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PROSPECTUS
PARTSBASE.COM [LOGO]
3,500,000 SHARES OF COMMON STOCK
$13.00 PER SHARE INITIAL PUBLIC OFFERING PRICE
PartsBase.com, Inc. is offering 3,500,000 shares of its common stock in an
initial public offering. Prior to this initial public offering, there has been
no public market for our common stock. Our common stock has been approved for
listing on the Nasdaq National Market under the symbol "PRTS."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7 FOR RISKS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE SHARES OF
OUR COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
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.
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Initial public offering price............................... $13.00 $45,500,000
Underwriting discounts and commissions...................... $ 0.91 $ 3,185,000
Proceeds, before expenses, to PartsBase.com................. $12.09 $42,315,000
</TABLE>
We have granted the underwriters a 45-day option to purchase up to an
additional 525,000 shares of common stock to cover over-allotments. The
underwriters expect to deliver shares of common stock to purchasers on or about
March 27, 2000.
ROTH CAPITAL PARTNERS, INC.[LOGO] PENNSYLVANIA MERCHANT GROUP [LOGO]
The date of this prospectus is March 22, 2000.
<PAGE>
The inside front cover includes:
THE E-COMMERCE MARKETPLACE FOR THE AVIATION INDUSTRY.
[A PICTURE OF THE PARTSBASE.COM WEB SITE'S HOME PAGE]
[A PICTURE OF THE PARTSBASE.COM WEB SITE'S PARTS SEARCH PAGE]
with the following text to the right of the picture:
THE PARTS YOU NEED @ YOUR FINGERTIPS!
- 24 hour global services
- Multiple search options
- Remote inventory management
[A PICTURE OF THE PARTSBASE.COM WEB SITE'S PARTS SEARCH RESULTS PAGE]
The inside back cover includes:
[A PICTURE OF THE PARTSBASE.COM WEB SITE'S AUCTION PAGE]
with the following text to the left of the picture:
XCHANGEBASE
- Auction off excess inventory
- Purchase at the lowest available price
[A PICTURE OF THE PARTSBASE.COM WEB SITE'S JOB SEARCH PAGE]
with the following text to the right of the picture:
JOBSBASE
- Find a job in the aviation industry
- Find the right employee
[A PICTURE OF THE PARTSBASE.COM WEB SITE'S AIRCRAFT SEARCH PAGE]
with the following text to the left of the picture:
AIRCRAFTSALESBASE
- Buy, sell and trade aircraft
At the bottom center of the inside back cover is the following text:
http://www.partsbase.com/
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 22
Management.................................................. 32
Certain Relationships and Related Transactions.............. 39
Principal Stockholders...................................... 40
Description of Capital Stock................................ 42
Shares Eligible for Future Sale............................. 45
Plan of Distribution........................................ 46
Legal Matters............................................... 48
Experts..................................................... 48
Where You Can Find More Information......................... 48
Index to Financial Statements............................... F-1
</TABLE>
"PARTSBASE" is a registered trademark of PartsBase. We have applied for
federal trademark registration for "PARTSBASE.COM". All other trademarks or
service marks appearing in this prospectus are the property of their respective
holders.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND
OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THIS ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THE RELATED NOTES BEGINNING ON
PAGE F-1. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS.
OUR BUSINESS
PartsBase.com is an online provider of Internet business-to-business
e-commerce services for the aviation industry. Our global e-commerce
marketplace, sometimes referred to as our "e-marketplace" or our "solution,"
provides a means for our over 13,000 members in more than 115 countries to buy
and sell new, used and overhauled aviation parts and products in an efficient,
competitive and cost-effective manner. We estimate that our e-marketplace
utilizes a database of approximately 1,200 suppliers, which we believe
constitutes one of the largest independent databases of inventory and
information in the aviation industry. Current members of our e-commerce
marketplace include Boeing, Honeywell, Federal Express, Pratt & Whitney,
Northrup Grumman Aviation and United Parcel Service.
The worldwide market for aviation parts and products is highly fragmented
and includes many types of suppliers, such as airlines, original equipment
manufacturers, also known as OEMs, numerous independent distributors, on-site
airport maintenance providers, also known as fixed base operators, Federal
Aviation Administration certified facilities, traders and brokers. Aerospace
Industries Association estimates that total exports and imports of aircraft
parts and products were approximately $29 billion in 1999. Furthermore, in
recent years, the airline industry has experienced rapid growth in business and
leisure travel. As a result, the world fleet of aircraft is projected to
increase from 12,600 aircraft in 1998 to 28,400 aircraft in 2018, according to
Boeing's 1999 Current Market Outlook. The increase in travel and the number of
aircraft have likely contributed to demand for aviation parts and products as
aircraft must be serviced at scheduled intervals. In addition, management
believes that as the age of the world fleet of aircraft increases, demand for
new, used and overhauled parts and products may increase. Forrester Research
estimates that the business-to-business e-commerce market will grow from
$43 billion in 1998 to $1.3 trillion by 2003.
Our goal is to solidify a position as a leading aviation industry e-commerce
marketplace in order to capitalize on the continued expansion of the market for
aviation parts and products. Our solution takes advantage of the growth,
pervasiveness, low costs and community building nature of the Internet as a
basis for e-commerce for the broad, highly fragmented aviation industry. We
believe that the value of our e-marketplace grows substantially as each new
member brings additional parts, products, information and buying power to our
community.
OUR SOLUTION
Our solution is designed to streamline the procurement cycle for our members
by enabling them to source, bid parts and products, and eventually manage their
order payment online. Our target members are primarily the businesses that buy
and sell aviation parts, supplies and components in the global marketplace, and
our current members vary from small businesses to Fortune 500 companies such as
General Electric, Honeywell, AMR and Boeing. We have designed our e-marketplace
to meet the needs of these customers and their industry. With a standard
Internet connection, a Web browser and a PartsBase.com membership, each of our
e-marketplace members can immediately participate as both a buyer and a seller.
Our e-marketplace is designed to provide advantages over traditional
procurement processes, including:
- reduced procurement costs;
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- more efficient pricing and improved access to sellers for buyers;
- ability to locate the most geographically desirable parts;
- expanded distribution opportunities for sellers; and
- ease of use and better access to information.
Our current Web site features include:
- online buying and selling utilizing advanced parts search features,
inventory listings, and requests for quotations, also known as RFQs,
member access to detailed information regarding current transactions;
- online auctions for aviation parts and products;
- procurement controls providing members with the ability to monitor
corporate purchasing; and
- community-building information such as industry job and aircraft sales
listings, as well as links to members and other industry Web sites.
In addition, we have recently signed an agreement with Tradex
Technologies, Inc., a subsidiary of Ariba, Inc., to install and implement
customized software that will allow for seamless online transactions. We have
also contracted with Trading Dynamics, Inc., another subsidiary of Ariba, Inc.,
to provide software for our auction platform. We expect that this transaction
software will further enable online negotiating, pricing and bidding, as well as
allow us to act as a clearing house for products, and to allow our members to
complete their transactions online.
We have a limited operating history, have limited revenues and have never
been profitable. In 1999, we generated revenues of $362,224 and incurred a net
loss attributable to holders of common stock of $7,815,409.
OUR BUSINESS STRATEGY
Our objective is to establish our e-marketplace as the preferred aviation
industry business-to-business e-commerce solution. The key elements of our
strategy include:
- Achieving growth through transaction fees and other sources of
revenues;
- Strengthening the PartsBase.com brand;
- Increasing membership and market penetration;
- Establishing and expanding strategic sales and marketing relationships;
- Expanding our international presence; and
- Attracting and retaining members with new content, features and
services.
The successful implementation of our strategy will be subject to many risks
and will depend on many factors, including but not limited to the continued
growth and acceptance of e-commerce in the aviation industry as a whole, and the
acceptance of our business model in particular. We may be adversely affected by
a variety of risks and difficulties. For a detailed description of these risks,
please refer to the "Risk Factors" section contained in this prospectus.
OUR HISTORY
We began operations in April 1996 under the name Aviation Parts Base, a
division of Aviation Laboratories, Inc. While our Web site was operational in
1996, we did not begin charging subscription fees until November 1998. In
April 1999, the assets of the division were conveyed to Robert A. Hammond, Jr.
in connection with the sale of Mr. Hammond's equity interest in Aviation
Laboratories, Inc. On April 27, 1999, Mr. Hammond transferred the assets of the
division into and incorporated PartsBase.com, Inc. as a Texas corporation. Our
headquarters are located at 7171 N. Federal Highway, Boca Raton, Florida 33487
and our telephone number is (561) 443-3302. Our Web site address is
WWW.PARTSBASE.COM. The information contained on our Web site is not a part of
this prospectus.
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THE OFFERING
Unless otherwise indicated, the following information assumes that the
underwriters do not exercise the over-allotment option to purchase up to 525,000
additional shares in the offering and reflects the automatic conversion of all
outstanding shares of preferred stock and all outstanding convertible notes into
shares of our common stock upon completion of this offering.
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COMMON STOCK OFFERED BY US................... 3,500,000 shares
COMMON STOCK OUTSTANDING AFTER THIS 14,087,500 shares (1)
OFFERING...................................
USE OF PROCEEDS.............................. We intend to use substantially all the
proceeds of this offering for general
corporate purposes, including working
capital, information technology, expansion of
sales and marketing activities and possible
acquisitions. We may also use a portion of
the net proceeds for the development of
business-to-business e-commerce solutions for
other industries.
SHARES BEING REGISTERED FOR THE ACCOUNT OF
EXISTING STOCKHOLDERS...................... An additional 1,336,250 shares are being
registered pursuant to the registration
statement of which this prospectus is a part
on behalf of the existing stockholders
identified in the registration statement.
These shares may not be sold, transferred or
assigned without the consent of the
underwriters during the 180 day period
following the effective date of this
offering. These shares are not being
underwritten by the underwriters and we will
not receive any of the proceeds from their
sale.
</TABLE>
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(1) Excludes:
- 175,000 shares issuable upon exercise of outstanding stock purchase
warrants;
- 2,000,000 shares reserved for issuance under our stock option plan, under
which options to acquire 987,875 shares are outstanding as of the date of
this prospectus; and
- 262,500 shares of common stock, or 301,875 shares if the overallotment
option is exercised in full, issuable upon exercise of a stock purchase
warrant to be issued to Roth Capital Partners, Inc. and Pennsylvania
Merchant Group, the representatives of the underwriters, upon completion
of the offering at an exercise price equal to $21.45 per share.
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SUMMARY FINANCIAL DATA
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<CAPTION>
PERIOD FROM
APRIL 1, 1996
(INCEPTION)
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1996 1997 1998 1999
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<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue............................................ $ -- $ 2,861 $ 3,504 $ 362,224
Cost of revenue........................................ 16,842 104,041 43,462 1,412,532
Noncash compensation expense........................... -- -- -- 1,799,139
---------- ---------- ---------- -----------
Total cost of revenue.................................. 16,842 104,041 43,462 3,211,671
---------- ---------- ---------- -----------
Gross loss............................................. (16,842) (101,180) (39,958) (2,849,447)
Operating expenses
General and administrative........................... 55,064 90,452 108,163 1,293,091
Noncash compensation expense......................... 899,821
---------- ---------- ---------- -----------
Total operating expenses........................... 55,064 90,452 108,163 2,192,912
---------- ---------- ---------- -----------
Operating loss..................................... (71,906) (191,632) (148,121) (5,042,359)
Other income (expense)
Interest expense..................................... -- -- -- (881,652)
Interest income...................................... -- -- -- 10,977
-----------
Total other income (expense)....................... -- -- -- (870,675)
---------- ---------- ---------- -----------
Net loss (1)....................................... (71,906) (191,632) (148,121) (5,913,034)
Value of preferred stock beneficial conversion
feature.......................................... -- -- -- (1,902,375)
---------- ---------- ---------- -----------
Net loss applicable to common stockholders......... $ (71,906) $ (191,632) $ (148,121) $(7,815,409)
========== ========== ========== ===========
Net loss per common share--basic and diluted (1)....... $ (0.84)
Weighted average common shares outstanding--basic and
diluted.............................................. 9,251,250
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 735,276 $ 735,276 $41,250,276
Working capital (deficit)................................... (687,172) (687,172) 39,827,828
Total assets................................................ 4,729,295 2,955,517 43,470,517
Convertible notes payable................................... 962,500 -- --
Total stockholders' equity.................................. 1,541,916 730,638 41,245,638
</TABLE>
The pro forma balance sheet data gives effect to the mandatory conversion of
all outstanding convertible notes into common stock under the terms of the
June 9, 1999 private placement, the mandatory conversion of the convertible
notes issued on November 10, 1999, and the issuance and mandatory conversion of
outstanding convertible preferred stock into common stock. Additionally, the pro
forma as adjusted balance sheet data gives effect to the sale of 3,500,000
shares of our common stock at the initial public offering price of $13.00 per
share after deducting underwriters discounts and commissions and estimated
offering expenses.
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(1) Since we have incurred net losses since inception, we would not have
incurred any income tax liabilities during the periods prior to
incorporation on April 27, 1999, and any deferred tax assets would have had
a corresponding valuation allowance and therefore pro forma presentation is
not required.
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RISK FACTORS
You should carefully consider the following risks, in addition to the other
information contained in this prospectus, before making any investment decision.
As a result of any of the risks we encounter, our business, financial condition
and results of operations could be materially adversely affected. In addition,
any of these adverse effects could cause the trading price of our common stock
to decline and you may correspondingly lose all or some portion of your
investment.
RISKS RELATED TO OUR BUSINESS
WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN AND WE HAVE
OPERATED OUR BUSINESS FOR ONLY A SHORT PERIOD OF TIME.
Our business model is new to the aviation industry and our ability to
generate revenues or profits is unproven. We have a limited operating history,
which will make it difficult for you to evaluate our performance. Our prospects
will be dependent upon our ability to effectively implement our business model
and adapt to changes in the business-to-business e-commerce market. If our
business model is not viable or if we are unable to identify and address changes
in our markets, we will not be able to grow our business, compete effectively or
achieve profitability. These factors could cause our stock price to fall
significantly.
WE PRIMARILY RELY ON REVENUE FROM SUBSCRIPTIONS AND WE MAY NOT BE ABLE TO
SUCCESSFULLY EXPAND OUR MEMBERSHIP BASE OR ESTABLISH ADDITIONAL REVENUE SOURCES.
We currently generate revenues from e-commerce customers in the aviation
industry who subscribe to our service. Our success will be dependent on our
ability to expand our membership base within the aviation industry. While we
have experienced increases in our subscriber base, there can be no assurance
that our recent growth in subscriber base can be continued. In addition, our
success will depend on our ability to generate additional revenues through the
introduction of a transaction-based model and/or the expansion into new markets
and industries. We cannot assure you that we will be successful in any efforts
to generate additional revenues.
WE HAVE NEVER BEEN PROFITABLE, ANTICIPATE CONTINUED LOSSES AND CANNOT GUARANTEE
PROFITABILITY IN THE FUTURE, AND THEREFORE YOUR INVESTMENT CANNOT BE VALUED ON
THE BASIS OF OUR EARNINGS.
We have never been profitable and expect to continue to incur operating
losses on both a quarterly and annual basis for the foreseeable future. We may
be unable to ever achieve profitability in the future. We have incurred net
losses in each accounting period since we began operations in April 1996,
including a net loss attributable to holders of common stock of $7,815,409 for
the year ended December 31, 1999. We expect to continue to make significant
expenditures for sales and marketing, information technology and general and
administrative functions. As a result, we will need to generate significant
revenues to achieve profitability. There can be no assurance that our revenues
will grow in the future or that we will achieve sufficient revenues for
profitability. If our revenues grow more slowly than we anticipate, or if our
operating expenses exceed our expectations, our business would be severely
harmed.
WE RECEIVE SUBSTANTIALLY ALL OF OUR REVENUE FROM PARTICIPANTS IN THE AVIATION
INDUSTRY, SO A DOWNTURN IN THE AVIATION INDUSTRY COULD DAMAGE OUR BUSINESS.
We receive substantially all of our revenue from members associated with the
aviation industry, and we expect these revenues will account for substantially
all of our revenues for the foreseeable future. Our dependence on members
associated with the aviation industry makes us vulnerable to downturns in that
industry. A downturn could lead our members to reduce their level of activity on
our e-marketplace and cause some to cancel their subscription.
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INTENSE COMPETITIVE PRESSURES IN THE BUSINESS-TO-BUSINESS E-COMMERCE MARKET MAY
IMPEDE OUR ABILITY TO ESTABLISH A SUBSTANTIAL MARKET SHARE THAT WOULD ALLOW US
TO BE PROFITABLE.
The business-to-business e-commerce market is new, rapidly evolving, and
intensely competitive, and we expect competition to further intensify in the
future. Barriers to entry are minimal, and competitors may develop and offer
services similar to ours in the future. We expect that additional companies will
offer competing e-commerce solutions in the future, and our business could be
severely harmed if we are not able to compete successfully against current or
future competitors. In addition, our members and partners may become competitors
in the future.
Increased competition is likely to result in price reductions, reduced gross
margins and/or loss of market share, any of which could harm our business. Our
actual and potential competitors vary in size and in the scope and breadth of
the services they offer.
IF WE FAIL TO EFFECTIVELY MANAGE OUR RAPIDLY EXPANDING OPERATIONS AND THE
INCREASING USE OF OUR SERVICES, WE MAY LOSE MEMBERS OR INCUR SIGNIFICANT
EXPENSES.
Our success depends on effective planning and growth management. We will
need to continue to improve our financial and managerial controls, reporting
systems, and procedures, and we will need to continue to expand, train and
manage our workforce. We continue to increase the scope of our operations and we
have grown our workforce substantially. Our rapid growth has placed, and will
continue to place, a significant strain on our management and operational
systems and resources. If we do not successfully implement and integrate these
new systems or if we fail to scale these systems to our growth, the performance
of our Web site may suffer which would cause us to lose members. In addition,
any failure could make us unable to operate with adequate, accurate and timely
financial and operational information which could result in us incurring
unnecessary and possibly damaging expenses.
FUTURE GROWTH OF OUR OPERATIONS MAY MAKE ADDITIONAL CAPITAL OR FINANCING
NECESSARY, SO YOU MAY BECOME SUBJECT TO DILUTION OF YOUR INVESTMENT AND YOUR
RIGHTS AS A STOCKHOLDER MAY BE SUBORDINATED TO OTHER INVESTORS.
We anticipate that the proceeds of this offering, cash on hand and cash
equivalents will be adequate to meet our working capital needs for at least the
next 12 months. However, beyond that period, we may need to raise additional
funds in order to:
- finance unanticipated working capital requirements;
- develop or enhance existing services or products;
- fund costs associated with strategic marketing alliances;
- respond to competitive pressures; and
- acquire complementary businesses, technologies, content or products.
We cannot be certain that we will be able to obtain needed funds on
favorable terms, if at all. If we decide to raise funds by issuing additional
equity securities, purchasers in this offering may experience additional
dilution. Issuance of additional equity securities may also involve granting
preferences or privileges ranking senior to those purchasers in this offering.
WE MAY BE UNABLE TO OBTAIN SUFFICIENT FUNDS TO EFFECTIVELY OPERATE OUR BUSINESS
WHICH COULD DAMAGE OUR COMPETITIVE POSITION.
In the rapidly evolving and highly competitive e-commerce industry, our
future prospects will depend heavily on our ability to take advantage of new
business opportunities and respond to technological developments. There can be
no assurances that we will have sufficient capital resources to
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respond to business opportunities, technological advancements and competitive
pressures. A lack of capital resources could seriously damage our competitive
position and prospects.
