<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 2000
REGISTRATION NO. 333-30174
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GARAGE.COM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6211 94-3285969
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER)
</TABLE>
420 FLORENCE AVENUE
PALO ALTO, CALIFORNIA 94301
(650) 470-0950
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GUY KAWASAKI
CHIEF EXECUTIVE OFFICER
GARAGE.COM INC.
420 FLORENCE AVENUE
PALO ALTO, CALIFORNIA 94301
(650) 470-0950
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ALAN K. AUSTIN KEVIN P. KENNEDY
JAMES C. CREIGH SHEARMAN & STERLING
DAVID A. HSU 1550 EL CAMINO REAL, SUITE 100
WILSON SONSINI GOODRICH & ROSATI MENLO PARK, CALIFORNIA 94025
650 PAGE MILL ROAD (650) 330-2200
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2)
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<S> <C> <C> <C>
Common Stock, $0.001 par value per share... 4,025,000 $14.00 $56,350,000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------- ----------------------
- -------------------------------------------------- ----------------------
AMOUNT OF REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED FEE(2)(3)
<S> <C>
Common Stock, $0.001 par value per share... $14,877
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</TABLE>
(1) Includes 525,000 shares of Common Stock that may be sold pursuant to the
Underwriters' overallotment option.
(2) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457 promulgated under the Securities Act.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER
TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION. DATED MARCH 24, 2000.
3,500,000 Shares
[Garage.com Logo]
Common Stock
-------------------------
This is an initial public offering of shares of common stock of Garage.com.
All of the 3,500,000 shares of common stock are being sold by Garage.com.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price will be
between $12.00 and $14.00. Application has been made for the quotation of the
common stock on the Nasdaq National Market under the symbol "GRGE".
See "Risk Factors" beginning on page 4 to read about factors you should
consider before buying shares of our common stock.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Garage.com.................... $ $
</TABLE>
To the extent that the underwriters sell more than 3,500,000 shares of
common stock, the underwriters have the option to purchase up to an additional
525,000 shares from Garage.com at the initial public offering price less the
underwriting discount.
-------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON
ROBERTSON STEPHENS
-------------------------
Prospectus dated , 2000.
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including "Risk Factors" and
the financial statements, before making an investment decision.
Garage.com operates an online business-to-business marketplace that helps
entrepreneurs and investors create, build, and fund promising early-stage
technology startups. We target our services at startups seeking to raise initial
financing of between $0.5 million and $5 million. These startups are often
underserved by the current venture capital market. We receive cash and the right
to buy stock in our client companies as compensation for our services. During
1999, we assisted:
- 28 client companies raise more than $90 million, for which we received
cash fees and the right to buy their stock as compensation. Immediately
following these financings, we owned or had the right to buy at a nominal
price, an average of 4% of these clients' outstanding capital stock.
- 12 other client companies with financing and marketing activities for
which we received the right to buy their stock as compensation. These
companies raised approximately $10 million.
We acted as placement agent in these transactions. The cash placement fees we
received for these transactions accounted for 42% of our total revenue in 1999.
We also derive revenue from our Bootcamp for Startups events, which are an
integral part of our marketing and branding strategy. During 1999, these
conferences accounted for approximately 41% of our total revenue. We anticipate
that as our business develops, the percentage of our revenue that we receive for
acting as placement agent will increase relative to our event revenue.
The existing venture capital market, and the market for early-stage
financing in particular, is highly fragmented and unstructured. As a result, we
believe the market is inefficient in matching supply and demand for venture
capital. Our online platform allows startups to confidentially submit their
business plans in a standardized format. This allows us to review business plans
quickly and cost-effectively. We then select early-stage startups that we
believe are promising to list in the password-protected section of our website
known as the "Portfolio". Prior to listing these companies in the Portfolio, we
assist them in refining their business models, developing their teams, and
creating an effective communications strategy. Finally, we help these portfolio
clients secure financing from qualified investors.
We enable startups to simultaneously present their investment opportunities
to more than 2,000 of our client investors with experience in high technology
investing, management, and operations. These investors include venture capital
firms, corporate investors, and angel investors. We enable these client
investors to access select early-stage investment opportunities without
expending significant search time and resources.
Our mission is to revolutionize and democratize the venture financing
process for entrepreneurs and investors. Our strategy to achieve this goal
includes continuing to:
- create a competitive Internet-based marketplace providing startups with
efficient access to venture capital;
- enhance the quality of startups by providing strategic guidance,
marketing and promotion, education, training, and executive and technical
recruiting services;
- improve our client investors' access to select early-stage investment
opportunities;
- establish Garage.com as the leading brand for online venture capital
matching startups with venture capital, corporate and angel investors;
- leverage our technology platform and extensive database of startup
companies and investors to increase the efficiency of our marketplace;
and
- promote collaboration and networking among client companies,
entrepreneurs, and investors.
In 1999, we generated $5.9 million in total revenue and net income of
$694,000. However, we expect to incur significant losses for the foreseeable
future as we continue to expand our operations.
1
<PAGE> 4
THE OFFERING
Shares offered by
Garage.com.................... 3,500,000 shares
Shares to be outstanding after
the offering.................. 32,556,129 shares
Use of proceeds............... General corporate purposes, including working
capital, the opening of additional offices, the
funding of our anticipated operating losses,
and to exercise our rights to buy stock in our
client companies. See "Use of Proceeds".
Proposed Nasdaq National
Market symbol................. "GRGE"
The number of shares of common stock to be outstanding after this offering
is based on 29,056,129 shares outstanding as of February 10, 2000, and excludes:
- 659,741 shares issuable upon exercise of options outstanding as of
February 10, 2000 at a weighted average exercise price of $6.04 per
share; and
- 3,684,259 shares available for future issuance under our incentive plans,
excluding the automatic annual increases in the number of shares
authorized under these plans beginning January 1, 2001. See
"Management -- Incentive Plans" for a description of how these annual
increases are determined.
------------------------
OTHER INFORMATION
Unless otherwise noted, this prospectus assumes:
- our reincorporation in Delaware, which will be completed prior to the
closing of this offering;
- the automatic conversion of all outstanding shares of our convertible
preferred stock into shares of common stock upon the closing of this
offering;
- the filing of our amended and restated certificate of incorporation
authorizing a class of 5,000,000 shares of undesignated preferred stock
upon the closing of the offering; and
- no exercise of the underwriters' option to purchase additional shares of
our common stock in the offering.
We incorporated in California on October 24, 1997 and will reincorporate in
Delaware prior to the date of this prospectus. Our principal executive offices
are located at 420 Florence Avenue, Palo Alto, California 94301, and our
telephone number at that address is (650) 470-0950. Our regulated activities are
conducted through our wholly-owned subsidiary, Garage.com Securities, Inc.,
which is a broker-dealer licensed with the SEC and a member of the NASD. Our
website is located at: http://www.garage.com. None of the information on our
website is part of this prospectus.
This prospectus contains service marks, trademarks, and trade names of
Garage.com, including: Garage.com, the Garage.com logo, and Bootcamp for
Startups.
2
<PAGE> 5
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The consolidated statement of operations data for the year ended December
31, 1998, is presented for the period from October 24, 1997 (inception) to
December 31, 1998. There was no revenue and operating expenses were $11,000 for
the period from inception to December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1999
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<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $ 149 $ 5,855
Total costs and expenses.................................... 1,653 5,144
Income (loss) from operations............................... (1,504) 711
Net income (loss)........................................... (1,504) 694
Net income (loss) per share -- basic........................ $ (0.86) $ 0.17
Shares used in per share calculation -- basic............... 1,740 4,119
Net income (loss) per share -- diluted...................... $ (0.86) $ 0.03
Shares used in per share calculation -- diluted............. 1,740 20,781
</TABLE>
You should read note 2 of the notes to our consolidated financial
statements for an explanation of the method used to calculate the number of
shares used to compute the per share data.
The following table sets forth our consolidated balance sheet data as of
December 31, 1999. This data is also presented:
- on a pro forma basis to give effect to the sale in February 2000 of
2,989,917 shares of convertible preferred stock at a price of $9.00 per
share, less offering expenses, and the automatic conversion of our
convertible preferred stock into shares of common stock which will occur
upon the closing of this offering; and
- on a pro forma basis as adjusted to give effect to our receipt of the
estimated net proceeds from the sale of 3,500,000 shares of common stock
at an assumed initial public offering price $13.00 per share in this
offering, less the underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $16,123 $43,007 $84,087
Working capital.......................................... 15,747 42,631 83,711
Total assets............................................. 17,437 44,321 85,401
Total stockholders' equity............................... 16,710 43,594 84,674
</TABLE>
3
<PAGE> 6
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occurs, our business
could be seriously harmed. In such case, the trading price of our common stock
could decline, and you may lose all or part of your investment.
RISKS ASSOCIATED WITH OUR OPERATIONS
THE MARKET FOR ONLINE VENTURE CAPITAL SERVICES IS NEW AND UNPROVEN. IF THE
MARKET FOR THESE SERVICES FAILS TO GROW, OUR BUSINESS WILL SUFFER.
The market for online venture capital services is at an early stage of
development and is rapidly evolving. Consequently, demand and market acceptance
for these recently introduced services are subject to a high level of
uncertainty. Traditional means of investing and raising capital generally
involve numerous face-to-face meetings. Our business requires entrepreneurs and
venture capital investors, who have relied in the past upon traditional means of
investing and raising capital, to submit information in a standardized format
through our website. Some entrepreneurs may be unwilling to restructure their
business plans to fit our Internet-based format, and entrepreneurs and investors
may not be comfortable submitting confidential information on the Internet.
Accordingly, we must conduct marketing and sales efforts to educate these
prospective clients about the uses and benefits of investing and raising capital
online. For example, we must persuade our prospective startup clients that the
services we offer, such as brokering venture capital transactions, executive
search, and business model review and counseling, provide value in relation to
the services that our competitors offer, principally providing capital. If our
online services are not accepted by these prospective clients, our business will
be seriously harmed.
WE BEGAN OPERATIONS IN 1998. AS A RESULT, YOU MAY HAVE DIFFICULTY EVALUATING OUR
BUSINESS AND PROSPECTS.
We have a limited operating history upon which you can evaluate our
business and prospects. We were organized on October 24, 1997, began our
development activities in March 1998, and commenced our broker-dealer operations
in late 1998. We did not open our first regional office until July 1999 and did
not open our first international office until November 1999. Our business and
prospects must be considered in light of the risks, expenses, and difficulties
frequently encountered by companies in the early stages of development. These
risks are particularly severe among companies in new and rapidly evolving
markets such as online venture capital services and those in regulated
industries such as the securities industry. It may be difficult or impossible to
accurately forecast our operating results based on our historical results.
OUR STOCK PRICE COULD FLUCTUATE DRAMATICALLY BECAUSE OF VARIATIONS IN OUR
QUARTERLY OPERATING RESULTS. WE HAVE DIFFICULTY PREDICTING OUR QUARTERLY
OPERATING RESULTS. THIS COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
Period-to-period comparisons of our operating results may not be a good
indication of our future performance. For the reasons set forth below, our
revenue is difficult to predict. Therefore, in any given quarter our operating
results may not meet the expectations of stock market analysts or investors. If
this occurs, our stock price will likely fall significantly.
Factors that may cause fluctuations in our operating results include the
following:
- introductions of or enhancements to online venture capital services by us
or our competitors;
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<PAGE> 7
- the pace of development of the market for online commerce;
- changes in the level of operating expenses to support projected growth;
- the timing and size of our advertising campaigns and those of our
competitors;
- changes in pricing policies by us or our competitors;
- disruptions or problems in our services to customers;
- changes in our business strategy;
- operating decisions that may negatively affect short-term results but
benefit long-term profitability; and
- general economic conditions.
As a result of these factors, our quarterly results of operations are difficult
to forecast.
VARIATIONS IN OUR QUARTERLY OPERATING RESULTS CAUSED BY THE TIMING OF OUR CLIENT
COMPANIES' FINANCING TRANSACTIONS AND THE TIMING OF OUR EVENTS COULD CAUSE OUR
STOCK PRICE TO FLUCTUATE. THIS COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
The timing of our revenue depends on a number of factors that are outside
of our control. For example, we receive cash placement fees only when our client
companies close their financings, the timing of which is outside our control.
Moreover, in our experience, our clients are more likely to close their
financings in the last month of each quarter. To the extent that a particular
financing is delayed into a subsequent quarter, our cash revenue from that
client will also be deferred into a subsequent quarter, which could cause us to
fail to meet the quarterly expectations of stock market analysts or investors.
In addition, we receive cash placement fees only when our client companies raise
funds from investors that are not excluded from our engagement agreement. These
excluded investors usually consist of investors with whom the startup has a
pre-existing relationship. We cannot control the extent to which our client
companies will raise funds from these excluded investors.
We also depend on revenue from our events, including Bootcamp for Startups.
Our events will not necessarily be scheduled evenly throughout the year. To the
extent that we have more events in a particular quarter than in the preceding or
succeeding quarter, our revenue will fluctuate, perhaps significantly.
BECAUSE WE RECOGNIZE CHANGES IN THE FAIR VALUE OF THE SECURITIES WE HOLD IN OUR
OPERATING RESULTS, OUR QUARTERLY OPERATING RESULTS COULD FLUCTUATE
SIGNIFICANTLY. THIS COULD CAUSE OUR STOCK PRICE TO FLUCTUATE, RESULTING IN
SUBSTANTIAL LOSSES TO INVESTORS.
We account for the securities that we hold at fair value. Under the fair
value method of accounting, we recognize as revenue any increases in fair value
of these securities and reduce revenue by the amount of any decreases in the
fair value of these securities. This could seriously harm our results of
operations. During 1999, approximately 4% of our revenues were attributable to
increases in the fair value of our securities. The following factors may affect
the fair value of our securities:
- an initial public offering or acquisition of our client companies;
- operating results of our client companies;
- market valuations of other companies that are comparable to our client
companies;
- the state of development of our client companies;
- a general decline in securities prices and inactivity or uncertainty in
the public or private equity markets;
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<PAGE> 8
- market acceptance of the services provided by our client companies; and
- general economic conditions.
We have no control over these factors. In addition, it is difficult for us to
value the securities we hold because little information may be available
regarding our client companies and because their securities are not publicly
traded. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Effect of Various Accounting Methods on our Results of
Operations" for a discussion of how we value our securities.
If valuations for high technology companies decline, the fair value of the
securities we hold may not appreciate and, accordingly, we would not recognize
any appreciation revenue. Furthermore, if the fair value of these securities
actually declines, we will be forced to offset our cash revenue by the amount
the fair value declined. This could seriously harm our results of operations.
Moreover, any downturn in the market for high technology stocks could adversely
affect our ability to sell these securities, which could harm our liquidity.
BECAUSE VENTURE CAPITAL ACTIVITY HISTORICALLY HAS DECLINED IN AUGUST AND
DECEMBER OF EACH YEAR, WE EXPECT SEASONALITY IN OUR REVENUES. HOWEVER, WE ARE
UNSURE HOW THIS SEASONALITY WILL AFFECT OUR BUSINESS BECAUSE OF OUR EARLY STAGE
OF DEVELOPMENT.
We expect to experience seasonality in our revenue. For example, venture
capital activity historically has declined in August and December of each year.
We anticipate, therefore, that our revenue may decline during these future
periods. These seasonal variations in our revenue may lead to fluctuations in
our quarterly operating results. It is difficult for us to evaluate the degree
to which this seasonality may affect our business because of our early stage of
development.
WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE.
At December 31, 1999, we had an accumulated deficit of $810,000. Although
we were profitable in 1999, we do not expect to be profitable in 2000. We expect
our operating expenses to increase significantly as we expand our professional
staff, acquire new office space for our headquarters, expand marketing
operations and events, increase the number of our domestic and international
offices, and continue to develop and extend our online services. However, we
cannot estimate the extent to which this anticipated expansion will impact our
operating results. In addition, we expect that our expenses associated with
amortization of deferred compensation will increase to at least $742,000 in 2000
from $541,000 in 1999. If such expenses precede or are not followed by increased
revenue, our financial results will be seriously harmed. Although our revenue
has grown in recent periods, we cannot assure you that our revenue will continue
at its current level or increase in the future.
PERIODS OF DECLINING SECURITIES PRICES, INACTIVITY, OR UNCERTAINTY IN THE PUBLIC
OR PRIVATE EQUITY MARKETS MAY ADVERSELY AFFECT OUR PLACEMENT FEE REVENUE DUE TO
A DECLINE IN INVESTMENT ACTIVITY.
Our placement fee revenue is likely to be lower during periods of declining
securities prices, particularly in the high technology sectors on which we
focus. Our business depends particularly on the public and private equity
markets for companies in the high technology sectors because many investors in
startup companies also own securities in other Internet and technology
companies. To the extent these investors incur losses on their other securities,
they may be less able or willing to invest in startup companies. In addition,
startup companies may find it more difficult to raise capital during periods of
declining securities prices. The public markets have historically experienced
significant volatility not only in the number and size of initial financing
transactions, but also in the secondary market trading volume and prices of
newly issued securities. For example, the securities markets for Internet
companies have recently experienced significant activity and volatility, which
may not be sustained. We believe activity in the private
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<PAGE> 9
equity markets frequently reflects trends in the public markets. As a result,
our revenue may be adversely affected during periods of declining prices or
inactivity in the public markets to the extent that our client companies or our
prospective client companies are unable or unwilling to seek financing.
We, like other broker-dealers, are directly affected by national and
international economic and political conditions, broad trends in business and
finance, and substantial fluctuations in volume and price levels of securities
transactions. Unfavorable financial or economic conditions would likely reduce
the number and size of transactions in which we provide services. Because our
placement fees are based on a percentage of the amount of capital raised by our
client companies and the number of financings we arrange, our revenue is
directly related to the number and size of the transactions in which we
participate and would therefore be adversely affected by a sustained market
downturn.
WE DEPEND ON INVESTOR INTEREST IN THE HIGH TECHNOLOGY AND TECHNOLOGY-RELATED
LIFE SCIENCES INDUSTRIES. ANY SUSTAINED DOWNTURN IN THE MARKET FOR THESE
COMPANIES WOULD SERIOUSLY HARM OUR RESULTS OF OPERATIONS AND LIQUIDITY.
All of our client companies are involved in sectors of the high technology
industry, including the technology-related life sciences sector. Life sciences
companies include pharmaceutical, health care services, and medical device
companies. Our success depends on the ability of our client companies to raise
capital and grow their businesses. In recent months, the U.S. securities
markets, particularly those markets involving the Internet, have established
record price levels which, we believe, have favorably impacted our business. If
the private capital markets for technology-related companies weaken for an
extended period of time, our client companies may not be able to raise funds,
leading to a decline in demand for our services. If this occurs, our cash and
equity compensation from placements will decline. Moreover, our client investors
may be reluctant or unable to invest additional funds in our client companies
and may not continue subscribing to our services. Prospective client investors
also may not be willing to pay subscription fees for the services we provide to
investors.
WE DEPEND ON A LIMITED NUMBER OF KEY EXECUTIVES, INCLUDING GUY KAWASAKI, WHO
WOULD BE DIFFICULT TO REPLACE.
Our success depends significantly on the continued services of our senior
management, especially Guy Kawasaki, our Chairman of the Board and Chief
Executive Officer. Losing Guy Kawasaki or any of our other key executives,
including William Reichert, our President; Mary Ann Cusenza, our Chief Financial
Officer; William Joos, our Vice President of Business Development; and William
Mayall, our Vice President of Engineering, could also seriously harm our
business. We cannot assure you that we will be able to retain our key executives
or that we would be able to replace any of our key executives if we were to lose
their services for any reason. Competition for these executives is intense. Many
of our key executives have been employed by Garage.com since inception. If we
had to replace any of these key executives, we would not be able to replace the
significant amount of knowledge that these key executives have about our
operations. We do not maintain "key man" insurance policies on any of our
executives. We do not have employment contracts with any of our executives.
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<PAGE> 10
WE HAVE GROWN VERY RAPIDLY. THIS GROWTH HAS PLACED A SIGNIFICANT STRAIN ON OUR
MANAGEMENT SYSTEMS AND RESOURCES. WE EXPECT THIS STRAIN TO CONTINUE. WE WILL NOT
BE ABLE TO IMPLEMENT OUR BUSINESS STRATEGY UNLESS WE ARE ABLE TO EFFECTIVELY
MANAGE THIS STRAIN ON OUR SYSTEMS AND RESOURCES.
We have grown rapidly. For example, our total employees have grown from 10
at the end of 1998 to 30 at the end of 1999. This growth has placed a
significant strain on our management systems and resources. To the extent that
our business continues to grow, we must:
- expand, train, and manage our employee base effectively;
- open new offices, both in the United States and internationally;
- expand our infrastructure and systems to accommodate the growth of our
client base;
- improve our management, financial, and information systems and controls;
and
- expand our ability to supervise our employees, particularly those in our
branch offices.
We must recruit qualified personnel, for which there is high demand and short
supply. We opened our first regional office in July 1999 and our first
international office in November 1999. We expect that we will need to open
additional offices. However, we cannot currently estimate the number of new
offices we may need. We do not have significant experience operating a
multi-office business. The strains imposed by these demands are magnified by the
early-stage nature of our operations. If we cannot manage our growth
effectively, our business could be seriously harmed.
We currently lease approximately 7,500 square feet of office space for our
headquarters but expect that we will need approximately 7,500 square feet of
additional office space during the next twelve months. Suitable office space in
Silicon Valley, where most of our operations are located, is in short supply and
may be twice as expensive per square foot as our current space. We are currently
seeking additional office space for our headquarters. However, we cannot assure
you that we will be able to locate suitable office space on cost effective or
favorable terms.
As our business expands, we also face risks relating to the need to expand
and upgrade our business processes and information technology systems, network
infrastructure, and other aspects of our technology. While many of our systems
can accommodate additional growth without redesign or replacement, we may
nevertheless need to make significant investments to accommodate growth,
particularly in our telecommunications systems. In addition, we cannot assure
you that we will be able to predict accurately the timing or rate of such
growth, or expand and upgrade our systems and infrastructure on a timely basis.
We also cannot assure you that we will be able to attract the employees or
conduct the systems improvements necessary to manage this growth effectively or
that we will be able to achieve the rate of growth we have experienced in the
past.
OUR GROWTH WILL BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL.
Our future success depends in significant part on our ability to retain our
key technical staff, business development managers, and management and marketing
personnel. In addition, we must continue to attract and retain qualified
professionals to perform services for our existing and future clients.
Competition for highly qualified technical, business development, and management
and marketing personnel is intense, particularly in Silicon Valley, where most
of our operations are located. We have in the past experienced difficulty in
attracting new personnel. We may not be able to hire the necessary personnel to
implement our business strategy, or we may need to pay higher compensation for
employees than we currently expect. We cannot assure you that we will succeed in
attracting and retaining the personnel we need to grow.
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OUR STRATEGY DEPENDS ON THE SUCCESS OF OUR CLIENT COMPANIES. WE HAVE LITTLE
INFLUENCE OR CONTROL OVER THE OPERATION OF THESE COMPANIES.
Our client companies are generally at early stages of development and
therefore may have greater risk of not succeeding than later-stage companies. We
depend on the success of our client companies, which we do not control. We
generally do not have board representation or active management involvement with
any of these companies. If our client companies do not succeed, our business
will be affected in the following ways:
- our client companies may not engage our services when they undertake
subsequent financings;
- prospective new client companies may not engage our services when they
undertake financings;
- client investors may decide that our selection process is faulty;
- the value of our brand name may diminish; and
- client investors may stop using our services.
In addition, we receive the right to buy stock in our client companies as
compensation for our services. If our client companies do not succeed, the fair
value of the securities we hold will be reduced, which could reduce our revenue.
This could seriously harm our financial results.
DURING 1999, EVENT SPONSORSHIPS AND WEBSITE SPONSORSHIPS ACCOUNTED FOR 23% OF
OUR REVENUE. IF WE ARE UNABLE TO MAINTAIN THESE SPONSORSHIPS OR DEVELOP NEW
SPONSORSHIPS, OUR BUSINESS WILL BE HARMED.
We have established sponsorships with professional services firms, media
companies, and financial services companies. In exchange for fees paid by these
sponsors, we promote these firms on our website and in conjunction with our
events. Our event sponsorship agreements, which may cover one or more events,
are short-term in nature and may be terminated at will by a sponsor. In
addition, we have website sponsorships with eight "founding" sponsors. These
agreements prohibit us from featuring another sponsor in the same industry more
prominently on our website. This may limit the number of sponsors we can
attract. These agreements generally have a term of three years and are
automatically renewable for additional one-year periods. However, one of our
founding sponsors has the right to terminate its agreement with us immediately
prior to the first or second anniversary of the agreement. We cannot assure you
that we will be able to maintain these relationships or develop new
relationships.
WE DEPEND ON OUR INTELLECTUAL PROPERTY. OUR INTELLECTUAL PROPERTY COULD BE USED
BY OTHERS WITHOUT OUR CONSENT BECAUSE WE MAY NOT BE ABLE TO PROTECT OUR
INTELLECTUAL PROPERTY ADEQUATELY.
Our success and ability to compete depend to a significant degree on our
intellectual property. We rely on copyright and trademark law, as well as
confidentiality arrangements, to protect our intellectual property. We currently
do not have any patents, although we have one patent pending. The concepts and
technologies we use may not be patentable. Effective protection may not be
available for our servicemarks. Although we have applied to register our
servicemarks, including the servicemark "GARAGE.COM", in the United States and
in countries in which we do business or expect to do business, we cannot assure
you that we will be able to secure significant protection for these marks. Our
competitors or others may adopt product or service names similar to
"GARAGE.COM", thereby impeding our ability to build brand identity and possibly
leading to client confusion. Our inability to adequately protect the name
"GARAGE.COM" would seriously harm our business. Policing unauthorized use of our
intellectual property is made especially difficult by the global nature of the
Internet and difficulty in
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controlling the ultimate destination or security of software or other data
transmitted on it. The laws of other countries may afford us little or no
effective protection for our intellectual property. We cannot assure you that
the steps we take will prevent misappropriation of our intellectual property or
that agreements entered into for that purpose will be enforceable. In addition,
litigation may be necessary in the future to:
- enforce our intellectual property rights;
- determine the validity and scope of the proprietary rights of others; or
- defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm our
business.
PROSPECTIVE CLIENTS AND OTHER THIRD PARTIES MAY CLAIM THAT WE HAVE INFRINGED
THEIR INTELLECTUAL PROPERTY. ANY CLAIMS AGAINST US WOULD BE COSTLY AND
TIME-CONSUMING TO DEFEND, AND COULD HARM OUR REPUTATION.
We may be subject to claims of intellectual property infringement as a
result of our business plan screening process. We regularly receive business
plans from thousands of startups whose primary assets are their business
concepts, ideas, and other intellectual property. Some of these startups may
later claim that we gave their ideas to others or that we breached a duty of
confidentiality. Venture capital firms in the past have been subject to claims
that they infringed the intellectual property of startups who had submitted
business plans to them. We are not aware that any such claims have been made or
threatened against us. However, if a startup makes such a claim against us, it
could be costly and time-consuming to defend and may damage our reputation. Our
business depends on startups having confidence in the confidentiality of our
review process. Any claim that we infringed the intellectual property of a
startup could harm our reputation and cause entrepreneurs to be less confident
doing business with us.
WE INTEND TO OPEN NEW OFFICES IN DIFFERENT GEOGRAPHIC REGIONS OF THE UNITED
STATES. WE MAY NOT BE SUCCESSFUL WHEN WE ENTER THESE NEW MARKETS.
We intend to open additional offices in the United States in or near areas
with a concentration of high technology activity. We have not yet identified our
next areas for expansion. We rely on these offices to generate interest among
local entrepreneurs, investment opportunities, and business plan submissions.
Opening these offices requires a substantial amount of management time and
resources to recruit local managers who are familiar with the local investor and
entrepreneur communities, develop relationships with local referral sources such
as professional service providers, and establish local operations. In addition,
in some states, we become subject to additional regulatory oversight from state
securities regulators when we open new branch offices. To the extent that we are
not able to open and operate new offices successfully, our business may be
harmed.
In addition, we believe that many of the areas where we intend to open new
offices have different cultures and processes for raising venture capital. To
succeed in these markets and successfully integrate our business into the local
venture capital community, we may need to adapt our policies and practices in
each new market that we enter. If we are not successful in doing so, we may not
succeed in developing relationships with local entrepreneurs and investors,
which could harm our business. To the extent we are unable to generate
investment opportunities and business plan submissions, our future growth may be
limited.
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WE PLAN TO EXPAND INTERNATIONALLY. OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO
UNCERTAINTIES, WHICH MAY PREVENT OR DELAY US FROM GENERATING SIGNIFICANT REVENUE
FROM INTERNATIONAL OPERATIONS.
None of our revenue to date has been derived from international operations.
