- $ 7.07
Exercise of common stock warrants.... -- -- (20,300) $ 0.01
Exercise of Series B preferred stock
warrants............................ (2,362) -- -- $ 2.46
Exercise of Series C preferred stock
warrants............................ -- (2,749) -- $ 7.07
------- ------- -------
Balance at June 30, 2000............. 127,866 152,698 680,183
======= ======= =======
</TABLE>
On February 1, 1997, the Company issued a warrant to purchase 20,300 shares
of common stock at an exercise price of $0.01 per share to an advisor of the
Company. These warrants were valued using the Black-Scholes valuation model at
less than $1. The warrants were exercised in February 2000.
In conjunction with a bridge loan, the Company issued warrants to purchase
125,228 shares of Series B preferred stock at $2.46 per share to certain of its
Series A preferred stockholders. These warrants expire in December 2003. These
warrants were valued using the Black-Scholes valuation model. Incremental
interest expense of $63 was recorded during the year ended December 31, 1998
related to these warrants. During May 2000 warrants to purchase 2,362 shares of
Series B preferred stock were exercised.
In conjunction with a bank loan, the Company issued a warrant to purchase
5,000 shares of the Company's Series B preferred stock at a price of $3.69 per
share. The warrant expires July 19, 2004. These warrants were valued using the
Black-Scholes valuation model at less than $1.
In conjunction with a bridge loan, the Company issued warrants to purchase
141,303 shares of Series C preferred stock at $7.07 per share to certain of its
Series A and B preferred stockholders. These warrants expire in November 2004.
These warrants were valued using the Black-Scholes valuation model. Incremental
interest expense of $242 was recorded during the year ended December 31, 1999
related to these warrants. During May 2000 warrants to purchase 2,749 shares of
Series C preferred stock were exercised.
In connection with a strategic relationship with a customer who is also a
preferred stockholder, the Company issued two warrants to purchase a total of
680,183 shares of common stock at prices ranging from $5.00 to $7.07 per share
in February and March 2000. The warrants were issued for equipment and
consulting services to be provided by the customer. The warrants were fully
vested and immediately exercisable upon issuance and expire in four years. The
warrants were valued using the Black-Scholes valuation model and had
F-16
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
an aggregate value of $4,703 at the date of issuance. The portion of the value
of the warrants attributable to the consulting services is being amortized to
sales and marketing expense over the four year service life of the agreement
beginning in February 2000. During the six months ended June 30, 2000, the
Company amortized $431 to sales and marketing expense.
In February 2000, the Company issued a warrant to purchase 14,144 shares of
Series C preferred stock at $7.07 per share to a bank. The warrant was issued
in connection with the Company renegotiating the terms of its revolving line of
credit facility with the bank. The warrant expires in four years. The warrant
was valued using the Black-Scholes valuation model and had a value of $135 at
the date of issuance. The value of the warrant is being amortized to interest
expense over the remaining term of the revolving line of credit facility.
10. Mandatorily Redeemable Convertible Preferred Stock
Following is a summary of mandatorily redeemable convertible preferred stock
("preferred stock") issued by the Company through June 30, 2000.
<TABLE>
<CAPTION>
Preferred Stock
(in thousands, except
share amounts)
Shares Dollars
------------ -----------
<S> <C> <C>
Balance at December 31, 1996.......................... -- $ --
Issuance of Series A preferred stock, net of issuance
costs of $23......................................... 2,802,745 2,976
Issuance of Series A preferred stock upon conversion
of founders' loans................................... 111,440 119
Issuance of Series A preferred stock upon conversion
of bridge loans...................................... 233,645 250
------------ ---------
Balance at December 31, 1997.......................... 3,147,830 3,345
Accrued dividends on preferred stock.................. -- 270
------------ ---------
Balance at December 31, 1998.......................... 3,147,830 3,615
Issuance of Series B preferred stock, net of issuance
costs of $75......................................... 4,205,263 10,269
Issuance of Series B preferred stock, upon conversion
of bridge loan....................................... 500,933 1,232
Issuance of Series C preferred stock, net of issuance
costs of $160........................................ 2,369,171 16,590
Issuance of Series C preferred stock upon conversion
of bridge loans...................................... 574,153 4,059
Accrued dividends on preferred stock.................. -- 1,176
Beneficial conversion feature related to issuance of
Series C preferred stock............................. -- 8,624
Beneficial conversion feature dividend related to
Series C preferred stock............................. -- (8,624)
------------ ---------
Balance at December 31, 1999.......................... 10,797,350 36,941
Issuance of Series C preferred stock, net of issuance
costs of $24......................................... 1,299,943 9,167
Issuance of Series B preferred stock, upon exercise of
warrants............................................. 2,362 6
Issuance of Series C preferred stock, upon exercise of
warrants............................................. 2,749 19
Beneficial conversion feature related to issuance of
Series C preferred stock............................. -- 3,809
Beneficial conversion feature dividend related to
Series C preferred stock............................. -- (3,809)
Accrued dividends on preferred stock.................. -- 1,798
------------ ---------
Balance at June 30, 2000.............................. 12,102,404 $ 47,931
============ =========
</TABLE>
The various issuances of the Series C resulted in beneficial conversion
feature amounts upon each issuance of approximately $8.6 million in December
1999 and $3.8 million in January 2000, calculated in accordance with Emerging
Issues Task Force Issue No. 98-5. "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversions Ratios."
The beneficial conversion feature was calculated as the difference between the
deemed fair value of a share of common stock at the time of the various
issuances of the Series C, $10.00 at both December 1999 and January 2000, minus
the conversion price of a share of Series C preferred stock ($7.07 per share),
multiplied by the number of shares of common stock that would be issued upon
conversion, 2,943,324 and 1,299,943 in December 1999 and January 2000,
respectively.