BECAUSE OUR REVENUE IS DERIVED FROM PROVIDING E-MARKETPLACE ACCESS TO
SUBSCRIBERS FOR AN ANNUAL SUBSCRIPTION FEE, THE CANCELLATION OR NON-RENEWAL OF
THESE SUBSCRIPTIONS WOULD HURT OUR BUSINESS.
We have generated substantially all of our revenues to date through member
subscription fees for access to our e-marketplace. Generally, our subscription
fees are paid on an annual basis, and these subscriptions may be terminated on
short-term notice. We have expended significant financial and personnel
resources and have expanded our operations on the assumption that our
subscribers will renew these annual subscriptions. We do not have a sufficiently
long history of operations to be able to predict renewal rates of our members.
If our members fail to continuously renew, or if they terminate, their
subscriptions, our revenues would be significantly reduced and our business
could suffer dramatically.
THERE IS A FINITE NUMBER OF POTENTIAL SUBSCRIBERS AND WE MAY BE UNABLE TO
DEVELOP OTHER MEANS OF GENERATING REVENUE, SO OUR GROWTH MAY BE LIMITED.
A major element of our growth strategy is the expansion of our subscriber
base. Our potential subscriber base is limited by the number of participants in
the aviation market. Additionally, the barriers to entry which exist in the
aviation market may limit the entry of additional subscribers into our
e-marketplace. Accordingly, the number of potential subscribers to our
e-marketplace is likely finite, in which case our revenues may be similarly
limited if we cannot generate revenue through other means.
IF OUR SELLERS DO NOT PROVIDE TIMELY, PROFESSIONAL AND LAWFUL DELIVERY OF
PRODUCTS TO OUR BUYERS, OUR MEMBERSHIP MAY DECREASE AND WE MAY HAVE LIABILITY.
We rely on our sellers to deliver purchased parts and products to our buyers
in a professional, safe and timely manner. If our sellers do not deliver the
parts and products to our buyers in a professional, safe and timely manner, then
our service will not meet customer expectations and our reputation and brand
will be damaged. In addition, deliveries that are nonconforming, late or are not
accompanied by information required by applicable laws or regulations, could
expose us to liability or result in decreased adoption and use of our solution,
which could have a negative effect on our business, results of operations and
financial condition.
WE CANNOT GUARD AGAINST HARM TO OUR BUSINESS FROM THE FRAUDULENT ACTIVITIES OF
THIRD PARTIES ON OUR WEB SITE.
Our future success will depend largely upon sellers reliably delivering and
accurately representing their listed products and buyers paying the agreed
purchase price. We do not take responsibility for the delivery of payment or
goods to any member. We have received in the past, and anticipate that we will
receive in the future, communications from members who did not receive the
purchase price or the products that were to be exchanged. While we can suspend
the privileges of members who fail to fulfill their delivery or payment
obligations, we do not currently have the ability to require sellers to deliver
products or buyers to make payments. We do not compensate members who believe
they have been defrauded by other members. Any negative publicity generated as a
result of fraudulent or deceptive conduct by members of our e-marketplace could
damage our reputation and diminish the value of our brand name. We may in the
future receive requests from members for reimbursement or threats of legal
action against us if no reimbursement is made. Any resulting litigation could be
costly for us, divert management attention, result in increased costs of doing
business, lead to adverse judgments, or otherwise harm our business.
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IF WE ARE UNABLE TO IMPLEMENT ADEQUATE MEASURES TO MAINTAIN THE VALUE OF OUR
INTELLECTUAL PROPERTY AND INTERNET DOMAIN NAME, OUR ABILITY TO COMPETE MAY BE
SEVERELY HARMED.
As an Internet company, our current and future copyrights, service marks,
trademarks, patents, trade secrets, domain name and similar intellectual
property, if any, are especially vital to our success. Despite our precautions,
unauthorized third parties may infringe or misappropriate our intellectual
property, copy portions of our services or reverse engineer or obtain and use
information that we regard as proprietary. Any infringement or misappropriation
of our intellectual property or proprietary information could make it difficult
for us to compete.
In addition, we currently hold various Internet Web addresses relating to
our network, including the domain name "PARTSBASE.COM." If we are not able to
prevent third parties from acquiring Web addresses that are similar to our
addresses, third parties could acquire similar domain names which could create
confusion that diverts traffic away from our e-marketplace to other competing
Web sites.
OTHER PARTIES MAY ASSERT CLAIMS AGAINST US THAT WE ARE INFRINGING UPON THEIR
INTELLECTUAL PROPERTY RIGHTS, WHICH COULD HARM OUR FINANCIAL CONDITION AND
ABILITY TO COMPETE.
We cannot be certain that our services do not infringe upon the intellectual
property rights of others. Because patent applications in the United States are
not publicly disclosed until the patent is issued, applications may have been
filed which relate to services similar to those offered by us. We may be subject
to legal proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. If our services violate
third-party proprietary rights, we cannot assure you that we would be able to
obtain licenses to continue offering such services on commercially reasonable
terms, or at all. Any claims against us relating to the infringement of
third-party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and for
injunctions preventing us from distributing these services. Such claims could
severely harm our financial condition and ability to compete.
IF WE ARE UNABLE TO LICENSE THIRD-PARTY TECHNOLOGIES OR EFFECTIVELY INTEGRATE
THEM, WE MAY EXPERIENCE DELAYS IN DEVELOPMENT OR EXPANSION OF OUR BUSINESS.
The e-commerce market is rapidly evolving and we have and will depend on
third-party software and other technology for the effective operation of our Web
site and business. We may not be able to license or renew the license for these
technologies on terms favorable to us or at all. Our inability to obtain
necessary third-party licenses could delay the continued development of our
business and services which could result in a loss of members, slow our growth
and severely harm our business. In addition, even if we are able to license
needed technology, we may not be able to successfully integrate such technology
into our operations which could also result in a loss of members, slow our
growth and severely harm our business.
RISKS RELATED TO THE INTERNET AND E-COMMERCE INDUSTRIES
OUR GROWTH MAY BE IMPAIRED IF THE INTERNET IS UNABLE TO ACCOMMODATE GROWTH IN
E-COMMERCE.
Our success depends on the widespread use of and growth in the use of the
Internet for retrieving, sharing and transferring information among buyers and
sellers in the aviation parts market. If the Internet cannot accommodate growth
in e-commerce or experiences periods of poor performance, the growth of our
business may suffer. Our ability to sustain and improve our services is limited,
in part, by the speed and reliability of the networks operated by third parties.
Consequently, the emergence and growth of the market for our services is
dependent on improvements being made to the Internet infrastructure to alleviate
overloading and congestion. Additionally, the possible slow adoption of the
Internet as a means of commerce by businesses may harm our prospects.
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Even if the Internet is widely adopted as a means of commerce, the adoption
of our network for procurement, particularly by companies that have relied on
traditional means of procurement, will require broad acceptance of e-commerce
and online purchasing. In addition, companies that have already invested
substantial resources in traditional methods of procurement, or in-house
e-commerce solutions, may be reluctant to adopt our e-commerce solution, thus
impairing the growth of our member base and revenue potential.
THE SECURITY RISKS RELATED TO E-COMMERCE MAY CAUSE MEMBERS TO REDUCE THE USE OF
OUR SERVICES, AND ATTEMPTING TO GUARD AGAINST THESE RISKS MAY CAUSE US TO INCUR
SIGNIFICANT COSTS AND EXPENSES.
A fundamental requirement to conduct business-to-business e-commerce is the
secure transmission of information over public networks. If our members are not
confident in the security of e-commerce, they may not effect transactions on our
e-marketplace or renew their subscriptions, which would severely harm our
business. There can be no guarantee that advances in computer capabilities, new
discoveries in the field of cryptography, or other developments will not result
in the compromise or breach of the algorithms that we use to protect content and
transactions on our e-marketplace or proprietary information in our databases.
We may be required to incur significant costs to protect against security
breaches or to alleviate problems caused by breaches. Further, a well-publicized
compromise of security could deter people from using the Internet to conduct
transactions that involve transmitting confidential information. Our failure to
prevent security breaches, or well-publicized security breaches affecting the
Internet in general, could adversely affect the willingness of our members to
use our services.
IF OUR SELLERS FAIL TO PROVIDE TIMELY AND ACCURATE INFORMATION, OUR MEMBERSHIP
BASE AND POTENTIAL REVENUE MAY DECLINE.
Our members use our service in large part because of the comprehensive
breadth and accuracy of our databases. It is our responsibility to load seller
product information into our database and categorize the information for search
purposes. However, we are dependent on our sellers to provide us in a timely
manner with accurate, complete, and current information regarding inventory. If
our timely loading of this information is impaired, this could result in member
dissatisfaction and a loss of members.
WE MAY NOT BE ABLE TO KEEP UP WITH TECHNOLOGICAL ADVANCEMENTS, WHICH COULD
RESULT IN A LOSS OF MEMBERS AND HARM OUR ABILITY TO COMPETE.
The market for Internet commerce is characterized by rapid change, evolving
industry standards and the frequent introduction of new technological products
and services. The introduction of new technology, products, services or
standards may prove to be too difficult, costly or simply impossible to
integrate into our existing systems. Moreover, innovations could render obsolete
our existing or any future products and services. Our ability to remain
competitive will also depend heavily upon our ability to maintain and upgrade
our technology products and services. We must continue to add hardware and
enhance software to accommodate any increased content and use of our Web site.
If we are unable to increase the data storage and processing capacity of our
systems at least in pace with the growth in demand, our Web site may fail to
operate at an optimal level for unknown periods of time. As a relatively small
company in the market for Internet commerce, we will be in a position of
responding to technological changes rather than establishing them. Any
difficulty keeping pace with technological advancements could hurt our ability
to retain members and effectively compete.
11
<PAGE>
BECAUSE WE DO NOT MAINTAIN A REDUNDANT SYSTEM, ANY SYSTEM FAILURE COULD DELAY OR
INTERRUPT OUR SERVICE WHICH COULD SEVERELY HARM OUR BUSINESS AND RESULT IN A
LOSS OF MEMBERS.
Our ability to successfully maintain an e-commerce marketplace and provide
acceptable levels of customer service depends largely on the efficient and
uninterrupted operation of our computer and communications hardware and network
systems. Any interruptions could severely harm our business and result in a loss
of members. Our computer and communications systems are located in Boca Raton,
Florida. Although we periodically back up our databases to tapes and store the
backup tapes offsite, we have not maintained a redundant site. As a result, our
systems and operations are particularly vulnerable to damage or interruption
from human error, sabotage, fire, flood, hurricane, power loss,
telecommunications or equipment failure, and similar events. We cannot assure
you that we will not experience system failures in the future. Moreover, we have
experienced delays and interruptions in our telephone and Internet access which
have prevented members from accessing our e-marketplace and customer service
department. Furthermore, we do not have a formal disaster recovery plan and do
not carry sufficient business interruption insurance to compensate us for losses
that may occur as a result of any system failure, and therefore the occurrence
of any system failure or similar event could harm our business dramatically.
DEFECTS IN THE COMPLEX SOFTWARE ON WHICH OUR SERVICES DEPEND COULD CAUSE SERVICE
INTERRUPTIONS THAT COULD DAMAGE OUR REPUTATION AND HARM OUR BUSINESS.
Unlike many traditional suppliers and distributors of aviation parts, we are
wholly dependent on the error-free functioning of our Web site and its
associated software. Our e-marketplace depends on complex software developed
internally and by third parties. Moreover, we are relying on third-party
software to implement our transaction-based model, which software has not yet
been integrated into our system. Software often contains defects, particularly
when first introduced or when new versions are released. Our testing procedures
may not discover software defects that affect our new or current services or
enhancements until after they are deployed. These defects could cause service
interruptions, which could damage our reputation or increase our service costs,
cause us to lose revenue, delay market acceptance, or divert our development
resources, any of which could severely harm our business, financial condition,
and results of operations.
WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE
INTERNET AND LIABILITY FOR AIRCRAFT PRODUCTS SOLD OVER THE INTERNET.
We could be exposed to liability with respect to third-party information
that may be accessible through our Web site. If any third-party content
information provided on our Web site contains errors, consumers potentially
could make claims against us for losses incurred in reliance on that
information. In addition, because defective aviation products can result in
substantial losses of property or life, we have a relatively greater risk of
being exposed to product liability claims arising out of or relating to aviation
parts and products sold through our Web site, which could result in us incurring
substantial defense costs and, if successful, liability, either of which could
severely harm our business. We currently carry no policies which would insure us
against product liability claims.
RISKS RELATED TO THIS OFFERING
VOTING CONTROL BY INSIDERS COULD ADVERSELY AFFECT THE TRADING PRICE OF OUR
STOCK.
We anticipate that our executive officers, directors and principal
stockholders will, in the aggregate, beneficially own approximately 66.1% of our
outstanding common stock following the completion of this offering, or 63.8% if
the underwriters' over-allotment option is exercised in full. These stockholders
will be able to exercise substantial influence over all matters requiring
approval by our stockholders, including the election of directors and approval
of significant corporate transactions. This concentration
12
<PAGE>
of ownership may have the effect of delaying or preventing a change in control
of PartsBase.com, which could impair our attractiveness as an acquisition target
and, as a result, adversely affect the trading price of our stock.
YOU WILL EXPERIENCE IMMEDIATE DILUTION WITH RESPECT TO YOUR SHARES AND
ADDITIONAL DILUTION IF WE NEED MORE CAPITAL OR IF PERSONS HOLDING OPTIONS TO
PURCHASE OUR STOCK EXERCISE THEIR OPTIONS.
You will incur immediate and substantial dilution of $10.10 per share in the
net tangible book value of your shares as a result of this offering. In
addition, if we raise additional funds through future financings or to the
extent that options or warrants to purchase common stock are exercised, you may
experience further dilution.
BECAUSE WE HAVE LIMITED ASSETS, NO HISTORY OF PROFITABILITY AND WILL HAVE A
RELATIVELY SMALL MARKET CAPITALIZATION, YOU MAY EXPERIENCE SIGNIFICANT
VOLATILITY IN THE MARKET VALUE OF YOUR SHARES AND MAY BE UNABLE TO SELL OUR
STOCK ON TERMS FAVORABLE TO YOU.
Because we have limited tangible or other assets and no history of
profitability, it will be difficult for investors in the public market to
determine the intrinsic value of our shares. In addition, our initial market
capitalization and public float will be small relative to other public companies
in the business-to-business e-commerce or other sectors. As a result, the price
at which our common stock will trade after this offering is likely to be more
volatile than those of other public companies and, as a result, it may be more
difficult for you to sell our stock on terms favorable to you. In addition, any
significant volatility in the market price of our common stock could result in
the initiation of securities class action litigation which could divert our
management and financial resources from more productive uses.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR EXISTING STOCKHOLDERS MAY ADVERSELY
AFFECT OUR STOCK PRICE.
After this offering, 14,087,500 shares of common stock will be outstanding.
Of these shares, the 3,500,000 shares sold in this offering will be freely
tradable without restrictions under the Securities Act of 1933, except for any
shares purchased by our "affiliates," as defined in Rule 144 under the
Securities Act. The number of shares of common stock outstanding would increase
to 14,612,500 and the number of freely tradable shares would increase to
4,025,000 if the underwriters exercise their over-allotment option in full. The
market price of our common stock could drop due to the sales of a large number
of shares of our common stock or the perception that sales could occur. These
factors could also make it more difficult to raise funds through future
offerings of common stock, which could in turn harm our business if additional
funds become necessary. See "Shares Eligible for Future Sale" for a more
detailed discussion.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS, INDEMNIFICATION AGREEMENTS,
AND TEXAS BUSINESS CORPORATION LAW COULD DELAY OR PREVENT A POSSIBLE TAKEOVER,
EVEN IF A CHANGE IN CONTROL WOULD BE BENEFICIAL TO SOME STOCKHOLDERS.
Our articles of incorporation and bylaws contain provisions that could
discourage potential acquisition proposals or proxy contests and might delay or
prevent a change in control. These provisions, our indemnification agreements
with our directors and executive officers and also some provisions of Texas
Business Corporation Law could make us less attractive to potential acquirers.
These provisions could also result in our stockholders being denied a premium
for, or receiving less for, their shares than they otherwise might have been
able to obtain in a takeover attempt.
OUR STOCKHOLDERS MAY HAVE DIFFICULTY IN RECOVERING MONETARY DAMAGES FROM OUR
DIRECTORS.
Our articles of incorporation contain a provision which eliminates the
personal liability of our directors for monetary damages to be paid to us and
our stockholders for some breaches of fiduciary
13
<PAGE>
duties. In addition, we have entered into indemnification agreements with each
of our directors and executive officers regarding claims that may be asserted
against directors or officers by reason of their status as directors or
officers. As a result of this charter provision and the indemnification
agreements, our stockholders may be unable to recover monetary damages against
our directors for their actions that constitute breaches of fiduciary duties,
negligence or gross negligence. Inclusion of this provision in our charter may
also reduce the likelihood of derivative litigation against our directors and
may discourage lawsuits against our directors for breach of their duty of care
even though some stockholder claims might have been successful and benefited
stockholders.
WARNING REGARDING OUR USE OF FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements which relate to possible
future events, our future performance and our future operations. In some cases,
you can identify forward-looking statements by our use of words such as "may,"
"will," "should," "anticipates," "believes," "expects," "plans," "future,"
"intends," "could," "estimate," "predict," "potential" or "continue," as well as
the negatives of these terms or other similar expressions. These forward-looking
statements are only our predictions. Our actual results could and likely will
differ materially from these forward-looking statements for many reasons,
including the risks described above and appearing elsewhere in this prospectus.
We cannot guarantee future results, levels of activity, performance or
achievements.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of 3,500,000 shares of common stock in
this offering are approximately $40,515,000, or $46,862,250 if the underwriters'
over-allotment option is exercised in full, after deducting underwriting
discounts and commissions and estimated offering expenses.
We intend to use the net proceeds of the offering for the following
purposes, in roughly the listed amounts, subject to change at the discretion of
our management:
- expansion of our sales and marketing efforts: $7,000,000
- system upgrades, including hardware, software and equipment: $5,000,000
- working capital for general corporate purposes, including the funding of
operating losses: $28,515,000
The amounts actually expended for each of the purposes listed above may vary
significantly depending on a number of factors, including the growth of our
membership base, capital spending requirements and developments in the aviation
parts and business-to-business e-commerce markets. Accordingly, our management
will have broad discretion over the use of the net proceeds of this offering.
We may use a portion of the net proceeds of this offering for the
development of business-to-business e-commerce solutions for other industries or
to acquire or invest in businesses, products, services or technologies
complementary to our current business through mergers, acquisitions, joint
ventures or otherwise. However, we have no specific agreements or commitments
and are not currently engaged in any negotiations with respect to any
transaction of this type. We have not yet established criteria for evaluating
acquisitions or investments. We intend to invest the net proceeds of this
offering in short-term, interest bearing, investment grade securities or
guaranteed obligations of the U.S. government pending the above uses.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying any dividends in the foreseeable future. We
currently intend to retain any future earnings for the expansion of our
business.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of PartsBase.com as of
December 31, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to the mandatory conversion of
all outstanding convertible notes and all outstanding Series A convertible
preferred stock under the terms of which they were issued; and
- on a pro forma basis as adjusted to reflect our receipt of the net
proceeds from the sale of the 3,500,000 shares of common stock in this
offering at the initial public offering price of $13.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses.