We opened offices in Israel in November 1999 and in London in January 2000, and
plan to open additional international offices during 2000. We have not yet
identified our next area for expansion. These offices may be more expensive to
operate than our U.S. offices. Initially, we plan to operate our international
offices to generate investment opportunities for our U.S. investors and do not
plan to offer investment opportunities to investors who reside outside of the
United States. However, we plan eventually to convert each international office
into a full-service office in which we offer investment opportunities to
non-U.S. residents. When we do, we will need to comply with the regulatory
controls of each specific country in which we conduct business.
The online services we offer were not contemplated at the time most foreign
securities laws were enacted. Only a few companies have attempted to establish
operations similar to ours in a number of countries where we plan to open
offices. As a result, we may need to incur significant expenses to resolve
issues with foreign securities regulators. If we cannot resolve these issues, we
will not be able to market our branded services and products successfully in
these international markets.
In addition, there are certain risks inherent in doing business in
international markets, particularly in the heavily regulated securities
industry, such as:
- unexpected changes in regulatory requirements, including foreign
securities laws;
- international tax issues and restrictions on the ability to repatriate
profits and cash;
- difficulties in staffing and managing foreign operations;
- less developed technological infrastructures;
- lower customer acceptance of our electronic investment services;
- political instability;
- fluctuations in currency exchange rates;
- reduced protection for intellectual property rights in some countries;
and
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
Any of the foregoing could adversely impact the success of our international
operations. We cannot assure you that one or more of the factors described above
will not harm our future international operations or our overall business.
IF WE DO NOT INTRODUCE NEW SERVICES AND PRODUCTS IN A TIMELY MANNER, OUR
BUSINESS MAY BE HARMED.
Our future success will depend on our ability to develop and enhance our
services and products. We operate in a very competitive industry in which the
ability to develop and deliver advanced services through the Internet and other
channels is a key competitive factor. There are significant risks in the
development of new or enhanced services and products, including the risks that
we will be unable to:
- effectively use new technologies;
- adapt our services and products to emerging industry or regulatory
standards; or
- market new or enhanced services and products.
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If we are unable to develop and introduce new or enhanced services and products
quickly enough to respond to market or customer requirements or to comply with
emerging industry standards, or if these services and products do not achieve
market acceptance, our business could be seriously harmed.
THE COMPETITION WE FACE FROM BOTH ESTABLISHED AND RECENTLY FORMED FIRMS MAY
ADVERSELY AFFECT OUR REVENUE AND PROFITABILITY. WE ALSO FACE COMPETITION FROM
FIRMS THAT ARE NOT CURRENTLY IN OUR MARKET BUT COULD QUICKLY AND EASILY ENTER
OUR MARKET.
We encounter intense competition in all aspects of our business, and we
expect this competition to increase. For example, we face competition from
regionally-focused companies, both domestically and internationally, which are
trying to connect startups with venture investors using an Internet-based
market. These competitors include SeedStage Capital, Vcapital.com, Yazam.com,
and OffRoad Capital.
We also face competition from incubator firms such as Internet Capital
Group, divine interVentures, Bill Gross' ideaLab!, and eCompanies. Safeguard
Scientifics, one of our stockholders, is the controlling stockholder of Internet
Capital Group. These companies offer an alternative source of capital and
provide startups with office space, equipment, professional services, and
strategic guidance. We also face competition from venture capital firms,
merchant banks, investment banks, and established angel investor networks. In
addition, companies that have not traditionally provided investment banking
services, including commercial banks and providers of online financial services,
may elect to enter into our industry, particularly if we or our existing
competitors are successful. This competition could reduce the demand for our
services and create pricing pressures. Established professional service and
financial firms could leverage their existing and future relationships with
startups, expertise, and established reputations to quickly enter our market,
thereby reducing the demand for, or the prices of, our services.
If we are unable to compete effectively with these competitors, the quality
of the startups applying to us for assistance may be reduced. Many of our
competitors have longer operating histories and significantly greater financial,
technical, and marketing resources than us. In addition, many of these
competitors offer a wider range of services and financial products than we do.
Many current and potential competitors also have greater name recognition and
more extensive customer bases that could be leveraged to accelerate their
competitive activity. Moreover, current and potential competitors have
established and may establish future cooperative relationships among themselves
and with third parties to enhance their products and services in this space.
Consequently, new competitors or alliances may emerge and rapidly acquire
significant market share. We cannot assure you that we will be able to compete
effectively with current or future competitors or that the competitive pressures
faced by us will not harm our business. For more information on the competition
that we face, see "Business -- Competition".
WE MAY BE LIABLE FOR INFORMATION RETRIEVED FROM OUR WEBSITE, THE WEBSITES OF OUR
SPONSORS, AND THE WEBSITES OF OTHER THIRD PARTIES.
Users of our website may access content on our website and on the websites
of our sponsors or other third parties through website links, and they may
download content and subsequently transmit this content to others over the
Internet or other means. This could result in claims against us based on a
variety of theories, including defamation, obscenity, negligence, copyright,
trademark infringement, or the wrongful actions of third parties. Other actions
may be brought based on the nature, publication, and distribution of our content
or based on errors or false or misleading information provided on our website.
Claims have been brought against online services in the past, sometimes
successfully, based on the content of material contained on their sites. In
addition, some of the content provided by our sponsors and other third parties
is drawn
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from data compiled by other parties, including governmental and commercial
sources. This data may contain errors.
We are not aware of any such claims threatened against us. However, claims
brought by users of our website could be material. Even if these claims do not
result in liability, we could incur significant costs in investigating and
defending against these claims. The imposition of potential liability for
information carried on or disseminated through our systems could require us to
implement measures to reduce our exposure to liability. Those measures may
require the expenditure of substantial resources and limit the attractiveness of
our services. Additionally, we have limited insurance coverage, which may not
cover all such claims to which we are exposed.
THE NEED TO COMPLY WITH THE INVESTMENT COMPANY ACT, AND THE UNCERTAINTY OF OUR
ABILITY TO COMPLY, COULD MAKE US DELAY OR MODIFY OUR BUSINESS PLANS, CHANGE OUR
BUSINESS STRUCTURE, OR IMPAIR OUR ABILITY TO OPERATE AS WE PROPOSE.
The Investment Company Act restricts the operations of companies that are
deemed to be "investment companies". Generally, any company that owns investment
securities with a value exceeding 40% of its total assets (excluding cash items
and United States government securities) is deemed to be an "investment company"
unless a particular exemption applies. We must qualify for an exemption under
the Investment Company Act because we hold a significant number of investment
securities, which we receive as compensation for our services. The Investment
Company Act provides an exemption for companies that are "primarily engaged" in
broker-dealer activities. We believe that we qualify for the broker-dealer
exemption because Garage.com Securities is primarily engaged in the business of
selling securities to customers, acting as a broker, and related activities. We
have been advised by our special counsel, Kirkpatrick & Lockhart LLP, that it is
reasonable for us to rely on the broker-dealer exemption. We have not sought a
ruling from the SEC or members of the SEC staff. This exemption has not,
however, been subject to substantial regulatory or judicial interpretation.
Accordingly, we cannot assure you that the SEC will agree with our conclusion or
that a court will agree with our conclusion if this issue is ever litigated.
If our efforts to continue to rely on this exemption, we could be forced to
modify our activities. This might include disposing of assets sooner than we
would prefer at prices lower than we might otherwise be able to realize. In that
case, we would incur tax liabilities in connection with such asset disposition.
In addition, we also might be forced to forego opportunities to purchase
additional investment securities or to undertake additional activities at a time
or in a manner that is not consistent with our best business interests. Any of
the foregoing could harm our business and results of operations. If we fail to
comply with the requirements of the Investment Company Act, we would be
prohibited from engaging in business or selling our securities, and could be
subject to civil and criminal actions for doing so. In addition, our contracts
would be voidable and a court could appoint a receiver to take control of us and
liquidate our business. Any failure to comply with the Investment Company Act
would therefore seriously harm our business.
WE MAY NEED TO RAISE ADDITIONAL FUNDS. THESE FUNDS MAY NOT BE AVAILABLE WHEN WE
NEED THEM.
Based on our current plans, we believe that the net proceeds from this
offering, our cash on hand, and cash generated from our operations will be
sufficient to fund our operations for at least the next 12 months. After this
time, we may need to raise additional funds to support more rapid expansion,
exercise our rights to acquire the equity interests that we receive as
compensation for our services, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses or
technologies, or respond to unanticipated events. We cannot assure you that
additional financing will be available when needed on favorable terms, or at
all. If these funds are not available when we need them, we may need to change
our business strategy or reduce our operations or investment activities. In
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addition, any issuance of additional equity securities will dilute the ownership
interest of our existing stockholders and the issuance of additional debt
securities may increase the perceived risk of investing in us.
RISKS RELATED TO ONLINE COMMERCE AND THE INTERNET
GOVERNMENTAL REGULATION OF THE INTERNET MAY NEGATIVELY AFFECT OUR BUSINESS AND
REDUCE DEMAND FOR OUR SERVICES.
Laws directly applicable to communications or commerce over the Internet
are becoming more prevalent. The manner in which new and existing laws will be
applied to the Internet, however, remains largely unsettled. It may take years
to determine whether and to what extent existing laws will apply to Internet
transactions. The uncertainty relating to how these laws will be applied may
increase our cost of doing business and increase the risk associated with doing
business.
In addition, the SEC is expected to adopt new interpretations soon
regarding the use of the Internet in the distribution of securities. These
regulations could fundamentally affect the manner in which we do business. If
these new regulations change the earlier positions of the SEC staff upon which
our business is based, for example, by stating that private placements of
securities may not be conducted over the Internet even with the password
protections that our system uses, then our business would be seriously harmed.
FAILURE OF OUR PASSWORD PROTECTION FEATURES COULD SERIOUSLY HARM OUR CLIENTS'
SECURITIES LAW COMPLIANCE. IF THIS OCCURS, OUR BUSINESS AND REPUTATION WILL BE
SERIOUSLY HARMED.
We rely upon password protection features to provide the security and
authentication necessary to comply with applicable state and federal securities
laws. Our client companies generally raise capital by making private placements
of their securities. The validity of these private placements depends in part on
our password protection features. If these password protection features fail,
our client companies' private placements may be invalid. If this occurs, we may
be subject to significant liability, and our business and reputation could be
seriously harmed. It is not possible to quantify the harm that might result if
this occurs.
OUR BUSINESS DEPENDS ON THE INTERNET AND OUR INTERNAL COMPUTER SYSTEMS. OUR
BUSINESS WILL BE HARMED IF THESE SYSTEMS FAIL.
Although a significant portion of our business is conducted using
traditional methods of contact and communications such as face-to-face meetings,
a portion of our business is conducted through the Internet. For example, all
business plans are submitted and screened through an Internet-based system. In
addition, we present investment opportunities to our client investors through
the Internet. We could experience future system failures and degradations. We
cannot assure you that we will be able to prevent an extended systems failure if
any of the following events occurs:
- human error;
- subsystem, component, or software failure;
- a power or telecommunications failure;
- an earthquake, fire, or other natural disaster;
- hacker attacks or other intentional acts of vandalism; or
- an act of God or war.
Any such systems failure that interrupts our operations could seriously
harm our business. We currently have limited off-site data storage and disaster
recovery systems.
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The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our future
success will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity, and security, and the
timely development of complementary products, such as high-speed modems, for
providing reliable Internet access and services.
ANY LACK OF CONFIDENCE RELATED TO THE SECURITY OF OUR SYSTEMS AND OUR ABILITY TO
TRANSMIT CONFIDENTIAL INFORMATION OVER THE INTERNET MAY ADVERSELY IMPACT OUR
BUSINESS.
The need to securely transmit confidential information over the Internet
has been a significant barrier to electronic commerce and communications. We,
like other companies that rely heavily on electronic communication, are
potentially vulnerable to attempts by unauthorized computer users to penetrate
our network security. If successful, those individuals could misappropriate
confidential information or cause interruptions in our online services. We may
be required to expend significant capital and resources to protect against the
threat of such security breaches or to alleviate problems. In addition to
security breaches, inadvertent transmission of computer viruses could expose us
to the risk of disruption of our business, loss, and possible liability.
Continued concerns over the security of Internet transactions and the privacy of
its users may also inhibit the growth of the Internet generally as a means of
conducting commercial transactions.
In addition, our business requires startups to submit business summaries to
us over the Internet. The confidentiality of these business summaries is of
great importance to these startups. Due to concerns regarding communications
security of the Internet, these startups may decide not to submit business
summaries over the Internet, which could harm our business.
RISKS ASSOCIATED WITH THE SECURITIES INDUSTRY
WE ARE REGULATED BY THE SEC, STATE REGULATORS, AND THE NASD. WE MAY IN THE
FUTURE BE REGULATED BY FOREIGN SECURITIES REGULATORS.
The securities industry in the United States is subject to regulation under
both federal and state laws. The SEC, the NASD, other self-regulatory
organizations and state securities commissions can censure, fine, issue
cease-and-desist orders, or suspend or expel a broker-dealer or any of its
officers or employees. If any of these events occur, our business and reputation
could be seriously harmed.
Broker-dealers are subject to regulations covering many aspects of the
securities business, including:
- sales methods;
- trade practices among broker-dealers;
- use and safekeeping of customers' funds and securities;
- capital structure;
- record keeping;
- conduct of directors, officers, and employees; and
- supervision of employees, particularly those in branch offices.
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Our mode of operation and profitability may be directly affected by:
- additional legislation;
- changes in rules promulgated by the SEC, state regulators, the NASD, and
other self-regulatory organizations; and
- changes in the interpretation or enforcement of existing laws and rules.
Our ability to comply with applicable laws and rules depends on our
establishment and maintenance of an effective compliance system, as well as our
ability to attract and retain qualified compliance personnel. The principal
purpose of regulation and discipline of broker-dealers is the protection of
customers and the securities markets, rather than protection of creditors and
stockholders of broker-dealers. If we are unable to comply with applicable laws
and rules, our business could be seriously harmed.
We anticipate that we will expand the operations of our foreign offices so
that we can offer investment opportunities to non-U.S. residents. If we do, we
will be subject to extensive regulation by foreign securities regulators. If we
cannot comply with these regulations in a cost-effective manner, our ability to
expand our business internationally will be limited.
For more detail on the regulatory environment in which we operate, see
"Business -- Regulation".
WE MAY EXPAND OUR SERVICES TO INCLUDE UNDERWRITING. IF WE DO, WE WILL FACE
ADDITIONAL LIABILITY EXPOSURE AND BUSINESS RISKS, WHICH COULD HARM OUR BUSINESS.
We may expand our services in the future to include underwriting.
Participation in underwriting involves significant risks. An underwriter may
incur losses if it is unable to resell the securities it is committed to
purchase or if it is forced to liquidate its commitment at less than the price
at which it purchased the securities from the issuer. We would also face
potential liability under federal and state securities and other laws for
allegedly false or misleading statements made in connection with securities
offerings or other transactions. We will also be subject to extensive additional
regulatory requirements if we enter the underwriting business, including those
of the SEC, the U.S. Treasury, and other regulatory agencies. If we enter the
underwriting business, our net capital requirements will significantly increase.
In addition, we will incur additional expenses. We cannot assure you that
revenue generated from underwriting will exceed these additional expenses.
EMPLOYEE MISCONDUCT IS DIFFICULT TO DETECT. IF MISCONDUCT OCCURS, OUR BUSINESS
AND REPUTATION COULD BE HARMED.
A number of highly publicized cases involving fraud or other misconduct by
employees in the financial services industry have occurred in recent years, and
we run the risk that employee misconduct could occur. Misconduct by our
employees could include binding us to transactions that have not been authorized
or that present unacceptable risks. In either case, this type of conduct could
result in unknown and unmanaged risks or losses. Broker-dealers, such as
Garage.com Securities, have greater exposure to these risks than do companies
outside of the financial services industry. Employee misconduct could also
involve the improper use of confidential information, which could result in
regulatory sanctions and serious reputational harm. Companies that are not
regulated do not face the same types of regulatory sanctions that we may face if
we experience employee misconduct. It is not always possible to deter employee
misconduct, and the precautions we take to prevent and detect this activity may
not be effective in all cases.
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RISKS ASSOCIATED WITH THIS OFFERING
OUR DIRECTORS AND EXECUTIVE OFFICERS WILL CONTROL 51.2% OF OUR COMMON STOCK
FOLLOWING THIS OFFERING.
Following the completion of this offering, our directors and executive
officers will control approximately 51.2% of our outstanding common stock. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and significant corporate transactions, such as mergers or other
business combination transactions. Such control may have the effect of delaying
or preventing a third party from acquiring or merging with Garage.com, which
could hinder your ability to receive a premium for your shares. For more details
on our principal stockholders, see "Principal Stockholders".
WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS OF THIS OFFERING, AND WE MAY
NOT USE THESE PROCEEDS EFFECTIVELY.
Our management could spend the proceeds from this offering in ways with
which our stockholders may not agree or that do not yield a favorable return.
Our primary purpose in conducting this offering is to create a public market for
our common stock. As of the date of this prospectus, we plan to use the proceeds
from this offering for general corporate purposes, including working capital,
the opening of additional offices, the funding of our anticipated operating
losses, and acquisition of equity interests in client companies. We may also use
the proceeds in future strategic acquisitions but do not have any acquisitions
planned.
OUR CHARTER DOCUMENTS COULD DETER A TAKEOVER, WHICH COULD INHIBIT YOUR ABILITY
TO RECEIVE A PREMIUM FOR YOUR SHARES.
Upon completion of this offering, our board of directors will have the
authority to issue up to 5,000,000 shares of preferred stock. Our board of
directors can fix the price, rights, preferences, privileges, and restrictions
of the preferred stock without any further vote or action by our stockholders.
The issuance of shares of preferred stock may delay or prevent a change in
control transaction. As a result, the market price of our common stock and the
voting and other rights of our stockholders may be adversely affected. The
issuance of preferred stock may result in the loss of voting control to other
stockholders. We have no current plans to issue any shares of preferred stock.
Our charter documents contain anti-takeover devices including:
- only one of the three classes of directors is elected each year;
- the ability of our stockholders to remove directors without cause is
limited;
- the right of stockholders to act by written consent has been eliminated;
- the right of stockholders to call a special meeting of stockholders has
been eliminated; and
- a requirement to give advance notice to nominate directors or to submit
proposals for consideration at stockholder meetings.
Any of the foregoing provisions could discourage potential acquisition proposals
for Garage.com and could delay or prevent a change in control transaction. They
could also have the effect of discouraging others from making tender offers for
our common stock. As a result, these provisions may prevent the market price of
our common stock from increasing substantially in response to actual or rumored
takeover attempts. These provisions may also prevent changes in our management.
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SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY INHIBIT POTENTIAL
ACQUISITION BIDS FOR OUR COMPANY.
Upon completion of this offering, we will be subject to Section 203 of the
Delaware General Corporation Law, which regulates corporate acquisitions.
Section 203 generally makes it more difficult for a person to make an
unsolicited acquisition of a corporation subject to this provision. Under
Delaware law, a corporation may opt out of the anti-takeover provisions of
Section 203. We do not intend to opt out of the anti-takeover provisions of
Delaware Law. Section 203 may deter a takeover, which could inhibit your ability
to receive a premium for your shares.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO RESELL
SHARES AT OR ABOVE THE OFFERING PRICE.
There was no public market for our shares prior to this offering, and after
the offering, a liquid public market for the shares may not develop. You may not
be able to resell your shares at or above the initial public offering price due
to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- revenue fluctuations caused by changes in the fair value of the equity
compensation we receive for our services;
- changes in general economic or market conditions;
- announcements of technological innovations; and
- the operating and stock price performance of other comparable companies.
The stock market in general, and the securities of technology-related
companies in particular, has experienced extreme volatility that often has been
unrelated to the operating performance of particular companies. In addition, the
stock prices of technology-related companies have been extremely high by
historical standards in recent years. These broad market and industry
fluctuations may adversely affect the trading price of our common stock,
regardless of our actual operating performance.
In the past, securities class action litigation has often followed periods
of volatility in the market price of a company's securities. If this were to
happen to us, the resulting litigation would be expensive and would divert
management's attention from us and our client companies. If our client companies
become subject to litigation, the fair value of the equity compensation we
receive from these companies may decline, which would harm our revenue.
We and the representatives of the underwriters will determine the offering
price for the shares through negotiations based on a number of factors. You
should read the "Underwriting" section for a more complete discussion of the
factors considered in determining the initial public offering price.
APPROXIMATELY 29.1 MILLION, OR 89.3%, OF OUR TOTAL OUTSTANDING SHARES ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have 32,556,129 shares of common stock
outstanding. This includes the 3,500,000 shares that we are selling in this
offering, which may be resold into the public market immediately as long as
these shares are not purchased by our affiliates. The remaining 89.3%, or
29,056,129 shares, of our total outstanding shares will become available for
resale in the public market as shown in the chart below.
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<PAGE> 21
In addition, all of our stockholders have agreed not to resell their shares
for 180 days after the date of this prospectus. The underwriters, in their sole
discretion, may release any or all of these shares from the 180 days restriction
at any time without notice. The underwriters do not have any preestablished
criteria upon which they will release these shares.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES TOTAL OUTSTANDING DATE OF AVAILABILITY FOR SALE INTO PUBLIC MARKET
- ---------------- ----------------- ------------------------------------------------
<S> <C> <C>
- -- ................................. -- 90 days after the date of this prospectus
3,487,318 .......................... 10.7% 180 days after the date of this prospectus
</TABLE>
The market price of our common stock could drop significantly if the holders of
shares sell them or are perceived by the market as intending to sell them.
THE PURCHASERS OF SHARES IN THE OFFERING WILL EXPERIENCE IMMEDIATE DILUTION.
The initial public offering price is expected to be substantially higher
than the net tangible book value per share of the outstanding common stock
immediately after the offering. Accordingly, purchasers of shares in the
offering will experience immediate and substantial dilution of approximately
$10.28 in net tangible book value per share, or approximately 79% of the
offering price of $13.00 per share. In contrast, existing stockholders paid an
average price of $1.68 per share. To the extent that outstanding options to
purchase our common stock are exercised, purchasers in the offering may
experience further dilution.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words such
as "expect," "anticipate," "intend" and "plan". Our actual results may differ
materially from those discussed in these statements. Factors that could
contribute to such differences include those discussed in "Risk Factors" and
elsewhere in this prospectus.
You should rely only on the information contained in this prospectus when
making a decision about whether to invest in our common stock. We have not
authorized anyone to provide you with information that is different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of when this prospectus or any shares of
common stock are delivered.
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<PAGE> 22
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 3,500,000 shares of
common stock that we are selling in this offering will be approximately $41.1
million, based on an assumed initial public offering price of $13.00 per share
and after deducting the underwriting discounts and estimated offering expenses
payable by us. If the underwriters exercise in full their option to purchase
additional shares in this offering, we estimate that our net proceeds will be
approximately $47.4 million.
We intend to use the net proceeds of the offering to:
- expand our business, including opening additional offices, acquiring new
larger space for our headquarters, developing and expanding our online
services, increasing marketing activities, and hiring employees across
all functional areas;
- exercise the right to buy stock that we receive as compensation for our
broker-dealer services and to acquire or invest in complementary
businesses, products, and technologies; and
- fund operating losses and for general corporate purposes.
As of the date of this prospectus, we have not allocated any specific
amount of the proceeds for the purposes listed above. Although we may use a
portion of the net proceeds to acquire or invest in complementary businesses,
products, and technologies in the future, there are no present understandings,
commitments, or agreements with respect to any such acquisitions. The amounts
actually expended for the purposes listed above will depend upon a number of
factors, including conditions in the public and private equity markets and
competitive developments in the market for online venture capital. Therefore, we
cannot specify with certainty the particular uses of the net proceeds of this
offering. Our management will retain broad discretion in the allocation of such
net proceeds.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock and do
not anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings for the expansion and operation of our
business.
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<PAGE> 23
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
1999. Our capitalization is also presented:
- on a pro forma basis to give effect to the sale in February 2000 of
2,989,917 shares of convertible preferred stock at a price of $9.00 per
share, less offering expenses and the conversion of all outstanding
shares of convertible preferred stock into shares of common stock; and
- on a pro forma basis as adjusted to give effect to our receipt of the
estimated net proceeds from the sale of 3,500,000 shares of common stock
at an assumed initial public offering price $13.00 per share in this
offering, less the underwriting discount and estimated offering expenses.
You should read this information together with our financial statements and
the notes to those financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current portion............ $ -- $ -- $ --
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding............. -- -- --
Convertible preferred stock, $0.001 par value;
14,700,000 and 17,800,000 shares authorized actual
and pro forma, respectively; 14,460,212 and
17,450,129 shares issued and outstanding actual and
pro forma, respectively; none authorized or
outstanding pro forma as adjusted................... 14 -- --
Common stock, $0.001 par value, 35,400,000 and
38,700,000 shares authorized actual and pro forma,
respectively; 10,212,318 shares issued and
outstanding actual and pro forma; 95,000,000 shares
authorized, 31,162,447 shares issued and outstanding
pro forma as adjusted............................... 10 27 31
Additional paid-in capital............................. 20,070 46,951 88,027
Notes receivable from stockholders..................... (167) (167) (167)
Deferred stock compensation............................ (2,407) (2,407) (2,407)
Accumulated deficit.................................... (810) (810) (810)
------- ------- -------
Total stockholders' equity.......................... 16,710 43,594 84,674
------- ------- -------
Total capitalization........................... $16,710 $43,594 $84,674
======= ======= =======
</TABLE>
The number of shares of common stock outstanding at December 31, 1999
excludes:
- 1,622,223 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1999 at a weighted average price of $1.06
per share; and
- 1,865,459 shares available for future issuance under our incentive plans
as of December 31, 1999, excluding the automatic annual increases in the
number of shares authorized under these plans beginning January 1, 2001.
See "Management -- Incentive Plans" for a description of how these annual
increases are determined.
Of the 1,865,459 shares available for future issuance under our incentive
plans, options to purchase 531,200 shares were granted from January 1, 2000 to
February 10, 2000, at a weighted average exercise price of $7.00 per share. In
this same period, options to purchase 1,393,682 shares were exercised at a
weighted average exercise price of $1.01 per share.
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<PAGE> 24
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price of our common
stock and the pro forma as adjusted net tangible book value per share of our
common stock after this offering. We calculate net tangible book value per share
by dividing the net tangible book value (total assets less intangible assets and
total liabilities) by the number of outstanding shares of common stock.
Our pro forma net tangible book value at December 31, 1999, was $43.6
million, or $1.58 per share based on 27,662,447 shares of common stock
outstanding after giving effect to the sale in February 2000 of 2,989,917 shares
of our Series E convertible preferred stock for net proceeds of $26.9 million
and to the conversion of all outstanding shares of our preferred stock into
common stock upon the closing of this offering.
After giving effect to the sale of 3,500,000 shares of common stock by us
at an assumed initial public offering price of $13.00 per share, assuming that
the underwriters' over-allotment option is not exercised, and subtracting the
underwriting discount and estimated offering expenses, our pro forma net
tangible book value at December 31, 1999 would be $84.7 million, or $2.72 per
share. This represents an immediate increase in the pro forma net tangible book
value of $1.14 per share to existing stockholders and an immediate dilution of
$10.28 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 13.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $1.58
Increase per share attributable to new investors.......... 1.14
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.72
-------
Dilution per share to new investors......................... $ 10.28
=======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share after the offering would be $2.87 per
share, the increase in net tangible book value per share to existing
stockholders would be $1.29 per share, and the dilution in net tangible book
value to new investors would be $10.13.
The following table shows on a pro forma basis at December 31, 1999, the
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid by our existing stockholders and by
new investors purchasing common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 27,662,447 88.8% $46,455,000 50.5% $ 1.68
New investors............ 3,500,000 11.2 45,500,000 49.5 13.00
---------- ----- ----------- ------
Total............... 31,162,447 100.0% $91,955,000 100.0%
========== ===== =========== ======
</TABLE>
These tables assume no exercise of stock options outstanding as of December
31, 1999. As of December 31, 1999, there were 1,622,223 shares of common stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $1.06 per share. If the underwriters' over-allotment option is
exercised in full, the number of shares purchased will increase to 4,025,000,
the total consideration paid will increase to $52.3 million and the average
price per share will remain unchanged.
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<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our historical consolidated financial data. You
should read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected data in this section is not intended to replace the
consolidated financial statements.
The consolidated statement of operations data for the year ended December
31, 1998, is presented for the period from October 24, 1997 (inception) to
December 31, 1998. There was no revenue and operating expenses were $11,000 for
the period from inception to December 31, 1997.