F-17
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
The rights with respect to the Series A, B and C preferred stock are as
follows:
Conversion
Each share of Series A, B and C preferred stock is convertible into common
stock on a one-for-one basis, subject to certain antidilution provisions.
Conversion is at the option of the stockholder or, in accordance with a written
consent the Company is seeking from holders of greater than two-thirds of the
outstanding preferred stock, automatic upon the closing of an initial public
offering of the Company's common stock on or before December 31, 2000 at a
price equal to or exceeding $11.00 per share. The assumed conversion of the
preferred stock has been included in the accompanying consolidated financial
statements because the Company anticipates receiving such consent from holders
of two-thirds of its preferred stock.
Dividends
The holders of the Series A, B and C preferred stock are entitled to receive
cumulative dividends at the rate of 8% per share based on $1.07 for Series A,
$2.46 for Series B and $7.07 for Series C per annum, payable upon conversion of
the preferred stock in either cash or common stock, at the option of the Board
of Directors, at the fair value of the common stock as determined in good faith
by a majority of the Board of Directors. Such dividends shall be cumulative
beginning January 1, 1998 with respect to the Series A preferred stock and the
date the first Series B and C preferred stock is issued with respect to the
Series B and C preferred stock. The holders of the outstanding preferred stock
can waive any dividend preference that such holders shall be entitled to
receive upon the affirmative vote or written consent of the holders of at least
two-thirds of the preferred stock then outstanding voting together as a single
class. Accrued dividends were $270, $1,446 and $3,244 at December 31, 1998,
1999 and June 30, 2000, respectively.
Voting Rights
The holder of each share of Series A, Series B, and Series C preferred stock
has the right to one vote for each share of common stock into which such Series
A, Series B and Series C, preferred stock can be converted, and with respect to
such vote, such stockholder has full voting rights and powers equal to the
voting rights and powers of the holders of common stock, and is entitled to
notice of any stockholders' meeting in accordance with the bylaws of the
corporation, and is entitled to vote, together with holders of common stock,
with respect to any question upon which holders of common stock have the right
to vote.
Liquidation and Redemption
Upon the occurrence of a liquidation event, such as a dissolution of the
Company or by merger or sale of assets, the available assets of the Company
would be distributed first to the holders of Series A, B and C preferred stock
until they receive the amount per share for which each such series was
originally purchased plus any accrued and unpaid dividends. If assets of the
Company remain available for distribution after such preferences have been
satisfied, such remaining assets would be distributed among the holders of
Series A, B and C preferred stock and common stock pro rata based on the "as if
converted" number of common stock shares. If upon the occurrence of such event,
the assets and funds thus distributed among the holders of the Series A, B and
C preferred stock shall be insufficient to permit the payment to such holders
of the full aforesaid preferential amounts, then the entire assets and funds of
the Company legally available for distribution shall be distributed ratably
among the holders of Series A, B and C preferred stock in proportion to the
preferential amount each such holder would be entitled to receive.
F-18
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Commencing on December 31, 2004, the Company may be required to redeem, upon
the affirmative vote of two-thirds of the preferred stockholders voting as a
group, 50% of the outstanding shares of preferred stock, an additional 50% on
December 31, 2005 and the remainder on December 31, 2006 at a redemption price
equal to $1.07, $2.46 and $7.07 for Series A, B and C respectively, plus
accrued dividends.
11. Stock Option Plan
The Company's 1997 Stock Option/Stock Issuance Plan (the "Plan") provides
for granting incentive stock options as defined by the Internal Revenue Code.
The Plan allows for grants of options to purchase 2,001,940 shares of the
Company's common stock (Note 16). Expired and canceled options are available to
be regranted under the Plan. Options are granted with exercise prices and
vesting schedules as approved by the Board of Directors or a Compensation
Committee appointed by the Board of Directors. Optionees may exercise all
options prior to vesting in which case the Company has the right to repurchase
the unvested shares from the optionee at the original purchase price upon the
employee's termination from the Company.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for the Plan. Had
compensation cost for the Plan been determined based on the fair market value
at the grant dates for awards under the Plan consistent with the method
provided by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net loss would have been increased to the following pro forma
amounts:
<TABLE>
<CAPTION>
For the Year Ended Six Months Ended
December 31, June 30,
---------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net loss attributable to
common stock........... As reported $ (1,147) $ (7,485) $(24,030) $(7,386) $(15,528)
Pro forma $ (1,151) $ (7,499) $(23,796) $(7,401) $(15,821)
Basic net loss per
share.................. As reported $ (0.89) $ (6.51) $ (12.72) $ (4.51) $ (5.90)
Pro forma $ (0.90) $ (6.53) $ (12.60) $ (4.52) $ (6.01)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value pricing model with the following weighted-average assumptions
used for grants during the years ended December 31, 1997, 1998 and 1999, and
the six months ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
For the Year Ended Six Months Ended
December 31, June 30,
------------------------- -----------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Dividend yield.............. -- -- -- -- --
Expected volatility......... -- -- -- -- --
Risk-free rate of return.... 6.2% 5.2% 5.6% 5.2% 6.5%
Expected life............... 5 years 5 years 5 years 5 years 5 years
</TABLE>
F-19
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
The following table summarizes activity under the Plan for the years ended
December 31, 1997, 1998 and 1999, and the six months ended June 30, 2000.