You should read the capitalization table together with the sections of this
prospectus entitled "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements, including the notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------------------
ACTUAL PRO FORMA PRO FORMA AS ADJUSTED
----------- ----------- ---------------------
<S> <C> <C> <C>
Convertible notes payable.............................. $ 962,500 $ -- $ --
Stockholders' equity (deficit):
Series A convertible preferred stock, 2,000,000 shares
authorized, 855,000 issued and outstanding; pro
forma--2,000,000 shares authorized, none issued and
outstanding; pro forma as adjusted--2,000,000 shares
authorized, none issued and outstanding, liquidation
preference........................................... 1,902,375 -- --
Common stock, no par value; 30,000,000 shares
authorized, 9,251,250 shares issued and outstanding;
pro forma--30,000,000 shares authorized, 10,587,500
shares issued and outstanding; pro forma as
adjusted--30,000,000 shares authorized,
14,087,500 shares issued and outstanding(1).......... -- -- --
Additional paid-in capital............................. 15,178,497 16,269,594 56,784,594
Accumulated deficit.................................... (7,762,678) (7,762,678) (7,762,678)
Unearned compensation.................................. (7,776,278) (7,776,278) (7,776,278)
----------- ----------- -----------
Total stockholders' equity............................. 1,541,916 730,638 41,245,638
----------- ----------- -----------
Total capitalization................................... $ 2,504,416 $ 730,638 $41,245,638
=========== =========== ===========
</TABLE>
- --------------------------
(1) The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999, and
does not include the following:
- 175,000 shares issuable upon exercise of an outstanding stock purchase
warrants;
- 2,000,000 shares reserved for issuance under our stock option plan, under
which options to acquire 987,875 shares are outstanding as of the date of
this prospectus; and
- 262,500 shares of common stock, or 301,875 shares if the over-allotment
option is exercised in full, issuable upon exercise of a stock purchase
warrant to be issued to Roth Capital Partners, Inc. and Pennsylvania
Merchant Group, the representatives of the underwriters, upon completion
of the offering at an exercise price of $21.45 per share.
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<PAGE>
DILUTION
Purchasers of the common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the common stock from
the initial public offering price. Net tangible book value per share represents
the amount of our total tangible assets reduced by the amount of our total
liabilities, divided by the number of shares of common stock outstanding.
As of December 31, 1999, our pro forma net tangible book value was $346,557,
or $0.03 per share of common stock after giving effect to the issuance and
conversion of all outstanding Series A convertible preferred stock and
convertible notes into shares of common stock.
As of December 31, 1999, our pro forma net tangible book value as adjusted
for the sale of the 3,500,000 shares offered in this offering and application of
the net proceeds of $40,515,000, calculated at the initial public offering price
of $13.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses, would have been approximately $2.90
per share.
This represents an immediate increase of $2.87 per share to existing
stockholders and an immediate and substantial dilution of $10.10 per share to
new investors purchasing common stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
PER SHARE OF
COMMON
STOCK
--------------
<S> <C> <C>
Initial public offering price............................... $13.00
Pro forma net tangible book value as of December 31,
1999.................................................... $0.03
Increase attributable to new investors.................... 2.87
Pro forma net tangible book value after the offering........ 2.90
------
Dilution to new investors................................... $10.10
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, the differences between the total consideration paid and the average price
per share paid by the existing stockholders, including the conversion of
convertible notes and Series A convertible preferred stock into common stock,
and the new investors with respect to the number of shares of common stock
purchased from us based on the initial public offering price of $13.00 per share
and before deducting the underwriting discounts and commissions and our
estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 10,587,500 75.2% $ 3,100,000 6.4% $ 0.29
New investors............... 3,500,000 24.8% 45,500,000 93.6 $13.00
---------- ----- ----------- -----
Totals.................... 14,087,500 100.0% $48,600,000 100.0%
========== ===== =========== =====
</TABLE>
The above discussion and tables exclude:
- 175,000 shares issuable upon exercise of an outstanding stock purchase
warrants;
- 2,000,000 shares reserved for issuance under our stock option plan, under
which options to acquire 987,875 shares are outstanding as of the date of
this prospectus; and
- 262,500 shares of common stock, or 301,875 shares if the over-allotment
option is exercised in full, issuable upon exercise of a stock purchase
warrant to be issued to Roth Capital Partners, Inc. and Pennsylvania
Merchant Group, the representatives of the underwriters, upon completion
of the offering at an exercise price equal to $21.45 per share.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this prospectus. The statement of operations data for the period
from April 1, 1996, our date of inception, to December 31, 1996 and the years
ended December 31, 1997, 1998 and 1999, and the balance sheet data at
December 31, 1996, 1997, 1998 and 1999 has been derived from the audited
financial statements of PartsBase.com. The results of operations of prior
periods are not necessarily indicative of results that may be expected for any
other period. Our predecessor was founded in April 1996 under the name Aviation
Parts Base, a division of Aviation Laboratories, Inc., and began accepting
members to the database at that time. In April 1999, the assets of the division
were conveyed to Mr. Robert A. Hammond, Jr. in consideration for, among other
things, Mr. Hammond's equity interest in Aviation Laboratories, Inc. On
April 27, 1999, Mr. Hammond transferred the assets of the division into and
incorporated PartsBase.com as a Texas corporation. The accounting for the
contribution of the division into PartsBase.com has been reported in the
accompanying financial statements as a reorganization of entities under common
control in a manner similar to a pooling of interests.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1996
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1996 1997 1998 1999
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue............................................ $ -- $ 2,861 $ 3,504 $ 362,224
Cost of revenue........................................ 16,842 104,041 43,462 1,412,532
Noncash compensation expense........................... -- -- -- 1,799,139
---------- ---------- ---------- -----------
Total cost of revenue.................................. 16,842 104,041 43,462 3,211,671
---------- ---------- ---------- -----------
Gross loss............................................. (16,842) (101,180) (39,958) (2,849,447)
Operating expenses
General and administrative........................... 55,064 90,452 108,163 1,293,091
Noncash compensation expense......................... 899,821
---------- ---------- ---------- -----------
Total operating expenses........................... 55,064 90,452 108,163 2,192,912
---------- ---------- ---------- -----------
Operating loss..................................... (71,906) (191,632) (148,121) (5,042,359)
Other income (expense)
Interest expense..................................... -- -- -- (881,652)
Interest income...................................... -- -- -- 10,977
---------- ---------- ---------- -----------
Total other income (expense)....................... -- -- -- (870,675)
---------- ---------- ---------- -----------
Net loss (1)....................................... (71,906) (191,632) (148,121) (5,913,034)
Value of preferred stock beneficial conversion
feature.......................................... -- -- -- (1,902,375)
---------- ---------- ---------- -----------
Net loss applicable to common stockholders......... $ (71,906) $ (191,632) $ (148,121) $(7,815,409)
========== ========== ========== ===========
Net loss per common share--basic and diluted (1)....... $ (0.84)
Weighted average common shares outstanding--basic and
diluted.............................................. 9,251,250
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------------
1996 1997 1998 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ -- $ -- $ -- $ 735,276
Working capital deficit............. (2,043) (1,709) (25,128) (687,172)
Total assets........................ 1,767 7,848 6,084 4,729,295
Convertible notes payable........... -- -- -- 962,500
Total stockholders' equity
(deficit)......................... (276) 6,139 (19,044) 1,541,916
</TABLE>
- ------------------------------
(1) Since we have incurred net losses since inception, we would not have
incurred any income tax liabilities during the periods prior to
incorporation on April 27, 1999, and any deferred tax assets would have had
a corresponding valuation allowance and therefore pro forma presentation is
not required.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the consolidated financial statements
and the related notes included elsewhere in this prospectus and which are deemed
to be incorporated into this section. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including but not
limited to those set forth under "Risk Factors" and included elsewhere in this
prospectus.
OVERVIEW
PartsBase.com is an online provider of Internet business-to-business
e-commerce services for the aviation industry. Our e-commerce marketplace
provides a means for our members to buy and sell aviation parts and products in
an efficient, competitive and cost-effective manner. Our target members are
primarily the businesses that buy and sell aviation parts, supplies and
components in the global marketplace. We have designed our e-marketplace to meet
the needs of these customers and their industry.
We began operations in April 1996 as a division of Aviation
Laboratories, Inc. In April 1999, we incorporated PartsBase.com and acquired all
of the assets from Robert A. Hammond, Jr. In September 1999, we relocated the
company to Boca Raton, Florida. From April 1996 to October 1998, when we began
charging for our services, we were engaged in the development of our database
and developing our e-marketplace software and network infrastructure.
To date, substantially all of our revenue has come from annual subscription
fees for access to our e-marketplace. Most of our members are companies that
sell products and services to the aviation industry. Generally, our
subscriptions are entered into on an annual basis. Although we have executed a
few subscriptions of a longer duration, generally these contracts may be
terminated at any time.
In the future, we plan to derive revenue from sources other than
subscription fees within our e-marketplace, including transaction fees. In
addition, we intend to generate transaction fee revenue from transactions
consummated by our members with value added merchandise and service providers.
Also, we believe we will generate advertising fees from banner and classified
advertisements. We cannot assure you that we will be successful in generating
any of these additional revenue and fees.
Since we began operations in April 1996, we have incurred significant net
losses. For the years ended December 31, 1997, 1998 and 1999, our net losses
attributable to holders of common stock were $191,632, $148,121 and $7,815,409,
respectively.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
NET REVENUE. Our revenue consists of subscription fees charged to our
subscribers and, to a lesser extent, banner advertising revenue. Our net revenue
for the year ended December 31, 1998 was $3,504, which consisted of $800 in
banner advertising revenue and $2,704 in subscription revenue, compared to net
revenue of $362,224 for the year ended December 31, 1999, which consisted of
$357,724 of subscription revenue and $4,500 of banner advertising revenue. We
did not begin charging subscription fees until November 1998.
COST OF REVENUE. Our cost of revenue consists of compensation for our sales
and marketing personnel, telephone expenses, Web site development, a proportion
of rent and office expenses and, to a lesser extent, bank and credit card
processing charges. Our cost of revenue increased from $43,462 for the year
ended December 31, 1998, to $3,211,671 for the year ended December 31, 1999,
including noncash compensation expense of $1,799,139 related to the issuance of
our restricted stock. This
19
<PAGE>
increase is attributable to an increase in the size of our sales force from 1 at
December 31, 1998 to 51 at December 31, 1999. We plan to continue to increase
the size of our sales force. We expect that our sales and marketing expenditures
will increase significantly, both in absolute dollars and as a percentage of net
revenue, as we increase our marketing efforts and incur additional sales
commissions.
Our gross loss increased from $39,958 for the year ended December 31, 1998
to $2,894,447 for the year ended December 31, 1999 as a result of the factors
described above.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased from $108,163 for the year ended December 31, 1998, to
$1,293,091 for the year ended December 31, 1999. Our general and administrative
expenses for the year ended December 31, 1998 consisted of personnel costs of
$65,458, costs allocated from our former parent of $39,153, and other costs
totalling $1,100, while expenses for the year ended December 31, 1999 consisted
of personnel costs of $455,268, amortization of deferred financing costs of
$364,925, advertising costs of $151,193 and other costs totaling $321,705
consisting of professional fees, rent, utilities, supplies and other related
administrative costs. The increase in personnel costs is attributable to the
increase in the number of our executive and administrative staff from one at
December 31, 1998 to 16 at December 31, 1999. The amortization of deferred
financing costs relates to our private placement of convertible notes which
began in June 1999. We did not begin incurring advertising costs until after
December 31, 1998. Our costs increased for the year ended December 31, 1999 over
the same period in 1998 due to our expansion of a fully operational office in
1999. During 1998 we were allocated costs incurred by our former parent. The
overall increase in costs corresponds to the increase in our revenues and
marketing efforts. We expect that our general and administrative expenses will
increase in absolute dollars as we continue to expand our operations but
decrease as a percentage of net revenues.
In connection with the issuance of our restricted stock, we recognized
noncash compensation expense of $899,821 which has been classified as a
component of operating expenses for the year ended December 31, 1999. We did not
have any noncash compensation expense for the same period of 1998.
INTEREST EXPENSE. Interest expense relates to the issuance of convertible
notes as part of our private placement from June 1999 through November 1999. Our
interest expense increased from $0 for the year ended December 31, 1998, to
$881,652 for the year ended December 31, 1999 including $850,000, representing
the beneficial conversion feature applicable to such convertible notes. Prior to
June 30, 1999, we did not have any debt.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
NET REVENUE. Net revenue increased from $2,861 for 1997, which represented
banner advertising revenue, to $3,504 for 1998, which consisted of $800 in
banner advertising revenue and $2,704 in subscription revenue. We did not begin
charging subscription fees until November 1998.
COST OF REVENUE. Our cost of revenue decreased from $104,041 for the year
ended December 31, 1997, to $43,462 for the year ended December 31, 1998. Our
cost of revenue consisted of Web site development costs and communication
expenses. In 1998, we continued to upgrade our network capacity and
functionality. However, our development costs and communication expenses were
lower in 1998 than in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased from $90,452 for 1997 to $108,163 for 1998. Expenses
consisted of general and administrative personnel costs and an allocation of
costs from our former parent. The increase was attributable to more costs being
allocated from our former parent in 1998 than in 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have had significant negative cash flows from our operations. For the
years ended December 31, 1997, 1998 and 1999, we used $168,373, $83,096 and
$596,498 of cash, respectively, in
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our operating activities. Cash used in operating activities in each period
resulted from net losses in those periods. For the year ended December 31, 1999,
our cash used in operating activities included increases in our trade accounts
receivable of $297,884. This reflects our efforts to expand the subscription
base by allowing for payment terms up to 60 days. For the years ended
December 31, 1997, 1998 and 1999, we used $8,476, $688 and $1,238,124,
respectively, of cash for investing activities which have consisted of
expenditures for computer hardware and software, furniture and fixtures,
communication equipment and leasehold improvements as well as deposits on
various equipment leases.
Since inception, we have financed our operations from the collection of
subscription fees, proceeds of $962,500 from issuance of convertible
subordinated notes and proceeds of $1,902,375 from issuance of convertible
preferred stock. Robert A. Hammond, Jr., our principal stockholder and Chief
Executive Officer, loaned us $80,900 which was repaid prior to December 31,
1999.
As of December 31, 1999, our principal source of liquidity was approximately
$735,276 of cash and cash equivalents. As of December 31, 1999, we had no
material commitments for capital expenditures.
We believe that we have sufficient cash and cash equivalents to fund our
operating and investing activities for at least the next 12 months. Our future
long-term capital needs will depend significantly on the rate of growth of our
business, the timing of extended service offerings and the success of these
services once they are launched. Any projections of future long-term cash needs
and cash flows are subject to substantial uncertainty. We may need to raise
additional funds in future periods through public or private financings, or
other arrangements. Any additional financings, if needed, might not be available
on reasonable terms or at all. Failure to raise capital when needed could harm
our business, financial condition and results of operations. In addition, such a
failure to raise needed capital could impair our future plans to expand our
e-marketplace, attract new members, and provide new and upgrade current services
to our members. If additional funds are raised through the issuance of equity
securities, additional dilution could result. In addition, any equity securities
issued might have rights, preferences or privileges senior to our common stock.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our convertible notes payable have a fixed rate and, therefore, do not
expose us to risk of earnings loss due to changes in market interest rates. The
market value of the convertible notes payable was $5,793,641 based on the market
value of the underlying common stock on December 31, 1999 plus unpaid interest
as of December 31, 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. We currently do not engage in, nor expect to engage in,
derivative or hedging activities, and therefore we anticipate there will be no
impact to our consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants, or
the AICPA, issued SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires that entities
capitalize costs related to internal use software once criteria designated in
SOP 98-1 have been met. We adopted SOP 98-1 for the year ending December 31,
1999. Adoption of SOP 98-1 did not have a material impact on our financial
condition, results of operations or cash flows.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were capitalized in the past must be written off when SOP 98-5 is adopted. We
adopted SOP 98-5 on January 1, 1999. The adoption of SOP 98-5 did not have a
material impact on our financial position, results of operations or cash flows.
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BUSINESS
INDUSTRY BACKGROUND
GROWTH OF E-COMMERCE. The growth of the Internet and related technologies
has resulted in drastic changes in the way businesses and consumers communicate,
share information and conduct business. As Internet usage has increased, the
Internet has expanded from a medium primarily for publishing information to one
that enables more complex business-to-business communications and commerce. At
the same time, in response to increasing competitive pressures to lower costs,
decrease inventories and improve sales and marketing productivity, businesses
are increasingly replacing paper-based transactions with more efficient Internet
e-commerce solutions. Forrester Research estimates that the business-to-business
e-commerce market will grow from $43 billion in 1998 to $1.3 trillion by 2003.
AVIATION PARTS INDUSTRY. The worldwide market for aviation parts and
products is highly fragmented and parts are supplied by many types of suppliers,
including airlines, OEMs, numerous distributors, on-site airport maintenance
providers, also known as fixed base operators, FAA certified facilities, traders
and brokers. Aerospace Industries Association estimates that total exports and
imports of aircraft parts and products were approximately $29 billion in 1999.
Furthermore, in recent years, the airline industry has experienced rapid growth
in business and leisure travel. As a result, the world fleet of aircraft is
projected to increase from 12,600 aircraft in 1998 to 28,400 aircraft in 2018,
according to the Boeing Report. The increase in travel and the number of
aircraft have likely contributed to demand for aircraft parts and products as
aircraft must be serviced at scheduled intervals. In addition, management
believes that as the age of the world fleet of aircraft increases, demand for
new, used and overhauled aircraft parts and products may increase.
Historically, airlines have controlled the majority of the aviation parts
and products inventory. Management believes airlines are beginning to reduce the
size of their parts inventories in an effort to reduce inventory carrying costs.
These inventory reductions have increased reliance by airlines on suppliers of
new, used and overhauled parts and products, many of which may be difficult to
obtain from manufacturers on a timely basis, if at all. If airlines demand time
responsive inventory procurement processes, responsibility for inventory storage
and handling may shift to suppliers.
Suppliers of aviation parts and products are geographically disperse and
because of the specialized and complex nature of aviation parts and products,
the particular part or product desired by a buyer may not be easily accessible.
Buyers often search for a specific part or product to meet the parameters for a
specific aircraft at a particular location. Buyers may spend several hours
examining multiple paper catalogs and other information from different suppliers
to identify the most appropriate part or product. After locating the desired
part or product, buyers place orders by telephone, fax, or e-mail and typically
must place orders with multiple suppliers in order to obtain parts or products
related to a single aircraft. Orders for aviation parts or products are
typically handled through internal, paper-based processes that require manual
preparation, written approval by purchasing managers and manual order tracking,
and billing and reporting across multiple departments within an organization. We
view current paper-based procurement processes as complex, cumbersome and
time-consuming. Paper-based orders also tend to be costly for buyers and sellers
to track and bill, and the decentralized order process does not facilitate the
collection of data that is necessary for efficient pricing and delivery.
OPPORTUNITY FOR BUSINESS-TO-BUSINESS E-COMMERCE SOLUTION. We believe the
fragmentation and complexities of the aviation industry and the current
paper-based purchasing processes create the need for a business-to-business
e-commerce solution that seamlessly brings together buyers and sellers of
aviation parts and products. To effectively address the needs of buyers and
sellers, it is important that the solution offers a neutral and fair marketplace
with accurate catalog descriptions of parts and products and this information
must also be fairly and accurately presented to buyers. In addition, the
solution should offer sellers an opportunity for incremental sales and the
ability to offer buyer-specific pricing.
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Traditional purchasing methods also present a number of challenges to
sellers trying to reach buyers of aviation parts and products. Due to the high
cost of printing and distributing paper catalogs, sellers cannot
cost-effectively manage frequent updates and distribution of time-sensitive
information. We view these catalogs as cumbersome to search and limited in their
ability to provide depth of product and seller content. Sellers who are small in
size may have limited resources available to support the growing challenge of
marketing and selling to the highly fragmented worldwide market for aviation
parts and products. As a result, we believe traditional procurement and sales
methods are inefficient in many respects for both buyers and sellers.
