<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 2000
REGISTRATION NO. 333-30174
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 4
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
DAVID A. HSU SHEARMAN & STERLING
SHAHRAM SEYEDIN-NOOR 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
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--------------------------------------------------------------------------------------------------------------------
<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 JUNE 2, 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
--------- -----
<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 $10 million. These startups are often
underserved by the current venture capital market. In exchange for our services,
we receive cash placement fees and the right to buy stock in our client
companies. Through March 31, 2000, we assisted:
- 37 client companies raise more than $134 million in 39 financings, for
which we received cash placement fees and the right to buy their stock.
Immediately following these financings, we owned or had the right to buy
at a nominal price, an average of more than 4% of these clients'
outstanding capital stock. Approximately 64% of these financings were led
by venture capital firms, corporate venture arms, or corporate
development organizations.
- 14 other client companies with financing and marketing activities for
which we received the right to buy their stock.
We acted as placement agent in these transactions. The cash placement fees we
received for these transactions and revenue derived from our Bootcamp for
Startups events each accounted for more than 40% of our total revenue in 1999
and more than 30% of our total revenue for the three months ended March 31,
2000. The balance of our revenue in both periods was generated from website
sponsorship fees, investor membership fees, interest income, and net increases
in the fair value of our equity interests in client companies. We anticipate
that as our business develops, the percentage of our revenue derived from
placement agent activities together with revenue from net increases in the fair
value of the stock we acquire in client companies will increase relative to our
other revenue sources, including revenue from events.
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 management
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.
In 1999, we generated $5.9 million in total revenue and net income of
$550,000. During the three months ended March 31, 2000, our revenue totaled $3.7
million and net income was $545,000. However, we expect to incur significant
losses for the foreseeable future as we continue to expand our operations.
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 registered 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 or any other website identified in this prospectus is part of this
prospectus.
1
<PAGE> 4
THE OFFERING
Shares offered by
Garage.com.................... 3,500,000 shares
Shares to be outstanding after
the offering.................. 32,788,829 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 29,288,829 shares outstanding as of March 31, 2000, and excludes:
- 571,041 shares issuable upon exercise of options outstanding as of March
31, 2000 at a weighted average exercise price of $8.33 per share; and
- 3,540,259 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.
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 THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------ -----------------
1998 1999 1999 2000
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue..................................... $ 149 $ 5,855 $ 248 $ 3,688
Total costs and expenses.......................... 1,653 5,288 511 2,781
Income (loss) from operations..................... (1,504) 567 (263) 907
Net income (loss)................................. (1,504) 550 (263) 545
Net income (loss) per share -- basic.............. $ (0.86) $ 0.13 $(0.09) $ 0.09
Shares used in per share calculation -- basic..... 1,740 4,119 3,021 5,889
Net income (loss) per share -- diluted............ $ (0.86) $ 0.03 $(0.09) $ 0.02
Shares used in per share calculation -- diluted... 1,740 20,781 3,021 28,087
Net income per share -- basic pro forma........... $ 0.04 $ 0.03
Shares used in per share calculation -- basic pro
forma........................................... 14,753 22,238
</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
March 31, 2000. This data is also presented on an as adjusted basis 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 MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $39,119 $80,199
Working capital............................................. 38,130 79,210
Total assets................................................ 47,762 88,842
Total stockholders' equity.................................. 44,661 85,741
</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. Approximately 4% and 24% of our revenues were attributable to net
increases in the fair value of our securities during 1999 and for the three
months ended March 31, 2000, respectively. 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 stage 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.
All of the securities we own were issued by high technology companies. 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. In
addition, in April 2000, the U.S. securities markets, generally, and those of
high technology companies in particular, experienced significant volatility.
This volatility could deter investors from investing in securities of high
technology companies, thereby lowering the demand for our services and value of
the securities we hold.
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 March 31, 2000, we had an accumulated deficit of $409,000. Although we
were profitable in 1999 and during the first quarter of 2000, we do not expect
to be profitable for the year ended December 31, 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. We estimate the expenditures related to
this anticipated expansion will total between $5 million and $15 million in
2000. In addition, we expect that our expenses associated with amortization of
deferred compensation will increase to at least $913,000 in 2000 from $685,000
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
6
<PAGE> 9
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 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.
Our wholly-owned subsidiary, Garage.com Securities, is a registered
broker-dealer. Like other broker-dealers, it is 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 38 at March 31, 2000. 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 more than 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.
EVENT SPONSORSHIP FEES AND WEBSITE SPONSORSHIP FEES ACCOUNTED FOR 23% OF OUR
REVENUE DURING 1999 AND 13% OF OUR REVENUE FOR THE THREE MONTHS ENDED MARCH 31,
2000. 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. These
sponsorships included $364,000 of non-monetary revenue in 1999 and $90,000 of
non-monetary revenue for the three months ended March 31, 2000. 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 became effective between March and September 1998, have a term of
three years, and are automatically renewable for additional one-year periods.
However, Microsoft Corporation has the right to terminate its agreement with us
without cause, within 45 days of January 1, 2001. Credit Suisse First Boston may
terminate its agreement with us without cause, at any time prior to July 21,
2000, and Heidrick and Struggles may terminate its agreement with us without
cause at any time. 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
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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
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,
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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.
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. 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". We believe that we are not an investment
company because our wholly-owned broker-dealer subsidiary Garage.com Securities
is primarily engaged in the business of selling securities to customers, acting
as a broker, and related activities. This provision of the Investment Company
Act 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 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. See
"Business -- Regulation" for a more detailed discussion of how we may be
affected by the Investment Company Act.
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
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.
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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. This means that the
investors in our client companies' private placements would have the right to
rescind their purchases of securities for one year after the date of purchase.
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.
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
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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
OUR WHOLLY-OWNED BROKER-DEALER SUBSIDIARY, GARAGE.COM SECURITIES, IS 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.
The mode of operation and profitability of Garage.com Securities 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.
Garage.com Securities' ability to comply with applicable laws and rules
depends on its establishment and maintenance of an effective compliance system,
as well as its 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 Garage.com Securities is unable
to comply with applicable laws and rules, its 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".
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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 because the federal securities laws
impose liability on a broker-dealer employer for acts of its employees that is
not imposed on 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.
THE SEC, THE SEC STAFF, AND OTHER SECURITIES REGULATORS MAY TAKE POSITIONS THAT
COULD HARM OUR BUSINESS.
As the SEC and other securities regulators continue to address how the
securities laws apply to the rapidly changing world of the internet, they may
take positions that harm our business. For example, the SEC may take more
expansive positions than it has currently that financial portals and other
websites engaging in securities-related businesses are "brokers." The
broker-related activities on our website are conducted exclusively by our
subsidiary, Garage.com Securities, a registered broker-dealer. Garage.com Inc.
is not a registered broker-dealer, accordingly such positions could expose
Garage.com Inc. to claims that it is conducting business as a broker without
being similarly registered. This could result in censures, fines, the issuance
of cease-and-desist orders or other actions against us. Further, we would be
unable to enforce contracts with third parties for the purchase or sale of
securities, and such third parties could seek rescission of securities
transactions undertaken by us, during the period in which we were deemed to be
an unregistered broker-dealer.
RISKS ASSOCIATED WITH THIS OFFERING
OUR DIRECTORS AND EXECUTIVE OFFICERS WILL CONTROL 49.9% OF OUR COMMON STOCK
FOLLOWING THIS OFFERING.
Following the completion of this offering, our directors and executive
officers, constituting a total of 12 persons, will control approximately 49.9%
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 has broad discretion in how we use the proceeds from this
offering because a significant amount of the proceeds from this offering has not
been allocated for a specific purpose. 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
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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.
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;
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- 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 29.3 MILLION, OR 89.3%, OF OUR TOTAL OUTSTANDING SHARES MAY NOT BE
IMMEDIATELY RESOLD 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 32,788,829 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 29,288,829
shares, or 89.3% of our total outstanding shares, will become available for
resale in the public market as shown in the charts below.
In addition, substantially 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 day lock-up period at any time without notice. The underwriters do
not have any preestablished criteria upon which they will release these shares.
If the underwriters do not release any shares from the 180 day lock-up
period, the number of shares that will become available for sale in the public
market is shown in the chart below:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES TOTAL OUTSTANDING DATE OF AVAILABILITY FOR SALE INTO PUBLIC MARKET
---------------- ----------------- ------------------------------------------------
<S> <C> <C>
3,500,000........................... 10.7% Upon effectiveness
-- ................................. -- 90 days after the date of this prospectus
25,390,700 ......................... 77.4% 180 days after the date of this prospectus,
subject in some cases to volume limitations
3,898,129 .......................... 11.9% More than 180 days after the date of this
prospectus
</TABLE>
18
<PAGE> 21
If no shares were subject to the 180 day lock-up period, the number of
shares of stock that will become available for sale in the public market is
shown in the chart below:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES TOTAL OUTSTANDING DATE OF AVAILABILITY FOR SALE INTO PUBLIC MARKET
---------------- ----------------- ------------------------------------------------
<S> <C> <C>
4,255,000........................... 13.0% Upon effectiveness
20,179,950.......................... 61.5% 90 days after the date of this prospectus,
subject in some cases to volume limitations
8,353,879........................... 25.5% More than 90 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
$10.38 in net tangible book value per share, or approximately 80% of the
offering price of $13.00 per share. In contrast, existing stockholders paid an
average price of $1.67 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.