<TABLE>
<CAPTION>
Six Months Ended
For the Year Ended December 31, June 30,
-------------------------------------------------------- ------------------
1997 1998 1999 2000
---------------- ------------------ ------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Price Shares Price Shares Price Shares Price Shares
-------- ------- -------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at the
beginning of the
period................. $ -- -- $0.107 587,761 $0.107 1,115,771 $ 1.655 800,261
Granted................ 0.107 587,761 0.107 751,000 1.329 1,194,154 13.280 1,177,480
Exercised.............. -- -- 0.107 (196,490) 0.252 (1,132,535) 1.723 (237,760)
Canceled............... -- -- 0.107 (26,500) 0.258 (377,129) 2.812 (119,501)
------ ------- ------ --------- ------ ---------- ------- ---------
Outstanding at the end
of the period.......... $0.107 587,761 $0.107 1,115,771 $1.655 800,261 10.007 1,620,480
====== ======= ====== ========= ====== ========== ======= =========
Options exercisable at
period end............. $0.107 587,761 $0.107 1,115,771 $1.655 800,261 9.492 1,287,880
====== ======= ====== ========= ====== ========== ======= =========
Weighted average fair
value of options
granted during the
period................. $0.035 $0.035 $0.419 $ 2.976
====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------
Weighted-
average Weighted-
Outstanding remaining Weighted- Exercisable average
Exercise at June 30, contractual average at June 30, exercise
price 2000 life exercise price 2000 price
-------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$0.107 50,500 8.04 $0.107 50,500 $0.107
0.246 8,000 8.63 0.246 8,000 0.246
0.492 153,500 8.84 0.492 153,500 0.492
1.000 126,000 9.20 1.000 126,000 1.000
4.000 39,750 9.38 4.000 39,750 4.000
5.000 215,250 9.22 5.000 215,250 5.000
12.000 332,600 9.67 12.00 -- --
13.500 294,980 9.84 13.50 294,980 13.50
17.000 399,900 9.78 17.00 399,900 17.00
-------- ------------- ------------- -------------- ------------- -------------
$0.107--
$17.000 1,620,480 9.45 $10.341 1,287,880 $9.492
======== ============= ============= ============== ============= =============
</TABLE>
As of December 31, 1998 and 1999, a total of 1,336,583 and 1,503,545 shares
were issued upon the exercise of options and founders shares prior to vesting.
As of June 30, 2000, a total of 706,877 shares were issued prior to vesting.
The Company may repurchase these shares at the original exercise price upon the
employee's termination from the Company. The contingent liability for exercised
unvested shares which were subject to repurchase at their original exercise
price was $28 and $261 at December 31, 1998 and 1999, respectively. The
contingent liability for exercised unvested shares subject to repurchase at
June 30, 2000 is $488. There were no options exercised prior to vesting as of
December 31, 1997.
During the six months ended June 30, 2000, the Company repurchased 72,285
shares of unvested common stock from terminated employees for a total of $11.
12. Employee Benefit Plan
During the year ended December 31, 1999, the Company's Board of Directors
approved an employee savings plan. The Company's 401(k) Plan is a defined
contribution retirement plan with a cash or deferred arrangement as
F-20
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
described in Section 401(k) of the Internal Revenue Code (the "401(k) Plan").
The 401(k) Plan is intended to be qualified under Section 401(a) of the
Internal Revenue Code. All employees of the Company are eligible to participate
in the 401(k) Plan. The 401(k) Plan provides that each participant may make
elective contributions from 1% to 15% of his or her compensation, subject to
statutory limits. The Company may, but is not required to, make matching
contributions. No matching contributions were made in 1999 or the six months
ended June 30, 2000.
13. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and equivalents, accounts receivable and
contracts receivable. To date, the Company has invested excess funds in money
market accounts, commercial paper, municipal bonds and term notes. The Company
deposits cash and equivalents and short-term investments with financial
institutions that management believes are credit worthy. The Company's accounts
receivable are derived from revenues earned from customers located primarily in
the United States. The Company maintains an allowance for doubtful accounts
receivable based upon the expected collectibility of all accounts receivable.
The following table summarizes the revenues from customers in excess of 10%
of total net revenues:
<TABLE>
<CAPTION>
For the Year Six
Ended Months
December 31, Ended
--------------- June 30,
1997 1998 1999 2000
---- ---- ---- --------
<S> <C> <C> <C> <C>
Customer A.............................................. -- 16% 18% 19%
Customer B.............................................. -- 4 16 23%
Customer C.............................................. 21 2 -- --
Customer D.............................................. 11 8 1 --
</TABLE>
The following table summarizes accounts and contracts receivable from the
above customers:
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1998 1999 2000
------ ------ --------
<S> <C> <C> <C>
Customer A........................................... 45% 8% 48%
Customer B........................................... 3% 22% 11%
</TABLE>
14. Geographic Information
While the Company sells its products to many different markets, its
management has chosen to organize the Company by geographical areas, and as a
result has determined that it has one reportable segment. Substantially all of
the interest income, interest expense, depreciation and amortization is
recorded in the United States. Revenues, operating expenses and identifiable
assets, classified by our two geographic locations are as follows:
<TABLE>
<CAPTION>
Six Months
For the Year Ended Ended
December 31, June 30,
------------------ -------------
1997 1998 1999 1999 2000
---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales to unaffiliated customers
United States............................ $396 $1,063 $5,031 $1,416 $5,300
Europe................................... -- -- 251 18 762
---- ------ ------ ------ ------
$396 $1,063 $5,282 $1,434 $6,062
==== ====== ====== ====== ======
</TABLE>
F-21
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
14. Geographic Information--(Continued)
<TABLE>
<CAPTION>
For the Year Ended Six Months
December 31, Ended June 30,
--------------------- --------------
1997 1998 1999 1999 2000
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Operating expenses:
United States......................... $1,417 $7,681 $16,107 $7,101 $12,887
Europe................................ -- 77 965 369 992
------ ------ ------- ------ -------
$1,417 $7,758 $17,072 $7,470 $13,879
====== ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
December
31, June 30,
----------- --------
1998 1999 2000
---- ------ --------
<S> <C> <C> <C>
Long-lived assets:
United States......................................... $589 $1,987 $4,091
Europe................................................ 8 11 18
---- ------ ------
$597 $1,998 $4,109
==== ====== ======
</TABLE>
15. Stock-Based Charges
In connection with certain stock option grants from December 10, 1997
through June 30, 2000, the Company recorded stock-based charges totaling
$2,118, which is being amortized in accordance with FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans" over the vesting periods of the related options, which is
generally four years. Stock-based charges recognized during the three year
period ended December 31, 1999 and the six months ended June 30, 2000 totaled
$348 and $724 respectively. Stock-based charges for the year ended December 31,
1999 and the six months ended June 30, 2000 have been allocated across the
relevant functional expense categories as follows:
<TABLE>
<CAPTION>
For the
For the Six Months
Year Ended Ended
December 31, June 30,
1999 2000
------------ ----------
<S> <C> <C>
Cost of services..................................... $ 4 $ 18
Sales and marketing.................................. 227 348
Research and development ............................ 100 234
General and administrative........................... 17 124
---- ----
$348 $724
==== ====
</TABLE>
16. Subsequent Events
In February 2000, the Company's Board of Directors increased the number of
shares that may be issued under the 1997 Stock Option Plan to 3,961,710.