TRADITIONAL ELECTRONIC PURCHASING. We believe the current methods which use
information technology to reduce inefficiencies in corporate purchasing have
limitations that prevent widespread adoption. Two methods currently used by some
of our competitors in the aviation parts industry are conventional Electronic
Data Interchange, also known as EDI, and Enterprise Purchasing Software Systems.
EDI systems allow computers to exchange information in uniform formats across
private networks without human intervention. Because EDI systems rely on the
execution of repetitive identical transactions, we believe they are generally
not well suited for dynamic procurement environments involving many buyers and
sellers of a wide variety of goods and services. By contrast, some vendors have
developed Enterprise Purchasing Software Systems designed to improve the
coordination of the purchasing function across large enterprises. However, both
EDI systems and Enterprise Purchasing Software Systems can be expensive to
license and/or install and may require users to pay ongoing maintenance and/or
transaction fees. Due to the expense and complexity of these systems, they are
generally unsuitable for all but the largest organizations. Furthermore, we
believe that neither EDI nor Enterprise Purchasing Software Systems offer a full
spectrum of online procurement functions.
THE PARTSBASE.COM ADVANTAGE
The Internet provides a cost-effective medium for businesses, regardless of
size, to link directly to their communities of customers and other business
partners. Our solution takes advantage of the low costs and community building
nature of the Internet to support our business-to-business e-commerce
marketplace. Our e-marketplace offers targeted content and services to meet the
specific needs of our members. With a standard Internet connection, a Web
browser and a PartsBase.com membership, each of our e-marketplace members can
immediately participate as both a buyer and a seller.
Our solution is comprised of an e-marketplace where our members can buy and
sell a wide range of aviation parts and products over the Internet in an
efficient and cost-effective manner. We estimate that our e-marketplace utilizes
a database of approximately 1,200 suppliers, which we believe constitutes one of
the largest independent databases of inventory and information in the aviation
industry. In addition, our advanced search functions enable users to quickly and
easily identify and locate the parts and products they need. We have designed
our e-marketplace to attract professionals responsible for selecting and
purchasing aviation parts and products. We believe our service enables our
members to quickly realize the benefits of increased efficiency, faster
turnaround and more timely information. Our solution is designed to provide the
following benefits to our members:
REDUCED PROCUREMENT COSTS. By eliminating many costly and time-consuming
functions of the traditional procurement process, we believe our e-marketplace
allows our members to reduce operating costs and shorten cycle times in the
buying and selling processes. Rather than searching through several paper-based
catalogs, buyers can identify and locate products through a single electronic
database. Our solution currently enables buyers to rapidly prepare and broadly
distribute bid requests and allows sellers to respond to these bid requests in a
timely and efficient manner. Moreover, our solution allows buyers and sellers to
immediately access our e-marketplace without incurring the cost of additional
software and system maintenance.
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MORE EFFICIENT PRICING AND BROADER PRODUCT CHOICES FOR BUYERS. By
automating the search and bid request process, our solution allows buyers to
identify sellers with desired inventory in our e-marketplace and to send out bid
requests efficiently. In addition, our e-marketplace allows buyers to expand the
number of sellers from which they request bids. Our database provides buyers
with the online ability to compare various products from an individual supplier
or multiple suppliers. As a result of increased access to sellers, product
availability and pricing information, we believe many of our members have
realized reductions in the cost of the parts and products they have purchased in
our e-marketplace.
ABILITY TO LOCATE THE MOST GEOGRAPHICALLY DESIRABLE PARTS. By providing
buyers access to a global e-marketplace for aircraft parts, we believe our
solution enables buyers to avoid the delays and costs associated with
traditional sourcing methods, which often require buyers to spend significant
time and resources searching for parts on a piecemeal basis via phone or fax
communication to regional suppliers. As a result, we believe that buyers are
often unable to quickly locate and receive needed parts at the best available
price. With our solution, we believe our members can locate and source needed
parts and products in a timely and cost-effective manner, regardless of where
the buyer is located.
EXPANDED DISTRIBUTION OPPORTUNITIES FOR SELLERS. We believe that our
e-marketplace enables sellers to receive requests for quotations from buyers to
whom they might not otherwise have access. Sellers in our e-marketplace,
regardless of their size and marketing resources, can receive requests for
quotations from buyers throughout the world. Sellers whose size would prohibit
them from actively participating in a traditional marketplace thus have access
to expanded distribution channels. We also believe that our solution enables
many of our sellers to offer, for the first time, their goods and services for
sale over the Internet. In addition, we offer sellers the capability to update
product information and introduce new products without being limited by specific
catalog publication cycles. As a result, we believe our e-marketplace is an
effective tool for sellers to achieve broader marketing and sales exposure in
their primary markets and to enter new geographic markets on a cost-effective
basis.
EASE OF USE AND BETTER ACCESS TO INFORMATION. With a standard Internet
connection and Web browser, our members are provided quick and easy access to
our e-marketplace from anywhere in the world. Our e-marketplace solution allows
sellers to control pricing and descriptive information about the aviation parts
and products they offer, helping to ensure that potential buyers obtain accurate
information on a 24-hour, 7-day a week basis. Moreover, our solution encourages
sellers to update their inventory regularly by displaying the most recent
inventory entries at the top of a list of those sellers with a particular part
in stock.
OUR SOLUTION
We currently offer a variety of services to our members. The following
summarizes some of the current services and features of our e-marketplace:
ONLINE BUYING AND SELLING. Our global e-marketplace enables our members
worldwide to interact as buyers and sellers, streamlining their purchase and
sale process over the Internet. In addition to searching by part number, our
members are able to utilize advanced search functions, such as Wildcard search,
Smart search and Keyword search, each of which allow members to use either a
description or a partial part number to locate the desired part. Also, members
using our e-marketplace's posting function can send a request for quotation,
including requests for line item price quotes, to sellers who respond
electronically with pricing and availability information.
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The request for quotation process begins with suppliers submitting their
inventories to us by e-mail or disk, which we then upload on to our Web site.
Using the search methods described above, buyers are then able to use our Web
site to identify where and from whom needed parts can be purchased. The buyers
may then elect to transmit a pre-formatted request for quotation via e-mail to
selected suppliers, or they might choose to print out a hard copy of the request
for quotation and fax it to the suppliers, at which point the buyers will
receive quotes from interested suppliers and can begin to make their purchase
decisions.
TRANSACTION INFORMATION. Our e-marketplace will allow members to update
their inventory database information. After sellers respond with bids, buyers
can analyze the responses and select one seller's bid or to select items from
specific sellers. We intend to design our solution so that after a bid is
accepted, our e-marketplace will allow buyers to complete the purchase by
creating and sending electronic purchase orders and finalizing the payment and
delivery instructions. In addition, sellers will be able to electronically
disseminate accurate information in a timely and cost efficient manner.
ONLINE AUCTIONS. Our e-marketplace will allow us to host and administrate
various types of online auctions for aircraft parts and products. We believe
these auctions will provide buyers and sellers an efficient means to purchase
and sell aircraft parts and products.
PROCUREMENT CONTROLS. A client password file is checked at each member
login and whenever members access the database. In the future, we intend to
implement controls which will allow members to limit their employees' access to
selected sellers, specific items, quantities and service features. Through
protocols like these, control over corporate purchasing will be significantly
enhanced without the installation of expensive enterprise purchasing software
systems. Members will also be able to monitor employee requests for proposals
and purchase orders. We will also maintain records of procurement activity by
our members that can be used to verify or validate transactions.
COMMUNITY. In addition to providing community-building information such as
industry job and aircraft sales listings, as well as links to members and other
industry Web sites, we will continue to expand our services to help foster
interaction among our members. We plan to introduce additional features such as
industry trade news, discussion forums, chat rooms and bulletin boards, all of
which foster active community participation among our members. We expect to
continue to add features, content and services that enhance the benefits of
membership in our e-marketplace.
FUTURE SERVICES. In addition to the foregoing, we have recently contracted
with Tradex Technologies, Inc., a multi-party e-commerce transaction software
developer and subsidiary of Ariba, Inc., for the installation and implementation
of software that will allow for online transactions among our members. We have
also contracted with Trading Dynamics, Inc., another subsidiary of Ariba, Inc.,
to provide software for our auction platform. These additional services are
expected to enable us to offer competitive online negotiation, pricing and
bidding for products, and will allow us to act as a virtual clearing house for
products. In addition, once implemented, the transaction software will enable
our members to retrieve and review their purchase and sale activity through
keyword, date, seller or purchase order number searches. This will enable buyers
and sellers to utilize historical transaction data in making future pricing and
procurement decisions. In addition, our solution will automatically generate
inquiry and transaction records facilitating improved documentation and
auditing.
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OUR BUSINESS STRATEGY
Our objective is to establish our e-marketplace as the preferred aviation
industry business-to-business solution. The key elements of our strategy
include:
ACHIEVING GROWTH THROUGH TRANSACTION FEES AND OTHER SOURCES OF
REVENUE. Substantially all of our current revenue is derived from subscription
fees from our paying members. In order to expand our potential revenue base, we
are in the process of installing and implementing customized software that will
allow for online transactions among our members. We expect that this software
will enable competitive online negotiating, pricing, and bidding for products,
and will allow us to act as a virtual clearing house for parts and products. We
believe that these features will allow us to generate additional revenue through
transaction fees charged to our members. We may also generate additional revenue
through the sale of banner advertisements, classified advertisements and other
electronic promotions, as well as from fees for value-added services.
STRENGTHENING THE PARTSBASE.COM BRAND. We believe that the breadth of
features that we offer, the number of members in our e-marketplace and the goods
and services offered by these members provide us with an essential foundation
for a comprehensive e-commerce solution for the aviation industry. We plan to
expand and enhance our marketing initiatives to increase our brand awareness and
identity. These initiatives will include traditional and Internet-based
advertising targeted at selected audiences, interviews, articles in business
media and trade publications and direct sales and telemarketing.
INCREASING MEMBERSHIP AND MARKET PENETRATION. Since we began operations in
1996, we have grown our membership to over 13,000 by focusing on buyers and
sellers in all facets of the aviation industry. In order to continue our
membership growth and increase our worldwide market penetration, we intend to
expand our sales and marketing efforts through our multilingual internal sales
force, indirect sales channels and by making use of the community offered by our
network of existing members.
ESTABLISHING AND EXPANDING STRATEGIC SALES AND MARKETING RELATIONSHIPS. We
intend to pursue strategic sales and marketing relationships to expand our
membership, extend our marketing reach, and further develop our e-marketplace in
a rapid and cost-effective manner. These expanded relationships, if successful,
will increase the breadth of information, goods and services available to our
members, thereby enabling us to attract and retain additional members.
EXPANDING OUR INTERNATIONAL PRESENCE. Our goal is to become the leading
e-marketplace for the aviation parts industry. We believe the international
scope of the Internet, the global reach of many of our customers and the
worldwide demand for aviation parts and products present opportunities to
further expand our e-marketplace internationally. Presently, we estimate that
approximately 25% of our members are based internationally or have international
operations. We plan to take advantage of our technology, expertise, and existing
member relationships to further expand our e-marketplace in other parts of the
world.
ATTRACTING AND RETAINING MEMBERS WITH NEW CONTENT, FEATURES AND
SERVICES. We intend to continue increasing the number of members in our
e-marketplace by introducing additional services and features, such as our
online auction service, that appeal to the specific needs of our members. In
addition, we intend to offer e-commerce transaction services such as online
order payment processing.
Our success as a business will depend in large part on our ability to build
a critical mass of parts, products and sellers. If we are unable to increase the
number of sellers and draw more buyers to our e-marketplace, we will not be able
to benefit from any network effect, where the value to each member in our
e-marketplace increases with the addition of each new member.
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OUR REVENUE SOURCES
To date, our primary source of revenue has been subscription fees from our
paying members. In general, annual subscription fees are paid in advance by
credit card or other form of immediate payment. In lieu of immediate payment,
clients may submit a verified purchase order and receive payment terms of up to
60 days from the date of the initial order. In order to build our base of
e-marketplace members, we have and will continue to provide free trial
memberships. During the free trial membership period, the length of which is
determined by us on a customer-by-customer basis, our sales people attempt to
convert these trial memberships into paying memberships. In the event that a
trial member is unwilling to become a paying member, we will generally terminate
such membership. While we do not currently limit the features that our trial
members can access, we expect that as we broaden the scope of available
features, only paying members will have access to all available features.
We believe our revenue base will expand as a result of our agreements with
Tradex Technologies, Inc. and Trading Dynamics, Inc. for the installation and
implementation of transaction software that will allow us to implement an
auction feature whereby our members will be able to buy and sell aircraft parts
and products by engaging in competitive online negotiating, pricing and bidding.
This transaction software is designed to allow us to act as a virtual clearing
house for aviation parts and products sold in our e-marketplace. If these
auctions are successfully developed and implemented, we believe we will be able
to charge a negotiated fee that will vary based on the size, scope and price of
the offered parts and products, thereby generating additional revenues.
We also plan to expand our revenue sources over time to include fees for
classified advertising as well as increased revenue from banner advertisements.
In addition, we believe our sources of revenue will increase as we expand the
scope of our value-added services.
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OUR E-MARKETPLACE MEMBERS
Our target members are primarily the businesses that buy and sell aircraft
parts and products in the global marketplace. We have over 13,000 members
representing over 115 countries. Our members vary from small businesses and
individual aircraft owners to Fortune 500 companies. Some of our members
include:
A. J. Walter Aviation
Aero Group
AGES Group
Airborne Express
Air New Zealand
Alaska Airlines
Allied Signal
American Aircarriers Support
Amway Corp.
Arca Airlines
Atlantic Airlines, Inc.
Aviation Spares Ltd.
Avjet Trading
Banyan Air Service
Bell Helicopter
Bermuda Air Service
BF Goodrich Aerospace
Big Island Air
Boeing
Bombardier
British Aerospace
BAX Global
BWIA
California Propeller
Canadian Airlines
CASA
Chrysler Pentestar
Commander Aero Inc
Copenhagen Avionics A/S
Curtiss-Wright Accessory
Services
D & D Aircraft Supply
Dallas Aerospace
Dee Electronics
Del Monte Aviation
Dyn Corp (NASA Houston)
ELECTROSONICS
Embraer
Executive Air Taxi
Flight Safety international
Florida Jet Center
Galaxy Aerospace
Garrett Aviation Services
GE Engine Services Wales
Grimes Aviation
Hamilton Sundstrand
Hawker Pacific
Honeywell
Icelandair
Itapemirim Airlines
Jet Aviation
Kellstrom Industries
Keyson Airways
King Aerospace
KLM
KRN Aviation
Learjet, Inc.
Lider Taxi Aero
Lockheed Martin Services
Lone Star Mooney
Lord Corporation
Lufthansa
Luton Aerospace
Maine Aviation Group
Maritime Helicopters, Inc.
Marsh Aviation
Meggitt Safety Systems
Memphis Group
Messier Services
Middle River Aircraft Services
Million Air
Mitchell Aviation
Mobile Aerospace Engineering
Moog Aircraft Group
Norco
Ohio State University Airport
Omni Air Support
Pensacola Aviation Center
Pilatus Aircraft
Pilkington Aerospace
Raytheon Aircraft Services
Rockwell Collins
Rolls Royce
Saab
Sabreliner Corporation
Seneca Flight
Sentry Aerospace Corporation
Sikorsky
SkyBolt Aeromotive Corp.
Susquehanna Precision
Textron
Tinker Air Force Base
Toronto Sky
TPI Aviation
TRW
Turbine Controls
Tyler Jet Aviation
Ultra Electronics
United Airlines
United Parcel Service
Universal Jet Aviation
U.S. Coast Guard--Hawaii
U.S.A. Jet Airlines
Varig
VASP
Virgin Atlantic
Volvo Aero Corp.
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SALES AND MARKETING
We market our solution through our direct internal sales force. Since our
potential members fall within a defined market segment, we are able to identify
and target the purchasing decision-makers and potential users who will influence
the decision to adopt our e-commerce solution.
Our sales and marketing approach is designed to help buyers and sellers
understand both the business and technical benefits of our e-marketplace, and to
promote adoption through one-on-one education and training. We intend to
continue to expand our direct sales force through the establishment of multiple
sales shifts per day, allowing us to reach geographically diverse markets.
However, competition for sales personnel is intense, and we may not be able to
attract, assimilate or retain additional qualified personnel in the future.
Our sales and marketing programs are designed to educate our target market,
create awareness and attract members to our e-marketplace. To achieve these
goals, we intend to take advantage of the community offered by our existing
membership base and engage in marketing activities such as trade shows, speaking
engagements and Web site marketing. Our targeted industry segment advertising
activities include on-line business media and print advertisements in industry
trade publications such as Avionics, Aviation Maintenance, Overhaul &
Maintenance, and Technology and Aviation Week.
We provide member service support from 6:00 am to 12:00 am, Eastern Standard
Time, Monday through Friday. Our customer support department is responsible for
day-to-day contact with members and responds to questions from members through
e-mail and a toll-free number. This department is responsible for retaining and
increasing use by existing members and is an important aspect of member
satisfaction. Our customer support and service personnel handle general member
inquiries and technical questions. We have automated some of the tools used by
our customer support and service staff, such as tracking screens that let our
support staff track a transaction through a variety of information sources.
Our worldwide sales and marketing group consisted of approximately 51
individuals as of December 31, 1999, all of whom are located at our Boca Raton,
Florida headquarters.
TECHNOLOGY AND OPERATIONS
Our e-marketplace technology serves as our enabling platform. Our Web site
technology resides on our server located in Boca Raton, Florida. Members access
our service using a standard Web browser.
Our Web site architecture is designed to allow us to accommodate membership
growth. This scalability permits us to quickly add new members to our
e-marketplace without those members incurring infrastructure costs.
Our Internet service providers currently maintain three high speed T3
Internet connections. The client connections are load balanced over our
presentation layer servers. Database servers are configured to be fault-tolerant
and their hard drives can be swapped while the system is operating. These
databases are replicated on additional back-up servers for quick access.
Our software makes significant use of standard software programming
languages, interfaces and protocols. The use of ODBC, or Open Database
Connectivity, compliant databases and plug-in technologies allows integration
with enterprise accounting and management systems such as Oracle and other ODBC
compliant systems. Many standard data transfer protocols are also supported.
We utilize firewalls and other restrictions and physical or electronic
separations to prevent harm to the service. Our servers add, update, and
retrieve data through procedures designed to prevent improper access to data.
Additionally, our staff has restricted access to our e-marketplace data and
network. Our servers are equipped with virus detection and removal software.
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In addition to the redundant database servers, all member data is backed-up
to tape on a daily basis.
We have designed our system to enable each member to maintain their
information on our databases so that other users can access the most current
data. In addition, by using custom interfaces, members can automate the process
of maintaining their data.
COMPETITION
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and is
expected to increase significantly in the future. We believe that companies in
our Internet business-to-business e-marketplace compete on the basis of:
- ease of use of technology;
- breadth and depth of product and service offerings;
- pricing of products and services;
- quality and reliability of the Internet purchasing solution; and
- quality and scope of customer service and support.
We currently compete almost solely in the market for aviation parts and
products, and we face competition from two main areas within this market: other
businesses with e-commerce offerings and traditional suppliers and distributors
of aviation parts. Because of the rapidly evolving nature of e-commerce, it is
difficult to objectively estimate the number of companies that compete directly
against us. However, we believe companies that primarily focus on creating
Internet purchasing solutions for the aviation parts industry include Inventory
Locator Service, a subsidiary of Aviall, Inc., and AVsupport, each of which
offers parts locating functions to customers. Traditional suppliers and
distributors, including the AGES Group and Boeing, currently sell aviation parts
through paper catalogs and Web sites.