19
<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.
The principal purposes of this offering are to:
- Create a public market for our common stock and to facilitate future
access by Garage.com to the public securities markets;
- 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 our rights to buy stock in client companies 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. We expect the expenditures
associated with our anticipated expansion will total between $5 million and $15
million in 2000. We also expect to use between $5 million and $25 million of the
proceeds from this offering to buy stock in client companies during 2000.
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 be certain that the amounts we expect to spend on
any of the uses described above will fall within the estimated ranges. We also
cannot be certain of the timing of these expenditures. Management reserves the
right to reallocate the net proceeds within the uses outlined above. Pending our
use of the net proceeds of this offering, we intend to invest them in
short-term, investment grade, interest-bearing securities.
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.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth our actual capitalization as of March 31,
2000. Our capitalization is also presented on an as adjusted basis to give
effect to the conversion of all our outstanding shares of convertible preferred
stock into shares of common stock and 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>
MARCH 31, 2000
--------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <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; 17,800,000
shares authorized, 17,450,129 shares issued and
outstanding; none authorized or outstanding as
adjusted............................................... 17 --
Common stock, $0.001 par value, 38,700,000 shares
authorized actual and as adjusted, respectively;
11,838,700 shares issued and outstanding actual;
95,000,000 shares authorized, 32,788,829 shares issued
and outstanding as adjusted............................ 12 33
Additional paid-in capital................................ 50,765 91,841
Notes receivable from stockholders........................ (2,510) (2,510)
Deferred stock compensation............................... (3,214) (3,214)
Accumulated deficit....................................... (409) (409)
------- -------
Total stockholders' equity............................. 44,661 85,741
------- -------
Total capitalization.............................. $44,661 $85,741
======= =======
</TABLE>
The number of shares of common stock outstanding at March 31, 2000
excludes:
- 571,041 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000 at a weighted average price of $8.33 per
share; and
- 2,540,259 shares available for future issuance under our incentive plans
as of March 31, 2000, 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.
21
<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 net tangible book value at March 31, 2000, was $44.7 million, or $1.53
per share based on 29,288,829 shares of common stock outstanding after giving
effect 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 March 31, 2000 would be $85.7 million, or $2.62 per
share. This represents an immediate increase in the pro forma net tangible book
value of $1.09 per share to existing stockholders and an immediate dilution of
$10.38 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............................................... $1.53
Increase per share attributable to new investors.......... 1.09
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.62
------
Dilution per share to new investors......................... $10.38
======
</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 $2.77 per
share, the increase in net tangible book value per share to existing
stockholders would be $1.24 per share, and the dilution in net tangible book
value to new investors would be $10.23.
The following table shows on a pro forma basis at March 31, 2000, 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..... 29,288,829 89.3% $49,024,000 51.9% $ 1.67
New investors............. 3,500,000 10.7 45,500,000 48.1 13.00
---------- ----- ----------- -----
Total................ 32,788,829 100.0% $94,524,000 100.0%
========== ===== =========== =====
</TABLE>
These tables assume no exercise of stock options outstanding as of March
31, 2000. As of March 31, 2000, there were 571,041 shares of common stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $8.33 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.
22
<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. The consolidated statement of
operations data for the three months ended March 31, 1999 and 2000, and the
consolidated balance sheet data at March 31, 2000, are derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus. Historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ---------------------
1998 1999 1999 2000
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Placement fees.................................... $ -- $ 2,485 $ 140 $ 1,216
Event registration and sponsorship fees (including
$300 in 1999 and $103 in the three months ended
March 31, 2000 from related parties)............ -- 2,429 -- 1,131
Interest income................................... 39 295 24 297
Principal transactions............................ -- 225 -- 888
Website sponsorships and other.................... 110 421 84 156
------- ------- ------ -------
Total revenue................................... 149 5,855 248 3,688
------- ------- ------ -------
Costs and expenses:
Cost of events.................................... -- 1,030 -- 478
Compensation and benefits......................... 909 2,216 292 1,291
Compensation and benefits -- amortization of
deferred stock compensation..................... -- 685 22 220
Professional fees................................. 234 377 44 171
Occupancy......................................... 147 295 47 136
Marketing......................................... 138 218 39 134
Other............................................. 225 467 67 351
------- ------- ------ -------
Total costs and expenses........................ 1,653 5,288 511 2,781
------- ------- ------ -------
Income (loss) from operations....................... (1,504) 567 263 907
Provision for income taxes.......................... -- 17 -- 362
------- ------- ------ -------
Net income (loss)................................... $(1,504) $ 550 $ (263) $ 545
======= ======= ====== =======
Net income (loss) per share -- basic(1)............. $ (0.86) $ 0.13 $(0.09) $ 0.09
======= ======= ====== =======
Shares used in per share calculation -- basic(1).... 1,740 4,119 3,021 5,889
======= ======= ====== =======
Net income (loss) per share -- diluted(1)........... $ (0.86) $ 0.03 $(0.09) $ 0.02
======= ======= ====== =======
Shares used in per share calculation --diluted(1)... 1,740 20,781 3,021 28,087
======= ======= ====== =======
Net income per share -- basic pro forma(1).......... $ 0.04 $ 0.03
======= =======
Shares used in per share calculation -- basic pro
forma(1).......................................... 14,753 22,238
======= =======
</TABLE>
------------------------
(1) See 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.
23
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1998 1999 2000
---- ---- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $2,816 $16,123 $39,119
Working capital............................................. 2,611 15,747 38,130
Total assets................................................ 2,975 17,539 47,762
Total stockholders' equity.................................. 2,706 16,812 44,661
</TABLE>
24
<PAGE> 27
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 derives revenue from placement fees, event registration and
sponsorship fees, principal transactions, website sponsorships, investor
membership fees, and interest income.
Our startup clients pay our wholly-owned broker-dealer subsidiary,
Garage.com Securities, cash placement fees when they close financings that we
arrange. Garage.com Securities arranges financings for startup clients on a best
efforts basis. To date, cash placement fees have comprised all of our placement
fee revenue. We generally earn cash placement fees of 5% or more of the funds
raised from non-excluded investors for our portfolio clients. During 1999, we
helped portfolio clients raise $90 million in 29 financings, for which we earned
$2.5 million in cash placement fees. The total amount raised by portfolio
clients includes amounts from excluded investors, on which we do not earn a
placement fee. During the three months ended March 31, 2000, we helped portfolio
clients raise $44 million in 10 financings, for which we earned $1.2 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. We cannot control the extent to which our portfolio
clients will raise funds from excluded investors. 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.
Event registration and sponsorship fees relate to our events, including our
two-day Bootcamps for Startups conferences. Entrepreneurs and investors pay us
cash fees to attend these conferences. We also generate cash and nonmonetary
revenue by selling sponsorships for these events. The nonmonetary portion of
this revenue was approximately $364,000 in 1999 and $90,000 for the three months
ended March 31, 2000. We expect the amount of our nonmonetary revenue to
decrease as a percentage of our total revenue. Registration fees and
sponsorships associated with our Bootcamps for Startups conferences are
recognized as revenue upon completion of the applicable conference. During 1999,
we held three Bootcamp for Startups conferences. We held one Bootcamp event in
the first quarter of 2000 and plan to hold seven more during the remainder of
2000. These events will not necessarily occur evenly throughout the year. As a
result, revenue from these events will fluctuate significantly between quarters.
Principal transactions revenue is the change in the fair value of equity
interests that we hold. We do not record revenue on the date that we purchase
stock or receive the rights to buy stock because the price on these dates
represents fair value. In the future, we expect principal transactions revenue
to comprise a significant portion of our revenue. The timing of the changes
25
<PAGE> 28
in fair value is difficult to predict. In addition, if the fair value of the
equity interests that we hold or the rights to buy stock declines, our revenue
will decrease. We cannot control our client companies or the fair value of their
stock. Our principal transactions revenue is subject to significant fluctuations
between quarters depending on the timing of these fair value fluctuations,
transactions and events. Principal transactions revenue also includes a
performance fee received for the management of Garage.com Investments I, LP. See
"Change in Structure" for a discussion of this management fee.
We also generate revenue from cash payments for sponsorships of our website
and from 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. We recognize revenue for website sponsorships
and investor memberships on a straight-line basis over their term.
Startup Client Equity. Our startup clients give us the right to buy stock
at fair value prior to the time that we assist them in arranging their
financings. The price of the stock we buy, or the exercise price of the rights
we receive, is generally nominal compared to the preferred stock price in the
financings we subsequently arrange. These rights generally vest immediately and
represent rights to purchase common stock. We purchase the common stock and
receive the rights to buy stock in our startup clients at the time we are
engaged by the startup client. To date, the average time between when we buy the
stock or receive the rights to buy stock and the financings we subsequently
arrange has been approximately four months. In addition, our startup clients
also give us the right to participate in the financings that we arrange. These
rights generally vest upon the first sale of stock in the financings that we
arrange. In some cases, the stock we buy or the rights we obtain vest based on
our performance in assisting our startup clients in arranging their financings.
These financings typically take the form of preferred stock that we purchase on
the same terms and conditions as other investors in the financing. Our startup
clients also generally grant us preemptive rights, which allow us to make
additional investments 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.