In February 2000, the Company's Board of Directors approved the adoption of
the Company's 2000 Employee Stock Purchase Plan (the "Purchase Plan"). A total
of 600,000 shares of common stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan permits eligible employees to purchase shares
of common stock through payroll deductions at 85% of the fair value of the
common stock, as defined in the Purchase Plan.
F-22
<PAGE>
CLEARCOMMERCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
In January 2000 and February 2000, the Company issued an additional
1,299,943 shares of Series C preferred stock at a price of $7.07 per share
resulting in gross proceeds of approximately $9,191. These transactions
completed the Series C funding. Total gross proceeds from the Series C,
including $20,809 received prior to December 31, 1999, were $30,000.
In conjunction with an agreement for a strategic alliance, the Company
issued two warrants to purchase a total of 680,183 shares of common stock at
prices ranging from $5.00 to $7.07 per share in February and March 2000. The
strategic alliance is with one of the Company's resellers.
In February 2000, the Company's Board of Directors adopted the 2000 Stock
Plan ("2000 Plan") and reserved the lesser of 1,000,000 shares or the remaining
available shares under the 1997 Plan for issuance under the 2000 Plan. The
number of shares reserved for issuance under our 2000 Stock Plan will increase
annually on January 1st of each calendar year, effective beginning in 2001,
equal to the lesser of 5% of the outstanding shares of our common stock on the
first day of the year or 2,500,000 shares or such lesser amount as the Board of
Directors may determine.
The 2000 Director Option Plan ("Director Plan") was adopted in February 2000
and provides for the periodic grant of non statutory stock options to our non-
employee directors. The Company has reserved 300,000 shares of common stock for
issuance under the Director Plan.
In February 2000, the Company issued a warrant to purchase 14,144 shares of
Series C preferred stock at $7.07 per share to a bank.
In February 2000, the Company's Board of Directors approved an amendment to
our certificate of incorporation to be effective upon the closing of our
offering that would increase the number of common shares authorized to
100,000,000.
F-23
<PAGE>
[LOGO OF CLEARCOMMERCE]
THE ENGINE THAT DRIVES eBUSINESS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by ClearCommerce in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 15,180
NASD filing fee............................................... 6,250
Nasdaq National Market listing fee............................ 95,000
Printing and engraving costs.................................. 175,000
Legal fees and expenses....................................... 450,000
Accounting fees and expenses.................................. 420,000
Blue sky fees and expenses.................................... 5,000
Transfer agent and registrar fees............................. 10,000
Miscellaneous expenses........................................ 73,570
----------
Total....................................................... $1,250,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law. Articles Nine and Ten of
the Registrant's Third Amended and Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law. The Registrant has entered into indemnification agreements
with its directors and executive officers, in addition to indemnification
provided for in the Registrant's Third Amended and Restated Certificate of
Incorporation, and intends to enter into indemnification agreements with any
new directors and executive officers in the future.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons, as described below. None of these
transactions involved any underwriters, underwriting discounts or commissions,
or any public offering, and the Registrant believes that each transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof, including Regulation D promulgated thereunder, or Rule
701 under compensatory benefit plans and contracts relating to compensation as
provided under such Rule 701. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.
(a) On September 21, 1995, we issued 1,299,500 (giving effect to a 1,299.83-
for-1 stock split) shares of common stock at $0.01 per share to initially
capitalize the Registrant for an aggregate purchase price of $10.00. The
Registrant relied on the exemption from registration provided by Section 4(2)
under the Securities Act for this issuance of securities.
(b) On May 22, 1997, we issued 501,607 (giving effect to a 1,299.83-for-1
stock split) shares of common stock at $0.01 per share for an aggregate
purchase price of $3.86. The Registrant relied on the exemption from
registration provided by Section 4(2) under the Securities Act for this
issuance of securities.
(c) On February 1, 1997, in partial satisfaction of a consulting fee we
issued a warrant to Gerald Youngblood for 20,300 shares of our common stock
exercisable at $0.01 per share, for an aggregate purchase
II-1
<PAGE>
price of $203.00. The Registrant relied on the exemption from registration
provided by Section 4(2) under the Securities Act for this issuance of
securities.