Many of our current and potential competitors may have longer operating
histories, larger customer bases and greater brand recognition in business and
Internet markets and significantly greater financial, marketing, technical and
other resources than we do. In addition, other e-commerce service providers may
be acquired by, receive investments from or enter into other commercial or
strategic relationships with larger, well established and well-financed
companies as use of Internet and other online services increases. For example,
companies that control access to Internet service provider services that are
used to connect to our network could promote our competitors or charge our
clients substantial fees for Internet access. Therefore, current and potential
competitors may be able to devote significantly greater resources to marketing
and promotional campaigns, may adopt more aggressive pricing policies or may try
to attract users by offering services for free and devote substantially more
resources to product development than us.
Increased competition may result in reduced operating margins, loss of
market share and diminished value in our brand, any of which could materially
and adversely affect our business, financial condition and results of
operations. New technologies and the expansion of existing technologies may
increase the competitive pressures on us by enabling our competitors to offer a
similar but lower-cost service. We cannot assure you that we will be able to
compete successfully against current and potential competitors. Further, as a
strategic response to changes in the competitive environment or otherwise, we
may, from time to time, make pricing, service or marketing decisions or
acquisitions that could materially and adversely affect our business, financial
condition and results of operations.
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<PAGE>
INTELLECTUAL PROPERTY
We rely on a combination of trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers and business partners to protect our proprietary rights in products,
services, know-how and information. We have a federal trademark registration for
"PARTSBASE" and we have applied for federal trademark protection for
"PARTSBASE.COM." We may seek additional trademarks in the future. Furthermore,
we may seek copyrights and patents in the future. Our means of protecting our
proprietary rights in the United States or abroad may not be adequate and
competitors may independently develop similar technology. We cannot be certain
that our services do not infringe patents or other intellectual property rights
that may relate to our services. Like other technology and Internet-based
businesses, we face the risk that we will be unable to protect our intellectual
property and other proprietary rights, and the risk that we will be found to
have infringed the proprietary rights of others.
GOVERNMENT REGULATION
Both domestic and foreign entities regulate the parts and products sold on
our Web site. The FAA is charged with regulating the manufacture, repair and
operation of all aircraft and aircraft equipment operated in the United States.
The FAA monitors safety by promulgating regulations regarding proper maintenance
of aircraft and aircraft equipment. Similar regulations exist in foreign
countries. Regulatory agencies specify maintenance, repair and inspection
procedures for aircraft and aircraft equipment. These procedures must be
performed by certified technicians in approved repair facilities on set
schedules. All parts must conform to prescribed regulations and be certified
prior to installation on any aircraft. Although we are not currently subject to
any governmental regulation regarding the parts and products sold on our Web
site, we may in the future become subject to FAA or other regulatory
requirements.
EMPLOYEES
As of December 31, 1999, we had 67 full time employees. Of these, 51 were in
sales and marketing, seven were in programming, technical and customer support
and operations and nine were in administration, including finance. None of our
employees is represented by a labor union. We have not experienced any work
stoppages, and we consider our relations with our employees to be good.
FACILITIES
Our corporate headquarters are located at 7171 N. Federal Highway, Suite
100, Boca Raton, Florida 33487, where we lease approximately 4,600 square feet
of office space for a monthly rental fee of approximately $6,500 under a lease
that expires May 31, 2001, with an option to renew for a two year period. This
facility houses all of our operations, including the executive staff,
e-marketplace operations, customer support and programming and development. We
maintain our Web site in Boca Raton, Florida.
LEGAL PROCEEDINGS
In the ordinary course of business, we may be subject to claims and legal
proceedings. We are not currently a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of PartsBase.com and their ages as of
December 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Robert A. Hammond, Jr.(1)............ 45 President, Chief Executive Officer and Chairman
Steven R. Spencer.................... 45 Chief Operating Officer and Director
Michael W. Siegel.................... 37 Chief Financial Officer
Yves C. Duplan....................... 38 Chief Technology Officer
Kevin J. Steil....................... 28 Chief Information Officer
Louis W. Storms IV................... 25 Director
Thomas C. Van Hare(1)(2)............. 38 Director
David G. Fessler(1)(2)............... 32 Director Nominee
Pierre A. Narath(2).................. 36 Director Nominee
</TABLE>
- ------------------------
(1) Member of the compensation committee of the board of directors effective
upon completion of this offering.
(2) Member of the audit committee of the board of directors effective upon
completion of this offering.
ROBERT A. HAMMOND, JR. Mr. Hammond has served as our President, Chief
Executive Officer and Chairman since our incorporation in April 1999. In
April 1996, Mr. Hammond founded our predecessor as a division of Aviation
Laboratories, Inc., a company for which he also served as Chief Executive
Officer from its inception in August 1985. From August 1985 until June 1999,
Mr. Hammond was the Chief Executive Officer and Chairman of Great Pines Water
Company, a publicly traded bottled water company that he sold to Suntory Bottled
Water Group in June 1999. Mr. Hammond received his Bachelor of Science degree in
Marketing from Syracuse University.
STEVEN R. SPENCER. Mr. Spencer joined us as Chief Operating Officer in
May 1999 and was elected to the board of directors in June 1999. Prior to
joining us, Mr. Spencer was a partner in Meridian Capital Group, Inc., where he
served as the Executive Vice President from December 1994 to March 1999.
Mr. Spencer left Meridian at the time it was purchased by E*Offering, an
Internet investment banking firm partially owned by E*Trade.
MICHAEL W. SIEGEL. Mr. Siegel joined us as Chief Financial Officer in
January 2000. From August 1997 through December 1999, Mr. Siegel served as
Director of Finance/Controller of Curtiss-Wright Flight Systems, Inc., a
subsidiary of Curtiss-Wright, Inc., a NYSE listed designer, manufacturer and
overhauler of precision components and systems and a provider of highly
engineered services to the aerospace and other industries. In addition, from
May 1997 through October 1999, Mr. Siegel served as a founder and vice president
of Mail Call, Inc., a developmental stage e-commerce company. From April 1995
through August 1997, Mr. Siegel served as the Chief Financial Officer of The
Protective Group, a manufacturer of protective products such as bulletproof
vests, armoring for automobiles and helicopters, and firefighter gear. From
March 1994 through April 1995, Mr. Siegel served as the Chief Financial Officer
of Universal Heights, Inc., a publicly traded manufacturer and distributor of
licensed sports and entertainment novelty products. Mr. Siegel is a Certified
Public Accountant and received a Bachelor of Science in economics from the
Wharton School, University of Pennsylvania, and a Master of Business
Administration from the University of Miami.
YVES C. DUPLAN. Mr. Duplan joined us in September 1999 as our Chief
Technology Officer, and has over 15 years of experience as a software developer
and project manager. From March 1996 to
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<PAGE>
September 1999, he was a Senior Software Developer with Office Depot Corporation
where he was a member of a core development team responsible for the design,
evaluation, and implementation of new technologies for backroom applications
running in Office Depot stores. From May 1990 to March 1996, Mr. Duplan was a
Software Engineer/Project Leader for Analyst International Corp, a consulting
company, where he managed a team of software developers. Mr. Duplan holds a
Bachelor of Science in Computer Engineering from Nova University.
KEVIN J. STEIL. Mr. Steil joined us in August 1999 as Chief Information
Officer. From February 1996 to August 1998, Mr. Steil was a developer for the
AGES Group, a division of Volvo that sells parts and ground support equipment to
the aviation industry. Mr. Steil was responsible for the design and
implementation of the AGES transactional Web site, as well as maintaining their
enterprise network. From May 1994 to January 1997, Mr. Steil served as internet
consultant for Infrastructure Inc. Mr. Steil received his Bachelor of Science in
marine biology from Florida Atlantic University in 1994 and Associates Degree in
computer science from Panama Canal College in 1991.
LOUIS W. STORMS IV. Mr. Storms was elected to our board of directors in
June 1999. Mr. Storms has served as a consultant to us since February 1999 and
in that capacity served as our interim Director of Technology until
August 1999. Mr. Storms is an author and expert in developing multi-tiered
distributed applications using Microsoft Windows DNA. His book, MICROSOFT
WINDOWS DNA EXPOSED, was published in April 1999 by a subsidiary of Macmillan
Computer Publishing. Mr. Storms is a founder and partner in Plan Three
Solutions, L.L.C., a software development company. From April 1998 to
September 1998 Mr. Storms acted as a consultant for Deloitte and Touche LLP, and
from June 1996 to March 1998, he served as a consultant in business valuations
and as a software consultant for Arthur Andersen LLP. In 1996, Mr. Storms
received a Bachelor of Business Administration from the University of Texas, at
Austin.
THOMAS C. VAN HARE. Mr. Van Hare was appointed to our board of directors in
November 1999 and has extensive experience in commercial design and Internet
marketing. Mr. Van Hare is the President and Chief Executive Officer of Capstone
Internet Services, Inc., a graphic design and marketing company which he founded
in early 1994. Mr. Van Hare is a commercial pilot with multi-engine and
instrument ratings and has over three years of search and rescue experience.
DAVID G. FESSLER. Mr. Fessler has been appointed as a member of our board
of directors effective upon completion of this offering. Since September 1999,
Mr. Fessler has served as the President and owner of ADGrant Systems and
Networking Corporation, a networking integration services company that currently
services the AGES Group and the University of Connecticut. Since January 1999,
he has served as the Vice President of Novus Holding Corporation, a holding
company for interests in Magellan Aircraft Sales and Leasing Corp. and
Fairdinkum Construction Company. In addition, since May 1999, Mr. Fessler has
served as a board member of QODE.COM, an Internet bar coding company. From
May 1990 to August 1999, Mr. Fessler served as the Vice President of Technology
for the Information Systems Group of the AGES Group where he was responsible for
worldwide network and computer operations support.
PIERRE A. NARATH. Mr. Narath has been appointed as a member of our board of
directors effective upon completion of this offering. Since January 1999,
Mr. Narath has served as the Chairman, Chief Executive Officer and President of
Touchstone Software Corp., an OTC Bulletin Board listed developer and publisher
of utility software used to set up, maintain, and manage personal computers and
networks. From May 1997 to November 1998, Mr. Narath served as Vice President of
Award Software International, Inc., a developer and marketer of system enabling
and management software for the global computing market that was acquired by
Phoenix Techologies, Inc., in 1998, and as President of Unicore Software, Inc.,
a software company acquired by Touchtone Software Corp. in 1999. From
February 1990 to May 1997, Mr. Narath founded and served as President of Unicore
Software, Inc.
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<PAGE>
BOARD COMMITTEES
We have established an audit committee and a compensation committee. The
audit committee recommends to the board of directors the independent certified
public accountants to be selected to audit our annual financial statements and
approves any special assignments given to those accountants. The audit committee
also reviews the planned scope of the annual audit and the independent
accountants' letter of comments and management's response thereto, any major
accounting changes made or contemplated and the effectiveness and efficiency of
our internal accounting staff. The compensation committee makes recommendations
to the board of directors regarding the compensation payable to our executive
officers, reviews general policies relating to the compensation and benefits of
our employees and administers the PartsBase.com, Inc. 1999 stock option plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee will be responsible for determining salaries,
incentives and other forms of compensation for our directors, officers and other
employees and administering various incentive compensation and benefit plans. We
did not have a compensation committee during 1999. Our board of directors was
responsible for these matters for that year. Upon completion of the offering,
our compensation committee will consist of Thomas Van Hare, David G. Fessler and
Robert A. Hammond, Jr. Mr. Hammond participates in all discussions and decisions
regarding salaries and incentive compensation for all employees and consultants
of PartsBase.com, except that he is excluded from discussions regarding his own
salary and incentive compensation. Other than Mr. Hammond, no member of the
compensation committee has at any time been an officer or employee of
PartsBase.com. No interlocking relationship exists between any member of our
compensation committee and any member of any other company's board of directors
or compensation committee. No interlocking relationship existed between any
member of our board of directors and any member of any other company's board of
directors or compensation committee in 1999.
See "Certain Relationships and Related Transactions" for a description of
certain transactions between us and members of our board of directors.
DIRECTOR COMPENSATION
Directors previously have received no cash compensation for serving on the
board of directors. Beginning upon completion of the offering, we will pay each
non-employee member of our board of directors a fee of $1,000 per board or
committee meeting attended, plus all out-of-pocket expenses incurred in
connection with attending board meetings. Mr. Storms received an option to
acquire 37,500 shares of our common stock at an exercise price of $0.63 per
share in November 1999. In addition, Mr. Van Hare received an option to acquire
10,000 shares of our common stock at an exercise price of $0.63 per share upon
his election to the board of directors in November 1999. With respect to
Mr. Fessler, Mr. Narath, or any future independent non-employee directors, upon
the effective date of their appointment to the board of directors, the directors
will be entitled to receive an option to purchase an aggregate of 10,000 shares
of our common stock. The exercise price of these options shall be the initial
public offering price with respect to Mr. Fessler and Mr. Narath and the fair
market value of our common stock on the grant date with respect to any future
non-employee directors. Mr. Storms' options vested 21,875 at the time of grant
with the remainder vesting in five equal monthly installments following the
grant date. Mr. Van Hare's, Mr. Narath's and Mr. Fessler's options, as well as
any future independent non-employee director's options, shall become exercisable
as to one-third of the shares on the six-month anniversary of the grant date,
one-third on the first anniversary of the grant date, and the remaining
one-third on the second anniversary of the grant date; provided, however, that
Mr. Van Hare's option shall accelerate and become exercisable in full if he is
not elected to the Board of Directors or otherwise involuntarily ceases to serve
as a director. The options will expire on the earlier of ten years from the date
of grant or three months after the optionee ceases to be a director. In
34
<PAGE>
addition, each of our non-employee directors will be eligible to receive
additional stock option grants in the future at the discretion of the board of
directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
during our fiscal year ended December 31, 1999 for our Chief Executive Officer.
No other executive officer received salary and bonus in excess of $100,000
during fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL
SALARY BONUS COMPENSATION
NAME AND POSITION YEAR ($) ($) ($)
- ----------------- -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Robert A. Hammond, Jr.
Chief Executive Officer
and President......................... 1999 81,250(1) -- --(2)
</TABLE>
- ------------------------
(1) Represents salary paid from June 1, 1999 through December 31, 1999. Mr.
Hammond's annual salary during that period was $150,000.
(2) Perquisites did not exceed the lesser of $50,000 or 10% of Mr. Hammond's
base salary in 1999.
STOCK OPTIONS
No stock options for our common stock were granted to Mr. Hammond during
fiscal 1999. However, certain of our executive officers were granted incentive
stock options in fiscal 1999. See "--Employee Benefit Plans" below.
EMPLOYMENT AGREEMENTS
In November 1999, we entered into employment agreements with each of our
executive officers other than Mr. Siegel, whose agreement is dated December 31,
1999. The employment contracts have an initial term of two years but shall be
renewed for successive two year terms unless earlier terminated. The agreements
may be terminated by us or the employee with or without cause upon 30 days prior
written notice.
The employment contracts of the executive officers provide for the following
annual base salaries both prior and subsequent to completion of this offering:
<TABLE>
<CAPTION>
POST-OFFERING PRE-OFFERING
BASE SALARY BASE SALARY
------------- ------------
<S> <C> <C>
Robert A. Hammond, Jr................................ $250,000 $150,000
Steven R. Spencer.................................... $125,000 $ 84,000
Michael W. Siegel.................................... $141,000 $141,000(1)
Yves C. Duplan....................................... $ 95,000 $ 95,000
Kevin J. Steil....................................... $ 80,000 $ 80,000
</TABLE>
- ------------------------
(1) Excludes a $30,000 signing bonus.
The base salaries of each executive officer may be increased in the
discretion of the board of directors or the compensation committee of the board
of directors. In addition to the base salaries described above, each of the
executive officers is entitled to three weeks vacation, reimbursement of
business expenses and may, at our expense, participate along with his spouse and
dependents in any medical or other insurance plan maintained by us for salaried
employees. In addition, Mr. Hammond,
35
<PAGE>
Mr. Spencer and Mr. Siegel receive automobile allowances of $1,000, $750, and
$750 per month, respectively.
Each of the employment agreements contain non-compete covenants that
prohibit the employee from directly or indirectly participating in businesses in
competition with us following termination of his employment for a period of two
years.
Pursuant to the terms of his employment agreement, Mr. Siegel is entitled to
receive a severance payment equal to six months' salary in the event of a
termination of his employment for any reason other than cause, as defined in his
employment agreement.
KEY MAN INSURANCE
Following completion of this offering, we intend to acquire key man
insurance covering the life of Mr. Hammond in the amount of at least $2,000,000
and naming PartsBase.com as beneficiary.
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
In November 1999, we adopted the PartsBase.com, Inc. 1999 stock option plan
for the purpose of promoting our long-term growth and profitability by providing
key people with incentives to improve stockholder value and contribute to our
growth and financial success.
The stock option plan provides for the award to eligible participants,
including employees, officers, directors and consultants, of stock options
including non-qualified options and incentive stock options under Section 422 of
the Internal Revenue Code. Under the stock option plan, 2,000,000 shares of
common stock are reserved for issuance. The stock option plan will terminate on
September 30, 2008 unless extended by our board of directors and, to the extent
required under applicable law, our stockholders. The stock option plan may be
amended or terminated by our board at any time provided that any significant
amendments must be approved by our stockholders.
Subsequent to this offering, the stock option plan will be administered by
our board of directors or the compensation committee of our board of directors.
The board or the compensation committee, as the case may be, will select the
participants and establish the terms and conditions of each option or other
rights granted under the stock option plan, including the exercise price, the
number of shares subject to options or other equity rights and the time at which
the options become exercisable. The exercise price of all "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code, granted
under the stock option plan must be at least equal to 100% of the fair market
value of the option shares on the date of grant. The term of any incentive stock
option granted under the stock option plan may not exceed ten years; however,
where the eligible stock option plan participant owns over 10% of the total
combined voting power of all classes of our stock, the exercise price must be at
least equal to 110% of the fair market value of the option shares on the date of
grant and the term cannot exceed five years.
To the extent required to comply with Rule 16b-3 under the Exchange Act, if
applicable, and in any event in the case of an incentive stock option, no award
granted under the stock option plan shall be transferable by a grantee otherwise
than by will or by the laws of descent and distribution. Other terms and
conditions of each award are set forth in the grant agreement governing that
award and determined by the board of directors or the compensation committee as
administrators of the stock option plan.
As of the date of this prospectus, non-qualified options to purchase a total
of 987,875 shares of common stock were outstanding under our stock option plan
at an exercise price of $0.63 per share and no options had been exercised. The
following of our executive officers and outside directors
36
<PAGE>
received non-qualified stock option grants in November 1999 except for
Mr. Siegel, whose grant was made in January 2000.
<TABLE>
<CAPTION>
NAME NO. OF SHARES OPTION PRICE VESTING
- ---- ------------- ------------ -------
<S> <C> <C> <C>
Michael Siegel.... 75,000 shares $0.63 24 equal monthly installments
Yves C. Duplan.... 35,000 shares $0.63 833 upon grant, remainder in 22 monthly
installments of approximately 1,458 shares
followed by 2 monthly installments of
approximately 1,045 shares
Kevin Steil....... 10,000 shares $0.63 1,875 upon grant; remainder in 9 monthly
installments of 625 shares followed by 12
monthly installments of approximately 208
shares
</TABLE>
In addition, each of our non-employee directors has received a non-qualified
stock option grant upon his appointment to the board of directors. See
"--Director Compensation" above.
RESTRICTED STOCK BONUS PLAN
In May 1999, we adopted the PartsBase.com, Inc. restricted stock bonus plan.
The stock bonus plan authorized us to award or grant to employees, consultants,
officers and directors (except persons serving as directors only) shares of our
common stock subject to a substantial risk of forfeiture. Our board of directors
had the sole authority to select participants, to establish the terms and
conditions of the stock and to grant the stock.