We derived the consolidated statement of operations data for the years
ended December 31, 1998 and 1999 and the consolidated balance sheet data at
December 31, 1998 and 1999 from our audited consolidated financial statements
included in this prospectus. Ernst & Young LLP, our independent auditors,
audited these consolidated financial statements. Historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
---- ----
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Placement fees............................................ $ -- $ 2,485
Event registration and sponsorship fees (including $300 in
1999 from related parties).............................. -- 2,429
Interest income........................................... 39 295
Principal transactions.................................... -- 225
Website sponsorships and other............................ 110 421
------- -------
Total revenue........................................... 149 5,855
------- -------
Costs and expenses:
Cost of events............................................ -- 1,030
Compensation and benefits................................. 909 2,216
Professional fees......................................... 234 377
Occupancy................................................. 147 295
Marketing................................................. 138 218
Amortization of deferred stock compensation............... -- 541
Other..................................................... 225 467
------- -------
Total costs and expenses................................ 1,653 5,144
------- -------
Income (loss) from operations............................... (1,504) 711
Provision for income taxes.................................. -- 17
------- -------
Net income (loss)........................................... $(1,504) $ 694
======= =======
Net income (loss) per share -- basic........................ $ (0.86) $ 0.17
======= =======
Shares used in per share calculation -- basic............... 1,740 4,119
======= =======
Net income (loss) per share -- diluted...................... $ (0.86) $ 0.03
======= =======
Shares used in per share calculation -- diluted............. 1,740 20,781
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $2,816 $16,123
Working capital............................................. 2,611 15,747
Total assets................................................ 2,975 17,437
Total stockholders' equity.................................. 2,706 16,710
</TABLE>
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<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus. The following discussion contains forward looking statements. Our
actual results may differ materially from those projected in the forward looking
statements. Factors that could cause our future results to differ materially
from those projected in the forward looking statements include those discussed
in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Garage.com operates an online business-to-business marketplace connecting
early-stage startup companies with investors, many of whom have backgrounds in
high technology company investment, management, and operations. We incorporated
on October 24, 1997 and launched our website on May 13, 1998. During the period
from inception to December 31, 1997, we had no revenue and expenses totaled
approximately $11,000. Our website initially provided only information for
entrepreneurs and investors. We launched our broker-dealer services in October
1998 and completed the first funding of a startup client in January 1999.
Garage.com is compensated for its services in several ways. Our startup
clients pay us cash placement fees when they close financings that we arrange.
Our startup clients also give us the right to buy stock at fair value prior to
our assisting them in arranging their financings. The price of the stock we buy,
or the exercise price of rights we receive, is generally nominal as compared to
the preferred stock price in the financings we subsequently arrange. In
addition, our startup clients also give us an option to participate in the
financings that we arrange. These financings typically take the form of
preferred stock that we purchase on the same terms and conditions as the other
investors. Our startup clients also sometimes grant us preemptive rights which
allow us to make additional investments in our clients when they undertake
subsequent financings. Through the exercise of these preemptive rights, we have
the ability to maintain our percentage ownership of our clients when they sell
additional securities.
We refer to the startup clients that we list in the Portfolio section of
our website as "portfolio clients." These clients receive the broadest range of
our services. We believe these clients present the most promising investment
opportunities. In addition, we provide capital raising and other services to
other startup clients that are not included in the Portfolio but that we
nevertheless believe present attractive investment opportunities.
Our revenue to date has come principally from cash placement fees earned in
connection with the funding of our client companies and from registration fees
and sponsorships for our two-day Bootcamp for Startups conferences. We also
generate cash revenue from website sponsorships and annual investor memberships.
Investor memberships are fees that investors pay us to view the password
protected area of our website where we present investment opportunities.
Equity Compensation. Our goal is to receive as compensation for our
services the right to buy at least 5% of the outstanding capital stock of our
portfolio clients. During 1999, we helped 28 portfolio clients raise capital. In
connection with these transactions, we exercised our right to buy stock
averaging 4% of each of these companies' outstanding stock on the date the
financings were completed. We recently increased our goal regarding the
percentage of our clients' stock received as compensation to at least 5% of
these companies' outstanding stock. This increase was a result of our improved
market position and enhancements to our service offerings which occurred in the
fourth quarter of 1999. These enhancements include the addition of management
recruiting services and marketing support. We account for the stock we own, as
well as the rights to buy stock, at fair value. Future fluctuations in the value
of the stock will be recognized as revenue or reductions to revenue.
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<PAGE> 27
During 1999, we assisted 12 other client companies with financing and
marketing activities. In connection with these transactions, we purchased stock
of each of these companies.
Our policy is to dispose of securities we own in our portfolio and other
client companies when a liquid market exists and we can do so in an orderly
manner. To date, we have not disposed of any of these securities.
Cash Compensation. In addition to the equity compensation described above,
our goal is to earn cash placement fees of 5% or more of the funds raised for
our portfolio clients. During 1999, we helped 28 portfolio clients raise $90
million in startup capital, for which we earned $2.5 million in cash placement
fees. We receive cash placement fees on funds raised from investors that are not
excluded from our engagement agreements. Excluded investors generally consist of
investors with whom the portfolio client has a pre-existing relationship.
Although we do not receive cash placement fees for investments made by excluded
investors, our equity compensation is determined based upon total outstanding
stock, including stock purchased by excluded investors. We cannot control the
extent to which our portfolio clients will raise funds from excluded investors.
Revenue Recognition. We recognize cash placement fees as revenue when all
agreements associated with the funding of a client company have been signed and
the client company has received the proceeds of the financing. We account for
the equity compensation that we receive for our broker-dealer and related
activities at fair value and recognize changes in fair value as revenue or
reductions to revenue, as applicable. Registration fees and sponsorships
associated with our Bootcamp for Startups conferences are recognized upon
completion of the applicable conference. We recognize revenue for website
sponsorships and investor memberships on a straight-line basis over their term.
Revenue Fluctuations. We currently derive a meaningful portion of our
revenue from each cash placement fee and Bootcamp for Startups conference.
During 1999, we held three Bootcamp for Startups conferences. In 2000 we plan to
hold eight Bootcamp for Startups events. These events will not necessarily be
scheduled evenly throughout the year. As a result, this schedule will cause
significant fluctuation in quarterly revenue attributable to these events.
In addition, we expect to derive a significant portion of our future
revenue from increases in the fair value of our equity interests in client
companies. The timing of increases in fair value, if any, is difficult to
predict. In addition, if the fair value of our equity interests in client
companies declines, this decrease will reduce our revenue. We cannot control our
client companies or the fair value of the equity interests we own in these
companies. Our revenue is subject to significant fluctuations between quarters
depending on the timing of these fair value fluctuations, transactions, and
events.
As of December 31, 1999, we had an accumulated deficit of $810,000.
Although we were profitable in 1999, we expect to incur a net loss in 2000 due
to significantly higher operating expenses associated with the addition of
employees, opening of new offices, acquisition of additional office space, and
marketing initiatives needed to support the expansion of our business. In
addition, we will record at least $742,000 of expense for amortization of
deferred compensation in 2000 related to stock options granted to employees,
compared with $541,000 in 1999.
We anticipate recognizing approximately $179,000 of expense for
amortization of deferred compensation in the first quarter of 2000 and at least
$188,000 of expense for amortization of deferred compensation in each quarter
through the first quarter of 2003.
We have a limited operating history upon which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses, and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets, such as the online market for early-stage venture capital,
25
<PAGE> 28
and those in heavily regulated industries, such as the securities industry. To
address these risks we must, among other things, attract, retain, and motivate
qualified personnel, and implement and successfully execute our business and
marketing strategy. We may not be successful in addressing these risks, and our
failure to do so could seriously harm our business.
As of December 31, 1999, we had a federal and state net operating loss
carryforwards of approximately $306,000 to offset future taxable income. If not
utilized, the federal and state net operating loss carryforwards will expire in
2018 and 2006, respectively. Utilization of the net operating losses and credits
may be subject to a substantial annual limitation due to ownership change
limitations provided by the Internal Revenue Code. The annual limitation may
result in the expiration of our net operating losses and credits before they can
be used. It is possible that such a change may have already occurred as a result
of this offering to date or could occur . See note 8 of the notes to our
consolidated financial statements.
EFFECT OF VARIOUS ACCOUNTING METHODS ON OUR RESULTS OF OPERATIONS
The consolidated financial statements include the accounts of Garage.com
and its wholly-owned subsidiary Garage.com Securities, Inc. All significant
intercompany balances and transactions were eliminated in consolidation.
Garage.com Securities, Inc. accounts for its stock holdings and its rights
to buy stock in startup clients at fair value. These amounts are classified as
principal investments in the consolidated balance sheets. Unrealized gains and
losses are recognized as revenue or reductions to revenue. Fair value is based
on quoted market prices, when available. However, because most of the equity
interests held by Garage.com Securities, Inc. are in companies in the very early
stage of development, fair value is usually not readily ascertainable. This is
in part because we may not have access to information about these companies and,
even if information is available, it may be difficult to ascertain a fair value.
In these cases, fair value is based on management's estimates and cost is often
the best estimate of fair value. In determining fair value, management considers
all available factors which may include cost, the type of equity interest,
subsequent purchases of the same or similar interests, and the current financial
position and operating results of the issuer. Management's estimates of fair
value could differ materially from values that would have been used had a ready
market for these equity interests existed. Impairments are immediately
recognized as an offset to revenue in the consolidated statements of operations.
During 1999, impairments totaled $8,000 and related to a single holding.
For further details on significant accounting policies relating to our
consolidated financial statements, please refer to the notes to consolidated
financial statements included elsewhere in this prospectus.
CHANGE IN STRUCTURE
Garage.com was, until January 2000, the managing member of Garage.com
Startups LLC, through which it owned most of the equity compensation that it
received. In December 1999 and January 2000, Garage.com acquired all of the
outstanding interests in Garage.com Startups in exchange for 560,212 shares of
its Series D preferred stock. We accounted for this transaction as if it had
occurred on December 31, 1999 because we acquired more than 90% of the interests
in Garage.com Startups on such date. We accounted for this transaction by
carrying forward the historical basis of the assets and liabilities of
Garage.com Startups. Thereafter, Garage.com Startups was dissolved and its
assets were transferred to Garage.com Securities.
Garage.com is the general partner of Garage.com Investments I, L.P., in
which it owns a one percent economic interest and receives a 20% performance fee
on the limited partnership's net realized gains and losses. Garage.com
recognizes the performance fee as principal transaction revenue when it is
earned. During 1999, no revenue was recognized related to Garage.com Investments
I, L.P. At February 10, 2000, the limited partnership held equity interests
26
<PAGE> 29
in 47 companies, most of which are client companies. Moving forward, Garage.com
Investments will be limited to making follow-on investments in companies in
which it currently holds equity positions. At December 31, 1999, Garage.com
Investments had approximately $2.8 million in cash available for such follow-on
investments. We do not currently plan to raise additional funds for Garage.com
Investments or to form any new such limited partnerships.
After 1999, all of the equity interests that we receive as compensation for
our services will be held by our wholly-owned subsidiary, Garage.com Securities.
STOCK COMPENSATION
During the year ended December 31, 1999, in connection with the grant of
stock options to employees, we recorded deferred stock compensation totaling
$2.9 million, representing the difference between the fair value of our common
stock for financial reporting purposes on the date such options were granted and
the exercise price. This figure is included as a reduction of stockholders'
equity and is being amortized on a straight-line basis over the vesting period
of the individual options, generally four years. We recorded amortization of
deferred stock compensation of $541,000 for the year ended December 31, 1999. At
December 31, 1999, we had a total of $2.4 million remaining to be amortized on a
straight line basis over the vesting period of the option, generally four years.
We anticipate that we will record additional deferred stock compensation of
approximately $584,000 for options granted between January 1, 2000 and February
10, 2000, which will also be amortized on a straight line basis over the vesting
period of the options, generally four years. The amount of stock compensation
expense to be recorded in future periods could decrease if options for which
accrued but unvested compensation has been recorded are forfeited. Unvested
stock options are forfeited upon termination of employment.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM OCTOBER 24, 1997
(INCEPTION) TO DECEMBER 31, 1998
Revenue. Total revenue increased to $5.9 million in 1999 from $149,000 in
1998. During 1999, we earned cash placement fees of $2.5 million in connection
with obtaining funds for client companies. Also during this period, we generated
$2.4 million of registration and sponsorships fees from three Bootcamp for
Startups events. We did not earn any placement fees or event fees in 1998
because our operations during that period were focused primarily on development
of our website and establishing our operations in compliance with NASD and SEC
regulations. Interest income was $295,000 in 1999 compared with $39,000 in 1998.
This increase arose from higher average interest bearing balances in 1999 and
1998 due to our receipt of the net proceeds from our preferred stock financings.
Principal transactions revenue of $225,000 was recognized in 1999 as a result of
an increase in the fair value of the equity we received as compensation. Website
sponsorship fees, which were earned in exchange for banner advertising and the
placement of company logos on our website, and other revenue, including $116,000
from investor membership fees that we began collecting in June 1999, increased
to $421,000 in 1999 compared with $110,000 in 1998.
Operating expenses. Our operating expenses increased significantly in 1999
as we completed our first full year of operations and commenced our
broker-dealer activities. We expect that our operating expenses will continue to
grow significantly in 2000 and beyond as we expand our professional staff,
acquire new office space for our headquarters, expand marketing operations and
events, increase the number of our offices, and continue to develop and extend
our online services.
Cost of events. Cost of events primarily consists of the expenses of
holding our Bootcamp for Startups conferences. These costs include facility
rental, food and beverage, speaker fees, advertising, and promotional and travel
costs directly related to each conference. Cost of events
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<PAGE> 30
increased to $1.0 million in 1999 from $0 in 1998. We held three conferences in
1999 and no conferences in 1998. Such costs are expected to increase in 2000 as
we expect to significantly increase the number of events we hold in 2000.
Compensation and benefits. Compensation and benefits expenses consist of
salaries, wages, and related employee benefits for our personnel. Compensation
and benefits increased to $2.2 million in 1999, up 144% from $909,000 in 1998,
reflecting the significant increase in the number of personnel we employed
during 1999. We had 30 employees at December 31, 1999 compared with 10 at
December 31, 1998. We expect such expenses to continue to increase in light of
our plans to continue to increase our number of employees in 2000 and beyond.
Professional fees. Professional fees include the costs we incur for our
outside legal, finance, business, and tax and accounting advisors. Professional
fees increased by $143,000 or 61% to $377,000 in 1999 from $234,000 in 1998
primarily in connection with the commencement of our broker-dealer activities in
1999 and the roll-up of Garage.com Startups. We expect that professional fees
will continue to increase in 2000 as a result of the ongoing regulation of our
broker-dealer activities, opening additional international offices, and our
anticipated status as a public company.
Occupancy. Occupancy costs are comprised of rental payments for our leased
facilities and related utility costs. Occupancy costs doubled in 1999 to
$295,000 from $147,000 in 1998 as we expanded our headquarter facilities and
opened branch offices. During 1999, we opened branch offices in Boston in July,
in Seattle in August, in Austin and Tel Aviv, Israel, both in November. We
anticipate that our occupancy costs will continue to increase in 2000 and beyond
as we further expand our headquarters facilities and add additional offices in
the United States and internationally.
Marketing. Marketing expenses represent the costs of outside marketing and
public relations consultants as well as advertising and other promotional
expenses we incur to promote our activities. However, these costs exclude
advertising expenses specifically related to our Bootcamp for Startups
conferences. Marketing expenses increased to $218,000 in 1999, up 58% from
$138,000 in 1998, as we expanded our marketing efforts in connection with the
commencement of our broker-dealer activities. We anticipate that our marketing
costs will continue to increase as we expand into additional geographic markets.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation was $541,000 in 1999. There was no amortization of deferred stock
compensation in 1998 as no stock options were granted prior to 1999. We recorded
deferred stock compensation of $2.9 million in 1999 for options awarded to
employees with exercise prices below the deemed fair value for financial
reporting purposes of our common stock on their respective grant dates. We will
record at least $742,000 of expense for amortization of deferred compensation in
2000 related to stock options granted to employees.
Other. Other expenses include travel and related costs for our employees
while traveling on company business other than Bootcamp for Startups events,
depreciation of property and equipment, telecommunications expenses, and offices
supplies. Other expenses totaled $467,000 in 1999, up $242,000 or 108% from
$225,000 in 1998. This increase was due to the travel costs we incurred in
connection with evaluating locations and establishing our office locations as
well as increases in property and equipment. We expect travel and other costs to
continue to increase as we expand our business around the world.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the eight
quarters in the period ended December 31, 1999. The information for each of
these quarters is unaudited and has been prepared on the same basis as the
audited consolidated financial statements contained in this prospectus. In the
opinion of management, all necessary adjustments, consisting only of normal
recurring adjustments, have been included to present fairly the unaudited
quarterly results when read in conjunction with the consolidated financial
statements and the notes to our financial statements appearing elsewhere in this
prospectus. These operating results are not necessarily indicative of results of
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Placement fees...................... $ -- $ -- $ -- $ -- $ 140 $ 652 $ 594 $1,099
Event registration and sponsorship
fees.............................. -- -- -- -- -- 445 1,076 908
Interest income..................... -- 2 7 30 24 24 53 194
Principal transactions.............. -- -- -- -- -- -- -- 225
Website sponsorships and other...... -- 23 35 52 84 85 105 147
----- ----- ----- ----- ----- ------ ------ ------
Total revenue -- 25 42 82 248 1,206 1,828 2,573
Costs and expenses:
Cost of events...................... -- -- -- -- -- 187 307 536
Compensation and benefits........... 110 247 262 290 292 324 559 1,041
Professional fees................... 66 25 50 93 44 38 64 231
Occupancy........................... 15 39 46 47 47 59 103 86
Marketing........................... -- 4 19 115 39 40 45 94
Amortization of deferred stock
compensation...................... -- -- -- -- 22 173 121 225
Other............................... 39 52 75 59 67 57 143 200
----- ----- ----- ----- ----- ------ ------ ------
Total costs and expenses 230 367 452 604 511 878 1,342 2,413
----- ----- ----- ----- ----- ------ ------ ------
Income (loss)from operations.......... (230) (342) (410) (522) (263) 328 486 160
Provision for income taxes............ -- -- -- -- -- 6 8 3
----- ----- ----- ----- ----- ------ ------ ------
Net income (loss)................. $(230) $(342) $(410) $(522) $(263) $ 322 $ 478 $ 157
===== ===== ===== ===== ===== ====== ====== ======
</TABLE>
Our quarterly revenue increased throughout 1998 and 1999. We earned
placement fees beginning in the first quarter of 1999 after completion of the
first financing by a portfolio client company. Placement fee revenue increased
in the second quarter of 1999 as we experienced increases in both the number of
financings closed by portfolio clients and the average size of financings, which
increased from $1.6 million in the first quarter of 1999 to $3.8 million in the
second quarter. In addition, our average placement fee percentage increased in
the second quarter of 1999. In the third quarter of 1999, placement fee revenue
decreased consistent with a decrease in the number of financings closed by
portfolio clients as compared with the second quarter. Placement fee revenue was
higher in the fourth quarter of 1999 mainly because the number of financings
completed by portfolio clients increased. This increase was partially reduced by
a decrease in the average size of financings to $2.8 million in the fourth
quarter. Event revenue from the three Bootcamp for Startups conferences we held
beginning in the second quarter of 1999 fluctuated with the paid attendance at
each event, which varied based on the seating capacity of the conference
facilities. Interest income increased significantly in the fourth quarter of
1999 as a result of higher interest-bearing balances related to $12.0 million in
net proceeds from the sale of Series C convertible preferred stock late in the
third quarter. Revenue from principal transactions in the fourth quarter of 1999
resulted from an increase in the fair value of the equity we receive as
compensation. Revenues from sponsorships and other
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sources increased significantly in the fourth quarter of 1999 after we began
charging member investors an annual fee for access to password-protected areas
of our website.
Costs and expenses increased each quarter in 1998. These increases related
to expansion of our operations in connection with the launch of our website in
May 1998 and the inception of our broker-dealer activities in October 1998.
Costs and expenses in the fourth quarter of 1998 exceeded costs and expenses in
the first quarter of 1999 primarily due to marketing expenses related to a
promotional event held in October 1998 to announce the commencement of our
broker-dealer activities. Thereafter in 1999, costs and expenses increased each
quarter as we added personnel to support the growth of our business and began
producing our Bootcamp for Startups conferences. Amortization of deferred stock
compensation was higher in the second quarter of 1999 than in the subsequent
quarter due to expense recorded for fully vested options granted during the
second quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our primary sources of funds have been the sale of
Garage.com equity securities and revenues generated from cash placement fees and
from our Bootcamp for Startups events. As of December 31, 1999, we had raised
net proceeds of $17.0 million from the sale of equity securities and generated
$5.6 million in cash revenues from equity placements, events, sponsorships, and
other sources. In February 2000, we raised approximately $26.9 million from the
sale of our Series E preferred stock.
We had cash and cash equivalents of $16.1 million at December 31, 1999, an
increase of $13.3 million from December 31, 1998. Cash provided by operating and
financing activities during 1999 was $1.2 million and $12.8 million,
respectively, while cash used in investing activities totaled $657,000. In the
future, we expect to significantly increase our use of cash for operating
activities to expand our operations and to exercise our preemptive rights in our
client companies, which we received as compensation for our services.
During the period from inception through December 31, 1998, cash used in
operating activities was $1.3 million. Uses of cash in operating activities were
primarily to fund net losses. Financing activities provided cash of $4.2 million
during the period ended December 31, 1998, which represented proceeds from the
sale of equity securities.
Based on our current plans, we believe that our cash on hand, and cash
generated from our operations will be sufficient to fund our operations for at
least the next 12 months. Our forecast of the period of time through which our
financial resources will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties. Actual results
could vary as a result of a number of factors including those set forth in "Risk
Factors".
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, we had $16.1 million in cash and cash equivalents. A
decrease in market rates of interest would have no material effect on the value
of these assets.
The potential for changes in the fair value of our investments is referred
to as "market risk". To date, our investments have been received as compensation
for our broker-dealer and related activities.
The broadly defined categories of market risk include exposures to interest
rates, currency rates, equity prices, and commodity prices. Based on our
operations to date and the nature of our investment holdings, our risk exposure
is limited to interest rate and equity price risk, defined as follows:
- Interest rate risks primarily result from exposures to changes in the
level, slope, and curvature of the yield curve, the volatility of
interest rates, and credit spreads.
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- Equity price risks result from exposures to changes in prices and
volatilities of individual equities, equity baskets, and equity indices.
Our business is subject to market risk in a number of respects. However,
since none of our investments as of December 31, 1999 are in publicly traded
companies, our exposure to equity price risk cannot be measured quantitatively.
Nevertheless, if the market for high technology securities declines, our member
investors may be reluctant or unable to invest additional funds in our clients.
This may reduce our investor membership fees. This may also reduce our cash
placement fees if the number or size of our client companies' financings is
reduced. In addition, this may reduce our event revenues if our member investors
or entrepreneurs stop attending our events, including Bootcamp for Startups.
Finally, our revenues will decline to the extent that the fair value of the
equity interests that we receive as compensation declines. Any of these events
could harm our business.
In the worst case, it is possible that all of the foregoing events could
happen simultaneously, in which case our business will be seriously harmed.
As we grow and our client companies mature and become publicly traded, we
expect our market risks to increase. We plan to manage these risk exposures
through diversifying exposures, controlling position sizes, and establishing
hedges in related securities or derivatives. For example, we may hedge a
portfolio of common stock by taking an offsetting position in a related
equity-index futures contract. The ability to manage an exposure may, however,
be limited by adverse changes in the liquidity of the security or the related
hedge instrument and in the correlation of price movements between the security
and related hedge instrument.
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BUSINESS
Garage.com operates an online business-to-business marketplace that helps
entrepreneurs and investors create, build, and fund promising early-stage
technology startups. Our services include acting as placement agent in
financings and assisting startups with marketing and promotion, business
development and executive recruiting. We target our services at startups seeking
to raise initial financing of between $0.5 million and $5 million. These
startups are often underserved by the current venture capital market. We receive
cash and the right to buy stock in our client companies as compensation for our
services. During 1999, we assisted:
- 28 client companies raise more than $90 million, for which we received
cash fees and the right to buy their stock as compensation. Immediately
following these financings, we owned or had the right to buy at a nominal
price, an average of 4% of these clients' outstanding capital stock.
- 12 other client companies with financing and marketing activities for
which we received the right to buy their stock as compensation. These
companies raised approximately $10 million.
We acted as placement agent in these transactions. The cash placement fees we
received for these transaction accounted for 42% of our total revenue in 1999.
We also derive revenue from our Bootcamp for Startups events, which are an
integral part of our marketing and branding strategy. During 1999, these
conferences accounted for approximately 41% of our total revenue. We anticipate
that as our business develops, the percentage of our revenue that we receive for
acting as placement agent will increase relative to our event revenue.
The existing venture capital market, and the market for early-stage
financing in particular, is highly fragmented and unstructured. As a result, we
believe the market is inefficient in matching supply and demand for venture
capital. Our online platform allows startups to confidentially submit their
business plans in a standardized format. This allows us to review business plans
quickly and cost-effectively. We then select early-stage startups that we
believe are promising to list in the password protected section of our website
known as the "Portfolio". Prior to listing these companies in the Portfolio, we
assist them in refining their business models, developing their teams, and
creating an effective communications strategy. We refer to the startups listed
in the Portfolio section of our website as "portfolio clients". Finally, we help
these portfolio clients secure financing from qualified investors. During 1999,
approximately 75% of the financings we arranged for our portfolio clients were
within our targeted range of $0.5 million to $5 million. The remaining
financings exceeded this range.
We enable startups to simultaneously present their investment opportunities
to more than 2000 of our client investors with experience in high technology
investing, management, and operations. These investors include venture capital
firms, corporate investors, and angel investors. Venture capital firms are firms
that specialize in investing in startups. Corporate investors are businesses
whose main focus does not involve investing but who occasionally invest in
startups if they can provide strategic benefits to their business. Angel
investors are individuals interested in investing in startups. We enable these
client investors to access select early-stage investment opportunities without
expending significant search time and resources.
Our mission is to revolutionize and democratize the venture financing
process for entrepreneurs and investors.
INDUSTRY BACKGROUND
THE IMPACT OF THE INTERNET AND TECHNOLOGICAL INNOVATION ON ENTREPRENEURIAL
ACTIVITY
The Internet has emerged as a global medium, lowering traditional barriers
to innovation and enabling millions of people worldwide to share information and
conduct business electronically. We believe that, together with technological
innovations in fields such as telecommunications,
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software, hardware, and life sciences, the Internet has created a significant
increase in startup company formation. This entrepreneurial activity has
stimulated demand for early-stage venture capital. In addition, based on our
experience in the industry, we believe that the Internet, as a global mode of
financial communication, has generated significant demand by investors for
online access to investment tools and opportunities.
THE VENTURE CAPITAL AND STARTUP MARKET
Direct venture capital investment in the United States has grown rapidly
with the business and technological innovation stimulated by the Internet and
other new technologies. According to information released in February 2000 by
the National Venture Capital Association, a venture capital trade and research
group, venture capital investments exceeded $48 billion in 1999, an increase of
151.6% over 1998. The vast majority of venture capital invested is being
directed to high technology companies. According to the National Venture Capital
Association, technology-based companies received approximately $40.5 billion, or
84% of all venture capital investments made, during 1999.
SHORTCOMINGS OF THE VENTURE CAPITAL MARKET FOR STARTUP COMPANIES
The existing venture capital market, and the market for early-stage
financing in particular, is highly fragmented and unstructured. As a result, we
believe the market is inefficient in matching supply and demand for venture
capital. No commonly accepted marketplace matching supply and demand for venture
capital currently exists. In addition, many startups cannot attract the
attention of venture capitalists without an introduction by someone with a prior
relationship to the venture capital firm. As a result, venture capital may not
be disbursed to startups that can make the most productive use of capital,
leaving the demands of both startup companies and early-stage investors
unsatisfied.
In addition to these inefficiencies, the venture capital industry's ability
to efficiently deploy the capital it manages has come under pressure as a result
of its own success. According to the National Venture Capital Association,
venture capital managed by venture capital firms in the United States has grown
from $38.5 billion in 1995 to $84.2 billion in 1998, a 30% compounded annual
growth rate. However, the number of investment professionals in the venture
capital industry has not kept pace with this growth. Based on data from the
National Venture Capital Association, venture capital disbursements per industry
professional increased from $2.4 million in 1995 to $5.5 million in 1998, while
the ratio of venture capital managed to industry professional increased from
$15.5 million to $27.9 million over the same timeframe.
Faced with the challenges of investing larger sums with relatively fewer
investment professionals, institutional venture capital investors increasingly
make larger investments. The average investment by venture capital firms in 1999
was $8.9 million according to PricewaterhouseCoopers, a professional services
firm, representing over a 70% increase from 1998. Ironically, this means that
early-stage companies seeking to raise relatively small amounts of
capital -- between $0.5 million and $5 million -- often cannot attract adequate
institutional venture investor attention.