During 1999 and the first quarter of 2000, we helped 37 portfolio clients
raise capital in 39 financings. In connection with these transactions, we
exercised our right to buy stock averaging over 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 that we obtain
the right to buy to at least 5% of these companies' outstanding stock. The
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 included the addition of management recruiting services and
marketing support.
The startup client stock that we buy represents purchases of principal
investments and is a use of cash in investing activities. These amounts are not
reflected in our statements of operations until there is a change in the fair
value of this stock. For the year ended December 31, 1999, purchases of startup
client stock totaled $459,000. For the three months ended March 31, 2000, such
purchases were $4.1 million. We expect that cash used to buy stock will continue
to increase.
As of March 31, 2000, we had an accumulated deficit of $409,000. Although
we were profitable in 1999 and during the first quarter of 2000, we expect to
incur a net loss for the year
26
<PAGE> 29
ending December 31, 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 $913,000 of
expense for amortization of deferred compensation in 2000 related to stock
options granted to employees, compared with $685,000 in 1999.
We recognized $220,000 of expense for amortization of deferred compensation
in the first quarter of 2000 and expect to recognize at least $231,000 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, 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 ON OUR RESULTS OF OPERATIONS OF ACCOUNTING FOR OUR STARTUP CLIENT EQUITY
AT FAIR VALUE
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 will be
based on quoted market prices, when available. However, as none of the equity
interests held by Garage.com Securities, Inc. are in companies with quoted
market prices, fair value is usually not readily ascertainable. In cases where
fair value is not readily ascertainable, fair value is based on management's
estimates and cost is often the best estimate of fair value. 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.
Management generally receives information regarding these companies through
publicly available sources or in connection with a financing in which we
participate. We generally do not have the right to obtain regular financial
information from our startup clients. In determining fair value, management
considers all available factors which may include the following:
- an initial public offering or acquisition;
- operating results;
- market valuations of comparable companies;
- the stage of development;
- market conditions;
27
<PAGE> 30
- market acceptance of the services the company provides; and
- general economic conditions.
Management reassesses fair value as new information becomes available and
performs a review at the end of each fiscal quarter. 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. There
were no impairments during the three months ended March 31, 2000.
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
Until January 2000, we were the managing member of Garage.com Startups LLC.
The LLC was formed to purchase for cash and hold the equity interests in startup
companies which received broker-dealer services from Garage.com Securities. Each
of the LLC members paid cash for units in the LLC or executed notes for their
units. All notes were repaid during 1999. The LLC was governed by an operating
agreement pursuant to which Garage.com was the sole managing member of the LLC.
Under the operating agreement the managing member had exclusive voting control
over the LLC. As such, the accompanying consolidated financial statements
include the accounts of LLC. In December 1999 and January 2000, Garage.com
issued 544,506 and 15,706 shares, respectively, of its Series D preferred stock
for the interests in the LLC that it did not own. This transaction was accounted
for as an asset acquisition at historical cost for the units acquired from
Garage.com shareholders and as an asset acquisition at fair value for the
remainder of the units acquired. Subsequent to the issuance of the Series D
shares, the LLC 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. The financial statements of Garage.com Investments are not included in
the consolidated financial statements of Garage.com. During 1999, no revenue was
recognized related to Garage.com Investments. For the three months ended March
31, 2000, principal transaction revenue related to Garage.com Investments was
$160,000. At March 31, 2000, the limited partnership held equity interests 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 March 31, 2000, Garage.com
Investments had approximately $1.8 million in cash available for such follow-on
investments. We do not currently plan to raise additional funds for Garage.com
Investments.
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
$3.6 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. We recorded an additional $552,000 of deferred stock
compensation related to the grant of stock options to employees during the first
quarter of 2000. These amounts are included as a reduction of stockholders'
equity and are being amortized on a straight-line basis over the vesting period
of the individual options,
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generally four years. We recorded amortization of deferred stock compensation of
$685,000 in 1999 and $220,000 for the three months ended March 31, 2000. At
March 31, 2000, we had a total of $3.2 million remaining to be amortized on a
straight line basis over the vesting period of the option, 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
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenue. Total revenue increased to $3.7 million in the three months ended
March 31, 2000 from $248,000 in the three months ended March 31, 1999. We earned
placement fees of $1.2 million in the 2000 period as compared to $140,000 in the
1999 period. We earn these fees in connection with assisting our client
companies in obtaining funds. We assisted ten client companies in the 2000
period as compared to three client companies in the 1999 period. Additionally,
during the 2000 period, we generated $1.1 million of revenue from registration
and sponsorship fees from one Bootcamp for Startups event. We did not hold any
Bootcamp for Startups events during the 1999 period. Principal transaction
revenue was $888,000 during the 2000 period as compared to no revenue during the
1999 period. Principal transaction revenue represents the net increase in the
fair value of the stock we own. During the 2000 period, approximately $461,000
of principal transaction revenue was recorded when WebOrder, one of our client
companies, was acquired. We recorded $297,000 of interest income during the 2000
period as compared to $24,000 during the 1999 period. The increase related to
interest on the proceeds from our preferred stock financings. We also earn
sponsorships and other revenue in exchange for banner advertising, the placement
of company logos on our website and investor membership fees. We recorded
$156,000 in sponsorships and other revenue during the 2000 period as compared to
$84,000 for the 1999 period. This increase is attributable to the fees we began
collecting from member investors in June 1999.
Operating expenses. Our operating expenses increased significantly during
the 2000 period as compared to the 1999 period as we grew our operations and
broker-dealer activities. We expect that our operating expenses will continue to
grow through 2000 and thereafter 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 related to each conference. Cost of events was $478,000 for the 2000
period. We held one conference in the 2000 period and no conferences in the 1999
period.
Compensation and benefits. Compensation and benefits expenses consist of
salaries, wages and related employee benefits for our personnel. Compensation
and benefits increased to $1.3 million in the 2000 period as compared to
$292,000 in the 1999 period. The increase relates to the increase in the number
of our employees from 11 as of March 31, 1999 to 38 employees as of March 31,
2000. We expect such expenses to continue to increase as we plan to continue to
increase our number of employees through 2000 and beyond.
Amortization of deferred stock compensation was $220,000 in the 2000 period
compared to $22,000 in the 1999 period. We recorded $3.6 million of deferred
stock compensation during fiscal 1999 and $552,000 during the 2000 period 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.
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Professional fees. Professional fees include the costs we incur for our
outside legal, finance, business, and tax and accounting advisors. Professional
fees were $171,000 in the 2000 period as compared to $44,000 in the 1999 period.
The increase relates to the increase in our broker-dealer activities in the 2000
period as compared to the 1999 period. We expect that our professional fees will
continue to increase through 2000 as a result of the ongoing regulation of our
broker-dealer activities, the opening of 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 were $136,000 for the 2000
period as compared to $47,000 for the 1999 period. The increase relates to an
expansion of our headquarters facilities as well as new offices in Boston,
Seattle, Austin, Tel Aviv and London. We anticipate that our occupancy costs
will continue to increase through 2000 and beyond as we further expand our
headquarters facilities and add additional offices in the Unites States and
internationally.
Marketing. Marketing expenses represent the cost of outside marketing and
public relations consultants as well as advertising and other promotional
activities. These costs exclude advertising related to our Bootcamps for
Startups conferences. Marketing expenses increased to $134,000 in the 2000
period as compared to $39,000 in the 1999 period as we expanded our marketing
efforts in connection with our broker-dealer activities. We expect that our
marketing costs will continue to increase as we expand into additional
geographic markets.
Other. Other expenses include travel and related costs for our employees
while traveling on company business other than Bootcamps for Startups events,
depreciation of property and equipment, telecommunications expenses and office
supplies. Other expenses increased to $351,000 for the 2000 period as compared
to $67,000 for the 1999 period. The increase related to travel between our
headquarters and our new United States and international offices, increased
telecommunications and office supplies costs as a result of the increase in the
number of employees and increased depreciation related to additional purchased
of property and equipment.
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 in 1999 arose from an increase in the
fair value of our equity interest in a portfolio client company that completed a
second financing with us in November 1999. This financing was completed at a
higher share price than we paid to acquire our original equity interest in the
client company. 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
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<PAGE> 33
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 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.
Amortization of deferred stock compensation was $685,000 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 $3.6 million
in 1999 for options awarded to employees with exercise prices below the fair
value for financial reporting purposes of our common stock on their respective
grant dates. We will record at least $913,000 of expense for amortization of
deferred compensation in 2000 related to stock options granted to employees.
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.