Employees, including officers, directors who are not employees, and outside
consultants selected by our board of directors, were eligible to receive stock
under the stock bonus plan. The maximum number of shares of common stock which
could have been granted under the stock bonus plan was 1,200,000 shares. The
vesting schedule of stock granted under the stock bonus plan was determined by
our board of directors.
Stock grants under the stock bonus plan vest in accordance with a schedule
established by our board of directors with respect to each individual grant. In
the event a stock grant recipient is terminated, any unvested portion of the
shares that were subject to the stock grant shall be canceled. Each recipient
has all the rights of a shareholder with respect to stock received pursuant to
the stock bonus plan, including the right to vote these shares and receive all
dividends and other distributions.
We terminated the stock bonus plan in November 1999. Prior to termination,
stock grants totaling 1,108,500 shares were granted to an aggregate of 42
persons. Effective November 17, 1999, we entered into restricted stock
cancellation agreements with substantially all of the recipients who received
stock pursuant to the stock bonus plan. The agreement calls for cancellation of
any stock received by the recipient and termination of the restricted stock
agreement between the employee and us. An aggregate of 251,250 shares of
restricted stock remain outstanding under the stock bonus plan. Such stock is
held by a total of four persons, including 250,000 shares held by Steven
Spencer, a director and executive officer. Mr. Spencer's stock grant vested with
respect to 50,000 shares upon commencement of employment. The remaining 200,000
shares vest in 24 equal monthly installments; provided, however, that vesting
shall accelerate with respect to 100,000 shares upon completion of this
offering.
In connection with the cancellation of the stock grants under our stock
bonus plan, we issued an option to purchase one share of common stock for each
cancelled share of stock bonus plan stock. The replacement options were granted
pursuant to our 1999 stock option plan.
37
<PAGE>
LIMITATIONS ON LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
As permitted by the Texas Business Corporation Act, we have included in our
articles of incorporation, as amended, a provision to eliminate the personal
liability of our directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to exceptions. In addition, both
our articles of incorporation, as amended, and our bylaws provide that we are
required to indemnify our officers and directors, and we are required to pay
for, and may advance, expenses for our officers and directors as incurred in
connection with proceedings against them for which they may be indemnified. We
have entered into indemnification agreements with our officers and directors
containing provisions that are in some respects broader than the specific
indemnification provisions contained in the Texas Business Corporation Act. The
indemnification agreements require us, among other things, to indemnify our
officers and directors against liabilities that may arise by reason of their
status or service as officers and directors, other than liabilities arising from
willful misconduct of a culpable nature, to pay for their expenses incurred as a
result of any proceeding against them as to which they could be indemnified, and
to obtain directors' and officers' insurance if available on reasonable terms.
We have also obtained directors' and officers' liability insurance.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of ours in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for
indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
38
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with our incorporation in April 1999, Robert Hammond, our
President and Chief Executive Officer, contributed assets to us in exchange for
shares of our common stock. See "Summary--Our History" for a brief description
of this transaction.
From time to time, Mr. Hammond has made advances to us for expenses and
short-term working capital needs. As of December 31, 1999, these advances
totaled $80,900, all of which was repaid in full prior to December 31, 1999.
Metro Investments, LLC, a company controlled by Mr. Narath, one of our
director nominees, acquired 40,000 shares of Series A convertible preferred
stock at $2.50 per share in connection with our November 1999 private placement.
In addition, Touchstone Software Corp., a publicly traded company of which
Mr. Narath is an officer, director and significant stockholder, acquired an
additional 260,000 shares of Series A convertible preferred stock in our
November 1999 private placement. A description of the terms of the private
placement is contained in "Description of Capital Stock--Private Placements."
In May through October 1999, we made stock grants to some of our employees,
most of which were cancelled in November 1999. A summary of these grants is
contained in "Management--Employee Benefit Plans."
Plan Three Solutions, LLC, a company owned and operated by Louis Storms, one
of our directors, provided significant services designing and maintaining our
Web site. We pay this company for its continued services. During the year ended
December 31, 1999, we made total payments of $260,000 for Web site maintenance
services. An additional $33,550 was owed to this company as of December 31,
1999. We believe the terms of our contract wtih Plan Three Solutions, LLC, are
at least as fair as those we could have obtained from unrelated third parties in
arms-length negotiations.
Capstone Internet Services, Inc., a graphic design and marketing company
founded and operated by Thomas Van Hare, one of our directors, provided services
in connection with the design of our advertising brochures and other marketing
materials. During the year ended December 31,1999 we made total payments of
$53,263 for those services. We believe the terms of our engagement of Capstone
Internet Services, Inc. are at least as fair as those that we could have
obtained from unrelated third parties in arms-length negotiations.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding shares of our common
stock beneficially owned as of February 29, 2000, and as adjusted to reflect the
offering, by:
- Each person or group known to us that beneficially owns more than five
percent of our outstanding common stock.
- Our directors and our Chief Executive Officer.
- All of our executive officers and directors as a group.
Beneficial ownership is calculated in accordance with Rule 13d-3(d) under
the Securities Exchange Act of 1934. Shares of common stock subject to options
and warrants that are currently exercisable or are exercisable within 60 days of
February 29, 2000, are deemed outstanding with respect to the person holding
those options but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Unless otherwise indicated, each
person possesses sole voting and investment power with respect to the shares
identified as beneficially owned. Except as otherwise indicated in the table,
the address of the stockholders listed below is that of our principal executive
office. Directors not included in the table below do not hold our securities.
Shares beneficially owned prior to the offering are as adjusted to reflect and
include the automatic conversion upon the completion of the offering of:
- All outstanding Series A convertible preferred stock into an aggregate
of 855,000 shares of common stock.
- All outstanding convertible notes into an aggregate of 481,250 shares
of common stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES BENEFICIALLY
OFFERING OWNED AFTER THE OFFERING
------------------------- --------------------------
NAME AND ADDRESS(1) NUMBER PERCENT(2) NUMBER PERCENT(2)
- ------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Robert A. Hammond, Jr............................. 9,000,000(3) 85.00 9,000,000(3) 63.89
Steven R. Spencer................................. 250,000(4) 2.34 250,000(4) 1.77
Louis W. Storms IV(5)............................. 37,500(6) * 37,500(6) *
Thomas Van Hare(7)................................ -- -- -- --
David G. Fessler(8)............................... -- -- -- --
Pierre A. Narath(9)............................... 40,000(10) * 40,000(10) *
All directors and executive officers as a group
(9 persons)(11)................................. 9,372,500 87.84 9,372,500 66.14
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding common stock.
(1) Except as otherwise indicated, the business address of each person listed is
c/o PartsBase.com, 7171 N. Federal Highway, Suite 100, Boca Raton, Florida
33487.
(2) Percentages based on 10,587,500 shares outstanding prior to the offering and
14,087,500 shares outstanding immediately after the offering.
(3) Includes 4,500,000 shares owned by Mr. Hammond individually and 4,500,000
shares owned by R. Hammond, L.P., a limited partnership of which Mr. Hammond
is the sole general partner and of which a trust established for the benefit
of Mr. Hammond's children is a 99% limited partner.
(4) Consists of 250,000 shares issued to Mr. Spencer pursuant to the terms of
our restricted stock bonus plan but which are subject to the vesting and
forfeiture provisions of the plan.
(5) Mr. Storms' address is 777 Dunlavy #9205, Houston, Texas 77019.
40
<PAGE>
(6) Consists of shares subject to stock options that are currently exercisable
or will become exercisable within 60 days following February 29, 2000.
(7) Mr. Van Hare's address is c/o Capstone Studio, 200 West Palmetto Park Rd.
Ste. 201, Boca Raton, Florida 33432.
(8) Mr. Fessler's address is 18350 Long Lake Drive, Boca Raton, Florida 33496.
(9) Mr. Narath's address is 1538 Turnpike Street, North Andover, Massachusetts
01845.
(10) Consists of shares of Series A convertible preferred stock owned by Metro
Investments, LLC, a company controlled by Mr. Narath, which convert into
40,000 shares of our common stock upon completion of this offering. Excludes
10,000 shares that are the subject of stock options that are not currently
exercisable and 260,000 shares of Series A convertible preferred stock owned
by Touchstone Software Corp., a company of which Mr. Narath is an officer,
director and significant stockholder.
(11) Includes 82,500 shares subject to options that are currently exerciseable
or will become exerciseable within 60 days following February 29, 2000.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
In our articles of incorporation, as revised, we are authorized to issue up
to 30,000,000 shares of common stock, no par value, and 2,000,000 shares of
preferred stock, no par value. Prior to this offering, 9,251,250 shares of
common stock were issued and outstanding and an additional 1,336,250 shares were
reserved for issuance upon conversion of 855,000 shares of outstanding Series A
convertible preferred stock and convertible notes. An additional 1,162,875
shares are reserved for issuance under the terms of outstanding options and
warrants. As of February 29, 2000, there were six record holders of our common
stock.
The following description of our capital stock is a summary and is qualified
in its entirety by the provisions of our articles of incorporation, bylaws and
applicable law. These documents have been filed as exhibits to the registration
statement, of which this prospectus is a part.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Holders of common stock are
entitled to share in any and all dividends that our board of directors, in its
discretion, declares from funds legally available for that purpose. In the event
of any liquidation or dissolution of PartsBase.com, the holders of common stock
are entitled to participate in and share pro rata in the assets available for
distribution to stockholders. Any distribution would be subsequent to payment of
our liabilities and may be subject to any preferential rights of any preferred
stock or other senior security then outstanding. The holders of common stock
have no cumulative voting, preemptive or other subscription rights, and there
are no conversion rights or redemption or sinking fund provisions with respect
to the common stock. 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 any shares of preferred stock or senior securities which we may
designate in the future.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed
by Texas law, but without further action by our shareholders, to provide for the
issuance of up to 2,000,000 shares of preferred stock in one or more series, to
establish from time to time the number of shares to be included in each series
and any qualifications, limitations, or restrictions thereof, and to increase or
decrease the number of shares of any series, but not below the number of shares
of the series then outstanding, without any further vote or action by the
stockholders. The board of directors may authorize and issue preferred stock
with voting or conversion rights that could adversely affect the voting power or
other rights of common stockholders.
Simultaneously with the consummation of the offering, all 855,000 shares of
our outstanding Series A convertible preferred stock will be converted into
855,000 shares of common stock and no shares of our preferred stock will remain
outstanding.
PRIVATE PLACEMENTS
In June 1999, we completed a private placement of $900,000 in 8% convertible
secured subordinated notes due 2001. GunnAllen Financial, Inc. acted as the
placement agent with respect to the placement and, as a result, received
commissions equal to 10% of the gross proceeds, a non-accountable expense
allowance of 3% of the gross proceeds, and a warrant to purchase up to 175,000
shares of our common stock at an exercise price of $2.00 per share.
42
<PAGE>
In November 1999, we issued to two investors an aggregate of $62,500 of
notes having substantially identical terms to the notes issued in connection
with the June placement, including $50,000 sold to the father of Mr. Duplan, one
of our executive officers.
The notes issued in connection with the June placement bear interest at an
annual rate of 8% and are secured by substantially all of our assets. Interest
is payable in quarterly installments commencing September 30, 1999 with all
principal and interest due and payable on December 31, 2001 unless prepaid by us
or converted into our common stock. Both the notes issued in connection with the
June placement and the notes issued in November will automatically convert into
shares of our common stock at a conversion rate of $2.00 upon closing of this
offering. An aggregate of 481,250 shares will be issued in connection with the
conversion of said notes. Subject to a lock-up restriction pursuant to which
holders will not be permitted to sell or transfer shares for a period of
180 days following the effective date of this offering, each holder of notes was
granted piggy-back registration rights to register for resale the shares of
common stock issuable upon conversion of the notes.
In November 1999, we raised an additional $2,137,500 through a private
placement of 855,000 shares of Series A convertible preferred stock at $2.50 per
share. In connection with such private placement, we paid a total placement fee
of $235,125 to three broker-dealers. The shares of Series A preferred stock will
automatically convert into an aggregate of 855,000 shares of common stock upon
completion of the offering. Subject to a lock-up restriction pursuant to which
holders will not be permitted to sell or transfer shares for a period of
180 days following the effective date of this offering, each holder of Series A
preferred stock was granted piggy-back registration rights to register for
resale in connection with this offering the shares of common stock issuable upon
conversion of the shares.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND
TEXAS LAW
Our articles of incorporation and bylaws contain provisions that under the
Texas Business Corporation Act, as amended, may be deemed to be "anti-takeover"
in nature that will be immediately applicable. These provisions are:
- the requirement that we indemnify our directors and officers to the
fullest extent permitted by Texas law;
- the power of the board of directors to authorize the issuance of up to
2,000,000 shares of preferred stock and to determine the designations,
preferences, limitations and relative rights, including voting rights,
of those shares without further vote or action by the stockholders; and
- the elimination of preemptive rights to common stock.
Upon completion of this offering, we will be subject to Part Thirteen of the
Texas Business Corporation Act. Subject to exceptions, Part Thirteen generally
prohibits a publicly held Texas corporation from engaging in any business
combination with any affiliated shareholder for a period of three years
following the date that the shareholder became an affiliated shareholder, unless
prior to that date, the corporation's board of directors approved either the
business combination or the transaction that resulted in the shareholder
becoming an affiliated shareholder, or the business combination is approved by
at least two-thirds of the outstanding voting shares that are not beneficially
owned by the affiliated shareholder or an affiliate or associate of the
affiliated shareholder at a meeting of shareholders called not less than six
months after the affiliated shareholder's share acquisition date.
In general, Part Thirteen defines an affiliated shareholder as any entity or
person beneficially owning 20% or more of the outstanding voting stock of the
issuing public corporation and any entity or person affiliated with or
controlling or controlled by that entity or person. Part Thirteen defines a
business combination to include, among other similar types of transactions, any
merger, share exchange, or conversion of an issuing public corporation involving
an affiliated shareholder. Part Thirteen may
43
<PAGE>
have the effect of inhibiting a non-negotiated merger or other business
combination that we may be involved in.
Our amended and restated articles of incorporation limit the liability of
our directors for monetary damages for an act or omission in the director's
capacity as a director, except to the extent otherwise required by the Texas
Business Corporation Act. This limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission. Our
amended and restated articles of incorporation permit us to indemnify our
directors and officers to the fullest extent permitted by Texas law, including
in circumstances in which indemnification is otherwise discretionary under Texas
law.
Under Texas law, a corporation may indemnify a director or officer or other
person who was, is, or is threatened to be made a named defendant or respondent
in a proceeding because the person is or was a director, officer, employee or
agent of the corporation, if it is determined the person:
- conducted himself or herself in good faith;
- reasonably believed, in the case of conduct in his or her official
capacity as a director or officer of the corporation, that his or her
conduct was in the corporation's best interests, and, in all other
cases, that his or her conduct was at least not opposed to the
corporation's best interests; and
- in the case of any criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful.
Any person meeting the standards set forth above may be indemnified against
judgments, penalties, including excise and similar taxes, fines, settlements and
reasonable expenses actually incurred by the person in connection with the
proceeding. If the person is found liable to the corporation or is found liable
on the basis that personal benefit was improperly received by the person, the
indemnification is limited to reasonable expenses actually incurred by the
person in connection with the proceeding, and must not be made in respect of any
proceeding in which the person is found liable for willful or intentional
misconduct in the performance of his or her duty to the corporation.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
this type of indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. We have entered into
indemnification agreements with each of our directors that provide for
indemnification and expense advancement in addition to the indemnification
provided by the amended and restated articles and bylaws. We believe that these
provisions and agreements are necessary to attract and retain qualified
directors.
The shares of preferred stock and the elimination of preemptive rights to
common stock were authorized for the purpose of providing the board of directors
with as much flexibility as possible to issue additional shares, without further
stockholder approval for proper corporate purposes, including financing,
acquisitions, stock dividends, stock splits, employee incentive plans and other
similar purposes. However, these additional shares may also be used by the board
of directors, if consistent with its fiduciary responsibilities, to deter future
attempts to gain control over PartsBase.com.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 14,087,500 shares
of common stock. Of these shares, the 3,500,000 shares of common stock sold in
this offering will be freely tradable in the public market without restrictions
under the Securities Act. Any shares purchased in this offering by our
affiliates, as defined in Rule 144 under the Securities Act, may only be sold in
compliance with the applicable provisions of Rule 144 discussed below.
In general, under Rule 144, a person who has complied with the requirements
set forth below and has beneficially owned "restricted securities" for at least
one year, including a person who may be deemed an affiliate of us, is entitled
to sell, within any three-month period, the number of shares of common stock
that does not exceed the greater of:
- one percent of the then outstanding shares of our common stock; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with the SEC.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice obligations and the requirements as to the availability of current public
information about us. Generally, a person who is not an affiliate of ours at any
time during the 90 days preceding a Rule 144 sale and who has beneficially owned
the shares for at least two years can sell without complying with the manner of
sale, notice, and volume requirements. As of December 31, 1999, the one-year
holding period had not expired with respect to any shares of our common stock.
Stockholders holding 10,587,500 shares, representing all of our outstanding
shares immediately prior to the offering, have entered into lock-up agreements
pursuant to which they agreed not to sell, pledge, assign, or otherwise
transfer, or agree to sell, pledge, assign or otherwise transfer their shares
without the prior written consent of the representatives of the underwriters for
a period of 180 days following the date of the final prospectus. Giving effect
to these lock-up agreements and applicable legal restrictions, the number of
shares of common stock and the dates when these shares will become freely
tradeable or saleable in the market, subject to volume limitations and other
requirements of Rule 144 applicable to affiliates and certain other
stockholders, is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- --------------------- ----
<C> <S>
3,500,000 At the date of this prospectus
10,587,500 180 days following the date of this prospectus
</TABLE>
Simultaneously with this offering, we have registered on behalf of selling
stockholders who participated in our private placements in June or November
1999, an aggregate of 1,336,250 shares of our common stock. Upon expiration of
the 180-day lock-up period, the shares registered on behalf of private placement
stockholders may be sold in the market pursuant to a selling stockholder
prospectus in the form accompanying the registration statement of which this
prospectus is a part. Shares subject to the 180-day lock-up period, other than
those that are registered on behalf of the private placement stockholders, may
be sold into the public market without registration under the Securities Act in
compliance with the volume limitations and other applicable restrictions of
Rule 144 under the Securities Act. These shares must be held for a period of at
least one year before they are eligible for resale in the public market pursuant
to Rule 144.
45
<PAGE>
PLAN OF DISTRIBUTION
GENERAL
Subject to the terms and conditions of our underwriting agreement, the
underwriters named below, for whom Roth Capital Partners, Inc. and Pennsylvania
Merchant Group are acting as representatives, agreed to purchase from us, and we
have agreed to sell to the underwriters, the respective number of shares of
common stock set forth opposite each underwriter's name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Roth Capital Partners, Inc.................................. 1,400,000
Pennsylvania Merchant Group................................. 1,400,000
Dain Rauscher Wessels....................................... 100,000
L.H. Friend, Weinress, Frankson & Presson, Inc.............. 100,000
Janney Montgomery Scott LLC................................. 100,000
Jefferies & Company......................................... 100,000
Pacific Crest Securities.................................... 100,000
Sutro & Co. Incorporated.................................... 100,000
H.C. Wainwright & Co., Inc.................................. 100,000
---------
Total................................................. 3,500,000
=========
</TABLE>
Our underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certificates,
opinions and letters from our counsel and independent public accountants. The
nature of the underwriters' obligation commits them to purchase and pay for all
the shares of common stock if any are purchased.