In addition, based on our experience in the industry, we believe that
venture capitalists increasingly face time constraints, which often force them
to narrowly focus their investments in companies located in their local
geographic regions. Highlighting this trend is the fact that approximately 35%
of all capital investments by venture capital firms made in 1999 went to
companies in the Silicon Valley area, where most venture capital funds are
headquartered, according to the National Venture Capital Association. The
combination of these factors has caused what the Small Business Association, an
agency of the federal government, refers to as the "Capital Chasm" for many
entrepreneurs seeking early-stage funding.
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CHALLENGES FACED BY STARTUPS
Startups encounter many obstacles in efficiently raising initial financing.
For example, startups often find it difficult to gain access to members of the
venture capital community. Even when they are able to gain this access, the
traditional financing process requires them to engage in a one-to-one marketing
effort with investors, which is often time-consuming and inefficient. Without a
structured venue for presenting investment ideas to a broad investor base, the
true demand for each investment opportunity is not readily apparent. As a
result, a startup may not realize the full value for its venture. In addition,
entrepreneurs often lack experience to effectively present a business
opportunity to investors and often have difficulty in negotiating investment
terms. This may result in excessive ownership dilution before the startup team
has had the opportunity to build significant value in their venture.
Entrepreneurs also face challenges beyond successful funding which may
threaten the viability of their startups. Armed with only a few employees and
limited resources, many entrepreneurial ventures find themselves in need of
operational and strategic guidance to succeed. Startups also frequently have
difficulty identifying scarce management and high-level technical personnel.
Similarly, many startups are uncertain how to best retain a team of professional
service providers, including attorneys, accountants, and other key advisors, to
execute their business strategy. These challenges remain largely unaddressed by
a system that provides limited opportunity for interaction between startups and
experienced investors.
CHALLENGES FACED BY INVESTORS
Many investors lack access to a broad universe of venture capital
investment opportunities and face difficulty in filtering through the available
opportunities. This is particularly true of investors interested in early-stage
companies, where the risks are often greater than those of companies in later
stages of development. In today's venture capital market, there are no
standardized methods for presenting or reviewing the large number of business
plans submitted for investors' evaluation. We believe that faced with time and
human capital constraints, many investors focus on larger, later-stage
investments that may offer greater certainty and may require less time and
effort to execute. In addition, most venture capitalists concentrate near
traditional high technology centers, investing primarily in companies within a
limited geographic region. We also believe that investors face difficulties in
efficiently accessing information to analyze the latest trends and developments
within the technology industry.
MARKET OPPORTUNITY FOR AN ONLINE VENTURE CAPITAL MARKETPLACE
Although the Internet presents an opportunity to create a transparent
marketplace for early-stage venture capital, we believe most Internet-based
venture capital efforts fail to adequately address the capital chasm faced by
investors and startups. Based on a review of our competitors' websites, we
believe that many websites focused on venture capital investing provide general
information content with little or no guidance on actual investing
opportunities. As a result, these websites lack the value-added service of
connecting both parties in the funding process. Traditional venture capital firm
and incubator websites act as a source of online information about themselves
and as a venue for soliciting business plans. Nevertheless, such sites offer
only limited direction to entrepreneurs and are not intended to create a market
for the startup's investment opportunity. We also believe that regional
matchmaking sites often suffer from a limited scope of service offerings and
limited geographic reach.
THE GARAGE.COM SOLUTION
We have developed an online venture capital marketplace that capitalizes
upon the advantages of the Internet to connect startups with venture capital,
corporate, and angel investors. Our integrated online delivery platform provides
an efficient Internet-based method for submitting business proposals in a
standardized fashion and allows a startup to simultaneously
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deliver its investment opportunity to more than 2,000 investors. Based on our
experience, we believe that this process allows us to accelerate the funding
cycle for early-stage companies and presents the startup with better information
about investor demand for its investment opportunity. In turn, investors are
notified of targeted investment opportunities without expending significant
search time and resources. We also provide startups with strategic guidance and
assistance in hiring senior executive and technical personnel. Additionally, we
connect our client companies with venture capitalists, corporate and angel
investors with whom we have developed relationships, as well as professional
services firms, and other industry experts focused on developing startups. We
also actively help our clients communicate their business propositions
effectively in a crowded market.
BENEFITS TO STARTUPS
IMPROVED ACCESS TO CAPITAL. We create an active market for early-stage
financing. This often increases demand for an investment opportunity, which
allows the startup to select the most value-added investor for its business.
These investors are those who can provide benefits to the startup, including
networking opportunities, industry insights, and experience, as well as capital.
In addition, using our marketplace, a startup can approach multiple investors
simultaneously, which may reduce the time to financing.
STRATEGIC AND OPERATIONAL GUIDANCE. We educate entrepreneurs about the
venture capital funding process. While we do not provide specific valuation
advice -- valuation is left to direct negotiation between the investor and the
startup -- we provide information about current trends in the venture capital
marketplace. In addition, we assist startups by challenging and refining their
business models and recruiting key executive and technical talent. We also help
startups prepare their investor presentations and effectively communicate their
investment opportunities to a broad range of institutional and individual
accredited investors. Throughout the process, we provide referrals to
professional service providers, such as attorneys, accountants, and other key
advisors.
MARKETING AND PROMOTION. We provide our startup clients with marketing
advice and help them develop an effective public relations program. Once our
client companies have completed their financings, we often introduce our client
companies to our contacts with the media and with industry leaders and experts.
These introductions provide our client companies with an opportunity to
effectively communicate their business messages. As a result, our client
companies often receive heightened awareness which may facilitate hiring key
employees, finding customers, and developing critical strategic relationships.
NETWORKING OPPORTUNITIES AND EDUCATIONAL CONTENT. Our website serves as an
online startup and venture capital destination providing a business development
framework for our entrepreneur and investor communities. In addition to our
online service offerings, we sponsor educational events such as Bootcamp for
Startups that provide information and practical guidance about building a
successful business. We also sponsor investor events such as Showcase Breakfasts
that provide forums in which startups can present investment opportunities to a
pre-qualified network of institutional and individual investors. In addition, we
provide entrepreneurs with web-based tools for retrieving market research data,
news, and other information relevant to starting a high technology business.
BENEFITS TO INVESTORS
ACCESS TO A SELECT AND TARGETED SET OF INVESTMENT OPPORTUNITIES. We review
thousands of business plans for their investment merit and select less than one
percent of the most promising plans for presentation to investors in the
Portfolio section of our website. In addition, we direct investment
opportunities to specific investors based upon their investment criteria, such
as
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startup location, industry sector, and investment size. We present each
investment opportunity in a standardized format, which expedites the investor
review process.
ACCESS TO A COMPREHENSIVE DATABASE OF STARTUPS, HIGH TECHNOLOGY, AND
VENTURE CAPITAL INFORMATION. Our client investors have the opportunity to
evaluate an extensive database of business summaries that startups have
electronically submitted to us. These business summaries may be reviewed by
client investors regardless of whether the startups were accepted as portfolio
clients, and may present additional investment opportunities for member
investors. In addition, they can search this database to study themes and trends
regarding early-stage companies and to conduct competitive analyses of these
companies. Our member investors also gain access to third-party research and
information about high technology and venture capital.
POSITIVE NETWORK EXTERNALITIES. Investors derive indirect benefits from
participation in our startup community. We coordinate events such as Showcase
Breakfasts, which facilitate discussion and provide co-investment opportunities
among venture capital, corporate, and angel investors. These interactions may
help investors assess the value of potential investment opportunities and
benefit from the experience and expertise and efforts of other members of our
investor community. In addition, our marketplace allows investors to interact
across geographic regions, benefiting from the efforts of other investors
regardless of their location.
GARAGE.COM'S STRATEGY
Our mission is to revolutionize and democratize the venture financing
process. Our strategy to achieve this goal includes continuing to:
CREATE A COMPETITIVE INTERNET-BASED MARKETPLACE PROVIDING STARTUPS WITH
EFFICIENT ACCESS TO VENTURE CAPITAL. We capitalize on our experience,
technology, and relationships to create an efficient marketplace for
early-stage venture capital by aggregating investors with knowledge and
expertise across the technology industry. In addition, Garage.com intends
to regularly improve the investment process to effectively aggregate demand
for each investment opportunity and help the market clear efficiently with
minimal time delay. To attract interest from our member investors for each
investment opportunity, we will continue to leverage the Internet, our
databases, and industry relationships. In addition, we actively screen
investors and entrepreneurs to match investors who possess unique
operational, strategic and industry knowledge with startups who can exploit
this expertise to grow their businesses.
ENHANCE THE QUALITY OF STARTUPS BY PROVIDING STRATEGIC GUIDANCE, EDUCATION,
TRAINING, AND EXECUTIVE AND TECHNICAL RECRUITING SERVICES. We will continue
to provide strategic guidance and support to our client companies regarding
market positioning, business model development, and competitive market
trends. We intend to continue to provide startups with access to a broad
network of professional service providers and products. We intend to
provide companies with the critical skills necessary to build their
companies by offering innovative educational events, counseling, and
consulting. Additionally, we will continue to assist our client companies
recruit key executive and technical talent.
IMPROVE OUR CLIENT INVESTORS' ACCESS TO SELECT EARLY-STAGE INVESTMENT
OPPORTUNITIES. Our objective is to provide investors with high quality
early-stage venture capital investment opportunities in the high technology
and life sciences industries. We plan to continue our geographic expansion
to high technology centers, both domestically and internationally, to
extend an investor's early-stage investment opportunities outside of the
investor's home region. In addition, we plan to attract promising startups
through the Internet, conferences, and outside relationships by using a
combination of marketing, Internet-based technology, and our proprietary
database. To better serve our investor community, we intend to develop
additional information services and structured financial products going
forward.
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ESTABLISH GARAGE.COM AS THE LEADING BRAND FOR ONLINE VENTURE CAPITAL. Our
objective is to establish Garage.com as the leading brand online for
obtaining venture capital services. We are creating a community comprised
of entrepreneurs, industry experts and advisors, investors, and experienced
managers focusing on the development of high-growth businesses. To support
these activities, we are building an online destination where members of
our startup community can exchange ideas and experiences relating to
technology, entrepreneurship, and venture capital. In addition, we intend
to market and highlight our educational conferences and public speaking
campaigns, which in conjunction with our geographic expansion, will promote
a strong Garage.com identity and brand.
LEVERAGE OUR TECHNOLOGY PLATFORM AND EXTENSIVE DATABASE OF STARTUP
COMPANIES AND INVESTORS TO INCREASE THE EFFICIENCY OF OUR MARKETPLACE. We
have created a password-protected and scalable website that provides a
standardized framework for investors, enabling efficient review and
comparison of early-stage investment opportunities. We intend to continue
to expand and utilize our database of startup investment opportunities to
develop future business and market-making activities.
PROMOTE COLLABORATION AND NETWORKING AMONG CLIENT COMPANIES, ENTREPRENEURS,
AND INVESTORS. We intend to extend our network of member investors,
professional service providers, and other industry experts to promote
innovation and collaboration among our client companies. We believe that as
our community grows, our community members will increasingly benefit from
knowledge sharing, business contacts, and the formation of strategic and
business alliances.
GARAGE.COM SERVICE OFFERINGS
FIND 'EM -- IDENTIFYING SELECT STARTUP INVESTMENT OPPORTUNITIES
We review thousands of business plans for their investment merit and select
a small percentage of the most promising plans for presentation to our member
investors. More than 41,000 entrepreneurs have registered for access to the
Garage portion of our website since we launched our website in May 1998. Of
these 41,000 registrants, more than 10,000 have submitted company overviews
through our website. In January 2000, we received approximately 30 to 40 company
overviews each business day, more than double the number of company overviews
submitted on a daily basis in January 1999.
In reviewing business plans, we look for four key characteristics:
- companies that focus on emerging growth sectors, including information
technology and life sciences;
- companies that have developed a business strategy, assembled a core
management team of individuals and are seeking capital to launch
development and/or marketing efforts;
- a growth-oriented business plan; and
- entrepreneurs who have a good understanding of the technology market and
their own business models.
Once a startup submits a company overview, our venture development team
reviews and evaluates the startup's proposal and business potential. We
generally respond to those startups that have submitted company overviews within
two to three business days. If we believe a startup's company overview looks
promising and fits the interests of our investor community, we will invite the
startup to complete a detailed application through our website. In the detailed
application, we request additional information about the startup's competitive
outlook, marketing strategy, financial projections, and funding history. When
the startup submits the detailed application, our venture development team
reviews it for investment suitability. We generally respond within seven days to
startups that have submitted detailed applications and follow up
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with questions via email or by phone. The most promising startups are then
invited to meet in person with members of our team at one of our six offices. As
of February 1, 2000, we had reviewed more than 1,800 detailed applications and
met with several hundred startup teams.
We invite startup companies that we believe present interesting investment
opportunities for our member investors to list in the Portfolio section of our
website. Final decisions about which startups we invite to list in the Portfolio
section are made by a committee of our senior executives. As of February 1,
2000, we had accepted more than 65 companies as Portfolio clients.
This process can be illustrated as follows:
[graph]
We do not charge separately for each service we provide to our portfolio
clients. Instead, we bundle our services. In exchange for our bundle of
services, we charge a cash placement fee based on the amount of proceeds the
portfolio client raises. In addition, our portfolio clients grant us the right
to invest in them. We provide a reduced range of services to our non-portfolio
clients. In exchange for our capital raising services, our non-portfolio clients
grant us the right to invest in them. With respect to all other services
provided to non-portfolio clients, we negotiate our compensation on a
case-by-case basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of our sources of
revenues.
We use the Internet, our technology platform, and a standardized format for
submitting business summaries to facilitate the review process. This process
allows us to efficiently build an extensive, searchable database of startups
that can be accessed by our member investors and personnel. We maintain strict
confidentiality over the startup's information throughout the review process.
Only information approved for release by the startup is presented to member
investors.
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FIX 'EM -- DELIVERING VALUE-ADDED SERVICES TO PORTFOLIO CLIENTS
Once a startup becomes a portfolio client company, we offer it a number of
value-added services before we present the investment opportunity to our member
investors. These services include:
- STRATEGIC GUIDANCE. We assess a startup's business and financial model,
competitive position, and overall market opportunity. Our experienced
team provides a wide range of training and strategic guidance to our
startup clients. Our portfolio clients can also access the resources and
expertise of PricewaterhouseCoopers and McKinsey & Company through the
relationships that we have with these firms. These services include
business model review, company and product positioning, competitive
analyses, and financial planning.
- VALUATION AND NEGOTIATION TECHNIQUES. We assist our portfolio clients in
building a valuation model specific to their company and provide
information on past investment valuations for comparable companies. We
educate our clients about the financing process and counsel them in
negotiating investment terms.
- BUSINESS DEVELOPMENT AND RELATIONSHIPS. We introduce our client
companies to prospective business partners and potential customers. We
leverage our network of advisors, investors, and sponsors to assist our
portfolio clients in developing their businesses.
- RECRUITING AND EXECUTIVE SEARCH. Our human capital group works with our
portfolio clients to find qualified personnel for key management and
technical positions. Our portfolio clients have access to the Startup
Jobs area of our website where they can post their company's employment
opportunities. Between the launch of this service on September 16, 1999
and February 10, 2000, our Startup Jobs area had received more than
11,000 job seeker profiles and our human capital group placed more than
25 senior executive and technical candidates with our portfolio clients.
We also train our portfolio clients in interviewing techniques and
provide them with compensation guidelines to help them build their
management and technical teams.
- MARKETING, PUBLIC RELATIONS, AND PROMOTION TRAINING. We help our
portfolio clients build effective marketing campaigns and work with the
media and industry leaders and experts to help these clients promote
their businesses effectively to customers, potential partners, and the
general public.
- CAPITAL RAISING. Once a startup becomes a portfolio client, we help them
develop an effective investor presentation. We then provide a variety of
opportunities for each startup to market its investment opportunity to a
network of highly qualified accredited investors through the
password-protected portion of our website, email notification, investor
events, and small investor meetings.
FUND 'EM -- INTRODUCING QUALIFIED INVESTORS TO SELECT STARTUP INVESTMENT
OPPORTUNITIES
Our member investors must satisfy a stringent set of criteria. To qualify,
an institutional investor must be employed by a venture capital firm or a
corporate development organization. Individual investors must have substantial
financial resources, private equity investment experience, and high technology
business expertise to provide value to startup companies. All investors must
substantiate that they are sophisticated and that they meet specified income or
net worth levels. These requirements are necessary so that our client companies
can make private placements for purposes of state and federal securities laws.
After acceptance, member investors complete an investor profile that details
their private equity investment experience and high technology expertise. In
their profile, investors may also specify the type of investment opportunities
they are interested in pursuing by characterizing their preferred industry
sectors and investment size.
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When a portfolio client is ready to present its investment opportunity, we
email those member investors that have indicated an interest in the startup's
specific characteristics. A brief summary of the portfolio investment
opportunity is then posted in the "Heaven" section of our website and made
available for review to all member investors. If a member investor is interested
in the portfolio client, the investor sends an email through our website to the
startup requesting more information. The startup maintains control of its
confidential information at all times during this process. The startup, with
guidance from us, then initiates contact with member investors with whom it
wants to start a dialogue. Investors are responsible for completing their own
due diligence and negotiation involving any investment.
We also sponsor events that provide portfolio clients with personal
exposure to member investors. We host monthly Showcase Breakfasts at which three
portfolio clients present their investment opportunities to 100 to 150 member
investors. These Showcase Breakfasts are followed by smaller portfolio client
luncheons that provide member investors with a more in-depth view of the startup
company. We may also contact targeted member investors who have an interest in a
portfolio client's industry sector to facilitate a meeting between the member
investor and the startup.
After we have arranged financings for our portfolio clients, we continue to
provide marketing and promotional support, strategic guidance, and networking
opportunities with other portfolio clients as well as other members of our
venture capital community.
GARAGE.COM CLIENTS
Set forth below are our portfolio clients that had completed financings as
of December 31, 1999, grouped by industry sector:
[DIAGRAM]
The foregoing table reflects only portfolio clients and does not include
other clients for which we provided services. In 1999, for example, we provided
services and raised capital for 12 non-portfolio client companies. At February
1, 2000, an additional 29 portfolio clients were actively seeking capital and
eight were no longer actively seeking funding through Garage.com.
GARAGE'S WEBSITE DESTINATION FOR STARTUPS
Our website is an Internet-based community that provides startups and
investors with information about starting a company and the venture capital
financing process. Our website also serves as the portal for the professional
services that we offer. Since we launched our website in
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May 1998, it has received more than 1.25 million unique visits. Our website is
comprised of a number of areas:
"Garage" is a password-protected area within the website where startups can
submit business summaries on a confidential basis. This is also the area where
we help startups refine their business models, find senior executive and
technical employees, and obtain funding.
"Heaven" is a password-protected area of our website where member investors
are able to review a group of select investment opportunities and access an
extensive database of startup and venture capital information. Startup companies
that have become our client companies and are currently seeking funding are
displayed in Heaven as portfolio companies.
"Startup Jobs" is a password-protected area where individuals can
confidentially submit their resumes to our client companies that are seeking to
fill key positions in their management and technical teams.
"Forums" is a public area that offers startup-related articles and question
and answer areas hosted by leaders in the accounting and consulting, commercial
banking, insurance, software development, legal, and venture capital fields.
"Resources" is a public area that contains research and tools for
entrepreneurs and investors such as articles on securities law, valuation
software, and information on capital raising. This area also provides access to
free startup-related email lists and links to professional service providers.
"Newsroom" is a public area that contains daily updates and customized news
retrieval on current news stories relevant to venture capital and startups. This
area also contains news and press releases about us.
EVENTS -- BOOTCAMP FOR STARTUPS
We conduct an ongoing series of conferences called Bootcamp for Startups.
These two-day conferences are aimed at entrepreneurs seeking information and
practical guidance about starting high technology companies. Each conference
features some of the high technology industry's leading investors,
entrepreneurs, and professional advisors, who speak on topics aimed at helping
entrepreneurs learn how to start up, finance, market, and manage technology
companies.
We conduct these fee-based conferences to promote our brand awareness with
entrepreneurs, investors, and key influencers in various venture capital
markets, and to stimulate future business plan submissions from conference
attendees. Our Bootcamp for Startups conferences serve both as an educational
venue for entrepreneurs and as a significant part of our marketing and branding.
MARKETING AND BRAND DEVELOPMENT
Our marketing program leverages multiple points of contact with our clients
and prospective clients. These points of contact include: our website, Bootcamp
for Startups conferences, email lists, a printed newsletter, public speaking
appearances, and a public relations campaign to communicate our message to
startups, investors, and other constituencies specifically interested in the
startup community. Guy Kawasaki, our chief executive officer, is the
best-selling author of seven books on marketing and entrepreneurship, a
columnist for Forbes magazine, and a frequent speaker at industry events. In
addition, our team includes Richard Karlgaard, a Garage.com co-founder and the
publisher of Forbes magazine, and Geoff Baum, a past editor and current
columnist at Forbes ASAP.
We also publish several email newsletters, which have a combined subscriber
base of more than 50,000. We have integrated our database technology to collect
information from our website
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visitors on a voluntary basis, which allows us to most effectively deliver to
them the specific types of information they are seeking.
We have sponsorship agreements with professional service providers to the
technology sector such as PricewaterhouseCoopers, Silicon Valley Bank, Venture
Law Group, Credit Suisse First Boston, Microsoft, Heidrick and Struggles,
Advanced Technology Ventures, McKinsey & Company, and ABD Insurance and
Financial Services. These firms provide our startup companies with valuable
services and provide us with a source of referrals for high quality investment
opportunities. We provide further detail on these agreements in "Related Party
Transactions -- Sponsorship Agreements". We are currently developing additional
marketing programs, including a new series of post-Bootcamp educational events
for entrepreneurs.
TECHNOLOGY
Our technology platform runs many of the critical functions of our
business. The platform consists of a website, and a secure, scalable
client/server database architecture that support our business.
Our website operates using StarNine WebStar 4.1 server software, and runs
on Apple server hardware. The site serves dynamically generated web pages with
data generated from our database. The system currently uses two independent web
servers, each of which can process several thousand page views per hour. We
designed the system to be scaleable and to accommodate more than twenty
additional Web servers to handle increases in website traffic.
We designed our technology platform to use widely accepted industry
standard products. All components of the system are designed for reliability.
Our database operates on dedicated hardware and is mirrored in real-time to
provide an exact duplicate on an independent machine that can be used in the
event of a failure on the main system. In addition, the servers operate on their
own dedicated hardware, connected via a 100 megabit Ethernet network. The
network is operated on the Macintosh operating system and designed for network
security.
Our platform is configured to adapt to use additional servers as needed. To
prevent unnecessary system downtime, we have developed the capability to switch
the system to a maintenance mode that allows routine site and database
maintenance without inhibiting system access for users. We regularly add
functionality and technologies to improve our business processes, track website
activity, and communicate with and serve our customers more effectively.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, business processes,
and other intellectual property as critical to our success. Unauthorized use of
our intellectual property by third parties may damage our brand and reputation.
We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, member investors
and client companies, partners, and others to protect our intellectual property
rights. Despite our precautions, it may be possible for third parties to obtain
and use our intellectual property without our authorization. Furthermore, the
validity, enforceability, and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States.
We filed a patent application for our business process, based on this
technology platform, in October 1999. We pursue the registration of our service
marks and trademarks in the United States and internationally. We have filed
applications for the service marks of Garage.com with logo in the United States
as well as certain foreign countries. In the United States, we have
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applied for additional service marks including Bootcamp for Startups, Bootcamp
for Angels, and Geoff's Gems among others.
COMPETITION
We encounter intense competition in all aspects of our business, and we
expect this competition to increase. We compete on the basis of service and
price, primarily the amount of equity compensation we receive.
We face competition from regionally-focused companies, both domestically
and internationally, which are trying to connect startups with venture investors
using an Internet-based marketplace. SeedStage Capital, based in Austin, Texas,
is an online market for startups and venture investors concentrating on the
southwestern United States. Vcapital.com, based in Chicago, Illinois, is an
online market for venture capitalists and startups. Yazam.com, based in Israel,
is focusing on the Israeli market. OffRoad Capital, based in San Francisco,
California, is an online market focused on later-stage private companies. These
firms generally are at earlier stages of development and do not have a national
presence.
We also face competition from incubator firms, such as Internet Capital
Group, divine interVentures, Bill Gross' IdeaLab!, and eCompanies. These
companies offer an alternative source of capital and provide startups with
office space, equipment, professional services, and strategic guidance. However,
these firms generally expect to receive a controlling interest in their
portfolio companies, usually more than 25% of the portfolio company's voting
power, while we do not.
We also face competition from early-stage venture capital firms. In
addition, companies who have not traditionally provided investment banking
services, including commercial banks and providers of online financial services,
may elect to enter into our industry, particularly if we or our existing
competitors are successful.
Many companies that have relationships with startups, such as commercial
banks, management consulting firms and accounting firms, could create services
that compete against Garage.com. Established professional service and financial
firms could leverage their existing and future relationships with startups,
expertise, and established reputations to quickly enter our market.
If we are unable to compete effectively with these competitors, the demand
for, or prices of, our services and the quality of the companies applying to us
for assistance may be reduced. Many of our competitors have longer operating
histories and significantly greater financial, technical, and marketing
resources than us. In addition, many of these competitors offer a wider range of
services and financial products than Garage.com. Many current and potential
competitors also have greater name recognition and more extensive customer bases
that could be leveraged to accelerate their competitive activity. Moreover,
current and potential competitors have established and may establish future
cooperative relationships among themselves and with third parties to enhance
their products and services in this space. Consequently, new competitors or
alliances may emerge and rapidly acquire significant market share.
REGULATION
We are engaged in the business of arranging financings for our client
companies and presenting investment opportunities to our client investors. We
charge fees for our services that are contingent on the success of these
transactions and the amount of funds raised. As a result of these activities we
must register as a broker-dealer.
Regulation of the Securities Industry and Broker-Dealers. Our business is
subject to regulation applicable to the securities industry in the United States
and elsewhere. As a matter of public policy, regulatory bodies in the United
States and rest of the world are charged with
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safeguarding the integrity of the securities and other financial markets and
with protecting the interests of customers participating in those markets. In
the United States, the SEC is the federal agency responsible for the
administration of the federal securities laws. We are registered as a
broker-dealer with the SEC and in 50 states, the District of Columbia, and
Puerto Rico. We are also a member of the NASD, a self regulatory body to which
all broker-dealers belong. The SEC, self-regulatory organizations, and state
securities commissions may conduct administrative proceedings which can result
in censure, fine, the issuance of cease-and-desist orders, or the suspension or
expulsion of a broker-dealer, its officers, or employees. The SEC and self-
regulatory organization rules cover many aspects of a broker-dealer's business,
including capital structure and withdrawals, sales methods, trade practices
among broker-dealers, use, and safekeeping of customers' funds and securities,
record-keeping, the financing of customers' purchases, broker-dealer and
employee registration, and the conduct of directors, officers, and employees.
Effect of Net Capital Requirements. As a registered broker-dealer and
member of the NASD, we are subject to the Uniform Net Capital Rule under the
Exchange Act. The Uniform Net Capital Rule specifies the minimum level of net
capital a broker-dealer must maintain and also requires that a minimum amount of
its assets be kept in relatively liquid form. As of December 31, 1999, our
broker-dealer subsidiary was required to maintain minimum net capital of
$100,000 and had total net capital of approximately $2.2 million.
The SEC and the NASD impose rules that require notification when net
capital falls below certain predefined criteria, dictate the ratio of debt to
equity in the regulatory capital composition of a broker-dealer, and constrain
the ability of a broker-dealer to expand its business under certain
circumstances. Additionally, the Uniform Net Capital Rule and NASD rules impose
certain requirements that prohibit a broker-dealer from distributing or
withdrawing capital and require prior notice to the SEC and the NASD for certain
withdrawals of capital. Because our principal asset will be the ownership of
stock in our broker-dealer subsidiary, these rules governing net capital and
restrictions on withdrawals of funds could prevent us from meeting our financial
obligations on a timely basis.
Application of Securities Act and Exchange Act to Internet Business. The
Securities Act governs the offer and sale of securities. The Exchange Act
governs, among other things, the operation of the securities markets and
broker-dealers. When enacted, the Securities Act and the Exchange Act did not
contemplate the conduct of a securities business through the Internet. Although
the SEC, in releases and no-action letters, has provided guidance on various
issues related to the offer and sale of securities and the conduct of a
securities business through the Internet, the application of the laws to the
conduct of a securities business through the Internet continues to evolve.
Uncertainty regarding these issues may adversely affect the viability and
profitability of our business.