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, MAR. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Placement fees............... $ -- $ -- $ -- $ -- $ 140 $ 652 $ 594 $1,099 $1,216
Event registration and
sponsorship fees (including
amounts from related
parties(1))................ -- -- -- -- -- 445 1,076 908 1,131
Interest income.............. -- 2 7 30 24 24 53 194 297
Principal transactions....... -- -- -- -- -- -- -- 225 888
Website sponsorships and
other...................... -- 23 35 52 84 85 105 147 156
----- ----- ----- ----- ----- ------ ------ ------ ------
Total revenue.............. -- 25 42 82 248 1,206 1,828 2,573 3,688
Costs and expenses:
Cost of events............... -- -- -- -- -- 187 307 536 478
Compensation and benefits.... 110 247 262 290 292 324 559 1,041 1,291
Compensation and
benefits -- Amortization of
deferred stock
compensation............... -- -- -- -- 22 262 145 256 220
Professional fees............ 66 25 50 93 44 38 64 231 171
Occupancy.................... 15 39 46 47 47 59 103 86 136
Marketing.................... -- 4 19 115 39 40 45 94 134
Other........................ 39 52 75 59 67 57 143 200 351
----- ----- ----- ----- ----- ------ ------ ------ ------
Total costs and expenses... 230 367 452 604 511 967 1,366 2,444 2,781
----- ----- ----- ----- ----- ------ ------ ------ ------
Income (loss)from operations... (230) (342) (410) (522) (263) 239 462 129 907
Provision for income taxes..... -- -- -- -- -- 6 8 3 362
----- ----- ----- ----- ----- ------ ------ ------ ------
Net income (loss).......... $(230) $(342) $(410) $(522) $(263) $ 233 $ 454 $ 126 $ 545
===== ===== ===== ===== ===== ====== ====== ====== ======
</TABLE>
---------------
(1) Amounts from related parties were $100, $122 and $78 in the three months
ended June 30, September 30, and December 31, 1999 and $103 in the three
months ended March 31, 2000.
Our quarterly revenue increased from inception through March 31, 2000. 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. The increase in placement fee revenue in the
first quarter of 2000 was due to an increase in the average size of financings
to $4.4 million.
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
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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 our equity interest in a portfolio client company that
completed a second financing with us in November 1999. The increase in principal
transactions revenue in the first quarter of 2000 related primarily to the
acquisition of a portfolio client by a publicly traded Internet infrastructure
company and valuation increases associated with follow-on financings of
portfolio clients at higher prices than we paid to acquire our equity interests.
Revenues from sponsorships and other 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 March 31, 2000, we had raised net
proceeds of $43.9 million from the sale of equity securities and generated $8.1
million in cash revenues from equity placements, events, sponsorships, and other
sources.
We had cash and cash equivalents of $39.1 million at March 31, 2000, an
increase of $23.0 million from December 31, 1999.
For the three months ended March 31, 2000, cash provided by operating and
financing activities was $158,000 and $27.1 million, respectively. In the
future, we expect to significantly increase our use of cash for operating
activities to expand our operations. We estimate the amount of expenditures that
we will make to expand our operations will total between $5 million and $15
million in 2000. For the three months ended March 31, 2000, cash used in
investing activities was $4.2 million and related primarily to the purchase of
principal investments. In the future, we expect our use of cash to increase to
exercise our rights to purchase stock in client companies and to purchase
property and equipment for the expansion of our operations. We also expect to
use between $5 million and $25 million in cash to buy stock in client companies
during the last three quarters of 2000. The rights we receive to buy stock in
client companies in connection with our services are generally exercisable when
received and expire if not exercised within five years.
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.
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.
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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
The potential for changes in the fair value of our investments is referred
to as "market risk". 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.
- Equity price risks result from exposures to changes in prices and
volatilities of individual equities, equity baskets, and equity indices.
At March 31, 2000, we had $39.1 million in cash and cash equivalents. A
decrease in market rates of interest would have no material effect on the value
of these assets.
Our business is also subject to equity price risk. As of March 31, 2000,
none of our principal investments were in publicly traded companies.
Nevertheless, our principal transactions revenue is affected by changes in the
fair value of our principal investments. For example, based on our principal
investment portfolio as of March 31, 2000 and assuming no new investment
activity, a hypothetical 10% decline in value of our portfolio at any time after
March 31, 2000 would result in our recognition of $567,000 in losses. Such
losses would be reflected as a reduction of principal transactions revenue.
Additionally, such a decline may cause our member investors to be reluctant or
unable to invest additional funds in our clients. This may reduce our investor
membership fees and our cash placement fees. This may also reduce our event
revenues if our member investors or entrepreneurs stop attending our events,
including Bootcamp for Startups.
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 $10 million.
These startups are often underserved by the current venture capital market. In
exchange for our services, we receive cash placement fees and the right to buy
stock in our client companies. Through March 31, 2000, we assisted:
- 37 client companies raise more than $134 million in 39 financings, for
which we received cash placement fees and the right to buy their stock.
Immediately following these financings, we owned or had the right to buy
at a nominal price, an average of more than 4% of these clients'
outstanding capital stock. Approximately 64% of these financings were led
by venture capital firms or corporate venture arms, or corporate
development organizations.
- 14 other client companies with financing and marketing activities for
which we received the right to buy their stock.
We acted as placement agent in these transactions. The cash placement fees we
received for these transactions and revenue derived from our Bootcamp for
Startups events each accounted for more than 40% of our total revenue in 1999
and more than 30% of our total revenue for the three months ended March 31,
2000. The balance of our revenue in both periods was generated from website
sponsorship fees, investor membership fees, interest income, and net increases
in the fair value of our equity interests in client companies. We anticipate
that as our business develops, the percentage of our revenue derived from
placement agent activities together with revenue from net increases in the fair
value of the stock we acquire in client companies will increase relative to our
other revenue sources, including revenue from events.
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 management
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. Through March 31, 2000, approximately 95% of the financings we
arranged for our portfolio clients were within our targeted range of $0.5
million to $10 million. The remaining financings exceeded this range.
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. 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.
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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, 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 in startup companies and in companies seeking
additional financing 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 invest in companies has come under pressure as a result of its
own success. According to the National Venture Capital Association, venture
capital under management 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. Funds under management include the total of all capital contributed
to venture capital funds less capital distributed to the funds' investors.
However, the number of investment professionals employed by venture capital
firms has not kept pace with this growth. Based on data from the National
Venture Capital Association, venture capital invested per investment
professional increased from $2.4 million in 1995 to $5.5 million in 1998.
Based on our experience in the industry, we believe that institutional
venture capital investors increasingly make larger investments because they are
faced with the challenges of investing larger sums with relatively fewer
investment professionals. The average investment by venture capital firms in
1999 was $8.9 million according to data on the website
(http://www.pwcmoneytree.com) of 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 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
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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.
CHALLENGES FACED BY STARTUPS
Startups encounter many obstacles in efficiently raising initial financing.
For example, the traditional process is not democratic in that startups often
find it difficult to gain access to members of the venture capital community
without prior relationships. 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. Based on our experience in the industry, 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, based on our experience in the
industry 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
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intended to create a market for the startup's investment opportunity. Based on a
review of our competitors' websites, 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 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 our
portfolio companies because it allows our portfolio companies to approach
multiple investors through Garage.com, a credible intermediary. The traditional
method requires startups to approach investors one after another. We believe
that our services present these startups with better information about investor
demand for their 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
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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 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.
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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.
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 50,000 entrepreneurs have registered for access to the
Garage portion of our website since we launched our website in May 1998. Of
these 50,000 registrants, more than 12,000 have submitted company overviews
through our website. In March 2000, we received an average of approximately 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.
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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 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 March 31, 2000,
we had reviewed more than 2,100 detailed applications and met with approximately
500 startup teams since commencing our broker-dealer operations in October 1998.
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 March 31, 2000,
we had accepted 75 companies as Portfolio clients.
This process can be illustrated as follows:
[PORTFOLIO CLIENTS 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
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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.
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 March 31, 2000, our Startup Jobs area had received more than 17,000
job seeker profiles and our human capital group placed more than 60
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.
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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.
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.
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GARAGE.COM CLIENTS
Set forth below are our portfolio clients that had completed financings as
of March 31, 2000, grouped by industry sector:
[DIAGRAM SHOWING PORTFOLIO CLIENTS]
The foregoing table reflects only portfolio clients and does not include
other clients for which we provided services. Through March 31, 2000, for
example, we provided services and raised capital for 14 non-portfolio client
companies. At March 31, 2000, an additional 34 portfolio clients were seeking
capital, including four from the table above that were pursuing financing for
the second time through us, and six 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. In May 1998, the month we launched our website, visitors
to our website viewed over 100,000 total pages compared with over 900,000 page
views during March 2000. 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. In the
"Portfolio" sub-area of Heaven, we post investment opportunities from our
portfolio client companies. We provide these portfolio companies with the full
range of our services. In the "Exchange" sub-area, we post other investment
opportunities from startups that are not included in the Portfolio.
Nevertheless, we believe many investors may find these investment opportunities
attractive given their specific experience and interest. In the "Gold Mine"
sub-area of Heaven, approved member investors can review an abbreviated
description of many early stage companies that currently do not match our
portfolio goals.
"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.
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"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 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.
Our sponsorship agreements with PricewaterhouseCoopers, Silicon Valley
Bank, Venture Law Group, Credit Suisse First Boston, Heidrick and Struggles,
Advanced Technology Ventures, and ABD Insurance and Financial Services 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
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sponsors on our website. Our founding sponsors (other than
PricewaterhouseCoopers and Silicon Valley Bank) have agreed not to
sponsor or promote any other service that uses the Internet to match
investment opportunities in technology startups with investors in a
manner competitive with us, but a sponsor may place advertisements on a
competing service, have links on the competing service's website to the
sponsor's website, and refer persons to a competing service. Silicon
Valley Bank has agreed not to be a founding sponsor of any of our
competitors. In addition, our founding sponsors (other than Credit Suisse
First Boston and PricewaterhouseCoopers) have agreed not to invest in any
of our competitors.
- Right of First Refusal: If we decide to terminate a sponsorship
agreement and obtain 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 may 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.