We have been advised by the representative that the underwriters propose to
offer the shares of common stock directly to the public on the terms set forth
on the cover page of this prospectus. The underwriters may allow selected
dealers a concession of not more than $0.50 per share, and the underwriters may
allow, and the selected dealers may reallow, a concession of not more than $0.10
per share, to other dealers. After the initial public offering of the shares,
the public offering price and other selling terms may be changed by the
representatives. No change in the terms shall change the amount of proceeds to
be received by us as set forth on the cover page of this prospectus.
We have granted an option to the underwriters, exercisable for a period of
45 days after the date of this prospectus to purchase up to an additional
525,000 shares of common stock at the same price per share as the initial shares
to be purchased by the underwriters to cover overallotments, if any. To the
extent that the underwriters exercise this option, each of the underwriters will
be committed, subject to customary conditions to closing, to purchase the
additional shares of common stock in approximately the same proportion as set
forth in the above table.
UNDERWRITERS' COMPENSATION
The representatives of the underwriters have advised us that they do not
expect any sales of the shares of common stock offered hereby to be made to
discretionary accounts controlled by the underwriters.
We have agreed to pay the representatives a nonaccountable expense allowance
equal to 2% of the aggregate price of the shares of common stock offered hereby,
including with respect to shares of common stock underlying the overallotment
option, if and to the extent it is exercised, set forth on the front cover of
this prospectus. The representatives' expenses in excess of the nonaccountable
expense allowance, including legal expenses, will be borne by the
representatives.
We have agreed to issue to the representatives at the closing of the
offering a warrant to purchase up to 262,500 shares of common stock, or
301,875 shares if the overallotment option is exercised in full, at an exercise
price per share of $21.45 per share. The representatives' warrant is exercisable
for a period of four years beginning one year from the date of this prospectus.
46
<PAGE>
The holder of the representatives' warrant will have no voting, dividends or
other shareholder rights until the representatives' warrant is exercised. The
terms of the representatives' warrant were established as the result of
negotiations between the representatives and us. If the representatives' warrant
is exercised, the representatives may realize additional compensation. By its
terms, the representatives' warrant will be restricted from sale, transfer,
assignment or hypothecation, except to persons that are officers or partners of
any NASD member participating in the offering. The number of shares covered by
the representatives' warrant and the exercise price are subject to adjustment to
prevent dilution. In addition, we have granted both demand and piggy-back
registration rights to the holder of the representatives' warrant to register
the representatives' warrant and the common stock underlying the
representatives' warrant under the Securities Act.
Total compensation to the representatives and the underwriters is as
follows:
- Commissions--$0.91 per share of common stock sold;
- Nonaccountable expense allowance--$0.26 per share of common stock sold;
and
- Warrant to purchase up to 262,500 shares of common stock, or 301,875
shares if the over-allotment option is exercised in full, at $21.45 per
share.
LOCK-UP AGREEMENTS
Our directors and officers and our shareholders have entered into lock-up
agreements which provide that they will not, directly or indirectly, offer,
sell, contract to sell, pledge, hypothecate or otherwise dispose of any of their
shares or securities convertible into or exercisable or exchangeable for, or any
rights to purchase or acquire common stock of the beneficial ownership, thereof
for an initial period of 180 days after the date of this prospectus without the
prior written consent of the representatives, on behalf of the underwriters. The
representatives have no present intention to release the locked-up shares prior
to expiration of the lock-up period although they may release the locked-up
shares prior to the expiration of the 180 day period. The granting of any
release would be conditioned, in the judgment of the representatives, on the
applicable sale not materially adversely impacting the prevailing trading market
for the common stock on the Nasdaq National Market System. Specifically, factors
such as average trading volume, recent price trends, and the need for additional
public float in the market for the common stock would be considered in
evaluating a request to sell.
DETERMINATION OF OFFERING PRICE
Prior to the offering, there has been no established trading market for the
common stock. Consequently, the initial public offering price for the common
stock offered hereby has been determined by negotiations between the
representatives and us. Among the factors considered in the negotiations were
the preliminary demand for the common stock, the prevailing market and economic
conditions, our results of operations, estimates of our business potential and
prospects, the present state of our business operations, an assessment of our
management, the consideration of these factors in relation to the market
valuation of comparable companies in related businesses, the current condition
of the markets in which we operate, and other factors deemed relevant. There can
be no assurance that an active trading market will develop for the common stock
or that the common stock will trade in the public market after the offering at
or above the initial public offering price.
MARKET STABILIZATION
The representatives have advised us that, pursuant to Regulation M under the
Securities Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of shares of common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is the bid for or purchase of common stock on
47
<PAGE>
behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by the underwriter or syndicate member
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by the underwriter or syndicate member.
The representatives have advised us that these transactions may be effected on
the Nasdaq National Market System or otherwise and, if commenced, may be
discontinued at any time.
The underwriting agreement provides that we will indemnify the underwriters
and their controlling persons against liabilities under the Securities Act or
will contribute to payments the underwriters and their controlling persons may
be required to make in respect thereof.
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved up to 15 percent of the
shares offered by this prospectus for sale at the initial public offering price
to our employees, officers, directors and other individuals associated with us
and members of their families. The number of shares available for sale to the
general public will be reduced to the extent these individuals purchase or
confirm for purchase, orally or in writing, such reserved shares. Any reserved
shares not purchased or confirmed for purchase will be offered by the
underwriters to the general public on the same basis as the other shares offered
by this prospectus.
LEGAL MATTERS
The legality of the securities in this offering has been passed upon for
PartsBase.com by Jeffer, Mangels, Butler & Marmaro LLP, Los Angeles, California.
Agreed upon legal matters will be passed upon for the underwriters by Greenberg
Traurig, LLP, McLean, Virginia.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of Deloitte & Touche, LLP, given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement, as some information is omitted in accordance with
the rules and regulations of the SEC. For further information with respect to us
and this offering, reference is made to the registration statement, including
the exhibits filed therewith, copies of which may be obtained at prescribed
rates from the SEC at the public reference facilities maintained by the SEC at
Judiciary Plaza Building, 450 Fifth Street, NW, Washington, D.C. 20549 and at
the SEC's regional offices located at Seven World Trade Center, Suite 1300, New
York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661. The SEC maintains a Web site on the Internet that will
contain all future reports, proxy and information statements and other
information that we are required to file electronically with the SEC. The
address of the SEC's Web site is HTTP://WWW.SEC.GOV. Further information
regarding the SEC's public reference facilities may be obtained by calling the
SEC at 1-800-SEC-0330.
This prospectus includes statistical data regarding Internet usage and
business-to-business e-commerce which were obtained from industry publications,
including reports generated by Forrester Research Inc., Boeing Corp. and
Aerospace Industries Association. These industry publications generally
48
<PAGE>
indicate that they have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of that
information. While we believe those industry publications to be reliable, we
have not independently verified the data included in the reports. We also have
not sought, in all instances, the consent of these organizations to refer to
their reports in this prospectus.
We will furnish our stockholders annual reports and make available unaudited
quarterly reports for the first three quarters of each fiscal year. Annual
reports will include audited consolidated financial statements prepared in
accordance with generally accepted accounting principles. The financial
statements included in the annual reports will be examined and reported upon,
with an opinion expressed, by our independent auditors.
49
<PAGE>
PARTSBASE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of PartsBase.com, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheets of PartsBase.com (the
"Company") as of December 31, 1998 and 1999 and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and 1999
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
January 28, 2000
Miami, Florida
F-2
<PAGE>
PARTSBASE.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
AS OF DECEMBER 31, EQUITY AT
----------------------- DECEMBER 31, 1999
1998 1999 (NOTE 2)
--------- ----------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ -- $ 735,276
Notes and accounts receivables..................... -- 297,884
Prepaids and other current assets.................. -- 504,547
-----------
Total current assets............................. -- 1,537,707
Property, Plant and Equipment........................ 12,660 1,034,123
Accumulated depreciation........................... (6,576) (24,646)
--------- -----------
Net property, plant and equipment................ 6,084 1,009,477
Deferred financing costs, net of amortization........ -- 1,937,677
Web site development costs, net of amortization...... -- 188,152
Other assets......................................... -- 56,282
--------- -----------
Total assets......................................... $ 6,084 $ 4,729,295
========= ===========
LIABILITIES
Current Liabilities:
Accounts payable................................... $ 2,469 $ 718,523
Other accrued liabilities.......................... -- 233,270
Deferred revenue................................... 22,659 1,263,978
Accounts payable--related party.................... -- 9,108
--------- -----------
Total current liabilities........................ 25,128 2,224,879
Convertible notes payable............................ -- 962,500
--------- -----------
Total liabilities.................................... 25,128 3,187,379
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par value; 2,000,000 shares
authorized, issued and outstanding December 31,
1999--855,000 shares, December 31, 1998--none,
liquidation preference........................... 1,902,375
Common stock, no par value; 30,000,000 shares
authorized, issued and outstanding December 31,
1999,--9,251,250 shares, December 31,
1998--none.......................................
Additional paid-in capital......................... 392,615 15,178,497 $16,269,594
Accumulated deficit................................ (411,659) (7,762,678) (7,762,678)
Unearned compensation.............................. -- (7,776,278) (7,776,278)
--------- ----------- -----------
Total stockholders' equity (deficit)................. (19,044) 1,541,916 $ 730,638
--------- ----------- ===========
Total liabilities & stockholders' equity (deficit)... $ 6,084 $ 4,729,295
========= ===========
</TABLE>
F-3
<PAGE>
PARTSBASE.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Net revenue............................................... $ 2,861 $ 3,504 $ 362,224
Cost of revenue........................................... 104,041 43,462 1,412,532
Noncash compensation expense.............................. -- -- 1,799,139
--------- --------- -----------
Total cost of revenue................................... 104,041 43,462 3,211,671
Gross loss................................................ (101,180) (39,958) (2,849,447)
Operating expenses:
General and administrative.............................. 90,452 108,163 1,293,091
Noncash compensation expense............................ -- -- 899,821
--------- --------- -----------
Total operating expenses.............................. 90,452 108,163 2,192,912
--------- --------- -----------
Operating loss........................................ (191,632) (148,121) (5,042,359)
Other income (expense):
Interest expense........................................ -- -- (881,652)
Interest income......................................... -- -- 10,977
--------- --------- -----------
Total other income (expense).......................... -- -- (870,675)
--------- --------- -----------
Net loss.............................................. (191,632) (148,121) (5,913,034)
Value of preferred stock beneficial conversion
feature............................................. -- -- (1,902,375)
--------- --------- -----------
Net loss applicable to common stockholders............ $(191,632) $(148,121) $(7,815,409)
========= ========= ===========
Net loss per common share--basic and diluted.............. $ (0.84)
===========
Weighted average common shares outstanding--basic
and diluted............................................. 9,251,250
===========
</TABLE>
F-4
<PAGE>
PARTSBASE.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ----------------------- ADDITIONAL UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN-CAPITAL COMPENSATION DEFICIT
-------- ---------- --------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996...... $ 71,630
Contribution from parent........ 198,047
Net loss........................
-----------
Balance, December 31, 1997...... 269,677
Contribution from parent........ 122,938
Net loss......................
-----------
Balance, December 31, 1998...... 392,615
Net loss (January 1--April 26,
1999).........................
Contribution from parent........ 22,659
Reorganization.................. (464,390)
Common stock issued............. 9,000,000
Restricted stock issued......... 1,075,250 5,859,383 $(5,859,383)
Preferred stock issued.......... 855,000 $1,902,375 1,902,375 $(1,902,375)
Exchange of restricted stock for
stock options................. (824,000) 3,531,441 (3,531,441)
Unearned compensation related to
stock options................. 1,084,414 (1,084,414)
Recognition of unearned
compensation.................. 2,698,960
Beneficial conversion feature of
convertible notes............. 850,000
Warrants issued................. 2,000,000
Net loss
(April 27--December 31,
1999)......................... (5,860,303)
-------- ---------- --------- ----------- ------------ -----------
Balance, December 31, 1999...... 855,000 $1,902,375 9,251,250 $15,178,497 $(7,776,278) $(7,762,678)
======== ========== ========= =========== ============ ===========
<CAPTION>
TOTAL
DIVISIONAL STOCKHOLDERS'
EQUITY EQUITY
(DEFICIT) (DEFICIT)
---------- -------------
<S> <C> <C>
Balance, December 31, 1996...... $ (71,906) $ (276)
Contribution from parent........ 198,047
Net loss........................ (191,632) (191,632)
--------- -----------
Balance, December 31, 1997...... (263,538) 6,139
Contribution from parent........ 122,938
Net loss...................... (148,121) (148,121)
--------- -----------
Balance, December 31, 1998...... (411,659) (19,044)
Net loss (January 1--April 26,
1999)......................... (52,731) (52,731)
Contribution from parent........ 22,659
Reorganization.................. 464,390
Common stock issued.............
Restricted stock issued.........
Preferred stock issued.......... 1,902,375
Exchange of restricted stock for
stock options.................
Unearned compensation related to
stock options.................
Recognition of unearned
compensation.................. 2,698,960
Beneficial conversion feature of
convertible notes............. 850,000
Warrants issued................. 2,000,000
Net loss
(April 27--December 31,
1999)......................... (5,860,303)
--------- -----------
Balance, December 31, 1999...... -- $ 1,541,916
========= ===========
</TABLE>
F-5
<PAGE>
PARTSBASE.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(191,632) $(148,121) $(5,913,034)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization........................... 2,395 2,453 410,918
Loss on property disposals.............................. -- -- 583
Recognition of unearned compensation.................... -- -- 2,698,960
Noncash interest on convertible notes................... -- -- 850,000
Noncash costs allocated from former parent.............. 21,198 39,153 15,037
Changes in assets & liabilities:
Accounts receivable--trade, net....................... -- -- (297,884)
Prepaids and other current assets..................... -- -- (504,547)
Deferred charges & other assets....................... -- -- (56,282)
Accounts payable...................................... (334) 760 716,054
Other accrued liabilities............................. -- -- 233,270
Deferred revenue...................................... -- 22,659 1,241,319
Accounts payable--related party....................... -- -- 9,108
--------- --------- -----------
Net cash used in operating activities............... (168,373) (83,096) (596,498)
--------- --------- -----------
Cash flow from investing activities:
Capital expenditures.................................... (8,476) (688) (1,022,049)
Web site development costs.............................. -- -- (216,075)
--------- --------- -----------
Net cash used in investing activities............... (8,476) (688) (1,238,124)
--------- --------- -----------
Cash flow from financing activities:
Issuance of convertible notes........................... -- -- 962,500
Debt issue costs........................................ -- -- (138,700)
Issuance of Preferred stock............................. -- -- 1,902,375
Deferred offering costs................................. -- -- (163,899)
Paid-in-capital....................................... 176,849 83,784 7,622
--------- --------- -----------
Net cash provided by financing activities........... 176,849 83,784 2,569,898
--------- --------- -----------
Net increase in cash and cash equivalents................. -- -- 735,276
Cash and cash equivalents at beginning of period.......... -- -- --
--------- --------- -----------
Cash and cash equivalents at end of period................ $ -- $ -- $ 735,276
========= ========= ===========
Noncash financing activities--
Warrants issued in connection with issuance of the
convertible notes....................................... -- -- $ 2,000,000
===========
</TABLE>
F-6
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND ORGANIZATION
PartsBase.com, Inc. (the "Company") is a provider of an e-commerce
Business-to-Business solution to the aviation parts industry. The Company
enables global aviation parts buyers and sellers to efficiently buy and sell
aviation parts and products worldwide through the Partsbase.com Web site, an
Internet based procurement solution.
The Company was incorporated in Texas on April 27, 1999 and prior to such
date operated as a division (the "Division") of Aviation Laboratories, Inc.
("Aviation Labs"). During this period, the Division did not have significant
sales and operating activities except for expenditures related primarily to the
design and development of its online database and Web site and the establishment
of relationships with industry buyers and sellers of aviation parts. In April
1999, the assets of the Division were conveyed to Mr. Robert A. Hammond, Jr. in
consideration for, among other things, Mr. Hammond's equity interest in Aviation
Labs. On April 27, 1999, Mr. Hammond transferred the assets of the Division into
the Company. The Company has incurred operating losses to date and had an
accumulated deficit of $7,762,678 at December 31, 1999. The Company's activities
have been primarily financed through private placements of convertible
subordinated debt and convertible preferred stock. The Company is no longer in
the development stage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounting for the contribution of the Division into the Company has
been reported in the accompanying financial statements as a reorganization of
entities under common control in a manner similar to a pooling of interests. As
the Company has, in effect, reorganized from an S corporation to a C
corporation, additional paid-in capital has been reduced by the amount of the
accumulated deficit as of April 26, 1999 of $464,390.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments in bank certificates of deposit and
other interest bearing instruments with initial maturities of three months or
less. Such investments are carried at cost, which approximates fair value. At
December 31, 1998 and 1999, the Company did not have any cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist primarily of uninsured cash and cash equivalents. Cash and cash
equivalents are deposited with a federally insured commercial bank in the United
States. At December 31, 1999 the Company had all of its cash and cash
equivalents in one financial institution of which the excess over $100,000 is
not covered by FDIC insurance and which, therefore, did not limit the Company's
amount of credit exposure. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
The Company sells primarily to aviation related companies and performs
ongoing credit evaluations of its customers but does not require collateral. The
Company analyzes the need for reserves for potential credit losses and records
reserves when necessary. The Company has not had significant write-offs of bad
debt. No reserves were recorded as of December 31, 1998 and 1999.
F-7
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has members in more than 115 countries. Revenues from domestic
and foreign customers were $325,227 and $36,997, respectively, for the year
ended December 31, 1999. The Company did not derive more than 10% of its revenue
from any single foreign country during 1999. Prior to 1999, all of the Company's
revenue was derived from domestic customers.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Costs incurred for additions,
improvements and betterments are capitalized as incurred. Costs for maintenance
and repairs are charged to expense as incurred. Gains or losses on dispositions
of property and equipment are included in the determination of income.
Depreciation and amortization are computed using the straight-line method over
the following estimated service lives of the related assets:
<TABLE>
<S> <C>
Computer software........................................... 3 years
Computer equipment.......................................... 5 years
Communication equipment..................................... 7 years
Furniture and fixtures...................................... 7 years
</TABLE>
DEFERRED FINANCING COSTS
Issue costs associated with obtaining debt through the Company's Private
Placement, including the excess of the fair value over exercise price of
warrants issued to the underwriters of the debt, and the Initial Public Offering
("IPO") of its common stock, $2,302,602, are recorded as a deferred charge. All
fees and issue costs associated with the Private Placement are amortized over
the term of the related debt utilizing the straight-line method. Amortization of
financing costs related to the Private Placement amounted to $364,925 for the
year ended December 31, 1999.
WEB SITE DEVELOPMENT COSTS
The Company follows the provisions of SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 requires that entities capitalize certain costs related to internal use
software once certain criteria have been met.
Web site development costs which are enhancements intended to extend and or
improve significantly the marketability of the original product are capitalized,
all other costs are expensed as incurred and classified as cost of revenues. Web
site development costs of $216,075 were capitalized during the year ended
December 31, 1999. No Web site development costs were capitalized in prior
periods. As of December 31, 1999, capitalized Web site development costs, net of
amortization, was $188,152.
Amortization is computed on an enhancement-by-enhancement basis utilizing
the straight-line method over the estimated economic life of the enhancement,
which at December 31, 1999 is estimated to be 24 months.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable are carried at cost, which approximates
their fair value because of the short-term
F-8
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
maturity of these instruments. The Company's convertible notes payable are
carried at cost and have a fair value of $5,793,641 based on the market value of
the underlying common stock on December 31, 1999 plus unpaid interest as of
December 31, 1999.