Foreign Securities Authorities. We recently opened our first offices
outside the United States in Israel and the United Kingdom. These businesses are
subject to foreign laws and the rules and regulations of foreign governmental
and regulatory authorities. These may include laws, rules, and regulations
relating to any aspect of the securities business, including sales methods,
trade practices among broker-dealers, use and safekeeping of customers' funds
and securities, capital structure, record-keeping, the financing of customers'
purchases, broker-dealer and employee registration requirements, and the conduct
of directors, officers, and employees.
Changes in Existing Laws and Rules. Additional legislation or regulation,
changes in existing laws and rules or changes in the interpretation or
enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect our mode of operation and our profitability.
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EMPLOYEES
At December 31, 1999, we employed 30 people full-time, including seven in
management, operations, and human capital; four in marketing; four in
information technology; and 15 in business development. We consider our employee
relations to be good.
Our future success depends in significant part on our ability to retain our
key technical, sales, and senior management, none of whom are bound by an
employment agreement. Competition for highly qualified technical, sales, and
management personnel is intense, particularly in Silicon Valley, where our
headquarters is located. At times we have experienced difficulty in attracting
new personnel.
FACILITIES
Our corporate offices are located in Palo Alto, California, where we
currently lease approximately 7,500 square feet under a lease that expires in
March 2002. We also have regional offices in the United States in Seattle,
Washington; Boston, Massachusetts; and Austin, Texas as well as international
offices in Israel and the United Kingdom. Rent expense for our headquarters and
branch offices totals approximately $50,000 per month.
We will need to obtain approximately 7,500 square feet of additional office
space for our headquarters in Palo Alto, California. Suitable office space in
Silicon Valley is in short supply and may be twice as expensive per square foot
as our current space. We cannot assure you that we will be able to obtain
additional office space on acceptable terms.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GARAGE.COM
- ---- --- ------------------------
<S> <C> <C>
Guy T. Kawasaki........................... 45 Chairman of the Board, Chief Executive
Officer and Director
William M. Reichert....................... 44 President and Director
Mary Ann Cusenza.......................... 43 Vice President of Finance and Chief
Financial Officer
William W. Joos........................... 53 Vice President of Business Development
William J. Mayall......................... 44 Vice President of Engineering
Thomas A. Bevilacqua(2)................... 43 Director
John C. Dean(1)........................... 53 Director
Joseph A. Grundfest(1).................... 48 Director
Jos C. Henkens(2)......................... 47 Director
Craig W. Johnson(2)....................... 53 Director
Richard P. Karlgaard(1)................... 45 Director
Chong-Moon Lee(1)......................... 71 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
GUY T. KAWASAKI has served as our Chairman of the Board, Chief Executive
Officer and a director since our founding in October 1997. Mr. Kawasaki also is
a columnist for Forbes Magazine and the author of seven books including Rules
for Revolutionaries and How to Drive Your Competition Crazy. From July 1995 to
January 1998, Mr. Kawasaki held a variety of positions at Apple Computer, Inc.,
including Chief Evangelist and Apple Fellow. Prior to joining Apple, Mr.
Kawasaki was the chief executive officer of Fog City Software, Inc. from June
1994 to July 1995. Mr. Kawasaki earned a B.A. from Stanford University and an
M.B.A. from the University of California, Los Angeles.
WILLIAM M. REICHERT has served as our President and a director since March
1998, and as the Chief Executive Officer of Garage.com Securities, Inc. since
April 1998. Mr. Reichert also served as our Chief Financial Officer from March
1998 to July 1999. Prior to joining us, Mr. Reichert served as Vice President
and Chief Financial Officer of Academic Systems Corp., an educational software
company, which he co-founded in February 1992. Mr. Reichert earned a B.A. from
Harvard College and an M.B.A. from Stanford Business School.
MARY ANN CUSENZA has served as our Vice President of Finance and Chief
Financial Officer since July 1999. From April 1998 to July 1999, Ms. Cusenza was
a private business consultant. From October 1996 to April 1998, Ms. Cusenza
served as Vice President, Chief Financial Officer for Tularik Inc., a
biotechnology company. Prior to joining Tularik Inc., Ms. Cusenza was employed
by Apple Computer, Inc. from May 1985 to February 1996, most recently as Vice
President and Treasurer. Ms. Cusenza also is a trustee of four mutual funds
managed by the Phoenix-Seneca Trust. Ms. Cusenza earned a B.S. from Santa Clara
University and an M.B.A. from the Walter A. Haas School of Business at the
University of California, Berkeley.
WILLIAM W. JOOS has served as our Vice President of Business Development
since our founding in October 1997. From August 1997 to October 1997 and from
July 1994 to November 1996, Mr. Joos was a private marketing consultant. Mr.
Joos was Vice President, Sales of
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Santeler Marketing Group, an event marketing company, from December 1996 to July
1997. Mr. Joos earned a B.S. from Jamestown College.
WILLIAM J. MAYALL has served as our Vice President of Engineering since our
founding in October 1997. Mr. Mayall has served as the President of Fog City
Software, Inc. since January 1995. Mr. Mayall is the brother-in-law of Jos C.
Henkens.
THOMAS A. BEVILACQUA has served as a director since August 1999. Mr.
Bevilacqua has served as Executive Vice President Corporate Development and
Strategic Investments Officer of E*TRADE Group, Inc. since March 1999, an online
brokerage. Prior to joining E*TRADE, Mr. Bevilacqua was a partner of Brobeck,
Phleger & Harrison LLP, a private law firm, from November 1991 to March 1999.
Mr. Bevilacqua is a director of Schuler Homes Inc. Mr. Bevilacqua earned a B.S.
in Business Administration and a J.D. from Boalt Hall at the University of
California. Mr. Bevilacqua was elected to our board of directors as a
representative of our Series C preferred stockholders. Upon the closing of this
offering, the outstanding shares of preferred stock will convert into shares of
common stock and the holders of the Series C preferred stock will no longer have
the right to appoint any directors.
JOHN C. DEAN has served as a director since our founding in October 1997.
Mr. Dean has been Chairman of Silicon Valley Bank, a bank holding company, and
President and Chief Executive Officer of Silicon Valley Bancshares since April
1993. Mr. Dean is a director of Silicon Valley Bancshares. Mr. Dean earned a
B.A. from Holy Cross College and a M.B.A. from the Wharton School at the
University of Pennsylvania.
JOSEPH A. GRUNDFEST has served as a director since our founding in October
1997. Mr. Grundfest joined the Stanford Law School faculty in January 1990 and
currently is the William A. Franke Professor of Law and Business. Prior to
joining the Stanford faculty, Mr. Grundfest served from November 1985 to January
1990 as a Commissioner of the United States Securities and Exchange Commission.
Mr. Grundfest is also a co-founder and director of Financial Engines, Inc., an
online investment advisor. Mr. Grundfest earned a B.A. from Yale College, a J.D.
from Stanford Law School, and completed all requirements for a doctorate in
economics from Stanford University but for the dissertation.
JOS C. HENKENS has served as a director since February 1998. Mr. Henkens
has been a general partner of Advanced Technology Ventures, a venture capital
firm since January 1983. Mr. Henkens is a director of Actel Corporation,
Credence Systems Corporation, and Seagull Business Software B.V. Mr. Henkens
earned an M.B.A. and an M.S. from Stanford University and a B.S. and an M.S.
from the University of Leyden, The Netherlands. Mr. Henkens is the brother-
in-law of William J. Mayall.
CRAIG W. JOHNSON has served as a director since our founding in October
1997. Mr. Johnson has been Chairman of Venture Law Group, a private law firm,
since 1993. Mr. Johnson previously was a partner of Wilson Sonsini Goodrich &
Rosati, a private law firm. Mr. Johnson is a director of Cohesion Technologies,
Inc., a medical products company, and a co-founder of Financial Engines, Inc.,
an online investment advisor. Mr. Johnson earned a B.A. from Yale College and a
J.D. from Stanford Law School.
RICHARD P. KARLGAARD has served as a director since our founding in October
1997. Mr. Karlgaard has served as publisher of Forbes magazine since July 1998.
Prior to joining Forbes magazine, Mr. Karlgaard founded and was the Editor of
Forbes ASAP from July 1992 to July 1998. Mr. Karlgaard earned a B.A. from
Stanford University.
CHONG-MOON LEE has served as a director since August 1998. Mr. Lee is
Chairman Emeritus and previously was President and Chief Executive Officer of
Diamond Multimedia Systems and its predecessor companies, a computer component
manufacturer, which he founded in 1973. Mr. Lee earned an M.B.A. equivalent from
Korea University in Seoul, Korea, a M.S. from Vanderbilt University and a L.L.B.
from Chung Ang University, in Seoul, Korea.
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BOARD OF DIRECTORS
Our board of directors consists of nine members. Upon the completion of the
offering, the terms of office of the board of directors will be divided into
three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 2001; Class II, whose term will expire at the annual
meeting of stockholders to be held in 2002; and Class III, whose term will
expire at the annual meeting of stockholders to be held in 2003. The Class I
directors are Messrs. Dean, Henkens, and Karlgaard. The Class II directors are
Messrs. Johnson, Lee, and Reichert. The Class III directors are Messrs.
Bevilacqua, Grundfest, and Kawasaki. At each annual meeting of stockholders
after the initial classification, the successors to directors whose term expires
will be elected to serve a term of three years. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the total number of directors. This classification of directors may
have the effect of delaying or preventing changes in control of Garage.com.
Executive officers are elected by the board of directors annually. There
are no family relationships among any of the directors, officers or key
executives of Garage.com, except Jos Henkens is the brother-in-law of William
Mayall.
BOARD COMMITTEES
Audit Committee. Garage.com has established an audit committee of which
Messrs. Dean, Grundfest, Lee, and Karlgaard are members. The audit committee
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent auditors. The audit committee must consist
entirely of independent directors who are able to read and understand financial
statements or become able to do so within a reasonable period of time after
their appointment to the audit committee. At least one member of the audit
committee must have past employment experience in finance or accounting,
requisite professional certification in accounting, or comparable experience or
background.
Compensation Committee. Garage.com has established a compensation committee
of which Messrs. Bevilacqua, Henkens and Johnson are members. The compensation
committee reviews and recommends to the board of directors the compensation and
benefits of all of our officers and establishes and reviews general policies
relating to compensation and benefits of our other employees. The compensation
committee must consist entirely of persons who are not employees of Garage.com.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
William M. Reichert, our President and a director, was a member of our
compensation committee from June 1999 to January 2000. Jos C. Henkens currently
serves on our compensation committee and currently serves on the compensation
committee of Actel Corp. and Seagull Business Software B.V. Until February 2000
Mr. Henkens served on the compensation committee of Credence Systems Corp.
Currently, none of our executive officers serves on our compensation
committee. None of our directors serves on the compensation committee of any
other company that has an executive officer who serves on our compensation
committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for their
service as directors, except for reimbursement for reasonable travel expenses in
connection with attendance at board and committee meetings. After this offering
is completed, each of our non-employee directors will receive an option to
purchase 20,000 shares of common stock pursuant to the automatic option grant
program in effect under the 2000 director option plan with an exercise price per
share equal to the initial public offering price. See "-- Incentive Plans" for
more information about the automatic grant program.
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our chief executive
officer and each of our other most highly compensated executive officers who
were paid more than $100,000 during the fiscal year ended December 31, 1999 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------- LONG-TERM
OTHER ANNUAL AND OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS COMPENSATION(1) COMPENSATION
--------------------------- --------- ----- --------------- ------------
<S> <C> <C> <C> <C>
Guy T. Kawasaki............................... $227,198 -- $3,242 --
Chairman of the Board and
Chief Executive Officer
William M. Reichert........................... 202,771 -- 1,556 --
President
William W. Joos............................... 182,909 -- 1,700 --
Vice President of Business Development
William J. Mayall............................. 177,709 -- 1,700 --
Vice President of Engineering
</TABLE>
(1) Other Annual Compensation consists of the difference between market interest
and actual interest on loans we made to these executives.
CHANGE-OF-CONTROL AGREEMENTS
We have agreed to enter into change-of-control agreements with each of our
executive officers pursuant to which the vesting of these officers' stock
options and restricted stock will accelerate in certain circumstances following
a change-of-control of Garage.com. These agreements will provide that such
acceleration will occur if the executive is involuntarily terminated following a
change-of-control. The agreements will further provide for accelerated vesting
of 50% of such officers' then unvested stock options or restricted stock. If,
however, termination occurs during the first year of an option grant, the
options that would have vested during the first year of the option will
accelerate. An involuntary termination will be deemed to have occurred if (1)
the executive is terminated without cause, (2) the executive's compensation,
benefits or responsibilities are materially reduced, or (3) if Garage.com moves
its corporate headquarters more than 50 miles from its current location.
INCENTIVE PLANS
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 employee stock purchase plan was adopted by our board of directors
in February 2000 and will become effective upon the closing of this offering. We
have reserved a total of 1,000,000 shares of common stock for issuance under the
2000 employee stock purchase plan, together with an annual increase in the
number of shares reserved thereunder beginning on January 1, 2001 in an amount
equal to the lesser of:
- 750,000 shares;
- two percent of our outstanding common stock on the first day of our
fiscal year; or
- an amount determined by our board of directors.
As a result of these annual increases, a maximum of 6,750,000 additional shares
could be sold over the remaining nine year life of the employee stock purchase
plan. Our employee stock purchase plan is administered by our board of directors
and is intended to qualify under Section 423 of the Internal Revenue Code. Our
employees, including our officers and employee directors, but excluding our five
percent or greater stockholders or those who would become five percent
stockholders upon execution of a grant, are eligible to participate if they are
customarily
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<PAGE> 52
employed for at least 20 hours per week and for more than five months in any
calendar year. In addition, no employee shall be granted an option under the
plan to the extent that his or her rights to purchase stock under the plan
exceed $25,000 worth of stock for each calendar year in which such option is
outstanding at any time. Our employee stock purchase plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed the lesser of 15% of an employee's compensation.
Our employee stock purchase plan will be implemented in a series of
overlapping twelve month offering periods, and each offering period consists of
two six month purchase periods. The initial offering period under our employee
stock purchase plan will begin on the effective date of this offering, and the
subsequent offering periods will begin on the first trading day on or after May
15 and November 15 of each year. Each participant will be granted an option on
the first day of the offering period and the option will be automatically
exercised on the date six months later, the end of a purchase period, throughout
the offering period. If the fair market value of our common stock on any
purchase date is lower than such fair market value on the start date of that
offering period, then all participants in that offering period will be withdrawn
from such offering period after the exercise of their option and automatically
re-enrolled in the immediately following offering period. The purchase price of
our common stock under our employee stock purchase plan will be 85% of the
lesser of the fair market value per share on the start date of the offering
period or at the end of the purchase period. Employees may end their
participation in an offering period at any time, and their participation ends
automatically on termination of employment with our company.
Our employee stock purchase plan will terminate in January 2010, unless our
board of directors terminates it sooner.
1999 STOCK PLAN
Our 1999 stock plan was adopted by our board of directors in May 1999 and
approved by our stockholders in July 1999. The stock plan was amended in
November 1999 and February 2000. A total of 5,000,000 shares of common stock
have been reserved for issuance under our stock plan, together with an annual
increase in the number of shares reserved for issuance under the plan beginning
on January 1, 2001, in an amount equal to the lesser of:
- 2,000,000 shares;
- five percent of our outstanding shares of common stock on the first day
of our fiscal year; or
- an amount determined by our board of directors.
As a result of these annual increases, a maximum of 18,000,000 additional shares
could be issued over the remaining nine year life of the 1999 stock plan.
The 1999 stock plan provides for grants of incentive stock options to our
employees including officers and employee directors and nonstatutory stock
options to our consultants and non-employee directors. The purposes of our stock
plan are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to our employees and
consultants, and to promote the success of our business. At the request of the
board of directors, the compensation committee administers our stock plan and
determines the optionees and the terms of options granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof.
The term of the options granted under the 1999 stock plan is stated in each
option agreement. However, the term of an incentive stock option may not exceed
ten years and, in the case of an option granted to an optionee who owns more
than ten percent of our outstanding
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<PAGE> 53
stock at the time of grant, the term of an option may not exceed five years.
Options granted under the 1999 stock plan vest and become exercisable as set
forth in each option agreement.
With respect to any optionee who owns more than ten percent of our
outstanding stock, the exercise price of any stock option granted must be at
least 110% of the fair market value on the grant date.
Any incentive stock options granted to an optionee, which, when combined
with all other incentive stock options becoming exercisable in any calendar year
that are held by that person, would have an aggregate fair market value in
excess of $100,000, will be treated as nonstatutory stock options. In any fiscal
year, we may not grant any employee, director, or consultant options to purchase
more than 1,500,000 shares, exclusive of 1,500,000 shares which may be granted
in the case of an employee's initial employment. The 1999 stock plan will
terminate in May 2009, unless our board of directors terminates it sooner.
As of February 10, 2000, we had issued 1,906,000 shares of common stock
upon the exercise of options granted under our stock plan, we had outstanding
options to purchase 659,741 shares of common stock at a weighted average
exercise price of $6.04 per share and 1,434,259 shares remain available for
future option grants under our stock option plan. In addition, we have reserved
1,000,000 additional shares for grant, effective upon the closing of our initial
public offering.
2000 DIRECTOR OPTION PLAN
Our 2000 director option plan will become effective upon the closing of
this offering. We have reserved a total of 250,000 shares of common stock for
issuance under the 2000 director option plan, together with an annual increase
in the number of shares reserved for issuance under the plan beginning on
January 1, 2001 equal to the lesser of:
- 100,000 shares;
- one percent of the outstanding shares of our common stock on the first
day of our fiscal year; or
- an amount determined by our board of directors.
As a result of these annual increases, a maximum of 900,000 additional shares
could be issued over the remaining nine year life of the 2000 director option
plan.
The option grants under the 2000 director option plan are automatic and
non-discretionary. The exercise price of the options is 100% of the fair market
value of our common stock on the grant date.
The 2000 director option plan provides for an initial grant to a
non-employee director of an option to purchase 20,000 shares of common stock.
Subsequent to the initial grants, each non-employee director will be granted an
option to purchase 5,000 shares of common stock on January 1 of each year if the
director has served on the board of directors for at least the preceding six
months.
The term of the options granted under the 2000 director plan is ten years,
but the options expire three months following the termination of the optionee's
status as a director or twelve months following termination if the termination
is due to death or disability. Options granted under the 2000 director plan will
become exercisable at a rate of 1/48th of the shares per month.
401(k) PLAN
In 1999, we adopted a Retirement Savings and Investment Plan, the 401(k)
Plan, covering our full-time employees located in the United States. The 401(k)
Plan is intended to qualify under Section 401(k) of the Internal Revenue Code,
so that contributions to the 401(k) Plan by
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<PAGE> 54
employees or by us and the investment earnings thereon are not taxable to the
employees until withdrawn. If our 401(k) Plan qualifies under Section 401(k) of
the Internal Revenue Code, our contributions will be deductible by us when made.
Our employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit of $10,000 in 1999 and to have those funds
contributed to the 401(k) Plan. The 401(k) Plan permits us, but does not require
us, to make additional matching contributions on behalf of all participants.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of our directors and
executive officers to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
- any breach of their duty of loyalty to our company or our stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- any transaction from which the director derived an improper personal
benefit.
The limits on a director or officer's liability in our certificate of
incorporation do not apply to liabilities arising under the federal securities
laws and do not affect the availability of equitable remedies such as injunctive
relief or rescission.
Our certificate of incorporation together with our bylaws provide that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee, or other agent
for any liability arising out of his or her actions in that capacity, regardless
of whether our bylaws would otherwise permit indemnification. We believe that
the indemnification provisions of our certificate of incorporation and bylaws
are necessary to attract and retain qualified persons as directors and officers.
We also maintain directors' and officers' liability insurance.
We entered into agreements to indemnify our directors, executive officers
and other employees as determined by the board of directors. These agreements
provide for indemnification for related expenses including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as our directors and executive
officers.
At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of our company where
indemnification will be required or permitted. Nor are we aware of any
threatened litigation or proceeding that might result in a claim for
indemnification.
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RELATED PARTY TRANSACTIONS
All future transactions, other than compensation, stock options pursuant to
our incentive plans and other benefits available to employees generally,
including any loans from us to our officers, directors, principal stockholders,
or affiliates, will be approved by a majority of our board of directors,
including a majority of our independent and disinterested members of our board
of directors. If required by law, all such future transactions will be approved
by a majority of the disinterested stockholders. These future transactions will
be on terms no less favorable to us than we could obtain from unaffiliated third
parties.
STOCK ISSUANCES TO OUR DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS
Between October 31, 1997 and March 23, 1998, we sold 8,300,000 shares of
our common stock to Joseph Grundfest, Craig Johnson, William Joos, Richard
Karlgaard, Guy Kawasaki, William Mayall, William Reichert, Silicon Valley
Bancshares and VLG Investments 1997 for an aggregate purchase price of $10,000.
Between March 11, 1998 and September 30, 1998, we sold 1,500,000 shares of
our Series A preferred stock to two funds affiliated with Advanced Technology
Ventures and to Silicon Valley Bancshares for an aggregate purchase price of
$500,025.
Between March 11, 1998 and September 30, 1998, we sold 3,000,000 shares of
our Series B preferred stock to two funds affiliated with Advanced Technology
Ventures and to Chong-Moon Lee for an aggregate purchase price of $1,500,000.
Between August 27, 1999 and November 24, 1999, we sold 2,734,000 shares of
our Series C preferred stock to three funds affiliated with Advanced Technology
Ventures, and to E*TRADE Group, Inc., Joseph Grundfest, Craig Johnson and
Chong-Moon Lee for an aggregate purchase price of $6,835,000.
In December 1999 and January 2000, we sold 329,380 shares of our Series D
preferred stock to three funds affiliated with Advanced Technology Ventures, and
to Chong-Moon Lee, Guy Kawasaki, E*TRADE Group, Inc., VLG Investments 1997, Mary
Ann Cusenza, Silicon Valley Bancshares, Joseph Grundfest, Craig Johnson, William
Joos, Richard Karlgaard, William Mayall and William Reichert in exchange for
their units of Garage.com Startups, LLC. The aggregate value of these shares was
$1,648,481.
On February 8, 2000, we sold 388,888 shares of our Series E preferred stock
to funds affiliated with Advanced Technology Ventures and to E*TRADE Group for
an aggregate purchase price of $3,499,992.
The foregoing transactions are summarized in the table below. Upon the
closing of this offering, each outstanding share of preferred stock will
automatically convert into one share of common stock.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
COMMON PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED AGGREGATE AGGREGATE
STOCKHOLDER STOCK STOCK STOCK STOCK STOCK STOCK CONSIDERATION VALUE
- ----------- --------- --------- --------- --------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jos C. Henkens and funds
affiliated with Advanced
Technology Ventures..... -- 750,000 1,000,000 1,004,000 50,711 216,666 $5,463,805 $39,277,901
Chong-Moon Lee............ -- -- 2,000,000 100,000 47,185 -- 1,486,151 27,913,405
Craig W. Johnson and VLG
Investments 1997........ 2,000,000 -- -- 10,000 46,835 -- 260,400 26,738,855
Guy T. Kawasaki........... 2,000,000 -- -- -- 46,795 -- 235,200 26,608,335
Thomas Bevilacqua and
E*TRADE Group, Inc. .... -- -- -- 1,600,000 15,630 172,222 5,628,223 23,242,076
John C. Dean and Silicon
Valley Bancshares....... 150,000 750,000 -- -- 21,058 -- 356,154 11,973,754
Joseph A. Grundfest....... 150,000 -- -- 20,000 3,666 -- 69,098 2,257,658
</TABLE>
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<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
COMMON PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED AGGREGATE AGGREGATE
STOCKHOLDER STOCK STOCK STOCK STOCK STOCK STOCK CONSIDERATION VALUE
- ----------- --------- --------- --------- --------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William W. Joos........... 1,000,000 -- -- -- 23,398 -- $ 117,602 $13,304,174
Richard P. Karlgaard...... 1,000,000 -- -- -- 23,398 -- 117,602 13,304,174
William J. Mayall......... 1,000,000 -- -- -- 23,398 -- 117,602 13,304,174
William M. Reichert....... 1,000,000 -- -- -- 23,398 -- 122,102 13,304,174
Mary Ann Cusenza.......... -- -- -- -- 3,908 -- 19,559 50,804
</TABLE>
The amounts under Aggregate Value are determined by multiplying the total
number of shares owned by an assumed public offering price of $13.00.
OPTION GRANTS AND LOANS TO EXECUTIVE OFFICERS
In July 1999, we granted an option to Mary Ann Cusenza, our Vice President
of Finance and Chief Financial Officer, to purchase 334,000 shares of common
stock at an exercise price of $0.50 per share. This option vests monthly over
four years. On December 14, 1999, we loaned Ms. Cusenza $167,000 to fund the
exercise price of the options. Ms. Cusenza agreed to pay the principal amount of
the loan with interest at an annual rate of 6.11% on July 31, 2003. The loan was
secured by 334,000 shares of our common stock.
In February 2000, we granted options to the executive officers set forth
below. These options vest over four years, with the first 25% vesting on the
first anniversary of grant and the remainder vesting monthly thereafter. These
options have an exercise price of $7.00 per share.
<TABLE>
<CAPTION>
NAME SHARES
---- -------
<S> <C>
Guy T. Kawasaki................................... 5,000
William M. Reichert............................... 2,500
Mary Ann Cusenza.................................. 102,500
William W. Joos................................... 2,500
William J. Mayall................................. 2,500
</TABLE>
SPONSORSHIP AGREEMENTS
We have entered into sponsorship agreements with each of Venture Law Group,
Silicon Valley Bank and Advanced Technology Ventures. Craig Johnson, one of our
directors, is a member of Venture Law Group. John Dean, one of our directors, is
chairman and chief executive officer of Silicon Valley Bank. Jos Henkens, one of
our directors, is a general partner of Advanced Technology Ventures. These
sponsorship agreements include the following provisions:
- Exclusivity: We have agreed not to have more than one "founding sponsor"
in the sponsor's industry. A "founding sponsor" is the most
prominently-mentioned sponsor in the sponsor's industry or profession on
our website. However, we can mention other sponsors on our website.
- Right of First Refusal: If we decide to have another "founding sponsor"
in the same industry as an existing sponsor, we must give the existing
sponsor an opportunity to match the prospective sponsor's offer. If the
existing sponsor matches the prospective sponsor's offer, then we may not
accept the prospective sponsor.
- Co-Marketing: We and each of our sponsors will promote each other's
website and services and to use each other's name and logo in specified
circumstances.
- Notice of Investment Opportunities: We have agreed to give advance
notice -- generally three business days -- of investment opportunities to
our sponsors prior to their posting on our website.
- Silicon Valley Bank: We have agreed to give Silicon Valley Bank 25
transferable one-year passes to our website each year. Each pass provides
full access to and use of the
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restricted portion of our website for angel, corporate and venture
capital investors for use by qualified persons designated by Silicon
Valley Bank. Collectively, these passes have a market value of
approximately $12,000. In exchange, Silicon Valley Bank agreed to provide
our clients with a 30-day pass. Each pass provides full access to and use
of Silicon Valley Bank's restricted portion of its website.
- Fees: We do not charge Venture Law Group a separate sponsorship fee
because of its role in setting up our legal entities, arranging for other
initial sponsors and providing uncompensated legal services to us in the
past. These services include refining our business plan and introducing
us to business contacts. We also do not charge Advanced Technology
Ventures a separate sponsorship fee because of the importance of its role
as the lead investor in our initial financing. Silicon Valley Bank agreed
to pay us a sponsorship fee of $25,000 every six months. We do not
recognize revenue related to these barter transactions as they do not
meet the criteria under our revenue recognition policy.
- Term: The term of each sponsorship agreement is three years, but each
agreement is automatically renewable for a period of one year unless we
or a sponsor give prior written notice of termination.
STARTUPS.COM
We subleased office space to Startups.com, one of our client companies,
from September 1999 to January 2000. Startups.com paid us a total of $33,579 in
rent, which was the same rent we paid for this space. In July 1999, we arranged
$2.4 million in financing for Startups.com for which we received $97,000 and the
right to purchase 300,000 shares of Startups.com's stock as compensation for our
services. We believe that the terms of this relationship were no less favorable
than we could have received from an unaffiliated third party.
We have a sponsorship agreement with Startups.com. Under this agreement,
Startups.com agreed that we will be the most prominently-mentioned sponsor on
the Startups.com website engaged in the business of venture capital financing,
except Startups.com can feature another venture financing firm on its website if
such firm pays a sponsorship fee of at least $50,000 annually. In addition, we
and Startups.com agreed to promote each other's websites and services. Guy
Kawasaki, our Chairman of the Board and Chief Executive Officer, and Craig
Johnson, one of our directors, are directors of Startups.com. Mr. Johnson and
VLG Investments 1999 own approximately 598,000 shares of Startups.com stock.
Messrs. Kawasaki and Johnson do not hold their positions as directors of
Startups.com as a result of any arrangement between Garage.com and Startups.com.