- Credit Suisse First Boston: Credit Suisse First Boston has agreed to
provide our client investors and client companies access without charge
to a portion of its on-line technology reports that Credit Suisse First
Boston, in its sole judgment, deems reasonably useful and beneficial to
our client investors and client companies.
- 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 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 value of approximately $12,000. In exchange, Silicon Valley Bank
agreed to provide our clients with 30-day passes to its websites. Each
pass provides full access to and use of the restricted portion of Silicon
Valley Bank's 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. The value of these
sponsorships for 1999 was approximately $50,000 per sponsor. However,
when the relationships were established, there could be no assurance that
the sponsorships would have any value. Credit Suisse First Boston and ABD
Insurance and Financial Services each paid us approximately $50,000 in
1999 in exchange for being listed as our sponsor. Silicon Valley Bank
agreed to pay us a sponsorship fee of $25,000 every six months up to a
total payment of $150,000 over three years. Heidrick and Struggles agreed
to pay us a sponsorship fee of $12,500 every three months up to a total
payment of $150,000 over those years. In place of a sponsorship fee,
PricewaterhouseCoopers has agreed to give us up to 2,000 hours per year
of access to the services of its marketing group to assist us in
screening and assisting potential client investment opportunities for the
duration of the sponsorship agreement. We do not recognize revenue
related to these barter transactions as they do not meet our revenue
recognition policy criteria.
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- Term: Our sponsorship agreements became effective between March and
September 1998, have a term of three years, and are automatically
renewable for additional one-year periods. However, Credit Suisse First
Boston may terminate its sponsorship agreement without cause at any time
prior to July 21, 2000, and Heidrick and Struggles may terminate its
sponsorship agreement without cause at any time.
Our sponsorship agreement with Microsoft Corporation includes the following
provisions:
- Exclusivity: We have agreed to promote and allow Microsoft to participate
in our events in a manner no less favorable than how we promote and allow
any other founding sponsor to participate in such events.
- Co-Marketing: We and Microsoft will include mutually acceptable
hyperlinks on our websites to each other's websites. In addition, we may
promote services at Microsoft's existing developer centers in Silicon
Valley, its developer center in Boston (once it is established), and
other mutually agreed upon Microsoft developer centers. Microsoft will
also include a feature article supplied by us or a description of our
company and/or services on, or linked to, the home page of Microsoft's
Developer Network website at least five days per year during the term of
the sponsorship agreement.
- Co-advising: Microsoft will provide one-year memberships to its "MSDN
Universal Program" which is associated with its developer centers to
selected client companies of ours. Guy Kawasaki, our CEO, will act as an
advisor to Microsoft's Silicon Valley Developer Center.
- Termination: The Microsoft agreement terminates on December 31, 2001.
However, Microsoft has the right to terminate its agreement, without
cause, within 45 days of January 1, 2001.
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.
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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 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
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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
Our subsidiary, Garage.com Securities, is registered as a broker-dealer and
is engaged in the business of arranging financings for our client companies and
presenting investment opportunities to our client investors. Garage.com
Securities charges fees for its services that are contingent on the success of
these transactions and the amount of funds raised.
Regulation of the Securities Industry and Broker-Dealers. The business of
Garage.com Securities 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
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. Garage.com Securities is
registered as a broker-dealer with the SEC and in 50 states, the District of
Columbia, and Puerto Rico. Garage.com Securities is also a member of the NASD, a
self regulatory body. 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. In connection with a violation of these rules, 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.
Effect of Net Capital Requirements. As a registered broker-dealer and
member of the NASD, Garage.com Securities is 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 March 31,
1999, Garage.com Securities was required to maintain minimum net capital of
$100,000 and had total net capital of approximately $24.7 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 Garage.com Securities, 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.
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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 is unclear in many
significant respects and continues to evolve. Uncertainty regarding these issues
may adversely affect the viability and profitability of our business. As the SEC
and other securities regulators continue to address how the securities laws
apply to the rapidly changing world of the Internet, they may take positions
that adversely affect our business. For example, the SEC may take more expansive
positions than it has currently that financial portals and other websites
engaging in securities-related businesses are "brokers." Although the
broker-related activities on our website are conducted exclusively by Garage.com
Securities, a registered broker-dealer, such positions could expose us to claims
that we are conducting business as a broker without being similarly registered.
This could result in censures, fines, the issuance of cease-and-desist orders or
other actions against us.
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. In connection with a violation of these
rules, foreign governmental and regulatory authorities may conduct proceedings
which can result in censure, fine, the issuance of cease-and-desist or other
actions against us.
Investment Company Act. 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. Our
wholly-owned subsidiary, Garage.com Securities, must qualify for an exemption
under the Investment Company Act because it holds a significant number of
investment securities, which it receives in connection with its services. The
Investment Company Act provides an exemption for companies that are "primarily
engaged" in broker-dealer activities. We believe that Garage.com Securities
qualifies for the broker-dealer exemption because it 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 Garage.com Securities to rely on the
broker-dealer exemption. We have not sought a ruling to this effect 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.
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.
EMPLOYEES
At March 31, 2000, we employed 38 people full-time, including 11 in
management, operations, and human capital; five in marketing; five in
information technology; and 18 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,
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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 a private
investor. From May 1985 to February 1996, Ms. Cusenza was employed by Apple
Computer, Inc., 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 Bancshares, a bank holding company,
since April 1993. From April 1993 to May 1999, he served as President of Silicon
Valley Bank. From April 1993 to January 2000, he served as Chief Executive
Officer of Silicon Valley Bank. He was appointed Chair of the Board of Silicon
Valley Bank in May 1999. Mr. Dean also 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.
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Mr. Lee earned an M.B.A. equivalent from Korea University in Seoul, Korea, an
M.S. from Vanderbilt University and an L.L.B. from Chung Ang University, in
Seoul, Korea.
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
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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.
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
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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 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 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. Effective upon the closing of this offering, a
total of 5,000,000 shares of common stock will be 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.
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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 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 March 31, 2000, we had issued 2,138,700 shares of common stock upon
the exercise of options granted under our stock plan, we had outstanding options
to purchase 571,041 shares of common stock at a weighted average exercise price
of $8.33 per share and 1,290,259 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.
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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 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 between us and any of our officers or directors,
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
</TABLE>
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<PAGE> 62
<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>
Joseph A. Grundfest....... 150,000 -- -- 20,000 3,666 -- 69,098 2,257,658
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>
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 for
which they paid approximately $77,000. 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 placement
fees and the right to buy stock in WebOrder. We believe that the terms of this
relationship were no less
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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,
the cost of which was approximately $2,000. Mr. Kawasaki does not hold his
position as a director of WebOrder as a result of any arrangement between
Garage.com and WebOrder. In March 2000, WebOrder was acquired by Netopia, Inc.
NETFREIGHT.COM, INC.
We arranged financing for NetFreight.com for which we received cash
placement fees and the right to buy stock in NetFreight.com. 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 960,000 shares of stock of NetFreight.com for which they paid
approximately $70,000. Mr. Johnson does not hold his position as a director of
NetFreight.com as a result of any arrangement between Garage.com and
NetFreight.com.
GATOR.COM CORPORATION
We arranged financing for Gator.com for which we received cash placement
fees and the right to buy stock in Gator.com. 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, and VLG
Investments, one of our principal stockholders, own approximately 451,000 shares
of Gator.com stock for which they paid approximately $121,000.
12DEGREES CORPORATION
We arranged financing for 12Degrees for which we received cash placement
fees and the right to buy stock in 12Degrees. 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, and VLG
Investments, one of our principal stockholders, own approximately 341,000 shares
of 12Degrees stock for which they paid approximately $26,000.
MYPERSONAL.COM, INC.
We arranged financing for MyPersonal.com for which we received cash
placement fees and the right to buy stock in MyPersonal.com. 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, and VLG
Investments, one of our principal stockholders, own approximately 200,000 shares
of MyPersonal.com stock for which they paid approximately $20.
NEXTPHASE INTERNATIONAL CORPORATION
We arranged financing for NextPhase International for which we received
cash placement fees and the right to buy stock in NextPhase International. 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, and VLG Investments, one of our principal stockholders, own
approximately 126,000 shares of NextPhase International stock for which they
paid approximately $27,000.
REALITY FUSION, INC.
We arranged financing for Reality Fusion for which we received the right to
buy stock in Reality Fusion. 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, and VLG Investments, one of our principal
stockholders, own approximately 310,000 shares of Reality
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Fusion stock for which they paid approximately $130,000 and a warrant to
purchase an additional $2,500 of Reality Fusion stock.
XIGO, INC.
We arranged financing for Xigo for which we received the right to buy stock
in Xigo. We believe that the terms of this relationship were no less favorable
than we could have received from an unaffiliated third party. Joseph Grundfest,
one of our directors, is a director of Xigo. Mr. Grundfest owns approximately
460,000 shares of Xigo stock and a warrant to purchase an additional 10,000
shares of Xigo stock, with an exercise price of $1.70 per share, for which he
paid an aggregate purchase price of approximately $26,000. Approximately 410,000
of Mr. Grundfest's shares are subject to a right of repurchase in favor of Xigo.
That right of repurchase lapsed with respect to one quarter of those shares on
January 1, 2000, and continues to lapse at a rate of 1/48th of those shares per
month for so long as Mr. Grundfest continues to serve as a director of Xigo. Mr.
Grundfest does not hold his position as a director of Xigo as a result of any
arrangement between Garage.com and Xigo.