(d) On June 2 and August 25, 1997, we issued convertible promissory notes
totaling $250,000 in connection with bridge financings to one private investor.
These notes were converted into shares of our Series A preferred stock on
September 15, 1997. The Registrant relied on the exemption from registration
provided by Section 4(2) under the Securities Act for this issuance of
securities.
(e) On September 15, 1997, we issued 789,523 shares of common stock at $0.01
per share to our founders and certain officers, for an aggregate purchase price
of $7,895.23. The Registrant relied on the exemption from registration provided
by Section 4(2) under the Securities Act for this issuance of securities.
(f) Prior to our Series A Preferred Stock financing in September 1997, two
of our officers had loaned us $191,196.50, of which $80,000 was repaid, and the
remainder converted into shares of our Series A preferred stock on September
15, 1997. The Registrant relied on the exemption from registration provided by
Section 4(2) under the Securities Act for this issuance of securities.
(g) On September 15, 1997 and December 1, 1997, we issued 3,147,830 shares
of Series A preferred stock to a group of private investors at $1.07 per share
for an aggregate purchase price of $3,368,178.10 including conversion of debt.
The Registrant relied on the exemption from registration provided by Section
4(2) of the Securities Act for this issuance of securities.
(h) On November 25, 1998, we entered into a Loan and Warrant Purchase
Agreement under which we issued convertible promissory notes in a bridge
financing totaling $2,000,000 to four private investors and two employees.
These notes were converted into shares of our Series B Preferred Stock on
January 8, 1999. In connection with this bridge financing, we also issued
warrants to purchase 125,228 shares of our Series B Preferred Stock at a
purchase price of $2.46 per share, for an aggregate purchase price of
$308,060.88. The Registrant relied on the exemption from registration provided
by Section 4(2) under the Securities Act for this issuance of securities.
(i) In 1998, we issued 196,490 shares of common stock to employees or other
service providers at $0.107 per share upon the exercise of stock options issued
under our 1997 Stock Plan for an aggregate purchase price of $21,024.43. The
Registrant relied on the exemption from registration provided by virtue of Rule
701 promulgated under the Securities Act for this issuance of securities.
(j) On January 8, 1999 and April 6, 1999, we issued 4,706,196 shares of
Series B preferred stock to a group of private investors at $2.46 per share for
an aggregate purchase price of $11,577,242.16. The Registrant relied on the
exemption from registration provided by Section 4(2) of the Securities Act for
this issuance of securities.
(k) On July 20, 1999, in connection with the execution of a credit agreement
we issued a warrant to Imperial Bank to purchase 5,000 shares of our Series B
preferred stock at a purchase price of $3.69 per share, for an aggregate
purchase price of $18,450. The Registrant relied on the exemption from
registration provided by Section 4(2) under the Securities Act for this
issuance of securities.
(l) On September 27, 1999, we entered into a Loan Agreement, which was
subsequently amended and restated as an Amended and Restated Loan and Warrant
Purchase Agreement on November 29, 1999, under which we issued promissory notes
in a bridge financing totaling $3,999,108.95. These notes were converted into
shares of our Series C preferred stock on December 31, 1999. In connection with
this bridge financing, we also issued warrants to purchase 141,303 shares of
our Series C preferred stock at a purchase price of $7.07 per share, for an
aggregate consideration of $999,012.21. The Registrant relied on the exemption
from registration provided by Section 4(2) of the Securities Act for this
issuance of securities.
(m) On December 31, 1999, January 21, 2000, and February 4, 2000, we issued
4,243,267 shares of Series C preferred stock to a group of private investors at
$7.07 per share for an aggregate purchase price of
II-2
<PAGE>
$29,999,897.69 including conversion of debt. The Registrant relied on the
exemption from registration provided by Section 4(2) of the Securities Act for
this issuance of securities.
(n) In 1999, we issued approximately 1,132,535 shares of our common stock to
employees or other service providers at a range of $0.107 to $5.00 per share
upon the exercise of stock options issued under our 1997 Stock Plan, for our
approximate aggregate purchase price of $285,398.82. The Registrant relied on
the exemption from registration provided by virtue of Rule 701 promulgated
under the Securities Act for this issuance of securities.
(o) On February 4, 2000, we issued a warrant to Hewlett-Packard to purchase
555,183 shares of our common stock at a purchase price of $7.07 per share, for
an aggregate purchase price of $3,925,143.81. The Registrant relied on the
exemption from registration provided by Section 4(2) under the Securities Act
for this issuance of securities.
(p) On February 28, 2000, in connection with a release of collateral under
our credit agreement, we issued a warrant to Imperial Bank to purchase 14,144
shares of our Series C preferred stock at a purchase price of $7.07 per share,
for an aggregate purchase price of $99,998.08. The Registrant relied on the
exemption from registration provided by Section 4(2) under the Securities Act
for this issuance of securities.
(q) On February 29, 2000, we issued 20,300 shares of our common stock to
Gerald Youngblood for an aggregate purchase price of $203.00 pursuant to the
exercise of Mr. Youngblood's warrant described in subsection (c) above. The
Registrant relied on the exemption from registration provided by Section 4(2)
under the Securities Act for this issuance of securities.
(r) On March 6, 2000, we issued a warrant to Hewlett-Packard to purchase
125,000 shares of our common stock for an exercise price of $5.00 per share,
for an aggregate purchase price of $625,000. The Registrant relied on the
exemption from registration provided by Section 4(2) under the Securities Act
for this issuance of securities.