WEBORDER
We arranged financing for WebOrder for which we received cash and equity as
compensation for our services. We believe that the terms of this relationship
were no less favorable than we could have received from an unaffiliated third
party. Guy Kawasaki, our Chairman of the Board and Chief Executive Officer, is a
director of WebOrder. Mr. Kawasaki owns approximately 10,000 shares of WebOrder
stock. Mr. Kawasaki does not hold his position as a director of WebOrder as a
result of any arrangement between Garage.com and WebOrder.
NETFREIGHT.COM
We arranged financing for NetFreight.com for which we received cash and
equity as compensation for our services. We believe that the terms of this
relationship were no less favorable than we could have received from an
unaffiliated third party. Craig Johnson, one of our directors, is a director of
NetFreight.com. Mr. Johnson and VLG Investments 1999 own approximately 270,000
shares of stock of NetFreight.com. Mr. Johnson does not hold his
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position as a director of NetFreight.com as a result of any arrangement between
Garage.com and NetFreight.com.
LOANS TO DIRECTORS, OFFICERS, AND SIGNIFICANT STOCKHOLDERS
We loaned $160,000 in 1999 to the following officers, directors, and
significant stockholders to fund the capital commitments of these persons to
Garage.com Startups, LLC.
<TABLE>
<S> <C>
Guy T. Kawasaki................................... $40,000
William M. Reichert............................... 20,000
William W. Joos................................... 20,000
William J. Mayall................................. 20,000
Craig W. Johnson.................................. 12,000
Richard P. Karlgaard.............................. 20,000
VLG Investments 1997.............................. 28,000
</TABLE>
Each such loan accrued interest at 4.6% annually and was evidenced by a
promissory note, which was secured by each person's interest in Garage.com
Startups, LLC. All of these loans have been repaid.
BOOTCAMP FOR STARTUPS SPONSORSHIPS
During 1999, we organized three Bootcamps for Startups conferences.
Advanced Technology Ventures, Forbes magazine, Silicon Valley Bank, and Venture
Law Group each sponsored one or more of these conferences. As founding sponsors
of Garage.com, Advanced Technology Ventures, Silicon Valley Bank, and Venture
Law Group are each entitled to preferential rates with respect to their
sponsorship of our conferences. Set forth below is the amount paid by each of
these firms and the amounts these firms would have paid if they were not
founding sponsors:
<TABLE>
<CAPTION>
ACTUALLY AMOUNT WOULD HAVE PAID
PAID IF NOT FOUNDING SPONSOR
-------- -----------------------
<S> <C> <C>
Advanced Technology Ventures........ $ 65,000 $ 85,000
Silicon Valley Bank................. 70,000 85,000
Venture Law Group................... 30,000 35,000
</TABLE>
Additionally, we received $130,000 of nonmonetary consideration from Forbes
magazine in exchange for event sponsorships. We recognized $130,000 in revenue
for this consideration based on amounts paid by unrelated parties for similar
sponsorships. Entities affiliated with Advanced Technology Ventures, Silicon
Valley Bank and Venture Law Group each own more than five percent of our capital
stock. In addition, Jos Henkens, one of our directors, is a general partner of
Advanced Technology Ventures. Richard Karlgaard, one of our directors, is
publisher of Forbes magazine. John Dean, one of our directors, is Chairman of
the Board of Silicon Valley Bank. Craig Johnson, one of our directors, is
Chairman of Venture Law Group.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of February 10, 2000 by:
- each person who is known by us to beneficially own more than 5% of our
common stock;
- each of our directors and Named Executive Officers; and
- all of our officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING(1)
SHARES -------------------------
BENEFICIALLY PRIOR TO THE AFTER THE
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ---------------- ------------ ------------ ---------
<S> <C> <C> <C>
Jos C. Henkens(2)....................................... 3,021,377 10.4% 9.3%
Funds affiliated with Advanced Technology Ventures
485 Ramona Street, Suite 200
Palo Alto, California 94301
Chong-Moon Lee.......................................... 2,147,185 7.4% 6.6%
c/o Garage.com
420 Florence Avenue
Palo Alto, California 94301
Craig W. Johnson(3)..................................... 2,056,835 7.1% 6.3%
VLG Investments 1997
2800 Sand Hill Road
Menlo Park, California 94025
Guy T. Kawasaki(4)...................................... 2,051,795 7.1% 6.3%
c/o Garage.com
420 Florence Avenue
Palo Alto, California 94301
Thomas A. Bevilacqua(5)................................. 1,787,852 6.2% 5.5%
E*TRADE Group, Inc
4500 Bohannon Drive
Menlo Park, California 94025
William J. Mayall(6).................................... 1,025,898 3.5% 3.2%
Richard P. Karlgaard(7)................................. 1,023,398 3.5% 3.1%
William M. Reichert(8).................................. 1,020,898 3.5% 3.1%
William W. Joos(9)...................................... 1,002,500 3.5% 3.1%
John C. Dean(10)........................................ 921,058 3.2% 2.8%
Silicon Valley Bancshares
Joseph A. Grundfest(11)................................. 173,666 * *
All executive officers and directors as a group (12
persons).............................................. 16,672,870 57.16% 51.19%
</TABLE>
- ---------------
* Less than 1%.
(1) Percentage of ownership is based on 29,056,129 shares outstanding as of
February 10, 2000 assuming conversion of the preferred stock, and
32,556,129 shares outstanding after this offering assuming no exercise of
the underwriters' over-allotment option. Beneficial ownership is calculated
based on SEC requirements. All shares of the common stock subject to
options currently exercisable or exercisable within 60 days after February
10, 2000 are deemed to be outstanding for the purpose of computing the
percentage of ownership of the person holding such options, but are not
deemed to be outstanding for
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computing the percentage of ownership of any other person. Unless otherwise
indicated below, each stockholder named in the table has sole voting and
investment power with respect to all shares beneficially owned, subject to
applicable community property laws.
(2) Consists of 1,791,944 shares owned by Advanced Technology Ventures V, LP,
1,203,610 shares owned by Advanced Technology Ventures IV, LP, and 25,823
shares of ATV Entrepreneurs Fund V, L.P., of which Mr. Henkens is a general
partner. Mr. Henkens disclaims beneficial ownership of these shares except
to the extent of his economic interest.
(3) Consists of 624,078 shares owned by Mr. Johnson and 1,432,757 shares owned
by VLG Investments 1997, of which Mr. Johnson is a partner. Mr. Johnson
disclaims beneficial ownership of these shares except to the extent of his
economic interest. 540,000 of the shares owned by Mr. Johnson are subject
to a right of repurchase in favor of Garage.com if Mr. Johnson ceases to
actively participate in the affairs of Garage.com. This repurchase right
lapses as to 1.875% of these shares each month from October 31, 1997.
1,260,000 of the shares owned by VLG Investments 1997 are subject to a
right of repurchase in favor of Garage.com if Mr. Johnson ceases to
actively participate in the affairs of Garage.com. This repurchase right
lapses as to 1.875% of the shares each month from January 7, 1998.
(4) Consists of 2,046,795 shares owned by The Kawasaki Family Trust U/D/T dated
June 15, 1994, of which Mr. Kawasaki is a trustee and 5,000 shares subject
to options exercisable within 60 days following February 10, 2000.
1,800,000 of these shares are subject to a right of repurchase in favor of
Garage.com if Mr. Kawasaki ceases to be a director, employee or consultant
to Garage.com. This repurchase right lapses as to 1.875% of these shares
each month from October 31, 1997.
(5) Consists of 1,787,852 shares owned by E*TRADE Group Inc., of which Mr.
Bevilacqua is Executive Vice President. Mr. Bevilacqua disclaims beneficial
ownership of these shares.
(6) Consists of 1,023,398 shares owned by the Mayall Family Trust, of which Mr.
Mayall is a trustee and 2,500 shares subject to options exercisable within
60 days following February 10, 2000. 900,000 of these shares are subject to
a right of repurchase in favor of Garage.com if Mr. Mayall ceases to serve
as an employee or consultant to Garage.com. This repurchase right lapses as
to 1.875% of these shares each month from October 31, 1997.
(7) Consists of 1,023,398 shares owned by Richard P. Karlgaard and Majorie V.
Karlgaard, as joint tenants. 900,000 of these shares are subject to a right
of repurchase in favor of Garage.com if Mr. Karlgaard ceases to be a
director or consultant to Garage.com. This repurchase right lapses as to
1.875% of these shares each month from October 31, 1997.
(8) Consists of 1,018,398 shares owned by Mr. Reichert and 2,500 shares subject
to options exercisable within 60 days following February 10, 2000. 995,000
of these shares are subject to a right of repurchase in favor of Garage.com
if Mr. Reichert ceases to serve as an employee or consultant to Garage.com.
This repurchase right lapses as to 1/48th of these shares each month from
March 23, 1998.
(9) Consists of 1,000,000 shares owned by The Joos Living Trust, dated April
25, 1996, of which Mr. Joos is a trustee and 2,500 shares subject to
options exercisable within 60 days following February 10, 2000. 900,000 of
these shares are subject to a right of repurchase in favor of Garage.com if
Mr. Joos ceases to serve as an employee or consultant to Garage.com. This
repurchase right lapses as to 1.875% of these shares each month from
October 31, 1997.
(10) Consists of 921,058 shares owned by Silicon Valley Bancshares, of which Mr.
Dean is Chief Executive Officer. Mr. Dean disclaims beneficial ownership of
these shares. 150,000
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<PAGE> 61
of these shares are subject to a right of repurchase in favor of Garage.com
if Mr. Dean ceases to be a director or consultant to Garage.com. Such
repurchase right lapses as to 25% of these shares on March 23, 1999 and
will lapse as to 1/48th of the shares each month through March 2002.
(11) Consists of 173,666 shares owned by Grundfest Living Trust U/T/A 8/25/97,
of which Mr. Grundfest is a trustee. 150,000 of these shares are subject to
a right of repurchase in favor of Garage.com if Mr. Grundfest ceases to
serve as a director or consultant to Garage.com. Such repurchase right
lapses as to 25% of the shares on March 23, 1999 and will lapse as to
2.083% of the shares per month through March 2002.
59
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of this offering, we will be authorized to issue
95,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
COMMON STOCK
As of February 10, 2000, we had 29,056,129 shares of common stock
outstanding held of record by approximately 166 stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared from time to time
by the board of directors out of funds legally available for that purpose. In
the event of our liquidation, dissolution, or winding up, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock then
outstanding. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. After the closing of this offering, there will
be no shares of preferred stock outstanding.
PREFERRED STOCK
Upon the closing of this offering, our board of directors will have the
authority, without action by our stockholders, to designate and issue preferred
stock in one or more series. The board of directors may also designate the
rights, preferences, and privileges of each series of preferred stock, any or
all of which may be superior to the rights of the common stock. It is not
possible to state the actual effect of the issuance of any shares of preferred
stock upon the rights of holders of the common stock until the board of
directors determines the specific rights of the holders of the preferred stock.
However, these effects might include:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; and
- delaying or preventing a change in control of our company without further
action by the stockholders.
We have no present plans to issue any shares of preferred stock.
ANTI-TAKEOVER EFFECTS OF SOME PROVISIONS OF DELAWARE LAW AND OUR CHARTER
DOCUMENTS
Provisions of Delaware law and our certificate of incorporation and bylaws,
which are summarized below, may have an anti-takeover effect and may delay,
defer or prevent a takeover attempt that a stockholder might consider in its
best interest, including those attempts that might result in our stockholders
receiving a premium for their shares.
DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. Section 203 generally prohibits a publicly held Delaware
corporation from engaging in a
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<PAGE> 63
"business combination" with an "interested stockholder" for a period of three
years following the date the person became an interested stockholder, unless:
- prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
- the stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes
of determining the number of shares outstanding (a) shares owned by
persons who are directors and also officers, and (b) shares owned by
employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or
- on or subsequent to the date of the transaction, the business combination
is approved by the board and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder.
A "business combination" generally includes a merger, asset, or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or more of a
corporation's outstanding voting securities. We expect the existence of this
provision to have an anti-takeover effect with respect to transactions our board
of directors does not approve in advance. We also anticipate that Section 203
may also discourage attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
CHARTER DOCUMENTS
Upon completion of this offering, our certificate of incorporation provides
for our board of directors to be divided into three classes serving staggered
terms. Approximately one-third of the board of directors will be elected each
year. The provision for a classified board could prevent a party who acquires
control of a majority of the outstanding voting stock from obtaining control of
the board of directors until the second annual stockholders meeting following
the date the acquirer obtains the controlling stock interest. The classified
board provision could discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of our company and could increase the
likelihood that incumbent directors will retain their positions. Our certificate
of incorporation provides that directors may be removed:
- with cause by the affirmative vote of the holders of at least a majority
of the outstanding shares of voting stock; or
- without cause by the affirmative vote of the holders of at least 66 2/3%
of the then-outstanding shares of the voting stock.
Our bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors. At an annual
meeting, stockholders may only consider proposals or nominations specified in
the notice of meeting or brought before the meeting by or at the direction of
the board of directors. Stockholders may also consider a proposal or nomination
by a person who was a stockholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has given to our Secretary timely
written notice, in proper form, of his or her intention to bring that business
before the meeting. The bylaws do not give the board of directors the power to
approve or disapprove stockholder nominations of candidates or proposals
regarding other business to be conducted at a special or annual meeting of the
stockholders. However, our bylaws may have the effect of precluding the conduct
of that
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<PAGE> 64
item of business at a meeting if the proper procedures are not followed. These
provisions may also discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect the acquirer's own slate of directors or
otherwise attempting to obtain control of our company.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the certificate
of incorporation or the bylaws. The following persons are authorized to call a
special meeting of stockholders:
- a majority of our board of directors;
- the chairman of the board;
- the chief executive officer; or
- 50% of our stockholders entitled to vote at the special meeting.
The limitation on the right of our stockholders to call a special meeting will
make it more difficult for a stockholder to force stockholder consideration of a
proposal over the opposition of the board of directors by calling a special
meeting of stockholders. The restriction on the ability of stockholders to call
a special meeting also will make it more difficult to replace the board until
the next annual meeting.
Although Delaware law provides that stockholders may execute an action by
written consent in lieu of a stockholder meeting, it also allows us to eliminate
stockholder actions by written consent. Elimination of written consents of
stockholders may lengthen the amount of time required to take stockholder
actions since actions by written consent are not subject to the minimum notice
requirement of a stockholder's meeting. However, we believe that the elimination
of stockholders' written consents may deter hostile takeover attempts. Without
the availability of stockholder's actions by written consent, a holder
controlling a majority of our capital stock would not be able to amend our
bylaws or remove directors without holding a stockholders meeting. The holder
would have to obtain the consent of a majority of the board of directors, the
chairman of the board or the chief executive officer to call a stockholders'
meeting and satisfy the notice periods determined by the board of directors. Our
certificate of incorporation provides for the elimination of actions by written
consent of stockholders upon the closing of this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC. The transfer agent's address and telephone number is
235 Montgomery Street, 23rd Floor, San Francisco, California 94104 and (415)
743-1423.
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 32,556,129 shares of common
stock outstanding assuming no exercise of the underwriters' over-allotment
option. Of this amount, the 3,500,000 shares of common stock offered by this
prospectus will be available for immediate sale in the public market as of the
date of this prospectus. Approximately 3,500,000 shares of common stock will be
available for sale in the public market following the expiration of 180-day
lock-up agreements with the representatives of our underwriters, subject in some
cases to compliance with the volume and other limitations of Rule 144.
<TABLE>
<CAPTION>
DAYS AFTER DATE OF SHARES ELIGIBLE
THIS PROSPECTUS FOR SALE COMMENT
- ------------------ --------------- -------
<S> <C> <C>
Upon Effectiveness................... 3,500,000 Shares sold in the offering and
shares subject to Rule 144(k)
90 days.............................. -- Shares subject to Rule 144
180 days............................. 3,487,300 Underwriter lock-up released; subject
in some cases to volume limitations
</TABLE>
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell within any
three-month period commencing 90 days after the date of this prospectus a number
of shares that does not exceed the greater of (a) 1% of the then outstanding
shares of common stock (approximately 325,561 shares immediately after the
offering) or (b) the average weekly trading volume during the four calendar
weeks preceding the sale, subject to the filing of a Form 144 with respect to
the sale. A person who is not deemed to have been an affiliate of ours at
anytime during the 90 days immediately preceding the sale and who has
beneficially owned his or her shares for at least two years is entitled to sell
these shares under Rule 144(k) without regard to the limitations described
above. Persons deemed to be affiliates must always sell under Rule 144, even
after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be sustained after the offering. Any future sale of substantial amounts of
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.
We and our directors, executive officers and other significant stockholders
have agreed that they will not sell any common stock without the prior written
consent of Goldman, Sachs & Co. for a period of 180 days from the date of this
prospectus. We have also agreed not to issue any shares during the lock-up
period without the consent of Goldman, Sachs & Co. except that we may, without
this consent, grant options and sell shares under our stock incentive and
purchase plans although the shares may not be resold into the public market
during the lock-up period.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan to resell such shares in reliance upon Rule 144 but without compliance with
specific restrictions. Rule 701 provides that affiliates may sell their Rule 701
shares under Rule 144 without complying with the holding period requirement and
that non-affiliates may sell such shares in reliance on Rule 144 without
complying with the holding period, public information, volume limitation, or
notice provisions of Rule 144.
We intend to file a registration statement on Form S-8 under the Securities
Act shortly after the completion of the offering to register the shares of
common stock subject to outstanding stock options that may be issued under these
plans, which will permit the resale of these shares in the public market without
restriction after the lock-up period expires. However, shares held by
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<PAGE> 66
affiliates will still be subject to the volume limitations of Rule 144 unless
otherwise resalable under Rule 701.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Garage.com by Wilson Sonsini Goodrich & Rosati, Palo Alto, California. Alan K.
Austin, a member of Wilson Sonsini Goodrich & Rosati, is our corporate
secretary. As of the date of this prospectus, attorneys and investment
partnerships associated with Wilson Sonsini Goodrich & Rosati beneficially owned
307,275 shares of common stock which will be worth approximately $4.0 million at
an assumed public offering price of $13.00. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Shearman &
Sterling, Menlo Park, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999 and for each of the two years in the
period ended December 31, 1999, as set forth in their report. We have included
our financial statements in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given upon their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares to be sold in the offering. This
prospectus does not contain all the information contained in the registration
statement. For further information with respect to Garage.com and the shares to
be sold in the offering, see the registration statement and the exhibits and
schedules filed with the registration statement. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. As a result, you should refer to the
copy of the contract, agreement or other document filed as an exhibit to the
registration statement for a complete description of the matter involved.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information that we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference room. Our SEC filings, including the
registration statement, are also available to you without charge from the SEC
Website, which is located at http://www.sec.gov.
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<PAGE> 67
UNDERWRITING
Garage.com and the underwriters for the offering named below have entered
into an underwriting agreement with respect to the shares being offered. Subject
to conditions specified in the underwriting agreement, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., Credit Suisse First Boston Corporation and
FleetBoston Robertson Stephens Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Credit Suisse First Boston Corporation......................
FleetBoston Robertson Stephens Inc. ........................
---------
Total............................................. 3,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 525,000
shares from Garage.com to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Garage.com. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase 525,000 additional shares.
<TABLE>
<CAPTION>
Paid by Garage.com
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>
The per share underwriting discounts and commission equals the public
offering price per share of common stock, less the per share amount paid by the
underwriters to Garage.com.
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Garage.com, its officers, directors and substantially all of its
stockholders have agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. This agreement does not apply to
any existing employee benefit plans. See "Shares Available for Future Sale" for
a discussion of certain transfer restrictions.
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<PAGE> 68
Garage.com currently anticipates that it will request the underwriters to
reserve up to 350,000 shares of its common stock for sale at the initial public
offering price through a directed share program to persons designated by
Garage.com, who have been or are expected to be vendors, service providers, or
clients of Garage.com or who are friends or family members of Garage.com
employees. The number of shares available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to the general
public on the same basis as other shares offered hereby.
Prior to the offering, there has been no public market for the common
stock. The initial public offering price will be negotiated among Garage.com and
the representatives. Among the factors to be considered in determining the
initial public offering price of the common stock, in addition to prevailing
market conditions, will be Garage.com's historical performance, estimates of
Garage.com's business potential and earnings prospects of Garage.com, an
assessment of Garage.com's management and the consideration of the above factors
in relation to market valuation of companies in related businesses.
Garage.com has applied to have its common stock quoted on the Nasdaq
National Market under the symbol "GRGE".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Garage.com estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $1.2
million.
Garage.com has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
In August 1999, Credit Suisse First Boston Venture Fund I, L.P. an
affiliate of Credit Suisse First Boston Corporation, purchased 400,000 shares of
our Series C preferred stock for $2.50 per share on the same terms and
conditions as the other purchasers of Series C preferred stock. In August, 1999,
Credit Suisse First Boston Venture Fund I, L.P. also purchased 83,333 units of
Garage.com Startups, LLC, for $0.04 per unit, which were exchanged in January
2000 for 3,908 shares of our Series D preferred stock for $5.00 per share and on
the same terms and conditions as the other purchasers of Series D preferred
stock. In August 1999, Merchant GP, an affiliate of Credit Suisse First Boston
Corporation, purchased 50,000 units of Garage.com Startups, LLC, for $0.04 per
unit, which were exchanged in January 2000 for 2,340 shares of Series D
preferred stock on the same terms and conditions as the other purchasers of
Series D
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<PAGE> 69
preferred stock. In February 2000, Credit Suisse First Boston Venture Fund I,
L.P. purchased 43,030 shares of our Series E preferred stock for $9.00 per share
pursuant to a contractual preemptive right and on the same terms and conditions
as the other purchasers of Series E preferred stock. See "Related Party
Transactions -- Stock Issuances to our Directors, Officers and Principal
Stockholders." All of the foregoing shares will automatically convert into
common stock upon the closing of this offering.
In February 2000, GS PIA Partners I, L.P., an affiliate of Goldman, Sachs &
Co., purchased 222,222 shares of our Series E preferred stock for $9.00 per
share on the same terms and conditions as the other purchasers of Series E
preferred stock. These shares will automatically convert into common stock upon
the closing of this offering.
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<PAGE> 70
GARAGE.COM INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Garage.com Inc.
We have audited the accompanying consolidated balance sheets of Garage.com
Inc. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for the period
from October 24, 1997 (inception) to December 31, 1998 and for the year ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Garage.com
Inc. as of December 31, 1998 and 1999, and the results of its operations and its
cash flows for the period from October 24, 1997 (inception) to December 31, 1998
and for the year ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Palo Alto, California
February 10, 2000, except for
the caption "Reincorporation" in Note 2,
as to which the date is March , 2000.
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the reincorporation described in Note 2 to the consolidated financial statements
under the caption "Reincorporation".
/s/ Ernst & Young LLP
Palo Alto, California
March 23, 2000
F-2
<PAGE> 72
GARAGE.COM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ DECEMBER 31,
1998 1999 1999
---- ---- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,816 $16,123
Accounts receivable.................................... 13 251
Prepaid expenses and other current assets.............. 51 100
------- -------
Total current assets........................... 2,880 16,474
Property and equipment, net.............................. 60 212
Principal investments.................................... -- 684
Other assets............................................. 35 67
------- -------
$ 2,975 $17,437
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 70 $ 137
Accrued compensation and related liabilities........... 109 99
Deferred revenue....................................... -- 359
Other current liabilities.............................. 90 132
------- -------
Total current liabilities...................... 269 727
Commitments (Note 4)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding pro forma... -- -- $ --
Convertible preferred stock, $0.001 par value;
14,700,000 shares authorized; 8,950,000 and
14,460,212 shares issued and outstanding in 1998 and
1999 (none pro forma), issuable in series; aggregate
liquidation preference of $19,051 as of December 31,
1999................................................ 9 14 --
Common stock, $0.001 par value; 95,000,000 shares
authorized; 9,600,000 and 10,212,318 shares issued
and outstanding in 1998 and 1999, respectively
(24,672,530 shares pro forma)....................... 10 10 24
Additional paid-in capital............................. 4,191 20,070 20,070
Notes receivable from stockholders..................... -- (167) (167)
Deferred stock compensation............................ -- (2,407) (2,407)
Accumulated deficit.................................... (1,504) (810) (810)
------- ------- -------
Total stockholders' equity..................... 2,706 16,710 $16,710
------- ------- =======
$ 2,975 $17,437
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
GARAGE.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24,
1997
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
Revenue:
Placement fees............................................ $ -- $ 2,485
Event registration and sponsorship fees (including $300 in
1999 from related parties)............................. -- 2,429
Interest income........................................... 39 295
Principal transactions.................................... -- 225
Website sponsorships and other............................ 110 421
---------- -----------
Total revenue............................................... 149 5,855
---------- -----------
Costs and expenses:
Cost of events............................................ -- 1,030
Compensation and benefits................................. 909 2,216
Professional fees......................................... 234 377
Occupancy................................................. 147 295
Marketing................................................. 138 218
Amortization of deferred stock compensation............... -- 541
Other..................................................... 225 467
---------- -----------
Total costs and expenses.................................... 1,653 5,144
---------- -----------
Income (loss) from operations............................... (1,504) 711
Provision for income taxes.................................. -- 17
---------- -----------
Net income (loss)........................................... $ (1,504) $ 694
========== ===========
Net income (loss) per share -- basic........................ $ (0.86) $ 0.17
========== ===========
Net income (loss) per share -- diluted...................... $ (0.86) $ 0.03
========== ===========
Shares used in per share calculation -- basic............... 1,739,593 4,119,035
========== ===========
Shares used in per share calculation -- diluted............. 1,739,593 20,781,220
========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
GARAGE.COM INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
------ ------ ------ ------ ---------- ------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series A convertible
preferred stock...................... 1,800,000 $ 2 -- $-- $ 591 $ --
Issuance of Series B convertible
preferred stock...................... 7,150,000 7 -- -- 3,567 --
Issuance of common stock............... 9,600,000 10 33 --
Net loss............................... -- -- -- -- -- --
---------- --- ---------- --- ------- -----
Balance at December 31, 1998............ 8,950,000 9 9,600,000 10 4,191 --
Issuance of Series B convertible
preferred stock...................... 150,000 -- -- -- 75 --
Issuance of Series C convertible
preferred stock...................... 4,800,000 5 -- -- 11,966 --
Issuance of Series D convertible
preferred stock...................... 560,212 -- -- -- 439 --
Issuance of common stock............... -- -- 612,318 -- 451 (167)
Deferred stock compensation............ -- -- -- -- 2,948 --
Amortization of deferred stock
compensation......................... -- -- -- -- -- --
Net income............................. -- -- -- -- -- --
---------- --- ---------- --- ------- -----
Balance at December 31, 1999............ 14,460,212 $14 10,212,318 $10 $20,070 $(167)
========== === ========== === ======= =====
<CAPTION>
DEFERRED TOTAL
STOCK ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
------------ ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Issuance of Series A convertible
preferred stock...................... $ -- $ -- $ 593
Issuance of Series B convertible
preferred stock...................... -- -- 3,574
Issuance of common stock............... -- -- 43
Net loss............................... -- (1,504) (1,504)
------- ------- -------
Balance at December 31, 1998............ -- (1,504) 2,706
Issuance of Series B convertible
preferred stock...................... -- -- 75
Issuance of Series C convertible
preferred stock...................... -- -- 11,971
Issuance of Series D convertible
preferred stock...................... -- -- 439
Issuance of common stock............... -- -- 284
Deferred stock compensation............ (2,948) -- --
Amortization of deferred stock
compensation......................... 541 -- 541
Net income............................. -- 694 694
------- ------- -------
Balance at December 31, 1999............ $(2,407) $ (810) $16,710
======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
GARAGE.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24, 1997
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
---------------- ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(1,504) $ 694
Adjustment to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization............................. 15 46
Amortization of deferred stock compensation............... -- 541
Principal transactions.................................... -- (225)
Changes in assets and liabilities:
Accounts receivable.................................... -- (238)
Other assets........................................... (99) (81)
Accounts payable and accrued expenses.................. 70 67
Accrued compensation and related liabilities........... 109 (10)
Deferred revenue....................................... -- 359
Other current liabilities.............................. 90 42
------- -------
Net cash (used in) provided by operating activities......... (1,319) 1,195
------- -------
INVESTING ACTIVITIES
Purchases of property and equipment......................... (75) (198)
Purchases of principal investments.......................... -- (459)
------- -------
Net cash used in investing activities....................... (75) (657)
------- -------
FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred stock....... 4,167 12,485
Proceeds from issuance of common stock...................... 43 284
------- -------
Net cash provided by financing activities................... 4,210 12,769
------- -------
Net increase in cash and cash equivalents................... 2,816 13,307
Cash and cash equivalents at beginning of year.............. -- 2,816
------- -------
Cash and cash equivalents at end of year.................... $ 2,816 $16,123
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for notes receivable......................... $ -- $ 167
======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Garage.com Inc. ("the Company") was incorporated in California on October
24, 1997 (inception) to operate an online business-to-business service that
helps entrepreneurs and investors create, build, and fund promising early-stage
technology startups. For the period from inception to December 31, 1997, the
Company had no operations and approximately $11,000 in expenses. The Company
introduced its website on May 13, 1998. The website served solely as an
information resource to entrepreneurs and investors until October 1998 when the
Company commenced broker-dealer activities through its wholly owned subsidiary,
Garage.com Securities, Inc. ("Securities"), a registered broker-dealer.