DRDREW.COM, INC.
We arranged financing for DrDrew.com for which we received cash placement
fees and the right to buy stock in DrDrew.com. 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 Chief Executive Officer, is on the
Board of Advisors of DrDrew.com. In exchange for Mr. Kawasaki's services on its
Board of Advisors, DrDrew.com agreed to grant an option to purchase 20,000
shares of DrDrew.com stock, with an exercise price of $0.75 per share, to Mr.
Kawasaki. Mr. Kawasaki does not hold his position on the Board of Advisors of
DrDrew.com as a result of any arrangement between Garage.com and DrDrew.com.
TRIPWIRE, INC.
We arranged financing for Tripwire for which we received cash placement
fees and the right to buy stock in Tripwire. 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 Chief Executive Officer, is on the
Board of Advisors of Tripwire. Mr. Kawasaki received an option to purchase
40,000 shares of Tripwire stock, with an exercise price of $0.10 per share. Mr.
Kawasaki does not hold his position on the Board of Advisors of Tripwire as a
result of any arrangement between Garage.com and Tripwire.
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.
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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 Chair of the
Board of Silicon Valley Bank. Craig Johnson, one of our directors, is Chairman
of Venture Law Group.
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
Chair of the Board of Silicon Valley Bank. Jos Henkens, one of our directors, is
a general partner of Advanced Technology Ventures. These sponsorship agreements
are summarized in "Business -- Marketing and Brand Development".
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of March 31, 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 10.3% 9.2%
Funds affiliated with Advanced Technology Ventures
485 Ramona Street, Suite 200
Palo Alto, California 94301
Chong-Moon Lee.......................................... 2,147,185 7.3% 6.6%
c/o Garage.com
420 Florence Avenue
Palo Alto, California 94301
Craig W. Johnson(3)..................................... 2,056,835 7.0% 6.3%
VLG Investments 1997
2800 Sand Hill Road
Menlo Park, California 94025
Guy T. Kawasaki(4)...................................... 2,007,021 6.9% 6.1%
c/o Garage.com
420 Florence Avenue
Palo Alto, California 94301
Thomas A. Bevilacqua(5)................................. 1,787,852 6.1% 5.5%
E*TRADE Group, Inc
4500 Bohannon Drive
Menlo Park, California 94025
William J. Mayall(6).................................... 1,004,398 3.4% 3.1%
Richard P. Karlgaard(7)................................. 957,398 3.3% 2.9%
William M. Reichert(8).................................. 1,008,898 3.4% 3.1%
William W. Joos(9)...................................... 978,500 3.3% 3.0%
John C. Dean(10)........................................ 883,558 3.0% 2.7%
Joseph A. Grundfest(11)................................. 173,666 * *
All executive officers and directors as a group (12
persons).............................................. 16,361,174 55.84% 49.88%
</TABLE>
---------------
* Less than 1%.
(1) Percentage of ownership is based on 29,288,829 shares outstanding as of
March 31, 2000 assuming conversion of the preferred stock, and 32,788,829
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 computing the percentage of ownership of any
other person. Unless otherwise indicated
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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 2,007,021 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 1,000,398 shares owned by the Mayall Family Trust, of which Mr.
Mayall is a trustee, 2,000 shares owned by the Sara Mayall 2000 Trust, of
which Mr. Mayall is a trustee, 2,000 shares owned by the Tess Mayall 2000
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 957,398 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 806,398 shares owned by Mr. Reichert, 100,000 shares owned by
The William M. Reichert 2000 Annuity Trust, of which Mr. Reichert is a
trustee, 100,000 shares owned by The Michelle M. Reichert 2000 Annuity
Trust, of which Michelle Reichert, Mr. Reichert's wife is a trustee, 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 972,000 shares owned by The Joos Living Trust, dated April 25,
1996, of which Mr. Joos is a trustee, 2,000 shares owned by the Lee
Children's Trust DTD February 28, 1996, FBO Catherine A. Lee, of which Mr.
Joos is a trustee, 2,000 shares owned by the Lee Children's Trust DTD
February 28, 1996, FBO Elizabeth A. Lee, 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
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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 37,500 shares owned by Mr. Dean and 846,058 shares owned by
Silicon Valley Bancshares, of which Mr. Dean is Chief Executive Officer.
Mr. Dean disclaims beneficial ownership of the shares owned by Silicon
Valley Bancshares. 150,000 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.
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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 March 31, 2000, we had 29,288,829 shares of common stock outstanding
held of record by approximately 265 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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"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
68
<PAGE> 71
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.
69
<PAGE> 72
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 32,788,829 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 25,400,000 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............................. 25,390,700 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 328,013 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 substantially all other
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
70
<PAGE> 73
in the public market without restriction after the lock-up period expires.
However, shares held by 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. 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.
71
<PAGE> 74
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.
72
<PAGE> 75
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. The material 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. These shares
have been deemed by the National Association of Securities Dealers Inc., or
NASD, not to be compensation in connection with this offering. 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. These shares have been deemed by the NASD to be underwriting compensation
in connection with this offering. In August 1999, Merchant GP, an affiliate of
Credit
73
<PAGE> 76
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 preferred stock. These shares have been deemed by the
NASD to be underwriting compensation in connection with this offering. 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 at the same price as the other purchasers of
Series E preferred stock. These shares have been deemed by the NASD to be
underwriting compensation in connection with this offering. See "Related Party
Transactions -- Stock Issuances to our Directors, Officers and Principal
Stockholders." Each of the foregoing shares will automatically convert into one
share of 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. Five percent of these shares have been deemed by the NASD to be
underwriting compensation in connection with this offering. These shares will
automatically convert into common stock upon the closing of this offering.
All shares deemed by the NASD to be underwriting compensation in connection
with this offering will be restricted from sale, transfer, assignment or
hyphothecation for a period of one year commencing on the date of this offering,
except as otherwise permitted by the NASD Conduct Rule 2710(c)(7)(A) which
permits securities deemed to be underwriting compensation in connection with an
offering to be transferred to any other underwriter or its bona fide officers or
partners, and which permits the exercise or conversion of convertible
securities, provided that all securities so transferred, exercised or converted
remain subject to the restrictions listed above for the remainder of the
initially applicable time period.
74
<PAGE> 77
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> 78
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 June , 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
May 31, 2000
F-2
<PAGE> 79
GARAGE.COM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
----------------- MARCH 31, EQUITY AT
1998 1999 2000 MARCH 31, 2000
------- ------- --------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 2,816 $16,123 $39,119
Accounts receivable............................. 13 251 1,447
Prepaid expenses and other current assets....... 51 100 665
------- ------- -------
Total current assets.................... 2,880 16,474 41,231
Property and equipment, net....................... 60 212 363
Principal investments............................. -- 786 5,759
Other assets...................................... 35 67 409
------- ------- -------
$ 2,975 $17,539 $47,762
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........... $ 70 $ 137 $ 531
Accrued compensation and related liabilities.... 109 99 75
Deferred revenue................................ -- 359 2,059
Deferred tax liability.......................... -- -- 362
Other current liabilities....................... 90 132 74
------- ------- -------
Total current liabilities............... 269 727 3,101
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;
17,800,000 shares authorized; 8,950,000,
14,460,212 and 17,450,129 shares issued and
outstanding at December 31, 1998 and 1999 and
March 31, 2000 (none pro forma), issuable in
series; aggregate liquidation preference of
$19,051 and $45,960 as of December 31, 1999
and March 31, 2000........................... 9 14 17 --
Common stock, $0.001 par value; 95,000,000
shares authorized; 9,600,000, 10,212,318 and
11,838,700 shares issued and outstanding at
December 31, 1998 and 1999 and March 31,
2000, respectively (29,288,829 shares pro
forma)....................................... 10 10 12 29
Additional paid-in capital...................... 4,191 20,689 50,765 50,765
Notes receivable from stockholders.............. -- (167) (2,510) (2,510)
Deferred stock compensation..................... -- (2,882) (3,214) (3,214)
Accumulated deficit............................. (1,504) (954) (409) (409)
------- ------- ------- -------
Total stockholders' equity.............. 2,706 16,812 44,661 $44,661
------- ------- ------- =======
$ 2,975 $17,539 $47,762
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 80
GARAGE.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24, 1997 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------
1998 1999 1999 2000
---------------- ------------ --------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Placement fees.................. $ -- $ 2,485 140 1,216
Event registration and
sponsorship fees (including
$300 in 1999 and $103 in 2000
from related parties)........ -- 2,429 -- 1,131
Interest income................. 39 295 24 297
Principal transactions.......... -- 225 -- 888
Website sponsorships and other.. 110 421 84 156
---------- ----------- --------- ----------
Total revenue..................... 149 5,855 248 3,688
---------- ----------- --------- ----------
Costs and expenses:
Cost of events.................. -- 1,030 -- 478
Compensation and benefits....... 909 2,216 292 1,291
Compensation and benefits --
amortization of deferred
stock compensation........... -- 685 22 220
Professional fees............... 234 377 44 171
Occupancy....................... 147 295 47 136
Marketing....................... 138 218 39 134
Other........................... 225 467 67 351
---------- ----------- --------- ----------
Total costs and expenses.......... 1,653 5,288 511 2,781
---------- ----------- --------- ----------