(s) On April 5, 2000, we issued 5,000 shares of our common stock to the
Austin Entrepreneur's Foundation for an aggregate purchase price of $5.00. This
issuance was a charitable gift and not a transfer for value and therefore is
not a sale within the meaning of the Securities Act.
(t) On May 12, 2000, we issued 2,362 shares of our Series B Preferred Stock
and 2,749 shares of our Series C Preferred Stock to R.C. Estes for aggregate
purchase prices of $5,810.52 and $19,435.43, respectively, upon the exercise of
outstanding warrants described in subsections (h) and (l) above held by Mr.
Estes. The Registrant relied on the exemption from registration provided by
Section 4(2) of the Securities Act for this issuance of securities.
(u) Between December 31, 1999 and September 1, 2000, we issued 254,560
shares of our common stock to our employees or other service providers at a
range of $.107 to $5.00 per share upon the exercise of stock options issued
under our 1997 Stock Plan, for an approximate aggregate purchase price of
$407,597. The Registrant relied on the exemption from registration provided by
virtue of Rule 701 promulgated under the Securities Act for this issuance of
securities.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1.1** Third Amended and Restated Certificate of Incorporation of
ClearCommerce Corporation.
3.1.2** Certificate of Correction to Third Amended and Restated Certificate
of Incorporation of the ClearCommerce Corporation.
3.1.3* Form of Fourth Amended and Restated Certificate of Incorporation of
ClearCommerce Corporation to be filed immediately prior to the
closing of the offering made pursuant to this Registration Statement.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
3.2.1** Bylaws of ClearCommerce Corporation.
3.2.2* Form of Amended and Restated Bylaws of ClearCommerce Corporation to
be in effect after the closing of the offering made pursuant to this
Registration Statement.
4.1 See Exhibits 3.1.1, 3.1.2, and 3.1.3 for provisions of the
Certificate of Incorporation of ClearCommerce Corporation defining
the rights of the holders of common stock.
4.2 See Exhibits 3.2.1 and 3.2.2 for provisions of the Bylaws of the
Registrant defining the rights of the holder of common stock.
4.3** Specimen common stock certificate.
4.4** Third Amended and Restated Investors Rights Agreement, as amended,
dated December 31, 1999, by and among the Registrant and certain
stockholders of ClearCommerce Corporation, as amended.
4.5** Warrant to purchase common stock issued to Gerald Youngblood.
4.6** ClearCommerce Corporation Stock Purchase Warrant issued to Imperial
Bank.
4.7** ClearCommerce Corporation Common Stock Purchase Warrant issued to
Hewlett Packard.
4.8** ClearCommerce Corporation Warrant to Purchase Common Stock issued to
Hewlett Packard.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between ClearCommerce Corporation
and each of its directors and officers.
10.2** 1997 Stock Option/Stock Issuance Plan, as amended.
10.2.1** Form of Option Agreement under the 1997 Stock Option/Stock Issuance
Plan.
10.2.2** Form of Stock Purchase Agreement under the 1997 Stock Option/Stock
Issuance Plan.
10.2.3** Form of Stock Issuance Agreement under 1997 Stock Option/Stock
Issuance Plan.
10.3** 2000 Stock Plan.
10.3.1** Form of Option Agreement under 2000 Stock Plan.
10.3.2** Form of Restricted Stock Purchase Agreement under 2000 Stock Plan.
10.4** 2000 Employee Stock Purchase Plan.
10.4.1** Form of Subscription Agreement under the 2000 Employee Stock
Purchase Plan.
10.5** 2000 Director Option Plan.
10.5.1** Form of Option Agreement under 2000 Director Option Plan.
10.6+ Strategic Relationship and Software License Agreement between
Hewlett-Packard Company and ClearCommerce Corporation.
10.6.1+ Amendment #1 to Strategic Relationship and Software License
Agreement between Hewlett-Packard Company and ClearCommerce
Corporation.
10.6.2**+ Amendment #2 to Strategic Relationship and Software License
Agreement between Hewlett-Packard Company and ClearCommerce
Corporation.
10.6.3* Amendment #3 to Strategic Relationship and Software License
Agreement between Hewlett-Packard Company and ClearCommerce
Corporation.
10.7+ License and Service Agreement dated June 30, 1998 between
ClearCommerce Corporation and Cardservice International.
10.7.1**+ License Agreement Addendum A, dated December 31, 1998, between
ClearCommerce Corporation and Cardservice International.
10.7.2**+ License Agreement Addendum B, dated March 31, 1999, between
ClearCommerce Corporation and Cardservice International.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.7.3**+ License Agreement Addendum C, dated March 6, 2000, between
ClearCommerce Corporation and Cardservice International.
10.7.4+ Value Added Reseller License Agreement dated June 30, 1998, between
ClearCommerce Corporation and Cardservice International.
10.7.5**+ Addendum E, dated April 28, 2000, to the License and Service
Agreement by and between ClearCommerce Corporation and Cardservice
International.
10.8** Lease Agreement between CFH-FTAX Limited Partnership as Landlord,
and ClearCommerce Corporation, as tenant.
10.8.1** First Amendment to the Lease Agreement, dated April 9, 1999, between
CFH-FTAX Limited Partnership, as Landlord, and ClearCommerce
Corporation, as Tenant.
10.8.2** Second Amendment to the Lease Agreement, dated July 19, 1999,
between CFH-FTAX Limited Partnership, as Landlord, and ClearCommerce
Corporation, as Tenant.
10.8.3** Letter Agreement dated September 15, 1999 amending the Lease
Agreement between CFH-FTAX Limited Partnership and ClearCommerce
Corporation.