The Company assists client companies with raising early-stage financing,
improving strategic and operational plans, and developing marketing and public
relations campaigns. The Company generally receives cash fees as well as equity
interests in client companies upon completion of a financing as compensation for
its services. The Company also sponsors "Bootcamp for Startups" educational
conferences for entrepreneurs. The Company receives registration and sponsorship
fees associated with its educational conferences. The Company also generates
revenue from website sponsorships and investor membership fees.
Until January 2000, the Company was the managing member of Garage.com
Startups LLC ("the LLC"), an entity with 95 percent common ownership that was
formed to hold and manage equity interests in startup companies earned by
Securities as compensation for its broker-dealer services. In December 1999 and
January 2000, the Company acquired all of the outstanding interests in the LLC
in exchange for 560,212 shares of its Series D preferred stock. The Company
recorded this transaction as if it had occurred on December 31, 1999 because
more than 90 percent of the interests in the LLC had been acquired by that date.
The Company accounted for this transaction by carrying forward the historical
bases of the assets and liabilities of the LLC. Subsequent to the transaction
the LLC was dissolved and its assets were transferred to Securities.
The Company is also the general partner of Garage.com Investments I, L.P.,
("the LP") in which it owns a one percent economic interest and will receive a
20 percent performance fee on the LP's net realized gains and losses. The LP
holds equity interests in startup companies who generally are clients of the
Company.
In May 1999, Garage.com's board of directors approved a two-for-one split
of the Company's common and preferred stock. Stockholders received one
additional share for every one share held on August 16, 1999. All share and per
share amounts in these consolidated financial statements and the notes thereto
have been retroactively adjusted to reflect the stock split.
In December 1999, the Company's board of directors authorized the filing of
a registration statement with the SEC to register shares of its common stock in
connection with a proposed initial public offering. If the offering contemplated
is consummated, the preferred stock outstanding as of the closing date will be
converted into shares of the Company's common stock. The pro forma stockholders'
equity in the accompanying balance sheet as of December 31, 1999 reflects
conversion of the outstanding preferred stock into 14,460,212 shares of common
stock.
F-7
<PAGE> 77
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Garage.com
and its wholly owned subsidiary, Garage.com Securities, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
REINCORPORATION
On February 2, 2000, the Company's board of directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company will be authorized to issue 95,000,000 shares of
$0.001 par value common stock and 5,000,000 shares of $0.001 par value Preferred
Stock. The board of directors has the authority, without action of the
stockholders, to issue the undesignated preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof. The par
value and shares of common stock and preferred stock authorized, issued and
outstanding at each balance sheet date presented, and for each period presented
in the consolidated statements of stockholders' equity have been retroactively
adjusted to reflect the reincorporation.
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 may differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains its cash and cash equivalent accounts, which periodically exceed the
federal deposit insurance corporation's insurance limits of $100,000, at high
credit quality financial institutions. The Company's cash and cash equivalents
are carried at cost, which approximates market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
calculated using the straight-line method over the estimated useful lives of the
assets, generally three years.
LONG-LIVED ASSETS
The Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" ("SFAS 121"). Consistent
with SFAS 121, the Company identifies and records impairment losses, as
circumstances dictate, on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. If these conditions are present, the impairment loss is
measured as the amount by which the carrying amount of the asset exceeds the
fair value. Fair value of an impaired asset is the amount at which the asset
could be bought or sold by willing parties. None of these events have occurred
with respect to the Company's long-lived assets, which consist primarily of
machinery and equipment and leasehold improvements.
F-8
<PAGE> 78
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPAL INVESTMENTS
Principal investments consist primarily of equity interests in early-stage
privately held companies acquired as compensation for the Company's services.
Principal investments are carried at fair value. Realized and unrealized gains
and losses are recognized as increases and decreases in revenue respectively.
Fair value is based on quoted market prices, when available. However, given the
nature of the Company's investments and its limited access to information about
investee companies, fair value is not usually readily ascertainable. In these
cases, fair value is based on management's estimates and cost is often the best
estimate of fair value. In determining fair value, management considers all
available factors, which may include cost, the type of investment, subsequent
purchases of the same or similar investments, and the current financial position
and operating results of the company invested in. Management's estimates of fair
value could differ materially from values that would have been used had a ready
market for these investments existed. Impairments are immediately recognized as
an offset to revenue in the consolidated statements of operations.
INCOME TAXES
The Company uses the liability method to account for income taxes as
required by Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
REVENUE RECOGNITION
Private placement fees are recognized as revenue when all agreements
associated with the funding of a client company have been signed and the client
company has received the proceeds of the financing. Event registration and
sponsorship fees associated with the Company's educational conferences are
recognized upon completion of the applicable conference. The Company also
generates revenue from website sponsorships and investor memberships, both of
which are recognized on a straight-line basis over their term. Deferred revenue
consists of payments received in advance of recognition of placement fee, event
registration, sponsorship and membership revenue.
The Company generally is paid cash based on established rates for event
sponsorships. The Company also exchanges event sponsorships for nonmonetary
consideration. Those exchanges are accounted for in accordance with the
consensus in Emerging Issues Task Force Issue 99-17 (EITF 99-17), "Accounting
for Advertising Barter Transactions". EITF 99-17 allows recognition of
nonmonetary sponsorship revenue only when the fair value of the sponsorship
surrendered is determinable based on the Company's historical practice of
receiving cash or cash equivalents for similar sponsorships from unrelated
entities. In 1998 and 1999, nonmonetary sponsorship revenues, recognized on the
basis of comparable cash transactions, totaled $0 and $364,000, respectively,
and are included in event registration and sponsorship fees in the accompanying
consolidated statement of operations.
DEVELOPMENT COSTS
Since January 1, 1999, the Company has accounted for internal use software
costs, including website development costs, in accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). In
F-9
<PAGE> 79
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordance with SOP 98-1, the Company capitalizes its costs to develop software
for its website and other internal uses when preliminary development efforts are
successfully completed and management has authorized and committed project
funding and it is probable that the project will be completed and the software
will be used as intended. Costs incurred prior to meeting these criteria,
together with costs incurred for training and maintenance, are expensed. Costs
incurred for upgrades and enhancements that are probable to result in additional
functionality are capitalized. All capitalized costs are amortized to expense
over their expected useful lives.
Costs required to be capitalized under SOP 98-1 have been insignificant to
date. Prior to the adoption of SOP 98-1, costs incurred by the Company to
develop, enhance, manage, monitor and operate its website were expensed as
incurred.
ADVERTISING EXPENSE
Advertising costs are expensed when incurred and included in marketing
expense except for those expenses related to the Company's educational
conferences, which are included in the cost of events. Advertising costs were
$24,000 and $78,000 in 1998 and 1999, respectively.
STOCK-BASED COMPENSATION
The Company accounts for grants of stock options and common stock purchase
rights to employees and directors according to Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations ("APB No. 25"). Pro forma net income (loss) information, as
required by Financial Accounting Standards Board Statement No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), is included in Note 6. Options
granted to consultants and other non-employees are accounted for in accordance
with Emerging Issues Task Force Consensus No. 96-18, "Accounting for Equity
Investments That Are Issued to Other Than Employees for Acquiring, or In
Conjunction with Selling, Goods or Services," and valued using the Black-Scholes
method prescribed by SFAS 123. These options are subject to periodic revaluation
over their vesting terms. Any deferred stock compensation calculated according
to APB No. 25 is amortized on a straight-line basis over the vesting period of
the individual options, generally four years.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's results of operations or stockholders' equity.
SEGMENT INFORMATION
Financial Accounting Standards Board Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131") establishes
standards for the reporting of financial and descriptive information about
reportable operating segments. Garage.com operates in two business segments. One
segment includes the broker-dealer activities of Securities, for which the
Company receives placement fees in the form of cash and equity securities. The
second segment consists primarily of the sponsorship and production of the
Company's periodic educational conferences from which the Company generates
registration and sponsorship fees. The revenues associated with each of the
Company's two segments and the costs directly related to the production of
events are separately reported in the statements of operations for
F-10
<PAGE> 80
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 and 1999. The Company's internal financial information does not segregate
any other cost or balance sheet information about the Company's segments. In
addition, through December 31, 1998, foreign operations have not been
significant to either revenue or investment in long-lived assets. The Company
had no single client or sponsor from which it derived greater than 10% of its
revenue in 1998 or 1999.
INCOME (LOSS) PER SHARE
Income (loss) per share has been computed according to the Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share" ("SFAS 128"),
which requires disclosure of basic and diluted earnings per share. Under SFAS
128, basic income (loss) per common share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
reporting period and excludes any dilutive effects of options, warrants, shares
subject to repurchase and convertible securities. Diluted income (loss) per
common share reflect the potential dilutive effect, determined by the treasury
stock method, of additional common shares that are issuable upon exercise of
outstanding stock options and warrants and gives effect to the conversion of the
convertible preferred stock into common stock as of the later of the beginning
of the period or the issuance of the convertible preferred stock. In 1998,
diluted loss per share excludes all potentially dilutive common shares as their
inclusion would be anti-dilutive. In 1999, all potentially dilutive common
shares outstanding during the period were included in the calculation of diluted
income per share.
Following the guidance given by the Securities and Exchange Commission
Staff Accounting Bulletin No. 98, common stock and preferred stock that has been
issued or granted for nominal consideration prior to the anticipated effective
date of the initial public offering must be included in the calculation of basic
and diluted net income (loss) per common share as if these shares had been
outstanding for all periods presented. To date, the Company has not issued or
granted shares for nominal consideration.
F-11
<PAGE> 81
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the numerator and denominator of basic
and diluted net income (loss) per share (in thousands, except share and per
share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24,
1997
(INCEPTION) TO YEAR ENDED
DECEMBER 31, ECEMBER 31
1998 1999
---- ----
<S> <C> <C>
Numerator:
Net income (loss)................................... $ (1,504) $ 694
=========== ===========
Denominator:
Weighted average shares............................. 8,712,329 9,697,206
Weighted average shares subject to repurchase....... (6,972,736) (5,578,171)
----------- -----------
Denominator for basic calculation................... 1,739,593 4,119,035
Weighted average effect of dilutive securities:
Assumed conversion of preferred stock............ -- 10,633,874
Unvested common stock subject to repurchase...... -- 5,578,171
Employee stock options........................... -- 450,140
----------- -----------
Denominator for diluted calculation................. 1,739,593 20,781,220
=========== ===========
Net income (loss) per share:
Basic............................................... $ (0.86) $ 0.17
=========== ===========
Diluted............................................. $ (0.86) $ 0.03
=========== ===========
</TABLE>
Options outstanding during the year ended December 31, 1999 to purchase
approximately 502,250 shares of common stock were not included in the
computation of diluted income per share because the options' exercise price was
greater than the average deemed fair value of the common stock for financial
statement purposes during the period and, therefore, would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that derivatives be recognized in the balance sheet at
fair value and specifies the accounting for changes in fair value. In June 1999,
the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," to
defer the effective date of SFAS 133 until fiscal years beginning after June 15,
2000. While Garage.com currently has no derivative financial instruments and
does not engage in hedging activities, the Company anticipates engaging in
derivative and hedging activity in the future and, therefore, expects to be
impacted by the pronouncement. The impact of SFAS 133 on Garage.com's
consolidated financial statements, however, will depend on a variety of factors
including the level of future hedging activity, the types of hedging instruments
used and the effectiveness of such instruments.
F-12
<PAGE> 82
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. The Company's revenue recognition practices are in
conformity with SAB No. 101.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the
current year's presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1999
---- ----
<S> <C> <C>
Computers, software and equipment........................... $ 66 $198
Furniture and fixtures...................................... 9 51
Leasehold improvements...................................... -- 24
---- ----
75 273
Less: Accumulated depreciation and amortization............. (15) (61)
---- ----
Property and equipment, net................................. $ 60 $212
==== ====
</TABLE>
4. COMMITMENTS
At December 31, 1999, the Company's aggregate noncancelable minimum rentals
based upon the terms of operating leases were as follows (in thousands):
<TABLE>
<CAPTION>
AGGREGATE
MINIMUM
RENTAL
---------
<S> <C>
Year ended December 31:
2000...................................................... $ 472
2001...................................................... 449
2002...................................................... 118
2003...................................................... 26
Thereafter................................................ --
------
Total minimum payment required......................... $1,065
======
</TABLE>
Rent expense, principally for leased facilities under long-term operating
lease commitments, was $147,000 and $295,000 in 1998 and 1999, respectively.
5. CONVERTIBLE PREFERRED STOCK
All series of preferred stock are convertible at the option of the holder
at any time into common stock on a one-for-one basis, subject to adjustment for
antidilution and carry voting rights equivalent to common stock with the
exception of Series A preferred stock, which is nonvoting. Each share of
preferred stock automatically converts into one share of common stock
F-13
<PAGE> 83
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the event of an initial public offering of the Company's common stock in
which gross offering proceeds exceed $10.0 million and the offering price is at
least $2.00 per share or upon the vote by holders of at least two-thirds of the
outstanding preferred stock. Holders of convertible preferred stock are entitled
to noncumulative dividends when and if declared by the board of directors. No
dividends have been declared through December 31, 1999.
The preferred stock authorized, issued and outstanding at December 31, 1999
is as follows:
<TABLE>
<CAPTION>
AGGREGATE
AUTHORIZED SHARES ISSUED LIQUIDATION
SHARES AND OUTSTANDING PREFERENCE
---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Series A............................... 2,000,000 1,800,000 $ 600
Series B............................... 7,300,000 7,300,000 3,650
Series C............................... 4,800,000 4,800,000 12,000
Series D............................... 600,000 560,212 2,801
---------- ---------- -------
14,700,000 14,460,212 $19,051
========== ========== =======
</TABLE>
In the event of liquidation or winding up of the Company, holders of Series
A, B, C, and D convertible preferred stock are entitled to a liquidation
preference of $0.33, $0.50, $2.50, and $5.00 per share, respectively, together
with any declared but unpaid dividends prior and in preference to any
distribution to holders of common stock. After payment has been made to the
holders of preferred stock, any remaining assets will be distributed ratably
among the holders of preferred stock and common stock in proportion to the
number of shares of common stock held by each, assuming conversion of all Series
A, B, C, and D preferred stock until certain limits are reached. If the
Company's assets are insufficient to provide for the full preference amount for
the preferred stock outstanding, then such assets will be distributed ratably
among the holders of the preferred stock in proportion to the amount of such
stock owned by each stockholder.
6. COMMON STOCK
1999 STOCK PLAN
During 1999, the board of directors adopted the 1999 Stock Plan ("1999
Plan"). The 1999 Plan provides for stock options and stock purchase rights to be
granted to employees, directors, and consultants. Options granted under the 1999
Plan may be incentive stock options or nonstatutory stock options. Exercise
prices are determined by the board of directors and may not be less than 100% of
the fair value of the Company's common stock (not less than 85% of fair value
for nonstatutory stock options granted under the 1999 Plan) on the date of
grant. Options and purchase rights generally vest over four years and expire no
more than 10 years from the date of grant. A summary of the Company's stock
option activity during 1998 and 1999, and related information follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED-AVERAGE
------------------------- EXERCISE PRICE
AUTHORIZED OUTSTANDING PER SHARE
---------- ----------- ----------------
<S> <C> <C> <C>
Options outstanding at December 31,
1998.................................... 4,000,000 -- $ --
Authorized.............................. -- -- --
Granted................................. (2,134,541) 2,134,541 1.02
Exercised............................... -- (512,318) 0.87
Forfeited............................... -- -- --
---------- ---------
Options outstanding at December 31,
1999.................................... 1,865,459 1,622,223 1.06
========== =========
</TABLE>
F-14
<PAGE> 84
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options outstanding as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
OPTIONS AVERAGE EXERCISE OPTIONS EXERCISE
OUTSTANDING AT REMAINING PRICE VESTED AT PRICE
DECEMBER 31, CONTRACTUAL PER DECEMBER 31, PER
EXERCISE PRICE 1999 LIFE SHARE 1999 SHARE
- -------------- -------------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.50..................... 997,334 9.41 $0.50 297,877 $0.50
$1.50-2.50................ 624,889 9.87 $1.96 -- --
--------- -------
1,622,223 297,877
========= =======
</TABLE>
The weighted average fair value of options granted during 1999 was $0.20
per share.
The Company has determined that the deemed fair value of all options
granted, for financial reporting purposes, was greater than the option exercise
price.
The Company has elected to follow APB No. 25 in accounting for its employee
and director stock options and stock purchase rights because, as discussed
below, the alternative fair value accounting provided for under SFAS 123
requires use of option valuation models that were not developed for use in
valuing employee stock options and rights. Under APB No. 25, the Company does
not recognize compensation expense with respect to awards if the exercise price
equals or exceeds the fair value of the underlying security on the date of grant
and other terms are fixed.
Pro forma net income per share information is required by SFAS 123, which
also requires that the information be determined as if the Company had accounted
for its employee stock options and rights under the fair value method. This
method was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly selective assumptions, including
the expected life of the options. Because the Company's stock-based awards 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 stock-based awards.
For purposes of the Company's pro-forma disclosures, the fair value of
these options and the purchase rights was estimated at the date of grant using
the minimum value method with the following weighted average assumptions for
1999: risk free interest rate of 6.0%; no dividend yield; and a weighted average
expected life of the options of five years. As no options were granted during
1998, no pro forma information for 1998 has been provided. Pro forma
F-15
<PAGE> 85
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information for 1999 assuming the estimated fair value of the options is
amortized over the options' vesting period is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1999
------------
<S> <C>
Net income:
As reported............................................... $ 694
Pro forma................................................. $ 661
Net income per share -- basic:
As reported............................................... $0.17
Pro forma................................................. $0.16
Net income per share -- diluted:
As reported............................................... $0.03
Pro forma................................................. $0.03
</TABLE>
DEFERRED STOCK COMPENSATION
During the year ended December 31, 1999, in connection with the grant of
stock options to employees, the Company recorded deferred stock compensation of
$2.9 million, representing the difference between the exercise price and the
deemed fair value for financial reporting purposes of the Company's common stock
on the date these stock options were granted. Deferred compensation is included
as a reduction of stockholders' equity and is being amortized by charges to
operations on a straight-line basis over the vesting period of each respective
option, generally four years. During 1999, the Company recorded amortization of
deferred stock compensation expense of approximately $541,000. At December 31,
1999, approximately $2.4 million of deferred stock compensation remained
unamortized.
Subsequent to December 31, 1999 through February 10, 2000, the Company has
granted additional options to purchase 531,200 shares of common stock at $7.00
per share. In connection with these grants, the Company will record additional
deferred compensation of approximately $584,000 in 2000 to be amortized to
operating expense as described above.
STOCK SUBJECT TO REPURCHASE
As of December 31, 1998 and 1999, the Company had 6,937,229 and 4,677,316
shares outstanding, respectively, which were subject to the Company's lapsing
right of repurchase in the event the holder's association with the Company
terminates. These shares of common stock were sold to employees, directors,
advisors and founding sponsors and generally vest over a four-year period.
F-16
<PAGE> 86
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVED SHARES
Shares of common stock reserved for future issuance were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
1999 Stock Plan:
Outstanding options....................................... 1,622,223
Reserved for future grants................................ 1,865,459
Convertible preferred stock:
Issued and outstanding.................................... 14,460,212
----------
17,947,894
==========
</TABLE>
7. RELATED PARTY TRANSACTIONS
During 1999, the Company loaned a total of $160,000 to certain officers,
directors and stockholders of the Company to fund their capital contributions to
the LLC. These loans were repaid to the Company in connection with the
acquisition of the LLC, plus interest at a rate of 4.60%.
In December 1999, the Company provided a full recourse loan to a corporate
officer to exercise options to purchase common stock. The loan totaled $167,000
and is repayable with interest to the Company in July 2003. The loan bears
interest at a rate of 6.11% and is secured by the underlying common stock
purchased.
Event revenues in 1999 include $380,000 in revenues received from entities
that are stockholders of the Company. None of this amount is included in
accounts receivable. Sponsorship revenues in 1999, include $50,000 in revenues
received from entities that are stockholders of the Company. Of this amount,
$33,000 is included in accounts receivable at December 31, 1999.
The Company subleased office space to a portfolio company for the period
August 1999 to January 2000 at a monthly rental rate of $5,596. Two of the
Company's directors are also directors of the portfolio company.
8. INCOME TAXES
The provision for income taxes for the year ended December 31, 1999 relates
to federal and state alternative minimum taxes of $13,000 and $4,000,
respectively. A reconciliation of the
F-17
<PAGE> 87
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
difference between the amount of income tax expense (benefit) recorded and the
amount calculated using the federal statutory rate of 34% is as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24, 1997
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
----------------- ------------
<S> <C> <C>
Statutory federal income tax........................ $(511) $ 242
State taxes, net of federal benefit................. (90) 76
Amortization of deferred compensation and other..... 6 188
Alternative minimum tax............................. -- 17
Change in deferred tax asset valuation allowance.... 595 (506)
----- -----
Provision for income taxes..................... $ -- $ 17
===== =====
</TABLE>
Deferred income taxes represent the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and the amount used for income tax purposes. Significant components of
the Company's deferred tax assets were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ----
<S> <C> <C>
Net operating loss carryforwards............................ $ 548 $ 122
Other, net.................................................. 47 57
----- -----
Total deferred tax assets.............................. 595 179
Valuation allowance for deferred tax assets................. (595) (89)
----- -----
Deferred tax assets, net of valuation allowance............. -- 90
Deferred tax liability, principal transactions.............. -- (90)
----- -----
Net deferred tax assets..................................... $ -- $ --
===== =====
</TABLE>
Because of the Company's short earnings history, the deferred tax assets
have been offset by a valuation allowance to the extent management cannot
conclude that it is more likely than not that the deferred tax asset will be
realized.
As of December 31, 1999, Garage.com had federal and state net operating
loss carryforwards of approximately $306,000, which expire in 2018 and 2006,
respectively. Utilization of net operating losses may be subject to a
substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
9. EMPLOYEE BENEFIT PLANS
In 1999, we adopted a 401(k) Savings Plan (the "401(k) Plan"). Under the
401(k) Plan, eligible employees may elect to contribute up to 25% of their
pre-tax compensation. The Company's contributions to the 401(k) Plan totaled
$39,000 for the year ended December 31, 1999.
F-18
<PAGE> 88
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS
PREFERRED STOCK FINANCING
On February 8, 2000, the Company issued 2,989,917 shares of Series E
convertible preferred stock for $9.00 per share. Net proceeds received by the
Company were approximately $26.9 million. In connection with this financing, the
Company's board of directors increased the number of shares of authorized
convertible preferred stock by 3,100,000 to a total of 17,800,000 shares. The
terms of the Series E convertible preferred stock are substantially similar to
those of prior issuances except that the liquidation preference is $9.00 per
share.
2000 EMPLOYEE STOCK PURCHASE PLAN
In February 2000, the board of directors adopted the 2000 Employee Stock
Purchase Plan ("Purchase Plan"), authorizing the issuance of common stock
through purchase rights granted to employees or to employees of affiliates, if
any. The Purchase Plan authorizes the issuance of a total of 1,000,000 shares of
common stock. This authorized share amount will be increased each February 1
beginning February 1, 2001, by the lesser of 750,000 shares or two percent of
the number of outstanding shares of common stock on the last day of the prior
fiscal year. However, the Company's board of directors has the authority to
designate a smaller number of shares by which the authorized number of common
shares will be increased on such dates.
2000 DIRECTOR OPTION PLAN
In February 2000, the Board of Directors adopted the 2000 Director Stock
Option Plan ("Director Plan"), authorizing the grant of stock options to
non-employee directors. The Director Plan authorizes the issuance of options on
a total of 250,000 shares of common stock. This authorized share amount will be
increased each January 1 beginning January 1, 2001, by the lesser of 100,000
shares or one percent of the number of outstanding shares of common stock on the
last day of the prior fiscal year. However, the Company's board of directors has
the authority to designate a smaller number of shares by which the authorized
number of common shares will be increased on such dates.
F-19
<PAGE> 89
Front Gate Graphics
The Garage.com Marketplace
a. Entrepreneurs:
High Technology and Life-Sciences
Industry sectors served by Garage.com
b. Investor groups
- VCs
- corporate investors
- angel investors
c. Garage.com
Solutions for Startups
d. Garage.com
Solutions for Investors
Inside Front Graphics
1. Garage.com public and password-protected website screen shots in three
visual layers
a. Screen shot of public website
Home page at www.garage.com
b. Screen shot of password-protected "Garage" portion of our website
for entrepreneurs and startups
c. "Heaven . . .
for our Member Investors
Graphics 4 Funnel Page 37
- - Number of startups who have registered for access to the password-protected
Garage section of our website.
- - Number of company overviews submitted by startups to Garage.com
- - Number of detailed applications submitted by startups to Garage.com
- - Number of meetings between startups and Garage.com at one of Garage.com's
offices.
- - Number of Garage.com Portfolio companies
Graphic 3 Inside Back
- - List of Garage.com Portfolio Clients
- - List of institutional investors in Garage.com clients
- - List of Garage.com Founding Sponsors
<PAGE> 90
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Information Regarding Forward-Looking
Statements.......................... 19
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 32
Management............................ 46
Related Party Transactions............ 53
Principal Stockholders................ 57
Description of Capital Stock.......... 60
Shares Eligible for Future Sale....... 63
Legal Matters......................... 64
Experts............................... 64
Where You Can Find Additional
Information......................... 64
Underwriting.......................... 65
Index to Financial Statements......... F-1
</TABLE>
-------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus) all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold allotment
or subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,500,000 Shares
GARAGE.COM INC.
Common Stock
-------------------------
[Garage.com Logo]
-------------------------
Goldman, Sachs & Co.
Credit Suisse First Boston
Robertson Stephens
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses to be paid by the Registrant,
other than the underwriting discounts and commissions payable by the Registrant
in connection with the sale of the common stock being registered. All amounts
shown are estimates except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
SEC Registration fee........................................ $ 18,065
NASD filing fee............................................. 7,343
Nasdaq National Market listing fee.......................... 95,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 550,000
Accounting fees and expenses................................ 250,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 150,000
----------
Total............................................. $1,235,408
==========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements with its
directors, officers and certain employees which would require the Registrant,
among other things, to indemnify them against certain liabilities which may
arise by reason of their status or service (other than liabilities arising from
willful misconduct of a culpable nature). The Registrant also intends to
maintain director and officer liability insurance, if available on reasonable
terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Registrant intends to obtain in conjunction with the effectiveness of
the Registration Statement a policy of directors' and officers' liability
insurance that insures the Registrant's directors and officers against the cost
of defense, settlement or payment of a judgment under certain circumstances.
The underwriting agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
II-1
<PAGE> 92
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception, the Registrant has issued and sold the following
unregistered securities:
(1) Between October 31, 1997 and April 27, 1999, the Registrant sold
9,700,000 shares of common stock at prices ranging from $0.0005 to $0.05
per share to employees, directors and consultants. Such sales were made in
reliance on Section 4(2) or Rule 701 of the Securities Act.
(2) Between March 11, 1998 and September 30, 1998, the Registrant sold
1,800,000 shares of its Series A preferred stock to (a) two funds
affiliated with Advanced Technology Ventures, (b) Silicon Valley Bancshares
and (c) George Gilder for an aggregate purchase price of $600,030. Such
sales were made in reliance on Section 4(2) of the Securities Act.
(3) Between March 11, 1998 and January 8, 1999, the Registrant sold
7,300,000 shares of its Series B preferred stock to a total of 37 venture
and individual investors. These investors include Chong-Moon Lee, Sanford
R. Robertson and two funds affiliated with Advanced Technology Ventures,
for an aggregate purchase price of $3,650,000. Such sales were made in
reliance on Section 4(2) of the Securities Act.
(4) Between May 19, 1999 and February 10, 2000, the Registrant granted
options to purchase 2,665,741 shares of common stock at prices ranging from
$0.50 to $7.00 to employees, directors and consultants pursuant to its 1999
Stock Plan. Such grants were made in reliance on Section 4(2) or Rule 701
of the Securities Act.