PRO FORMA PRESENTATION
The unaudited pro forma presentation of shareholders' equity at
December 31, 1999 gives effect to the mandatory conversion of all outstanding
convertible notes under the terms of the private placement agreement into common
stock (see Note 5) and the mandatory conversion of the convertible preferred
stock issued on November 22, 1999 into common stock (see Note 6) .
Since the Company has incurred net losses since inception, it would not have
incurred any income tax liabilities during the period prior to incorporation on
April 27, 1999, and any deferred tax assets would have had a corresponding
valuation allowance therefore pro forma presentation on net loss per share is
not required.
REVENUE RECOGNITION
Revenues are recognized, net of discounts, over the period services are
provided to subscribers. The Company does not charge initial sign-up fees to new
subscribers.
ACCOUNTING FOR STOCK-BASED COMPENSATION PLAN
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation
expense is based on the difference, if any, on the date of the grant, between
the fair value of the Company's stock and the exercise price.
INCOME TAXES
The Company accounts for income taxes according to SFAS No. 109, "Accounting
for Income Taxes." Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount to be recovered.
Prior to April 27, 1999, the date of incorporation, the Company, with the
consent of its stockholders, elected to be taxed under Section 1362 of the
Internal Revenue Code (the "Code") as an S corporation, which provides that, in
lieu of corporate income taxes, the stockholders account for the pro rata share
of the Company's items of income, deductions, losses, and credits. In connection
with the incorporation of the Company (see Note 1), the Company, with the
consent of its stockholders, elected to be taxed under the provisions of
Subchapter C of the Code.
F-9
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per Share." In
accordance with SFAS No. 128, basic earnings per share ("EPS") is computed by
dividing net loss applicable to common stock by the weighted average common
shares outstanding during the period. Shares of common stock, options, warrants
or other common stock equivalents are considered outstanding for all periods
presented in the computation of basic and diluted EPS if issued for nominal
consideration. For the year ended December 31, 1999, the weighted average common
shares outstanding used to compute basic and diluted EPS includes the effect of
restricted common stock issued to employees.
The EPS computation excludes warrants to purchase 200,000 shares of common
stock at an exercise price of $2.00 per share that were issued in August 1999
and outstanding as of December 31, 1999 because such warrants were issued at
fair market value and were antidilutive. The EPS computation also excludes
919,375 options to purchase shares of common stock at an exercise price of $0.63
per share issued in November 1999 and outstanding as of December 31, 1999
because such options were antidilutive.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements and is effective for fiscal
years beginning after December 15, 1997. The Company adopted SFAS No. 130 in the
year ended December 31, 1998. The Company had no comprehensive income items to
report for all periods presented.
SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.131 changes the way
companies report selected segment information in annual financial statements and
requires companies to report selected segment information in interim financial
reports to stockholders. The Company operates solely in one operating segment,
the development and marketing of an online marketplace for the purchasing and
distribution of products.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which 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 fiscal years beginning after June 15, 2000. The Company
currently does not engage in, nor does it
F-10
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expect to engage in, derivative or hedging activities, and therefore, the
Company anticipates there will be no impact to its consolidated financial
statements.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were capitalized in the past must be written off when SOP 98-5 is adopted. The
Company implemented SOP 98-5 on January 1, 1999. The adoption of SOP 98-5 did
not have a material impact on the Company's financial position or results of
operations.
3. PROPERTY AND EQUIPMENT
Property and equipment, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
-------- ----------
<S> <C> <C>
Computer equipment..................................... $12,660 $ 298,345
Computer software...................................... -- 675,000
Telephone equipment.................................... -- 42,379
Furniture and Fixtures................................. -- 18,399
------- ----------
12,660 1,034,123
Accumulated depreciation............................... (6,576) (24,646)
------- ----------
$ 6,084 $1,009,477
======= ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
amounted to $2,395, $2,452, $18,070, respectively.
4. ADVANCES FROM STOCKHOLDER
In May and June 1999, The Company's principal stockholder and Chief
Executive Officer (the "Principal Stockholder") provided funds to finance
development of the Company's product. The advances were non interest bearing and
did not have a stated maturity date. The advances were repaid in November 1999.
5. CONVERTIBLE NOTES PAYABLE
For the period from June 9, 1999 to August 31, 1999, the Company, through a
Private Placement, sold and issued 8% Convertible Secured Subordinated Notes due
and payable December 31, 2001 totaling $900,000 (the "Convertible Notes") to
several investors. Terms of the Convertible Notes provide for interest at 8%
payable quarterly. All principal and unpaid interest is due and payable
December 31, 2001, if there is no conversion. Each note is convertible at any
time into common stock at a conversion price of $2.00 per share at the holder's
option. The Convertible Notes automatically convert upon the filing and closing
of an initial public offering of the Company's common stock with gross proceeds
of $5 million or more or upon certain mergers and consolidations of the Company.
Accrued interest payable on such notes at December 31, 1999 aggregated $18,641.
The Convertible Notes have a beneficial conversion feature totaling $787,500,
measured as the difference between the
F-11
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONVERTIBLE NOTES PAYABLE (CONTINUED)
conversion price of $2.00 per share and the fair value of the underlying common
stock at the time of issuance limited to the amount of proceeds received. The
beneficial conversion feature has been recorded as a charge to interest expense
with a corresponding credit to additional paid-in capital. The value of the
beneficial conversion feature was recognized immediately because the Convertible
Notes are immediately convertible at the option of the holder. The Convertible
Notes are secured by substantially all of the Company's assets.
In November 1999, the Company issued an additional $62,500 of notes having
substantially identical terms to the Convertible Notes to an aggregate of two
investors, including $50,000 sold to the father of one of the Company's
executive officers. The Convertible Notes have a beneficial conversion feature
of $62,500 measured as the difference between the conversion price of $2.00 per
share and the fair value of the underlying stock at time of issuance, limited to
the amount of proceeds. At the time of issuance, the beneficial conversion
feature was recorded as a charge to interest expense and with a corresponding
credit to additional paid-in capital. The value of the beneficial conversion
feature was recognized immediately because the Convertible Notes are immediately
convertible at the option of the holder.
6. STOCKHOLDERS' EQUITY
CAPITAL STOCK
The Company has authorized the issuance of 30,000,000 shares of common
stock, without par value, and 2,000,000 shares of preferred stock, without par
value. The Board of Directors have authority to establish series of unissued
shares of any class by fixing and determining the designations, preferences,
limitations and relative rights, including voting rights, of the shares of any
series. The Board of Directors shall have the authority to increase or decrease
the number of shares of such series to the fullest extent of the law. The number
of common and preferred shares outstanding, including restricted stock, at
December 31, 1999, is 9,251,250 and 855,000, respectively.
PREFERRED STOCK
Between November 1, 1999 and November 17, 1999, the Company sold 855,000
shares of its Series A Convertible Preferred Stock ("Convertible Preferred
Stock") at $2.50 per share for aggregate net proceeds of $1,902,375 after
commissions of $235,125. All of the shares are convertible at any time into
855,000 shares of the Company's common stock. Such shares are convertible upon
the completion of the Company's IPO or at the discretion of the shareholder if
an IPO is not completed. The Convertible Preferred Stock has a beneficial
conversion feature totaling $1,902,375, measured as the difference between the
conversion price of $2.50 per share and the fair value of the underlying common
stock at the time of issuance, limited to the amount of the proceeds received
and was treated as a Preferred dividend which was a reduction to income
applicable to common shareholders at issuance.
WARRANTS
In connection with the closing of the 8% Convertible Secured Subordinated
Notes private placement in August 1999, the placement agent was granted warrants
to purchase 200,000 shares of common stock of the Company at an exercise price
equal to $2.00 per share until the expiration date of
F-12
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
September 1, 2002. The warrants had a fair market value upon issuance of
approximately $2,400,000. As of December 31, 1999, no warrants had been
exercised. Subsequent to December 31, 1999, an agreement was reached with the
placement agent that reduced the number of warrants from 200,000 to 175,000.
In the event of certain consolidations or sales affecting the Company, the
Company is required to call the warrants for cash at a price based on the
greater of the trading price of the Company's common stock or the value paid by
a purchaser of the Company's common stock.
1999 STOCK OPTION PLAN
On November 2, 1999 the Board of Directors adopted the PartsBase.com, Inc.
1999 Stock Option Plan. The plan is a qualified stock option plan in accordance
with Section 422 of the Internal Revenue Code and provides for the issuance of
both incentive and non-qualified stock options. The maximum number of shares of
common stock that may be issued upon the exercise of all options shall not
exceed 2,000,000 shares of common stock. The per share option price of the
common stock shall be determined by the Board. The per share price with respect
to any incentive stock options shall not be less than the fair market value of
the common stock on the date of grant. Each option granted vests in accordance
with a vesting schedule established by the Board of Directors or a Committee of
the Board of Directors. Absent a specific determination of vesting, options
granted shall vest over a twenty-four month period and the period of exercise of
each option shall not exceed ten (10) years from date of grant. On November 16,
1999, the Company granted 95,375 nonqualified stock options in addition to the
824,000 options exchanged for the terminated stock grants for a total issuance
of 919,375 nonqualified stock options at an exercise price of $0.63 per share
including options to acquire 35,000 and 10,000 shares of common stock at an
exercise price of $.63 per share to two executives of the Company, respectively.
One executive became vested in 833 options upon grant with the remainder vesting
in 22 monthly installments of approximately 1,458 options followed by 2 monthly
installments of approximately 1,045 options. The other executive became vested
in 1,875 options upon grant with the remainder vesting in 9 equal monthly
installments of 625 options followed by 12 monthly installments of approximately
208 options. Unearned compensation of $511,650 was charged to stockholders'
equity in November 1999 based on the market value of the Company's common stock
at the date of the award. Compensation expense of approximately $54,000 was
recognized in November and December 1999 related to these options. On
December 31, 1999, the Company entered into an employment agreement with an
executive of the Company that provides for the grant on January 19, 2000 of
options to acquire 75,000 shares of common stock at an exercise price of $0.63
per share. The options will vest over 24 equal monthly installments beginning on
the date of grant. Assuming the market value of the Company's stock on the date
of grant is equal to the market value on December 31, 1999, unearned
compensation of $852,750 will be charged to stockholders' equity in January
2000.
F-13
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock option activity, and related
information for the year ended December 31, 1999 is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding January 1, 1999......................... --
Granted............................................. 919,375 $ 0.63
Exercised........................................... --
Forfeited........................................... --
------- ------
Outstanding December 31, 1999....................... 919,375 $ 0.63
======= ======
Options exercisable at December 31, 1999............ 235,792 $ 0.63
Weighted-average fair value of options granted
during the year................................... $11.47
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------------
NUMBER AVERAGE REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF PRICE OUTSTANDING CONTRACT LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.63.................... 919,375 9.98 $0.63 235,792 $0.63
</TABLE>
The Company applies the provisions of APB No. 25 and its related
interpretations in accounting for its stock option plans. Accordingly,
compensation expense recognized was different than what would have been
otherwise recognized under the fair value based method defined in SFAS No. 123.
Had the Company accounted for these plans under SFAS No. 123, the Company's net
loss applicable to common stock and loss per share would have been reduced to
the following pro forma amounts:
<TABLE>
<S> <C>
Net loss
As reported............................................... $(5,913,304)
===========
Proforma.................................................. $(6,004,972)
===========
Basic and diluted loss per share
As reported............................................... $ (0.64)
===========
Proforma.................................................. $ (0.65)
===========
</TABLE>
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method provided for in SFAS 123. The
fair value of options was estimated at the date of grant using a
F-14
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
minimum value option pricing model with the following weighted-average
assumptions for options granted during the year ended December 31, 1999:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.88%
Expected life (in years).................................... 3
Volatility.................................................. 0%
Dividend yield.............................................. 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options using a
graded vesting method. The effects of applying SFAS 123 for pro forma
disclosures are not likely to be representative of the effects on reported net
loss for future years.
The option valuation models were developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
RESTRICTED STOCK BONUS PLAN
In May 1999, the Company adopted the PartsBase.com, Inc. Restricted Stock
Bonus Plan ("Stock Bonus Plan"). Under the Stock Bonus Plan, the Company was
authorized to award or grant to employees, consultants, officers and directors
(except persons serving as directors only) shares of common stock subject to a
substantial risk of forfeiture. The Board of Directors had the sole authority to
select participants, to establish the terms and conditions of the stock,
including vesting provisions, and to grant the stock. The maximum number of
shares of common stock which could have been granted under the Stock Bonus Plan
was 1,200,000 shares. In the event a stock grant recipient was terminated, any
unvested portion of the shares that were subject to the stock grant was
canceled. Each stock grant recipient has all the rights of a shareholder with
respect to stock received pursuant to the Stock Bonus Plan, including the right
to vote such shares and receive all dividends and other distributions.
On November 17, 1999 the Company entered into an agreement with all of the
employees who received restricted stock awards. The agreement calls for the
employee to return all shares received and the termination of the Restricted
Stock Agreement between the employee and the Company as it relates to the
restricted stock award. As part of the terminated restricted stock award each
employee participating in the restricted stock grant plan received one
(1) nonqualified option to purchase one (1) share of common stock for each
restricted stock terminated. The options granted are part of the
PartsBase.Com, Inc. 1999 Stock Option Plan and vest over a twenty-four month
period and the period of exercise shall not exceed ten (10) years from date of
the grant. The options were granted at $0.63 per share. The number of options
granted as part of this agreement totaled 824,000. As a result of the
termination of the restricted stock and issuance of the nonqualified stock
options, additional unearned compensation of approximately $3,500,000 was
charged to stockholders' equity in November 1999. The additional unearned
compensation was determined as the amount by which the intrinsic value of the
F-15
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
options issued exceeded the amount of unearned compensation recorded prior to
the termination of the restricted stock based on the market value of the
Company's common stock at the date of grant. Prior to termination, stock grants
totaling 1,075,250 were outstanding. An aggregate of 251,250 shares of
restricted stock remain outstanding under the Stock Bonus Plan. Such stock is
held by a total of four persons, including 250,000 shares held by Steven
Spencer, a director and executive officer. Mr. Spencer's stock grant vested with
respect to 50,000 shares upon commencement of employment. The remaining 200,000
shares vest in 24 equal monthly installments; provided, however, that vesting
shall accelerate with respect to 100,000 shares upon completion of an initial
public offering. The remaining 100,000 shares vest in equal monthly installments
over the two year period beginning with the commencement of Mr. Spencer's
employment.
The Company applies the provisions of APB No. 25 and its related
interpretations in accounting for its employee stock grant plan. As the stock
grants were recorded at their fair value at the date of grant, compensation
expense recognized was no different than what would have been otherwise
recognized under the fair value based method defined in SFAS No. 123.
UNEARNED COMPENSATION
Unearned compensation of $10,475,238 was charged to stockholders' equity in
1999 in connection with the issuance of stock options and restricted stock
grants based on the market value of the Company's common stock at the date of
grant. Compensation expense of $2,698,960 was recognized during 1999 related to
these options and grants.
7. INCOME TAXES
The Company did not record any provision (benefit) for income taxes for the
year ended December 31, 1999, because it experienced a net loss and generated a
net operating loss of approximately $2,464,000 since incorporation on April 27,
1999, which expires in 2019. The Company's utilization of its net operating loss
carryforward will be limited pursuant to Internal Revenue Code Section 382 due
to cumulative changes in ownership in excess of 50% within a three-year period.
Prior to April 27, 1999, the Company was not subject to Federal income taxes.
A reconciliation of income tax benefit provided at the Federal statutory
rate (34%) to income tax benefit is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-------------------------
<S> <C> <C>
Net loss............................................. $(5,913,034)
Income tax benefit at statutory rate................. (2,010,432) (34.00%)
Loss attributable to operations prior to inception... 19,774 0.33%
Permanent difference relating to stock
compensation....................................... (266,137) (4.5%)
State income taxes................................... (206,956) (3.50%)
Change in valuation allowance........................ 2,463,662 41.67%
Other................................................ 89 0.00%
----------- ------
$ -- 0.00%
=========== ======
</TABLE>
F-16
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The major tax effected components of the Company's net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 2,472,090
Valuation allowance....................................... (2,471,292)
-----------
798
Deferred tax liabilities--
Differences between book and tax basis of property........ (798)
-----------
Total net deferred taxes.................................... $ --
===========
</TABLE>
8. RELATED PARTY TRANSACTIONS
CONTRACT SERVICES
A company owned and operated by one of the Company's directors and minority
stockholders provided significant services designing and maintaining the
Company's Web site. The Company pays this company for its continued services.
Services performed totaling $0 and approximately $260,000 of which approximately
$220,000 has been capitalized as Web site development costs and approximately
$43,000 has been expensed as cost of revenue for the years ended December 31,
1998 and 1999, respectively. There was $37,350 owed to this company as of
December 31, 1999 which is included in accounts payables in the accompanying
balance sheets.
In addition, a company owned and operated by another of the Company's
directors provided services in connection with the design of the Company's
advertising brochures and other marketing materials. Total payments of
approximately $0 and $53,263 were made by the Company for such services for the
years ended December 31, 1998 and 1999, respectively.
DUE TO/FROM OTHER COMPANIES
The company in which PartsBase.Com, Inc. had previously operated as a
division until April 26, 1999, collected sales revenues and paid certain costs
on its behalf. The other company then billed PartsBase.Com, Inc. for net amounts
owed. At December 31, 1999, the Company owed a net amount aggregating $9,108. At
December 31, 1998, there were no amounts due to the other company.
ALLOCATION OF COSTS INCURRED BY FORMER PARENT
The financial statements include costs incurred by Aviation Labs on the
Company's behalf. Such costs include administrative salaries, related payroll
taxes and benefits, utilities, office supplies and rent. These costs aggregated
$21,198, $39,153 and $15,037 the years ended December 31, 1997, 1998 and 1999,
respectively. The Company used a proportional cost allocation methodology based
on the ratio of the number of employees dedicated to the operations of the
Company to the total number of employees of Aviation Labs. Management believes
such allocation to be reasonable.
F-17
<PAGE>
PARTSBASE.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is party to several non-cancelable lease agreements for certain
equipment as well as its principal administrative offices. Rent expense under
non-cancelable operating leases totaled $0, $0 and $48,943 for the years ended
December 31, 1997, 1998 and 1999, respectively. Minimum future lease obligations
under non-cancelable operating leases in effect at December 31, 1999, are as
follows:
<TABLE>
<S> <C>
2000........................................................ $ 73,596
2001........................................................ 49,064
2002........................................................ 0
2003........................................................ 0
2004........................................................ 0
--------
Total..................................................... $122,660
========
</TABLE>
10. INVESTMENT BANKING AGREEMENT
On October 7, 1999, the Company had entered into an agreement with an
investment banking group (the "Group") whereby such Group would act as the
exclusive financial advisor to the Company. Such services to be performed by the
Group would be in connection with the exploration of potential financing and
strategic transactions, including the private placement of debt or equity
capital, strategic mergers and acquisitions and or a public equity offering.
Immediately upon signing of the agreement the Group commenced work as the
Company's lead managing underwriter in a proposed public offering (the
"Offering") of the Company's common stock. In addition, the Group assisted the
Company, on a best efforts basis, in completing the private placement of the
Convertible Preferred stock.
The Company paid fees for services in connection with this agreement which
included a non-refundable initial cash fee of $35,000 which was intended to
offset non-accountable expenses related to the private capital offering, plus a
commission of $125,125 relating to the proceeds raised in the private placement
of equity and debt which is convertible into equity.
On or about December 3, 1999, this agreement was terminated. The Company is
currently working with a new investment banking firm in connection with a public
equity offering.
F-18
<PAGE>
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UNTIL APRIL 16, 2000, 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 UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
3,500,000 SHARES OF COMMON STOCK
-------------
PROSPECTUS
-------------
ROTH CAPITAL PARTNERS, INC. PENNSYLVANIA MERCHANT GROUP
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YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
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