10.8.4** Rent schedule dated October 19, 1999 amending the Lease Agreement
between CFH-FTAX Limited Partnership and ClearCommerce Corporation.
10.8.5** Third Amendment to Lease Agreement between CFH-FTAX Limited
Partnership, as Landlord, and ClearCommerce Corporation, as Tenant
dated February 23, 2000.
10.9** Credit Agreement dated July 20, 1999, between ClearCommerce
Corporation and Imperial Bank.
10.9.1** First Amendment to Credit Agreement between ClearCommerce
Corporation and Imperial Bank dated September 14, 1999.
10.9.2** Second Amendment to Credit Agreement between ClearCommerce
Corporation and Imperial Bank dated February 28, 2000.
10.9.3** Third Amendment to Credit Agreement and Promissory Note between
ClearCommerce Corporation and Imperial Bank dated June 22, 2000.
10.9.4** Letter agreement dated July 13, 2000 between Imperial Bank and
ClearCommerce Corporation.
10.10** Employment Agreement with Alan Scutt dated November 2, 1998.
10.11** Repurchase Agreement dated September 15, 1997 between ClearCommerce
Corporation and R.C. Estes.
10.11.1** First Amendment of Repurchase Agreement between ClearCommerce
Corporation and R.C. Estes dated March 26, 1999.
10.12** Repurchase Agreement dated September 15, 1997 between ClearCommerce
Corporation and Julie Fergerson.
10.12.1** First Amendment of Repurchase Agreement between ClearCommerce
Corporation and Julie Fergerson dated March 26, 1999.
10.13** Stock Subscription Agreement dated September 15, 1997 between
ClearCommerce Corporation and Robert J. Lynch.
10.13.1** First Amendment of Stock Subscription Agreement between
ClearCommerce Corporation and Robert Lynch dated March 26, 1999.
10.14** ClearCommerce Corporation 401(K) Plan.
21.1** List of Subsidiaries.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (see Page II-4).
27.1** Financial Data Schedule.
</TABLE>
---------------------
* To be filed by amendment
** Previously filed.
+ Certain portions of this Exhibit have been omitted based upon a request for
confidential treatment and the omitted portions have been separately filed
with the Commission.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions referenced in
Item 14 of this Registration Statement 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 Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by a director, officer or controlling person in connection with the
securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 5 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on the 6th day of October, 2000.
CLEARCOMMERCE CORPORATION
/s/ Michael S. Grajeda
By:__________________________________
Michael S. Grajeda
Vice President, Chief Financial
Officer and Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 5 to the 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/ Robert J. Lynch* President, Chief Executive October 6, 2000
______________________________________ Officer and Director
Robert J. Lynch (Principal Executive
Officer)
/s/ Michael S. Grajeda Vice President, Chief October 6, 2000
______________________________________ Financial Officer and
Michael S. Grajeda Secretary (Principal
Financial Officer)
/s/ Victoria R. Richardson* Controller (Principal October 6, 2000
______________________________________ Accounting Officer)
Victoria R. Richardson
/s/ James G. Treybig* Chairman of the Board, October 6, 2000
______________________________________ Director
James G. Treybig
/s/ Scott D. Sandell* Director October 6, 2000
______________________________________
Scott D. Sandell
/s/ Wendy L. Harrington* Director October 6, 2000
______________________________________
Wendy L. Harrington
/s/ R. C. Estes* Director October 6, 2000
______________________________________
R. C. Estes
/s/ William H. McAleer* Director October 6, 2000
______________________________________
William H. McAleer
/s/ Joseph C. Aragona* Director October 6, 2000
______________________________________
Joseph C. Aragona
*By: /s/ Michael S. Grajeda
_________________________________
Michael S. Grajeda,
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of ClearCommerce Corporation
In connection with our audits of the consolidated financial statements of
ClearCommerce Corporation and its subsidiary as of December 31, 1998 and 1999,
and for each of the three years in the period ended December 31, 1999, which
financial statements are included in the prospectus, we have also audited the
financial statement schedule listed in Item 16(b) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
February 25, 2000
S-1
<PAGE>
ClearCommerce Corporation
Schedule II - Valuation and Qualifying Accounts
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance Additions Balance
At Beginning to At End
Description of Year Allowance Year
----------- ------------ --------- -------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997.................... $ 0 $ 2 $ 2
Year ended December 31, 1998.................... 2 19 21
Year ended December 31, 1999.................... 21 191 212
Valuation allowance on net deferred tax asset:
Year ended December 31, 1997.................... $ 0 $ 440 $ 440
Year ended December 31, 1998.................... 440 2,712 3,152
Year ended December 31, 1999.................... 3,152 5,541 8,603
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1.1** Third Amended and Restated Certificate of Incorporation of
ClearCommerce Corporation.
3.1.2** Certificate of Correction to Third Amended and Restated Certificate
of Incorporation of the ClearCommerce Corporation.
3.1.3* Form of Fourth Amended and Restated Certificate of Incorporation of
ClearCommerce Corporation to be filed immediately prior to the
closing of the offering made pursuant to this Registration Statement.
3.2.1** Bylaws of ClearCommerce Corporation.
3.2.2* Form of Amended and Restated Bylaws of ClearCommerce Corporation to
be in effect after the closing of the offering made pursuant to this
Registration Statement.
4.1 See Exhibits 3.1.1, 3.1.2, and 3.1.3 for provisions of the
Certificate of Incorporation of ClearCommerce Corporation defining
the rights of the holders of common stock.
4.2 See Exhibits 3.2.1 and 3.2.2 for provisions of the Bylaws of the
Registrant defining the rights of the holder of common stock.
4.3** Specimen common stock certificate.