Income (loss) from operations..... (1,504) 567 (263) 907
Provision for income taxes........ -- 17 -- 362
---------- ----------- --------- ----------
Net income (loss)................. $ (1,504) $ 550 (263) 545
========== =========== ========= ==========
Net income (loss) per share --
basic........................... $ (0.86) $ 0.13 (0.09) 0.09
========== =========== ========= ==========
Net income (loss) per share --
diluted......................... $ (0.86) $ 0.03 (0.09) 0.02
========== =========== ========= ==========
Shares used in per share
calculation -- basic............ 1,739,593 4,119,035 3,021,319 5,889,397
========== =========== ========= ==========
Shares used in per share
calculation -- diluted.......... 1,739,593 20,781,220 3,021,319 28,086,799
========== =========== ========= ==========
Net income per share -- basic pro
forma (unaudited)............... $ 0.04 $ 0.03
=========== ==========
Shares used in per share
calculation -- basic pro forma
(unaudited)..................... 14,753,000 22,238,000
=========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 81
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 -- -- -- 541 --
Issuance of common stock............... -- -- 612,318 -- 451 (167)
Deferred stock compensation............ -- -- -- -- 3,567 --
Amortization of deferred stock
compensation......................... -- -- -- -- -- --
Net income............................. -- -- -- -- -- --
---------- --- ---------- --- ------- -------
Balance at December 31, 1999............ 14,460,212 14 10,212,318 10 20,791 (167)
Issuance of Series E convertible
preferred stock...................... 2,989,917 3 -- -- 26,855 --
Issuance of common stock............... -- -- 1,626,382 2 2,567 (2,343)
Deferred stock compensation............ -- -- -- -- 552 --
Amortization of deferred stock
compensation......................... -- -- -- -- -- --
Net income............................. -- -- -- -- -- --
---------- --- ---------- --- ------- -------
Balance at March 31, 2000............... 17,450,129 $17 11,838,700 $12 $50,765 $(2,510)
========== === ========== === ======= =======
<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...................... -- -- 541
Issuance of common stock............... -- -- 284
Deferred stock compensation............ (3,567) -- --
Amortization of deferred stock
compensation......................... 685 -- 685
Net income............................. -- 550 550
------- ------- -------
Balance at December 31, 1999............ (2,882) (954) 16,812
Issuance of Series E convertible
preferred stock...................... -- -- 26,858
Issuance of common stock............... -- -- 226
Deferred stock compensation............ (552) -- --
Amortization of deferred stock
compensation......................... 220 -- 220
Net income............................. -- 545 545
------- ------- -------
Balance at March 31, 2000............... $(3,214) $ (409) $44,661
======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 82
GARAGE.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
OCTOBER 24, 1997 ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------
1998 1999 1999 2000
---------------- ------------ ------ -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $(1,504) $ 694 $ (263) $ 545
Adjustment to reconcile net income (loss) to net
cash (used in) provided by operating
activities:
Depreciation and amortization.................. 15 46 7 10
Amortization of deferred stock compensation.... -- 541 -- 220
Principal transactions......................... -- (225) -- (888)
Deferred tax provision......................... -- -- -- 362
Changes in assets and liabilities:
Accounts receivable......................... -- (238) (253) (1,196)
Other assets................................ (99) (81) (70) (907)
Accounts payable and accrued expenses....... 70 67 (23) 394
Accrued compensation and related
liabilities............................... 109 (10) (3) (24)
Deferred revenue............................ -- 359 419 1,700
Other current liabilities................... 90 42 -- (58)
------- ------- ------ -------
Net cash (used in) provided by operating
activities..................................... (1,319) 1,195 (186) 158
------- ------- ------ -------
INVESTING ACTIVITIES
Purchases of property and equipment.............. (75) (198) (15) (161)
Purchases of principal investments............... -- (459) -- (4,085)
------- ------- ------ -------
Net cash used in investing activities............ (75) (657) (15) (4,246)
------- ------- ------ -------
FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred
stock.......................................... 4,167 12,485 75 26,858
Proceeds from issuance of common stock........... 43 284 3 226
------- ------- ------ -------
Net cash provided by financing activities........ 4,210 12,769 78 27,084
------- ------- ------ -------
Net increase in cash and cash equivalents........ 2,816 13,307 (123) 22,996
Cash and cash equivalents at beginning of year... -- 2,816 2,816 16,123
------- ------- ------ -------
Cash and cash equivalents at end of year......... $ 2,816 $16,123 2,693 39,119
======= ======= ====== =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for notes receivable.............. $ -- $ 167 -- $ 2,343
======= ======= ====== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 83
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
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 compensation
for its services. It also receives the right to buy stock in client companies
upon completion of financings. 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"). The LLC was formed to purchase for cash and hold the
equity interests in startup companies which received broker-dealer services from
Securities. Each of the LLC members paid cash for units in the LLC or executed
notes for their units. All notes were repaid during 1999. The LLC was governed
by an operating agreement pursuant to which the Company was the sole managing
member of the LLC. Under the operating agreement the managing member had
exclusive voting control over the LLC. As such, the accompanying consolidated
financial statements include the accounts of LLC. In December 1999 and January
2000, the Company issued 544,506 and 15,706 shares, respectively of its Series D
preferred stock for the interests in the LLC that it did not own. This
transaction was accounted for as an asset acquisition at historical cost for the
units acquired from Garage.com shareholders and is an asset acquisition at fair
value for the remainder of the units acquired. Subsequent to the issuance of the
Series D shares, 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. The performance fee is recognized as principal transactions revenue and
as an increase to our principal investments balance. The Company accounts for
its investment in the LP using the cost method.
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
F-7
<PAGE> 84
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
stockholders' equity in the accompanying balance sheet as of March 31, 2000
reflects conversion of the outstanding preferred stock into 17,450,129 shares of
common stock.
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
F-8
<PAGE> 85
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
have occurred with respect to the Company's long-lived assets, which consist
primarily of machinery and equipment and leasehold improvements.
PRINCIPAL INVESTMENTS
Principal investments consist primarily of stock held in early-stage
privately held companies acquired in connection with 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, through
March 31, 2000, none of the Company's investments are publicly traded and
therefore, 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
information, which may include an initial public offering or acquisition,
operating results, market valuations of comparable companies, the stage of
development, market conditions, market acceptance of the services the Company
provides and general economic conditions. Management's estimates of fair value
could differ materially from values that would have been used had a ready market
for these investments existed. Management reassesses fair value as new
information becomes available. 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. During the years ended December 31, 1998 and 1999 and the quarter
ended March 31, 2000, nonmonetary sponsorship revenues, recognized on the basis
of comparable cash transactions, totaled $0, $364,000 and $90,000 respectively,
and are included in event registration and sponsorship fees in the accompanying
consolidated statement of operations.
F-9
<PAGE> 86
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
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 and there was no impact when the Company adopted SAB
101 effective January 1, 2000.
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 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,
F-10
<PAGE> 87
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
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 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.
HISTORICAL NET INCOME (LOSS) PER SHARE AND PRO FORMA NET INCOME PER SHARE
Net 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.
Net income per share -- pro forma basic is presented to reflect per share
data assuming the conversion of all outstanding shares of convertible preferred
stock into common stock as if the conversion had taken place at the beginning of
the period or at the date of issuance, if later. Net income per share -- diluted
already includes the effect of such conversion. Therefore, separate net income
per share -- pro forma diluted has not been presented as such amounts would be
the same as those computed in accordance with SFAS 128.
F-11
<PAGE> 88
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
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 THREE MONTHS ENDED:
DECEMBER 31, DECEMBER 31, -------------------------
1998 1999 1999 2000
-------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)............ $ (1,504) $ 550 $ (263) $ 545
=========== =========== =========== ===========
Denominator:
Weighted average shares...... 8,712,329 9,697,206 9,625,556 11,403,826
Weighted average shares
subject to repurchase..... (6,972,736) (5,578,171) (6,604,237) (5,514,429)
----------- ----------- ----------- -----------
Denominator for basic
calculation............... 1,739,593 4,119,035 3,021,319 5,889,397
Weighted average effect of
dilutive securities:
Assumed conversion of
preferred stock......... -- 10,633,874 -- 16,348,389
Unvested common stock
subject to repurchase... -- 5,578,171 -- 5,514,429
Employee stock options.... -- 450,140 -- 334,584
----------- ----------- ----------- -----------
Denominator for diluted
calculation............... 1,739,593 20,781,220 3,021,319 28,086,799
=========== =========== =========== ===========
Denominator -- pro forma basic
Shares used in basic
calculation............... 4,119,035 5,889,397
Assumed conversion of
preferred stock........... 10,633,874 16,348,389
----------- -----------
Denominator for pro forma basic
calculation.................. 14,752,909 22,237,786
=========== ===========
Net income (loss) per share:
Basic........................ $ (0.86) $ 0.13 $ (0.09) $ 0.09
=========== =========== =========== ===========
Diluted...................... $ (0.86) $ 0.03 $ (0.09) $ 0.02
=========== =========== =========== ===========
Pro forma basic.............. $ 0.04 $ 0.03
=========== ===========
</TABLE>
Options outstanding during the year ended December 31, 1999 and the quarter
ended March 31, 2000 to purchase approximately 502,250 and 188,500 shares of
common stock, respectively, were not included in the computation of diluted
income per share because the
F-12
<PAGE> 89
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
options' exercise price was greater than the average 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.