(5) Between August 27, 1999 and November 24, 1999, the Registrant sold
4,800,000 shares of its Series C preferred stock to a total of 37 venture
and individual investors, led by E*TRADE Group and funds affiliated with
Advanced Technology Ventures, Mayfield Fund, Credit Suisse First Boston
Corporation, and Draper Fisher Jurvetson Partners, for an aggregate
purchase price of $12,000,000. Such sales were made in reliance on Section
4(2) of the Securities Act.
(6) On December 31, 1999 and January 12, 2000, the Registrant issued
560,212 shares of Series D preferred stock to a total of 106 venture and
individual investors in exchange for their units of Garage.com Startups,
LLC for an aggregate purchase price of $2,801,060. Such sales were made in
reliance on Rule 506 under the Securities Act.
(7) On February 8, 2000, the Registrant sold 2,989,917 shares of its
Series E preferred stock to a total of 54 venture and individual investors,
led by Sequoia Capital, Safeguard Scientifics, Goldman Sachs, E*TRADE
Group, Mayfield Fund, Advanced Technology Ventures, 3i Corporation, Hikari
Tsushin, DBV Investments and Highland Capital for an aggregate purchase
price of $26,909,253. Such sales were made in reliance on Rule 506 under
the Securities Act.
Share numbers in the foregoing table for shares issued prior to August 16,
1999 have been adjusted to account for a two-for-one stock split distributed on
August 16, 1999.
In each of the foregoing transactions, the purchasers of securities
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, no
general solicitation or advertising was used and appropriate legends were
affixed to the certificates that represented such securities. No commissions
were paid in connection with any of the foregoing transactions, and no brokers
or underwriters were engaged.
II-2
<PAGE> 93
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Certificate of Incorporation of Garage.com Inc.
3.2** Form of Amended and Restated Certificate of Incorporation of
Garage.com Inc. to be filed immediately after the closing
of the offering
3.3** Bylaws of Garage.com Inc.
4.1 Specimen Common Stock Certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati
10.1** Amended and Restated 1999 Stock Plan and forms of agreements
thereunder
10.2** 2000 Director Option Plan
10.3** 2000 Employee Stock Purchase Plan
10.4** Form of Indemnification Agreement
10.5** Sponsorship Agreement, dated as of March 11, 1998, between
Garage.com and Advanced Technology Ventures IV, L.P.
10.6** Sponsorship Agreement, dated as of July 21, 1998, between
Garage.com and Credit Suisse First Boston Corporation
10.7** Sponsorship Agreement, dated as of March 11, 1998, between
Garage.com and Silicon Valley Bank
10.8** Sponsorship Agreement, dated as of July 9, 1998, between
Garage.com and Heidrick & Struggles
10.9** Sponsorship Agreement, dated as of May 7, 1998, between
Garage.com and Coopers & Lybrand LLP
10.10** Sponsorship Agreement, dated as of May 8, 1998, between
Garage.com and Venture Law Group
10.11** Sponsorship Agreement, dated as of September 30, 1998,
between Garage.com and Alburger Basso de Grosz Insurance
Services, Inc., DBA abd Insurance and Financial Services
10.12# Sponsorship Agreement, dated as of January 19, 1999, between
Garage.com and Microsoft Corporation
10.13** Lease, dated as of March 10, 1998, between 505 Hamilton
Partners and Garage.com
10.14** Amendment to Lease, dated as of November 11, 1999, between
505 Hamilton Partners and Garage.com
21.1** List of Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1)
23.3 Consent of Kirkpatrick & Lockhart LLP
24.1** Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
# Confidential treatment requested for portions of this exhibit.
II-3
<PAGE> 94
(B) FINANCIAL STATEMENT SCHEDULES.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, County of Santa Clara, State of California, on the 24th day of March 2000.
GARAGE.COM
By: /s/ GUY KAWASAKI
-----------------------------------
Guy Kawasaki
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GUY KAWASAKI Chairman of the Board, March 24, 2000
- --------------------------------------------------- Chief Executive Officer and
Guy Kawasaki Director
(Principal Executive Officer)
/s/ MARY ANN CUSENZA Vice President of Finance March 24, 2000
- --------------------------------------------------- and Chief Financial Officer
Mary Ann Cusenza (Principal Financial and
Accounting Officer)
WILLIAM M. REICHERT* President and Director March 24, 2000
- ---------------------------------------------------
William M. Reichert
THOMAS BEVILACQUA* Director March 24, 2000
- ---------------------------------------------------
Thomas Bevilacqua
JOHN DEAN* Director March 24, 2000
- ---------------------------------------------------
John Dean
JOSEPH GRUNDFEST* Director March 24, 2000
- ---------------------------------------------------
Joseph Grundfest
JOS HENKENS* Director March 24, 2000
- ---------------------------------------------------
Jos Henkens
</TABLE>
II-5
<PAGE> 96
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
CRAIG JOHNSON* Director March 24, 2000
- ---------------------------------------------------
Craig Johnson
RICHARD KARLGAARD* Director March 24, 2000
- ---------------------------------------------------
Richard P. Karlgaard
CHONG-MOON LEE* Director March 24, 2000
- ---------------------------------------------------
Chong-Moon Lee
*Power of Attorney
By: /s/ MARY ANN CUSENZA
----------------------------------------
Mary Ann Cusenza
Attorney-in-fact
</TABLE>
II-6
<PAGE> 97
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Certificate of Incorporation of Garage.com Inc.
3.2** Form of Amended and Restated Certificate of Incorporation of
Garage.com Inc. to be filed immediately after the closing
of the offering
3.3** Bylaws of Garage.com Inc.
4.1 Specimen Common Stock Certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati
10.1** Amended and Restated 1999 Stock Plan and forms of agreements
thereunder
10.2** 2000 Director Option Plan
10.3** 2000 Employee Stock Purchase Plan
10.4** Form of Indemnification Agreement
10.5** Sponsorship Agreement, dated as of March 11, 1998, between
Garage.com and Advanced Technology Ventures IV, L.P.
10.6** Sponsorship Agreement, dated as of July 21, 1998, between
Garage.com and Credit Suisse First Boston Corporation
10.7** Sponsorship Agreement, dated as of March 11, 1998, between
Garage.com and Silicon Valley Bank
10.8** Sponsorship Agreement, dated as of July 9, 1998, between
Garage.com and Heidrick & Struggles
10.9** Sponsorship Agreement, dated as of May 7, 1998, between
Garage.com and Coopers & Lybrand LLP
10.10** Sponsorship Agreement, dated as of May 8, 1998, between
Garage.com and Venture Law Group
10.11** Sponsorship Agreement, dated as of September 30, 1998,
between Garage.com and Alburger Basso de Grosz Insurance
Services, Inc., DBA abd Insurance and Financial Services
10.12# Sponsorship Agreement, dated as of January 19, 1999, between
Garage.com and Microsoft Corporation
10.13** Lease, dated as of March 10, 1998, between 505 Hamilton
Partners and Garage.com
10.14** Amendment to Lease, dated as of November 11, 1999, between
505 Hamilton Partners and Garage.com
21.1** List of Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1)
23.3 Consent of Kirkpatrick & Lockhart LLP
24.1** Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
# Confidential treatment requested for portions of the exhibit.
<PAGE> 1
EXHIBIT 4.1
NUMBER XX GARAGE.COM XX SHARES
a Delaware Corporation COMMON STOCK
INCORPORATED UNDER THE LAWS CUSIP 364797 10 0
OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT XXXXXXXX is the record holder of XXXXX fully paid
and non-assessable shares of COMMON STOCK, $0.001 PAR VALUE, of GARAGE.COM,
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate and the shares represented hereby are issued and shall
be subject to all the provisions of the Amended and Restated Certificate of
Incorporation of the Corporation and its Bylaws (copies of which are on file at
the office of the Corporation), to all of which the holder of this certificate,
by acceptance hereof, assents. This certificate is not valid until countersigned
by a transfer agent and registered by a Registrar.
WITNESS the Seal of the Corporation and the signatures of its duly
authorized officers this XXX day of XXXXX, XXXX.
- --------------------- -------------------
President Secretary
<PAGE> 2
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS, A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS, SO FAR AS THE SAME SHALL HAVE BEEN FIXED, AND OF THE AUTHORITY OF
THE BOARD OF DIRECTORS TO DESIGNATE AND FIX ANY PREFERENCES, RIGHTS AND
LIMITATIONS OF ANY WHOLLY UNISSUED SERIES.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________Custodian _______________
TEN ENT -- as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to Minors
JT TEN -- as joint tenants with Act___________________________________
rights of survivorship (State)
and not as tenants in UNIF TRF MIN ACT -- _________Custodian (until age________)
common (Cust)
______________ under Uniform Transfers
(Minor)
to Minors Act_________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________________________________ hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_______________________
X_______________________________________
X_______________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By_____________________________
THE SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad
15.
-2-
<PAGE> 1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
EXHIBIT 5.1
March 23, 2000
Garage.com Inc.
420 Florence Avenue
Palo Alto, California 94301
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you
with the Securities and Exchange Commission on February 11, 2000, as amended
(the "Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of up to 4,025,000 shares of your Common
Stock (the "Shares"). As your legal counsel, we have examined the proceedings
taken, and are familiar with the proceedings proposed to be taken, by you in
connection with the sale of the Shares.
It is our opinion that the Shares, when sold and issued in accordance
with the Registration Statement, will be legally issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE> 1
EXHIBIT 10.12
MICROSOFT CORPORATION
SPONSORSHIP AGREEMENT
This Sponsorship Agreement ("AGREEMENT") in entered into by and between
Microsoft Corporation, a Washington corporation ("MICROSOFT"), and garage.com,
a California Corporation ("GC") to be effective as of January 19, 1999
("EFFECTIVE DATE").
RECITALS
GC is an Internet based business that facilitates business relationships
between technology entrepreneurs and potential technology investors. One of the
primary methods by which GC offers its services is through its web site,
currently located at http://www.garage.com ("GC WEB SITE"). Pursuant to the
terms of this Agreement, GC desires to engage Microsoft as a founding sponsor
of GC and the GC Web Site and offer the corresponding promotional consideration
to Microsoft as described below. In consideration thereof, Microsoft is willing
to provide GC the financial and promotional consideration described more fully
below.
Now, therefore, in consideration of the covenants and conditions set forth
below, the adequacy of which is hereby acknowledged, the parties agree as
follows:
AGREEMENT
1. TERM AND TERMINATION
1.1. Term. This Agreement shall commence as the Effective Date and shall
expire on December 31, 2001, unless earlier terminated as provided
in this Section 1.
1.2. Termination for Convenience. Within forty five (45) days of January
1, 2000 or January 1, 2001, Microsoft may terminate this Agreement
without cause upon written notice to GC.
1.3. Termination By Either Party For Cause. Either party may suspend
performance and/or terminate this Agreement immediately upon
written notice at any time if the other party is in material breach
of this Agreement and fails to cure that breach within thirty (30)
days after written notice thereof.
MICROSOFT CONFIDENTIAL Page 1
<PAGE> 2
2. SPONSORSHIP PAYMENTS
2.1 During the term of this Agreement, Microsoft shall make sponsorship
payments to GC as follows:
<TABLE>
<CAPTION>
PAYMENT DATE
------- ----
<S> <C>
* Thirty (30) days after the
Effective Date
* July 15, 1999
* January 15, 2000
* July 15, 2000
* January 15, 2001
* July 15, 2001
</TABLE>
2.2 GC shall submit invoices to Microsoft as payments become due hereunder.
Microsoft shall pay all invoices properly submitted pursuant to this
Section 2 within thirty (30) days after Microsoft's receipt of the same.
3. MICROSOFT AS FOUNDING SPONSOR
GC will promote and allow microsoft to participate in all GC-sponsored
events in a manner no less favorable than GC promotes and/or allows any
other Founding Sponsor (defined below) to participate in such events. For
the purposes of this Agreement, "FOUNDING SPONSORS" means the following
original founding sponsors of the GC Web Site: PricewaterhouseCoopers,
Silicon Valley Bank, ABD Insurance, Venture Law Group, Heidrick & Struggles,
Credit Suisee First Boston, and Advanced Technology Ventures. If such events
require fees to be paid, Microsoft shall be required to pay such fees if it
desires the promotion and participation opportunity offered by the event,
provided that the fees charged to Microsoft shall be no greater than the
fees charged to any other Founding Sponsor for the same level of
sponsorship. If Microsoft desires to become a premium, major, or lead
sponsor of any event that senior sponsorship level may have greater fees
associated with it, provided that such fees shall be no greater than the
fees charged to any other Founding Sponsor for the same level of
sponsorship. The parties agree to discuss opportunities for Microsoft to pay
such fees "in kind" as the parties agree is appropriate.
MICROSOFT CONFIDENTIAL Page 2
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment, and have been filed separately with the SEC.
<PAGE> 3
4. SOFTWARE DEVELOPERS FORUM
4.1 On the GC Web Site, GC shall develop a "Software Developers Forum" or
"Developers Forum" ("DEVELOPERS FORUM") substantially similar to the
"Accounting, Tax and Consulting", "Commercial Banking", "Insurance",
"Law", "Venture Capital", and "Soapbox" forums currently present on
the GC Web Site. GC shall develop the Developers Forum in such a
manner so that, like these other forums, the Developers Forum shall
contain short articles, questions and answers, mailing lists supplied
by the applicable Founding Sponsor, as well as the same functionality
allowing the Founding Sponsor to interact and respond with visitors to
the Developers Forum. GC shall consider in good faith any input from
Microsoft on the structure and design of the Developers Forum.
4.2 During the term of this Agreement, GC shall promote Microsoft as the
Founding Sponsor for the Developers Forum in a manner no less
favorable than GC promotes the Founding Sponsors of the other forums
on the GC Web Site. Such promotion shall include, without limitation,
(i) the attribution of Microsoft as the Founding Sponsor for the forum
wherever sponsors of the forums are mentioned; (ii) the display of a
Microsoft-supplied logo on the entry page of the GC Web Site for the
forums (within 20 business days of the Effective Date located at
http://www.garage.com/forums); (iii) the inclusion in the Developers
Forum of Microsoft-supplied articles and content relating to software
development and business relationships with Microsoft; (iv) allowing
Microsoft to receive and respond to questions submitted by visitors to
the Developers Forum through the functionality by the GC Web Site; and
(v) including hyperlinks within the GC Web Site to
Microsoft-designated URLs in a manner similar to the hyperlinks to
other Founding Sponsors of GC Web Site forums.
4.3 GC shall be entitled to designate other secondary sponsors of the
Developers Forum, provided that no other sponsor shall be promoted or
entitled to benefits equal to or more favorable than those provided to
Microsoft as the Founding Sponsor. Any secondary sponsors may also
provide similar content in the Developers Forum.
5. ADDITIONAL EVENT
Microsoft and GC agree that representatives of Microsoft's Silicon Valley,
or Boston, after it is established, Developer Centers and GC shall discuss
in good faith the possibility of jointly sponsoring an additional
entrepreneur software conference to be held within twelve (12) months of
the Effective Date. The parties' roles, rights, and responsibilities for
the additional conference shall be as agreed by the parties.
Notwithstanding anything to the contrary, neither party shall have any
obligations
MICROSOFT CONFIDENTIAL Page 3
<PAGE> 4
with regard to this additional conference (other than the obligation to
discuss the possibility of such an additional conference) unless and until
the parties agree in writing upon their specific roles, rights, and
responsibilities for the conference.
6. GC PRESENCE AT MICROSOFT DEVELOPER CENTERS
At GC's request, Microsoft shall allow GC to promote its services at
Microsoft's existing developer centers in Silicon Valley, the developer
center in Boston after it is established, and other mutually agreed upon
Microsoft developer centers. Such promotion may consist of (i) on site
signage that indicates the parties' relationship and/or Microsoft's
sponsorship of GC; (ii) the display of copies of GC-supplied promotional
and collateral materials; and (iii) reasonable mentions in Microsoft's
marketing and communications materials sent out by the applicable developer
center when such materials mention their other major alliance partners. The
size, placement, and content of all such promotion, however, shall be
mutually agreed upon by the parties.
7. DEVELOPER CENTER SLOTS/MSDN MEMBERSHIPS
7.1 Microsoft shall provide GC with a schedule of selected classes, labs,
workshops, and briefings offered by Microsoft's Developer Centers. At
GC's request, Microsoft shall reserve a single space for a GC-selected
entrepreneur company at each of these events.
7.2 During the first year of this Agreement, Microsoft will provide up to
ten (10) GC-selected companies with complementary, one-year
memberships to Microsoft's MSDN Universal Program, subject to the
standard terms and conditions for participation in this program. In
future years of this Agreement, Microsoft shall provide additional
complementary, one-year memberships to Microsoft's MSDN Universal
Program to GC-selected companies provided (i) the parties agree upon a
specific number of complementary memberships to be offered, (ii) the
parties agree upon a value for each of the complementary memberships
provided by Microsoft, and (iii) Microsoft's payment obligations
hereunder to GC during such year is reduced by the total value of all
of the complementary memberships provided by Microsoft during such
year (i.e., the agreed upon quantity multiplied by the agreed upon
value).
8. GUY KAWASAKI ADVISOR
Guy Kawasaki of GC shall act as an advisor to Microsoft's Silicon Valley
Developer Center. As an advisor he shall (i) attend quarterly meetings for
the group of advisors for Microsoft's Silicon Valley Developer Center
except that if such meetings conflict
MICROSOFT CONFIDENTIAL Page 4
<PAGE> 5
with his previously scheduled travel plans, GC shall send another GC
executive, reasonably acceptable to Microsoft and (ii) provide information
and advice from time-to-time as reasonably requested by Microsoft's Silicon
Valley Developer Center.
9. WEB LINKS
As agreed by the parties, Microsoft and GC shall endeavor to include
mutually acceptable hyperlinks between the GC Web Site and web sides for
Microsoft's Developer Centers. In addition, all logos supplied for display
on the parties' web sites shall, at the supplying party's request, contain
a hyperlink to a web site designated by the supplying party.
10. MSDN FEATURE ARTICLE
Microsoft shall include a GC-supplied feature article or description of GC
and/or GC's services at least five (5) days per year on or linked to the
home page of Microsoft's Developer Network web site (currently located at
http://msdn.microsoft.com). The content for the article shall be mutually
agreed upon by the parties, but shall generally be consistent with other
feature articles contained within Microsoft's Developer Network web site.
Once near the beginning of the article or description, the full GC URL will
be shown and hyperlinked to that URL.
11. LOGOS
As each party deems appropriate, each party shall supply the other with
logos to be displayed on the other party's web site, subject to the
provisions of Section 9 and any usage guidelines or terms and conditions
provided in connection with the logos.
12. PRESS RELEASES
The parties anticipate releasing one or more press releases, separately or
jointly relating to the collaboration described in this Agreement. Each
party agrees to obtain the other's prior written approval of any press
releases relating to the collaboration described in this Agreement, with
such approval not to be unreasonably withheld or delayed. Notwithstanding
the foregoing, each party shall be allowed to identify Microsoft as a
founding sponsor of GC without obtaining the other side's permission.
13. COMMUNICATIONS AND BRIEFINGS
Periodically, Microsoft representatives shall provide GC executives with a
presentation on Microsoft-selected selected issues relating to then-current
Microsoft technical and business plans. GC recognizes, however, that
Microsoft shall select the
MICROSOFT CONFIDENTIAL Page 5
<PAGE> 6
information to be described in these briefings and that such information
will not cover all of Microsoft's technical and business plans.
14. SPEAKERS
As mutually agreed by the parties, (i) GC shall provide Guy Kawasaki to
speak at selected Microsoft events and (ii) Microsoft shall provide
Microsoft-selected Microsoft executives to speak at selected GC events.
15. LIAISONS
Microsoft and GC shall each designate representatives to act as liaisons
to facilitate the exchange of information and referrals of start up
businesses to each other as the parties individually deem appropriate. For
example, the liaisons may facilitate introductions between appropriate
Microsoft product and/or business development groups and premier start up
companies that are members of GC. Notwithstanding anything to the
contrary, neither party shall be required exchange specific information
or referrals hereunder; rather, the intent of this Section is to create a
mechanism to facilitate the exchange of information and referrals in the
event that the parties determine, in their sole discretion, that such
exchange and referrals are appropriate. In addition the Microsoft liaison
shall, upon request, provide information to GC and selected GC represented
developers on available developer support resources offered by Microsoft.
16. CONFIDENTIALITY
16.1 As used in this Section 16, "CONFIDENTIAL INFORMATION" means
nonpublic information that a party designates as being confidential
or which, under the circumstances surrounding disclosure, ought to
be treated as confidential. "Confidential Information" includes,
without limitation, the terms and conditions of this Agreement,
information relating to released or unreleased software or hardware
products, the marketing or promotion of any product, business
policies or practices, the pricing, payment and other provisions of
the Agreement between the parties, and information received from
others that either party is obligated to treat as confidential.
"Confidential Information" shall not include information that: (i)
is or becomes generally known or available by publication,
commercial use or otherwise through no fault of the receiving party;
(ii) is known and has been reduced to tangible form by the receiving
party at the time of disclosure and is not subject to restriction;
(iii) is independently developed or learned by the receiving party;
(iv) is lawfully obtained from a third party that has the right to
make such disclosure; or (v) is
MICROSOFT CONFIDENTIAL Page 6
<PAGE> 7
made generally available by the disclosing party without
restriction on disclosure.
16.2. Each party shall use its best efforts to protect the other's
Confidential Information from unauthorized dissemination and shall
use, at a minimum, the same degree of care that such party uses to
protect its own like information. Neither party will use the
other's Confidential Information for purposes other than those
necessary to directly further the purposes of this Agreement.
Neither party will disclose to third parties the other's
Confidential Information without the prior written consent of the
other party. Except as expressly provided in this Agreement, no
ownership or license rights are granted in any Confidential
Information.
16.3. The parties' obligations of confidentiality under this Agreement
shall not be construed to limit either party's right to
independently develop or acquire products without use of the other
party's Confidential Information. Further, either party shall be
free to use for any purpose the residuals resulting from access to
or work with such Confidential Information, provided that such
party shall maintain the confidentiality of the Confidential
Information as provided herein. The term "residuals" means
information in non-tangible form, which may be retained by persons
who have had access to the Confidential Information, including
ideas, concepts, know-how or techniques contained therein. Neither
party shall have any obligation to limit or restrict the assignment
of such persons or to pay royalties for any work resulting from the
use of residuals. However, the foregoing shall not be deemed to
grant to either party a license under the other party's copyrights
or patents.
17. GENERAL
17.1. Notices. All notices and requests in connection with this Agreement
shall be deemed given as of the day they are received either by
messenger, delivery service, or in the United States of America
mails, postage prepaid, certified or registered, return receipt
requested, or transmitted by facsimile with machine-generated
confirmation of transmission and addressed as follows:
MICROSOFT CONFIDENTIAL Page 7
<PAGE> 8
<TABLE>
<S> <C>
To GC: To Microsoft:
Garage.com Microsoft Corporation - Larry Cohen
420 Florence Avenue, Suite 300 One Microsoft Way
Palo Alto, CA 94301 Redmond, WA 98052-6399
Attn: Bill Joos Attn: TERRY HANOLD
Phone: (650) 470-0950 Phone: (425) 936-9072
Fax: (650) 470-0940 Fax: (425) 936-7329
Copy to: Law & Corporate Affairs
Fax: (425) 936-7409
</TABLE>
or to such other address as a party may designate pursuant to
this notice provision.
17.2. No Partnership. GC and Microsoft are independent contracting
parties. Nothing in this Agreement shall be construed as
creating an employer-employee relationship, a partnership, or a
joint venture between the parties.
17.3. Governing Law. This Agreement shall be construed and
controlled by the laws of the State of Washington, and GC
consents to exclusive jurisdiction and venue in the federal
courts sitting in King County, Washington, unless no federal
subject matter jurisdiction exists, in which case GC consents
to exclusive jurisdiction and venue in the Superior Court of
King County, Washington. GC waives all defenses of lack of
personal jurisdiction and forum non conveniens. Process may be
served on either party in the manner authorized by applicable
law or court.
17.4. Assignment. This Agreement shall be binding upon and inure to
the benefit of each party's respective successors and lawful
assigns; provided, however, that GC may not assign (by
operation or law or otherwise) this Agreement, in whole or in
part, without the prior written approval of Microsoft. For
purposes of the foregoing, an assignment shall be deemed to
include, without limitation, a merger of GC with another party,
whether or not GC is the surviving entity, or the acquisition
of direct or indirect control of management through one or a
series of transactions. Any attempted assignment by GC in
violation of this Section shall be void and shall entitle
Microsoft to terminate this Agreement immediately upon written
notice to GC.
17.5. NO CONSEQUENTIAL DAMAGES. TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAW, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
ANY SPECIAL, INCIDENTAL, INDIRECT, OR
MICROSOFT CONFIDENTIAL Page 8
<PAGE> 9
CONSEQUENTIAL DAMAGES WHATSOEVER (INCLUDING, BUT NOT LIMITED TO, DAMAGES
FOR LOSS OF PROFITS OR OTHER INFORMATION, FOR FAILURE TO MEET ANY DUTY
INCLUDING OF GOOD FAITH OR OF REASONABLE CARE, FOR NEGLIGENCE, AND FOR
ANY OTHER PECUNIARY OR OTHER LOSS WHATSOEVER) ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT, EVEN IN THE EVENT OF THE FAULT, TORT
(INCLUDING NEGLIGENCE), STRICT LIABILITY, BREACH OF CONTRACT OR BREACH
OF WARRANTY OF EITHER PARTY TO THIS AGREEMENT, AND EVEN IF SUCH PARTY
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
17.6 Construction. If for any reason a court of competent jurisdiction finds
any provision of this Agreement, or portion thereof, to be
unenforceable, that provision of the Agreement will be enforced to the
maximum extent permissible so as to effect the intent of the parties,
and the remainder of this Agreement will continue in full force and
effect. Failure by either party to enforce any provision of this
Agreement will not be deemed a waiver of future enforcement of that or
any other provision. This Agreement has been negotiated by the parties
and their respective counsel and will be interpreted fairly in
accordance with its terms and without any strict construction in favor
of or against either party.
17.7 Entire Agreement. This Agreement does not constitute an offer by
Microsoft and it shall not be effective until signed by both parties.
This Agreement constitutes the entire agreement between the parties with
respect to the subject matter hereof and merges all prior and
contemporaneous communications. It shall not be modified except by a
written agreement dated subsequent to the date of this Agreement and
signed on behalf of GC and Microsoft by their respective authorized
representatives.
MICROSOFT CONFIDENTIAL Page 9
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MICROSOFT CORPORATION GARAGE.COM
/s/ LARRY COHEN /s/ BILL JOOS
- ------------------------------- -------------------------------
By By
Larry Cohen Bill Joos
- ------------------------------- -------------------------------
Name (print) Name (print)
GM Silicon Valley DRG VP
- ------------------------------- -------------------------------
Title Title
MICROSOFT CONFIDENTIAL Page 10
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 10, 2000, except for the caption "Reincorporation" in Note 2, as to
which the date is March , 2000, in the Registration Statement on Form S-1 and
related Prospectus of Garage.com Inc. for the registration of shares of its
common stock.
Ernst & Young LLP
Palo Alto, California
March 23, 2000
- --------------------------------------------------------------------------------
This is the form of the consent we will issue when the reincorporation described
in Note 2 to the consolidated financial statements under the caption
"Reincorporation" is completed.
/s/ Ernst & Young LLP
Palo Alto, California
March 23, 2000
<PAGE> 1
Exhibit 23.3
[Kirkpatrick & Lockhart LLP Letterhead]
Garage.com Inc.
420 Florence Avenue
Suite 300
Palo Alto, California 94301
Ladies and Gentlemen:
We consent to the reference of this firm in the registration statement on
Form S-1 of Garage.com Inc. (file no. 333-30174). In giving our consent, we do
not admit that we are "experts" within the meaning of Section 11 of the
Securities Act of 1933, as amended (the "Securities Act") or within the category
of persons whose consent is required by Section 7 of the Securities Act.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
------------------------------
Kirkpatrick & Lockhart LLP
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 16,123 2,816
<SECURITIES> 0 0
<RECEIVABLES> 251 13
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 16,474 2,880
<PP&E> 273 75
<DEPRECIATION> 61 15
<TOTAL-ASSETS> 17,437 2,975
<CURRENT-LIABILITIES> 727 269
<BONDS> 0 0
0 0
14 9
<COMMON> 10 10
<OTHER-SE> 16,686 2,787
<TOTAL-LIABILITY-AND-EQUITY> 17,437 2,975
<SALES> 5,855 149
<TOTAL-REVENUES> 5,855 149
<CGS> 0 0
<TOTAL-COSTS> 5,144 1,653
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 711 (1,504)
<INCOME-TAX> 17 0
<INCOME-CONTINUING> 694 (1,504)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 694 (1,504)
<EPS-BASIC> 0.17 (0.86)
<EPS-DILUTED> 0.03 (0.86)
</TABLE>