4.4** Third Amended and Restated Investors Rights Agreement, as amended,
dated December 31, 1999, by and among the Registrant and certain
stockholders of ClearCommerce Corporation, as amended.
4.5** Warrant to purchase common stock issued to Gerald Youngblood.
4.6** ClearCommerce Corporation Stock Purchase Warrant issued to Imperial
Bank.
4.7** ClearCommerce Corporation Common Stock Purchase Warrant issued to
Hewlett Packard.
4.8** ClearCommerce Corporation Warrant to Purchase Common Stock issued to
Hewlett Packard.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between ClearCommerce Corporation
and each of its directors and officers.
10.2** 1997 Stock Option/Stock Issuance Plan, as amended.
10.2.1** Form of Option Agreement under the 1997 Stock Option/Stock Issuance
Plan.
10.2.2** Form of Stock Purchase Agreement under the 1997 Stock Option/Stock
Issuance Plan.
10.2.3** Form of Stock Issuance Agreement under 1997 Stock Option/Stock
Issuance Plan.
10.3** 2000 Stock Plan.
10.3.1** Form of Option Agreement under 2000 Stock Plan.
10.3.2** Form of Restricted Stock Purchase Agreement under 2000 Stock Plan.
10.4** 2000 Employee Stock Purchase Plan.
10.4.1** Form of Subscription Agreement under the 2000 Employee Stock Purchase
Plan.
10.5** 2000 Director Option Plan.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.5.1** Form of Option Agreement under 2000 Director Option Plan.
10.6+ Strategic Relationship and Software License Agreement between
Hewlett-Packard Company and ClearCommerce Corporation.
10.6.1+ Amendment #1 to Strategic Relationship and Software License
Agreement between Hewlett-Packard Company and ClearCommerce
Corporation.
10.6.2**+ Amendment #2 to Strategic Relationship and Software License
Agreement between Hewlett-Packard Company and ClearCommerce
Corporation.
10.6.3* Amendment #3 to Strategic Relationship and Software License
Agreement between Hewlett-Packard Company and ClearCommerce
Corporation.
10.7+ License and Service Agreement dated June 30, 1998 between
ClearCommerce Corporation and Cardservice International.
10.7.1**+ License Agreement Addendum A, dated December 31, 1998, between
ClearCommerce Corporation and Cardservice International.
10.7.2**+ License Agreement Addendum B, dated March 31, 1999, between
ClearCommerce Corporation and Cardservice International.
10.7.3**+ License Agreement Addendum C, dated March 6, 2000, between
ClearCommerce Corporation and Cardservice International.
10.7.4+ Value Added Reseller License Agreement dated June 30, 1998, between
ClearCommerce Corporation and Cardservice International.
10.7.5**+ Addendum E, dated April 28, 2000, to the License and Service
Agreement by and between Cardservice International and ClearCommerce
Corporation dated June 30, 1998.
10.8** Lease Agreement between CFH-FTAX Limited Partnership as Landlord,
and ClearCommerce Corporation, as tenant.
10.8.1** First Amendment to the Lease Agreement, dated April 9, 1999, between
CFH-FTAX Limited Partnership, as Landlord, and ClearCommerce
Corporation, as Tenant.
10.8.2** Second Amendment to the Lease Agreement, dated July 19, 1999,
between CFH-FTAX Limited Partnership, as Landlord, and ClearCommerce
Corporation, as Tenant.
10.8.3** Letter Agreement dated September 15, 1999 amending the Lease
Agreement between CFH-FTAX Limited Partnership and ClearCommerce
Corporation.
10.8.4** Rent schedule dated October 19, 1999 amending the Lease Agreement
between CFH-FTAX Limited Partnership and ClearCommerce Corporation.
10.8.5** Third Amendment to Lease Agreement between CFH-FTAX Limited
Partnership, as Landlord, and ClearCommerce Corporation, as Tenant
dated February 23, 2000.
10.9** Credit Agreement, dated July 20, 1999, between ClearCommerce
Corporation and Imperial Bank.
10.9.1** First Amendment to Credit Agreement between ClearCommerce
Corporation and Imperial Bank dated September 14, 1999.
10.9.2** Second Amendment to Credit Agreement between ClearCommerce
Corporation and Imperial Bank dated February 28, 2000.
10.9.3** Third Amendment to Credit Agreement and Promissory Note between
ClearCommerce Corporation and Imperial Bank dated June 22, 2000.
10.9.4** Letter agreement dated July 13, 2000 between Imperial Bank and
ClearCommerce Corporation.
10.10** Employment Agreement with Alan Scutt dated November 2, 1998.
10.11** Repurchase Agreement dated September 15, 1997 between ClearCommerce
Corporation and R.C. Estes.
10.11.1** First Amendment of Repurchase Agreement between ClearCommerce
Corporation and R.C. Estes dated March 26, 1999.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.12** Repurchase Agreement dated September 15, 1997 between ClearCommerce
Corporation and Julie Fergerson.
10.12.1** First Amendment of Repurchase Agreement between ClearCommerce
Corporation and Julie Fergerson dated March 26, 1999.
10.13** Stock Subscription Agreement dated September 15, 1997 between
ClearCommerce Corporation and Robert J. Lynch.
10.13.1** First Amendment of Stock Subscription Agreement between
ClearCommerce Corporation and Robert Lynch dated March 26, 1999.
10.14** ClearCommerce Corporation 401(K) Plan.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (see Page II-4).
27.1** Financial Data Schedule.
</TABLE>
---------------------
* To be filed by amendment
** Previously filed.
+ Certain portions of this Exhibit have been omitted based upon a request for
confidential treatment and the omitted portions have been separately filed
with the Commission.