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>
F-13
<PAGE> 90
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
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 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 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 2000
-------------------------------- --------------------------------
AGGREGATE AGGREGATE
AUTHORIZED SHARES ISSUED LIQUIDATION SHARES ISSUED LIQUIDATION
SHARES AND OUTSTANDING PREFERENCE AND OUTSTANDING PREFERENCE
---------- --------------- -------------- --------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Series A............... 2,000,000 1,800,000 $ 600 1,800,000 $ 600
Series B............... 7,300,000 7,300,000 3,650 7,300,000 3,650
Series C............... 4,800,000 4,800,000 12,000 4,800,000 12,000
Series D............... 600,000 560,212 2,801 560,212 2,801
Series E............... 3,100,000 -- -- 2,989,917 26,909
---------- ---------- ------- ---------- -------
17,800,000 14,460,212 $19,051 17,450,129 $45,960
========== ========== ======= ========== =======
</TABLE>
In the event of liquidation or winding up of the Company, holders of Series
A, B, C, D and E convertible preferred stock are entitled to a liquidation
preference of $0.33, $0.50, $2.50, $5.00 and $9.00 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
F-14
<PAGE> 91
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
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, D, and E 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
Authorized............................. -- -- --
Granted................................ (975,200) 975,200 8.20
Exercised.............................. -- (1,626,382) 1.59
Forfeited.............................. 400,000 (400,000) 6.00
---------- ----------
Options outstanding at March 31, 2000.... 1,290,259 571,041 8.33
========== ========== =====
</TABLE>
F-15
<PAGE> 92
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
Options outstanding as of December 31, 1999 and March 31, 2000 were as
follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE EXERCISE OPTIONS EXERCISE
REMAINING PRICE VESTED AT PRICE
OPTIONS CONTRACTUAL PER DECEMBER 31, PER
EXERCISE PRICE OUTSTANDING LIFE SHARE 1999 SHARE
-------------- ----------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
December 31, 1999
$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
========= =======
March 31, 2000
$0.50..................... -- -- $ -- -- $ --
$1.50-$2.50............... 30,541 9.64 $2.06 -- $ --
$7.00-$10.00.............. 540,500 9.92 $8.68 -- $ --
--------- -------
571,041 --
========= =======
</TABLE>
The weighted average fair value of options granted during 1999 and the
three months ended March 31, 2000 was $0.20 and $2.82, respectively, per share.
The Company has determined that the 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-16
<PAGE> 93
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
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............................................... $ 550
Pro forma................................................. $ 517
Net income per share -- basic:
As reported............................................... $0.13
Pro forma................................................. $0.12
Net income per share -- diluted:
As reported............................................... $0.03
Pro forma................................................. $0.02
</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
$3.6 million, representing the difference between the exercise price and the
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 $685,000. At December 31,
1999, approximately $2.9 million of deferred stock compensation remained
unamortized.
In the three months ended March 31, 2000, the Company granted additional
options to purchase 954,164 shares of common stock at exercise prices of $7.00
to $10.00 per share. In connection with these grants, the Company recorded
additional deferred compensation of approximately $552,000 in the three months
ended March 31, 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-17
<PAGE> 94
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
RESERVED SHARES
Shares of common stock reserved for future issuance were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
1999 Stock Plan:
Outstanding options............................ 1,622,223 571,041
Reserved for future grants..................... 1,865,459 1,290,259
Convertible preferred stock:
Issued and outstanding......................... 14,460,212 17,450,129
---------- ----------
17,947,894 19,311,429
========== ==========
</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. During the three months ended March 31, 2000, the Company provided
full recourse loans to employees and officers to exercise options to purchase
common stock. Such loans totaled $2,343,000 and bear interest at rates from
6.11% to 6.8% and are secured by the underlying common stock purchased.
Event revenues in 1999 and 2000 include $380,000 and $103,000,
respectively, 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-18
<PAGE> 95
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
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) $ 193
State taxes, net of federal benefit................. (90) 76
Amortization of deferred compensation and other..... 6 237
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-19
<PAGE> 96
GARAGE.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
10. SUBSEQUENT EVENTS
1999 STOCK PLAN
In February 2000, the Board of Directors authorized reserving 1,000,000
additional shares for grant under the 1999 Stock Plan, effective upon the
closing of the proposed initial public offering.
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-20
<PAGE> 97
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> 98
------------------------------------------------------
------------------------------------------------------
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....................... 25
Business.............................. 35
Management............................ 52
Related Party Transactions............ 59
Principal Stockholders................ 64
Description of Capital Stock.......... 67
Shares Eligible for Future Sale....... 70
Legal Matters......................... 71
Experts............................... 71
Where You Can Find Additional
Information......................... 71
Underwriting.......................... 72
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> 99
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>
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> 100
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
investors. These investors consisted of Theodore Ashford, Paul Auerbach,
Big Wave N.V., Mark Blumenkranz, the Phyllis Boozer Trust, Young Boozer
III, the Carreker Family Trust, Julie Constantin, Eagle Creek Capital,
Frederico Faggin, Thomas Friel, the Fred Gibbons Separate Property Trust,
Stephen Jackson, George Jaynes, Samuel Jones, David Kixmiller, Chong-Moon
Lee, Alan and Linda Lubitz, the McGee Family Trust, Merchant GP, Inc.,
Montreux Equity Management II, LLC, the Moore Family Trust, the Patterson
Family Trust, the Pinsker Family Trust, Wesley Richards, Sanford Robertson,
Benjamin Rosen, Andrew Sterngold, Sunrise Capital Fund I, LLC, Christina
Flammer Walling, the Jack Woodrow Trust, and the Kenneth Woodrow Family
Living Trust, as well as existing stockholders, officers and directors.
These sales were 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
investors. These investors consisted of the Anderson Family Limited
Partnership, the Banatao Living Trust, Credit Suisse First Boston Venture
Fund I, L.P., Draper Jurvetson Fund V, L.P., Draper Fisher Jurvetson
Partners VI, LLC, E*TRADE Group, Inc., Joseph Graziano, Highland Capital
Partners IV, L.P., Highland Entrepreneurs' Fund IV, L.P., Aaron Hsu,
Ignitio Partners, Mayfield X, L.P., Mayfield Associates Fund IV, L.P.,
Mayfield Principals Fund, L.L.C., Overbrook Limited Partnership, The Roman
Arch Fund, L.P., The Roman Arch Fund II, L.P., the Frank Ruderman IRA, Enzo
Torresi, Yoseph Vardi, Vitreal Partners LLC, Charles Wolf, and YK Capital
L.P., as well as existing stockholders, officers and directors. 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 investors in
exchange for their units of Garage.com Startups, LLC for an aggregate
purchase price of $2,801,060. These investors consisted of existing
stockholders and consultants. 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 investors, consisting of 3i
Technology Partners, LP, AP Venture Partners I, L.P., the Capps-D'Amico
Family Trust, CLAL Industries and Investments, Ltd., Constantin Partners,
LLC, Andrew Constantin, Crystal Springs Foundation, DBV Investments, L.P.,
the Dilsaver Living Trust, the Feintech/Bernhardt Revocable Trust, John
Giacomazzi, GS PIA Partners I, L.P., Hikari Tsushin Incorporated, William
Hooper, Isal Amlat Investments (1993) Ltd., Deborah Kurstetter, Duke
Kawasaki, MAC Investment Corp., Audrey MacLean
II-2
<PAGE> 101
and Michael Clair Trust, Peter D. Moore, MSD GCI, LLC, David Pottruck
Revocable Trust, Safeguard 2000 Capital, L.P., Charles R. Schwab, Sequoia
Capital Franchise Fund, and Sequoia Capital Franchise Partners Fund, as
well as existing stockholders, officers and directors. These sales were
made 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-3
<PAGE> 102
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>
---------------
** Previously filed.
# Confidential treatment requested for portions of this exhibit.
II-4
<PAGE> 103
(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-5
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 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 2nd day of June 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. 4 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, June 2, 2000
--------------------------------------------------- Chief Executive Officer and
Guy Kawasaki Director
(Principal Executive Officer)
/s/ MARY ANN CUSENZA Vice President of Finance June 2, 2000
--------------------------------------------------- and Chief Financial Officer
Mary Ann Cusenza (Principal Financial and
Accounting Officer)
WILLIAM M. REICHERT* President and Director June 2, 2000
---------------------------------------------------
William M. Reichert
THOMAS BEVILACQUA* Director June 2, 2000
---------------------------------------------------
Thomas Bevilacqua
JOHN DEAN* Director June 2, 2000
---------------------------------------------------
John Dean
JOSEPH GRUNDFEST* Director June 2, 2000
---------------------------------------------------
Joseph Grundfest
JOS HENKENS* Director June 2, 2000
---------------------------------------------------
Jos Henkens
</TABLE>
II-6
<PAGE> 105
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
CRAIG JOHNSON* Director June 2, 2000
---------------------------------------------------
Craig Johnson
RICHARD KARLGAARD* Director June 2, 2000
---------------------------------------------------
Richard P. Karlgaard
CHONG-MOON LEE* Director June 2, 2000
---------------------------------------------------
Chong-Moon Lee
*Power of Attorney
By: /s/ MARY ANN CUSENZA
----------------------------------------
Mary Ann Cusenza
Attorney-in-fact
</TABLE>
II-7
<PAGE> 106
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>
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** Previously filed.
# Confidential treatment requested for portions of the exhibit.
